UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended September 30, 2001 Commission File No. 1-11166
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AXA Financial, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 13-3623351
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1290 Avenue of the Americas, New York, New York 10104
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 554-1234
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None
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(Former name, former address, and former fiscal year if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
---- ----
No voting or non-voting common equity of the registrant is held by
non-affiliates of the registrant as of November 12, 2001.
At November 12, 2001, 436,192,949 shares of the registrant's Common Stock were
outstanding.
REDUCED DISCLOSURE FORMAT:
Registrant meets the conditions set forth in General Instruction H (1) (a) and
(b) of Form 10-Q and is therefore filing this form with the Reduced Disclosure
Format.
Page 1 of 25
AXA FINANCIAL, INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2001
TABLE OF CONTENTS
Page #
PART I FINANCIAL INFORMATION
Item 1: Unaudited Consolidated Financial Statements
Consolidated Balance Sheets as of September 30, 2001 and
December 31, 2000...................................................... 3
Consolidated Statements of Earnings for the Three Months and
Nine Months Ended September 30, 2001 and 2000.......................... 4
Consolidated Statements of Shareholders' Equity for the Nine
Months Ended September 30, 2001 and 2000............................... 5
Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 2001 and 2000............................................ 6
Notes to Unaudited Consolidated Financial Statements..................... 7
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations ("Management Narrative")......................... 18
Item 3: Quantitative and Qualitative Disclosures About Market Risk*.............. 21
PART II OTHER INFORMATION
Item 1: Legal Proceedings........................................................ 22
Item 6: Exhibits and Reports on Form 8-K......................................... 24
SIGNATURES............................................................................ 25
<FN>
*Omitted pursuant to General Instruction H to Form 10-Q.
</FN>
2
PART I FINANCIAL INFORMATION
Item 1: Unaudited Consolidated Financial Statements.
AXA FINANCIAL, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
September 30, December 31,
2001 2000
----------------- -----------------
(In Millions)
ASSETS
Investments:
Fixed maturities:
Available for sale, at estimated fair value............................. $ 23,749.7 $ 20,715.8
Held to maturity, at amortized cost..................................... - 256.7
Mortgage loans on real estate............................................. 4,415.1 4,712.6
Equity real estate........................................................ 959.0 1,017.8
Policy loans.............................................................. 4,092.0 4,034.6
Other equity investments.................................................. 792.0 2,430.9
Other invested assets..................................................... 1,235.3 788.8
----------------- -----------------
Total investments..................................................... 35,243.1 33,957.2
Cash and cash equivalents................................................... 1,099.3 2,479.5
Cash and securities segregated, at estimated fair value..................... 1,093.5 1,306.3
Broker-dealer related receivables........................................... 1,148.6 1,900.3
Deferred policy acquisition costs........................................... 5,317.1 5,128.8
Intangible assets, net...................................................... 3,923.3 4,066.2
Amounts due from reinsurers................................................. 2,234.0 2,097.9
Loans to affiliates......................................................... - 3,000.0
Other assets................................................................ 3,656.5 3,618.7
Separate Accounts assets.................................................... 42,666.3 51,705.9
----------------- -----------------
Total Assets................................................................ $ 96,381.7 $ 109,260.8
================= =================
LIABILITIES
Policyholders' account balances............................................. $ 20,582.5 $ 20,445.8
Future policy benefits and other policyholders liabilities.................. 13,505.3 13,432.1
Broker-dealer related payables.............................................. 989.1 1,283.0
Customers related payables.................................................. 1,347.4 1,636.9
Short-term and long-term debt............................................... 3,509.7 3,432.3
Federal income taxes payable................................................ 1,246.2 2,421.4
Other liabilities........................................................... 3,543.5 3,513.2
Separate Accounts liabilities............................................... 42,607.3 51,632.1
Minority interest in equity of consolidated subsidiaries.................... 1,261.2 1,275.8
Minority interest subject to redemption rights.............................. 658.6 681.1
----------------- -----------------
Total liabilities..................................................... 89,250.8 99,753.7
----------------- -----------------
Commitments and contingencies (Note 10)
SHAREHOLDERS' EQUITY
Series D convertible preferred stock........................................ 165.0 219.6
Stock employee compensation trust........................................... (165.0) (219.6)
Common stock, at par value.................................................. 3.9 4.6
Capital in excess of par value.............................................. 1,009.8 4,753.8
Treasury stock.............................................................. - (629.6)
Retained earnings........................................................... 5,701.2 5,380.6
Accumulated other comprehensive income (loss)............................... 416.0 (2.3)
----------------- -----------------
Total shareholders' equity............................................ 7,130.9 9,507.1
----------------- -----------------
Total Liabilities and Shareholders' Equity.................................. $ 96,381.7 $ 109,260.8
================= =================
See Notes to Unaudited Consolidated Financial Statements.
3
AXA FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------------- ---------------------------------
2001 2000 2001 2000
--------------- ---------------- --------------- ---------------
(In Millions)
REVENUES
Universal life and investment-type
product policy fee income.......................... $ 325.9 $ 359.0 $ 1,012.0 $ 1,048.0
Premiums............................................. 244.8 335.7 758.5 909.7
Net investment income................................ 592.9 712.4 1,814.4 2,198.8
Investment losses, net............................... (118.2) (79.0) (147.4) (267.0)
Commissions, fees and other income................... 790.2 665.8 2,418.5 1,903.1
--------------- ---------------- --------------- ---------------
Total revenues................................. 1,835.6 1,993.9 5,856.0 5,792.6
--------------- ---------------- --------------- ---------------
BENEFITS AND OTHER DEDUCTIONS
Policyholders' benefits.............................. 459.8 524.2 1,392.1 1,581.4
Interest credited to policyholders' account
balances........................................... 246.2 271.4 744.1 791.0
Compensation and benefits............................ 447.8 278.6 1,259.5 829.8
Commissions.......................................... 108.2 127.3 352.9 404.9
Distribution plan payments........................... 120.9 113.1 369.1 348.9
Amortization of deferred sales commissions........... 57.4 56.7 173.6 160.6
Interest expense..................................... 53.6 73.7 172.9 155.3
Amortization of deferred policy acquisition costs.... 75.3 92.2 228.0 284.0
Capitalization of deferred policy acquisition
costs.............................................. (169.2) (186.9) (548.8) (577.4)
Rent expense......................................... 44.8 35.8 135.3 102.0
Amortization of intangible assets, net............... 51.5 9.0 154.2 11.9
Other operating costs and expenses................... 187.4 221.8 707.3 662.0
--------------- ---------------- --------------- ---------------
Total benefits and other deductions............ 1,683.7 1,616.9 5,140.2 4,754.4
--------------- ---------------- --------------- ---------------
Earnings from continuing operations before
Federal income taxes and minority interest......... 151.9 377.0 715.8 1,038.2
Federal income tax expense........................... (28.8) (112.6) (177.3) (307.0)
Minority interest in net income of
consolidated subsidiaries.......................... (71.2) (71.3) (218.6) (210.7)
--------------- ---------------- --------------- ---------------
Earnings from continuing operations.................. 51.9 193.1 319.9 520.5
Earnings (loss) from discontinued operations,
net of Federal income taxes:
Investment Banking and Brokerage segment......... - 107.5 - 376.2
Other............................................ (.5) - 7.7 (6.4)
Tax provision related to disposal of
Investment Banking and Brokerage segment......... - (407.0) - (407.0)
Cumulative effect of accounting change, net of
Federal income taxes............................. - (3.5)
--------------- ---------------- --------------- ---------------
Net Earnings (Loss).................................. $ 51.4 $ (106.4) $ 324.1 $ 483.3
=============== ================ =============== ===============
See Notes to Unaudited Consolidated Financial Statements.
4
AXA FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 2001 and 2000
(UNAUDITED)
2001 2000
----------------- -----------------
(In Millions)
SHAREHOLDERS' EQUITY
Series D convertible preferred stock, beginning of year..................... $ 219.6 $ 239.7
Exchange of Series D convertible preferred stock............................ (54.6) (20.1)
----------------- -----------------
Series D convertible preferred stock, end of period......................... 165.0 219.6
----------------- -----------------
Stock employee compensation trust, beginning of year........................ (219.6) (239.7)
Exchange of Series D convertible preferred stock in the employee
compensation trust........................................................ 54.6 20.1
----------------- -----------------
Stock employee compensation trust, end of period............................ (165.0) (219.6)
----------------- -----------------
Common stock, at par value, beginning of year............................... 4.6 4.5
Shares cancelled in connection with merger of AXA Merger Corp............... (.5) -
Treasury stock retired, at par value........................................ (.2) -
----------------- -----------------
Common stock, at par value, end of period................................... 3.9 4.5
----------------- -----------------
Capital in excess of par value, beginning of year........................... 4,753.8 3,739.1
Decrease related to the merger of AXA Merger Corp........................... (2,999.5) -
Decrease from retirement of treasury stock.................................. (629.4) -
Other changes in additional capital in excess of par value.................. (115.1) 134.6
----------------- -----------------
Capital in excess of par value, end of period............................... 1,009.8 3,873.7
----------------- -----------------
Treasury stock, beginning of year........................................... (629.6) (490.8)
Purchase of shares for treasury............................................. - (138.3)
Retirement of treasury stock................................................ 629.6 -
----------------- -----------------
Treasury stock, end of period............................................... - (629.1)
----------------- -----------------
Retained earnings, beginning of year........................................ 5,380.6 3,008.6
Net earnings................................................................ 324.1 483.3
Dividends on common stock................................................... - (32.5)
Decrease in retained earnings in connection with merger of
AXA Merger Corp........................................................... (3.5) -
----------------- -----------------
Retained earnings, end of period............................................ 5,701.2 3,459.4
----------------- -----------------
Accumulated other comprehensive loss, beginning of year..................... (2.3) (422.5)
Other comprehensive income.................................................. 418.3 101.4
----------------- -----------------
Accumulated other comprehensive income (loss), end of period................ 416.0 (321.1)
----------------- -----------------
Total Shareholders' Equity, End of Period................................... $ 7,130.9 $ 6,387.4
================= =================
See Notes to Unaudited Consolidated Financial Statements.
5
AXA FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2001 and 2000
(UNAUDITED)
2001 2000
----------------- -----------------
(In Millions)
Net earnings................................................................ $ 324.1 $ 483.3
Adjustments to reconcile net earnings to net cash used by
operating activities:
Interest credited to policyholders' account balances.................... 744.1 791.0
Universal life and investment-type product policy fee income............ (1,012.0) (1,048.0)
Net change in broker-dealer customer related receivables/payables....... (36.9) 170.7
Investment losses, net.................................................. 147.4 267.0
Change in deferred policy acquisition costs............................. (319.2) (287.3)
Change in future policy benefits........................................ (34.0) (854.5)
Change in property and equipment........................................ (202.0) (207.9)
Change in Federal income tax payable.................................... (1,401.6) 387.3
Decrease in segregated cash and securities, net......................... 212.9 -
Other, net.............................................................. 501.6 (904.6)
----------------- -----------------
Net cash used by operating activities....................................... (1,075.6) (1,203.0)
----------------- -----------------
Cash flows from investing activities:
Maturities and repayments................................................. 1,757.8 2,020.9
Sales..................................................................... 6,072.5 6,365.2
Purchases................................................................. (7,827.9) (6,232.8)
Decrease (increase) in short-term investments............................. (350.4) 1,757.1
Other, net................................................................ (75.9) (50.9)
----------------- -----------------
Net cash (used) provided by investing activities............................ (423.9) 345.3
----------------- -----------------
Cash flows from financing activities:
Policyholders' account balances:
Deposits................................................................ 2,118.2 1,989.9
Withdrawals and transfers to Separate Accounts.......................... (1,809.3) (3,122.0)
Net (decrease) increase in short-term financings.......................... (299.5) 1,527.1
Additions to long-term debt............................................... 398.4 476.3
Purchase of treasury stock................................................ - (138.3)
Other, net................................................................ (288.5) (101.3)
----------------- -----------------
Net cash provided by financing activities................................... 119.3 631.7
----------------- -----------------
Change in cash and cash equivalents......................................... (1,380.2) (226.0)
Cash and cash equivalents, beginning of year................................ 2,479.5 863.7
----------------- -----------------
Cash and Cash Equivalents, End of Period.................................... $ 1,099.3 $ 637.7
================= =================
Supplemental cash flow information
Interest Paid............................................................. $ 126.5 $ 125.1
================= =================
Income Taxes Paid......................................................... $ 1,577.3 $ 313.5
================= =================
See Notes to Unaudited Consolidated Financial Statements.
6
AXA FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1) BASIS OF PRESENTATION
The preparation of the accompanying unaudited consolidated financial
statements in conformity with U.S. GAAP requires management to make
estimates and assumptions (including normal, recurring accruals) that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates. The accompanying
unaudited interim consolidated financial statements reflect all adjustments
(which include only normal recurring adjustments) necessary in the opinion
of management to present fairly the consolidated financial position of AXA
Financial and its consolidated results of operations and cash flows for the
periods presented. These statements should be read in conjunction with the
consolidated financial statements of AXA Financial for the year ended
December 31, 2000. The results of operations for the nine months ended
September 30, 2001 are not necessarily indicative of the results to be
expected for the full year.
The terms "third quarter 2001" and "third quarter 2000" refer to the three
months ended September 30, 2001 and 2000, respectively. The terms "first
nine months of 2001" and "first nine months of 2000" refer to the nine
months ended September 30, 2001 and 2000, respectively.
AXA, a French holding company for an international group of insurance and
related financial services companies, has been the Holding Company's
largest shareholder since 1992. In October 2000, the Board of Directors of
the Holding Company, acting upon a unanimous recommendation of a special
committee of independent directors, approved an agreement with AXA for the
acquisition of the approximately 40% of outstanding Holding Company Common
Stock it did not already own. Under terms of the agreement, the minority
shareholders of the Holding Company received $35.75 in cash and 0.295 of an
AXA ADR (before giving effect to AXA's four-for-one stock split and related
change in ADRs' parity for each Holding Company share). On January 2, 2001,
AXA Merger Corp., a wholly-owned subsidiary of AXA, was merged with and
into the Holding Company, resulting in AXA Financial becoming a wholly
owned subsidiary of AXA. As a result of AXA Merger Corp's merger into the
Holding Company, the obligation to repay the $3.0 billion loan from AXA
Merger Corp. to the Holding Company was extinguished resulting in a
decrease in consolidated shareholders' equity of $3.0 billion. In
conjunction with the minority interest buyout, 53.4 million shares of
Common Stock purchased by AXA Merger Corp. were cancelled and 20.7 million
treasury shares held by the Holding Company were retired.
Certain reclassifications have been made in the amounts presented for prior
periods to conform those periods with the current presentation.
2) CAPITAL STOCK
In September 2001, the SECT released 10,920 shares of Series D Preferred
Stock, having an approximate value of $203.5 million. The value of the
Series D Preferred Stock was remitted to Equitable Life to fund designated
benefit plans. Equitable Life reimbursed the Holding Company for the value
of the Series D Preferred Stock. This transaction had no impact on
consolidated shareholders' equity. At September 30, 2001, the Series D
Preferred Stock remaining in the SECT had a fair value of $621.4 million.
In August 2000, the SECT released 4,020 shares of Series D Preferred Stock
which were converted into 1.6 million shares of Common Stock. The Holding
Company purchased all of these shares in connection with its treasury stock
repurchase program and as a result there was no impact on consolidated
shareholders' equity.
3) ACCOUNTING CHANGES
On January 1, 2001, AXA Financial adopted SFAS No. 133, as amended, that
established new accounting and reporting standards for all derivative
instruments, including certain derivatives embedded in other contracts, and
for hedging activities. Free-standing derivative instruments maintained by
AXA Financial at January 1, 2001 included interest rate caps, floors and
collars intended to hedge crediting rates on interest-sensitive individual
annuities contracts and certain reinsurance contracts. Based upon guidance
from the FASB and the Derivatives Implementation Group ("DIG"), the caps,
floors and collars could not be designated in a qualifying hedging
7
relationship under SFAS No. 133 and, consequently, require mark-to-market
accounting through earnings for changes in their fair values beginning
January 1, 2001. In accordance with the transition provisions of SFAS No.
133, AXA Financial recorded a cumulative-effect-type charge to earnings of
$3.5 million to recognize the difference between the carrying values and
fair values of free standing derivative instruments at January 1, 2001.
With respect to adoption of the requirements on embedded derivatives, AXA
Financial elected a January 1, 1999 transition date, thereby effectively
"grandfathering" existing accounting for derivatives embedded in hybrid
instruments acquired, issued, or substantively modified before that date.
As a consequence of this election, coupled with recent interpretive
guidance from the FASB and the DIG with respect to issues specifically
related to insurance contracts and features, adoption of the new
requirements for embedded derivatives had no material impact on AXA
Financial's results of operation or its financial position. Upon its
adoption of SFAS No. 133, AXA Financial reclassified $256.7 million of
held-to-maturity securities as available-for-sale. This reclassification
resulted in an after-tax cumulative-effect-type adjustment of $8.9 million
in other comprehensive income, representing the after-tax unrealized gain
on these securities at January 1, 2001.
AXA Financial adopted SOP 00-3 prospectively as of January 1, 2001 with no
financial impact upon initial implementation. Prior period
reclassifications have been made to include Closed Block assets,
liabilities, revenues and expenses on a line-by-line basis as required by
SOP 00-3.
4) NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the FASB issued SFAS No. 141, "Business Combinations," SFAS
No. 142, "Goodwill and Other Intangible Assets," and SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-lived Assets". SFAS No.
141 requires all business combinations initiated after June 30, 2001 to be
accounted for using only the purchase method. Under SFAS No. 142, goodwill
and intangible assets deemed to have indefinite lives will no longer be
amortized but will be tested for impairment. Other intangible assets will
continue to be amortized over their useful lives. Impairment losses for
goodwill and indefinite-lived intangible assets that arise due to the
initial application of SFAS No. 142 will be reported as resulting from a
change in accounting principle. SFAS No. 144 retains many of the
fundamental recognition and measurement provisions previously required by
SFAS No. 121 except for the removal of goodwill from its scope and
inclusion of specific guidance on cash flow recoverability testing and the
criteria that must be met to classify a long-lived asset as held-for-sale.
SFAS Nos. 142 and 144 are effective beginning in first quarter 2002. AXA
Financial's management is assessing the impact of adoption.
5) INVESTMENTS
Investment valuation allowances and changes thereto are shown below:
Nine Months Ended
September 30,
-----------------------------------
2001 2000
--------------- ---------------
(In Millions)
Balances, beginning of year............................................... $ 126.2 $ 177.9
Additions charged to income............................................... 31.1 45.9
Deductions for writedowns and asset dispositions.......................... (36.7) (92.9)
--------------- ---------------
Balances, End of Period................................................... $ 120.6 $ 130.9
=============== ===============
Balances, end of period:
Mortgage loans on real estate........................................... $ 44.7 $ 38.4
Equity real estate...................................................... 75.9 92.5
--------------- ---------------
Total..................................................................... $ 120.6 $ 130.9
=============== ===============
For the third quarters and first nine months of 2001 and of 2000,
investment income is shown net of investment expenses of $54.3 million,
$47.1 million, $170.8 million and $165.3 million, respectively.
As of September 30, 2001 and December 31, 2000, fixed maturities classified
as available for sale had amortized costs of $22,921.8 million and
$20,667.2 million and fixed maturities in the held to maturity portfolio
had estimated fair values of $266.9 million at December 31, 2000. Other
8
equity investments included trading securities having carrying values of
$45.5 million and $1,563.3 million and costs of $48.4 million and $1,607.1
million at September 30, 2001 and December 31, 2000, respectively, and
other equity securities with carrying values of $36.5 million and $32.7
million and costs of $41.1 million and $36.5 million as of September 30,
2001 and December 31, 2000, respectively.
In the third quarters and first nine months of 2001 and of 2000,
respectively, net unrealized and realized holding (losses) gains on trading
account equity securities of $(1.4) million, $(2.0) million, $25.1 million
and $3.0 million were included in net investment income in the consolidated
statements of earnings.
For the first nine months of 2001 and 2000, proceeds received on sales of
fixed maturities classified as available for sale amounted to $4,308.3
million and $6,087.0 million, respectively. Gross gains of $131.8 million
and $71.7 million and gross losses of $82.4 million and $155.1 million were
realized on these sales for the first nine months of 2001 and of 2000,
respectively. Unrealized net investment gains related to fixed maturities
classified as available for sale increased by $778.0 million during the
first nine months of 2001, resulting in a balance of $827.9 million at
September 30, 2001.
Impaired mortgage loans along with the related provision for losses were as
follows:
September 30, December 31,
2001 2000
------------------ -----------------
(In Millions)
Impaired mortgage loans with provision for losses.................... $ 140.1 $ 170.9
Impaired mortgage loans without provision for losses................. 41.9 5.8
------------------ -----------------
Recorded investment in impaired mortgage loans....................... 182.0 176.7
Provision for losses................................................. (44.7) (45.7)
------------------ -----------------
Net Impaired Mortgage Loans.......................................... $ 137.3 $ 131.0
================== =================
9
During the first nine months of 2001 and of 2000, respectively, AXA
Financial's average recorded investment in impaired mortgage loans was
$156.1 million and $171.6 million. Interest income recognized on these
impaired mortgage loans totaled $5.4 million and $9.8 million for the first
nine months of 2001 and 2000, respectively.
6) CLOSED BLOCK
The excess of Closed Block liabilities over Closed Block assets (adjusted
to exclude the impact of related amounts in accumulated other comprehensive
income and DAC) represents the expected maximum future post-tax earnings
from the Closed Block which would be recognized in income from continuing
operations over the period the policies and contracts in the Closed Block
remain in force. As of January 1, 2001, AXA Financial has developed an
actuarial calculation of the expected timing of the Closed Block earnings.
If the actual cumulative earnings from the Closed Block are greater than
the expected cumulative earnings, only the expected earnings will be
recognized in net income. Actual cumulative earnings in excess of expected
cumulative earnings at any point in time are recorded as a policyholder
dividend obligation because they will ultimately be paid to Closed Block
policyholders as an additional policyholder dividend unless offset by
future performance that is less favorable than originally expected. If a
policyholder dividend obligation has been previously established and the
actual Closed Block earnings in a subsequent period are less than the
expected earnings for that period, the policyholder dividend obligation
would be reduced (but not below zero). If, over the period the policies and
contracts in the Closed Block remain in force, the actual cumulative
earnings of the Closed Block are less than the expected cumulative
earnings, only actual earnings would be recognized in income from
continuing operations. If the Closed Block has insufficient funds to make
guaranteed policy benefit payments, such payments will be made from assets
outside the Closed Block.
Many expenses related to Closed Block operations, including amortization of
DAC, are charged to operations outside of the Closed Block; accordingly,
net revenues of the Closed Block do not represent the actual profitability
of the Closed Block operations. Operating costs and expenses outside of the
Closed Block are, therefore, disproportionate to the business outside of
the Closed Block.
Summarized financial information for the Closed Block is as follows:
September 30, December 31,
2001 2000
----------------- -----------------
(In Millions)
CLOSED BLOCK LIABILITIES:
Future policy benefits and other policyholders' account balances....... $ 8,977.1 $ 9,026.4
Other liabilities...................................................... 140.1 33.8
----------------- -----------------
Total Closed Block liabilities......................................... 9,117.2 9,060.2
----------------- -----------------
ASSETS DESIGNATED TO THE CLOSED BLOCK:
Available for sale, at fair value (amortized cost
of $4,533.1 and $4,373.5)............................................ 4,763.2 4,408.0
Mortgage loans on real estate.......................................... 1,524.0 1,581.8
Policy loans........................................................... 1,522.4 1,557.7
Cash and other invested assets......................................... 199.8 174.7
Other assets........................................................... 205.2 237.1
----------------- -----------------
Total assets designated to the Closed Block........................... 8,214.6 7,959.3
----------------- -----------------
Excess of Closed Block liabilities over assets designated to
the Closed Block.................................................... 902.6 1,100.9
Amounts included in accumulated other comprehensive income:
Net unrealized investment gains, net of deferred Federal
income tax of $80.6 and $12.2................................... 149.6 22.7
----------------- -----------------
Maximum Future Earnings To Be Recognized From Closed Block
Assets and Liabilities.............................................. $ 1,052.2 $ 1,123.6
================= =================
10
Closed Block revenues and expenses were as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------------- ---------------------------------
2001 2000 2001 2000
--------------- ---------------- --------------- ---------------
(In Millions)
REVENUES:
Premiums and other income............... $ 135.2 $ 139.2 $ 426.7 $ 442.6
Investment income (net of investment
expenses of $.1, $.9, $2.6
and $7.6)............................ 146.5 147.3 437.2 436.9
Investment losses, net.................. (.6) (4.0) (13.2) (5.0)
--------------- ---------------- --------------- ---------------
Total revenues.......................... 281.1 282.5 850.7 874.5
--------------- ---------------- --------------- ---------------
BENEFITS AND
OTHER DEDUCTIONS:
Policyholders' benefits and dividends... 238.1 239.6 724.9 751.4
Other operating costs and expenses...... 4.4 4.9 14.0 14.1
--------------- ---------------- --------------- ---------------
Total benefits and other deductions..... 242.5 244.5 738.9 765.5
--------------- ---------------- --------------- ---------------
Net revenues before Federal income
taxes................................ 38.6 38.0 111.8 109.0
Federal income taxes.................... (13.8) (13.9) (40.4) (39.7)
--------------- ---------------- --------------- ---------------
Net Revenues............................ $ 24.8 $ 24.1 $ 71.4 $ 69.3
=============== ================ =============== ===============
11
7) OTHER DISCONTINUED OPERATIONS
Summarized financial information for Other Discontinued Operations follows:
September 30, December 31,
2001 2000
----------------- -------------------
(In Millions)
BALANCE SHEETS
Mortgage loans on real estate.......................................... $ 190.2 $ 330.9
Equity real estate..................................................... 303.3 350.9
Fixed maturities, available for sale, at estimated fair value
(amortized cost $455.2 and $321.5)................................... 480.0 336.5
Other equity investments............................................... 29.0 43.1
Other invested assets.................................................. 2.0 1.9
----------------- -------------------
Total investments................................................. 1,004.5 1,063.3
Cash and cash equivalents.............................................. 75.8 84.3
Other assets........................................................... 165.1 148.8
----------------- -------------------
Total Assets........................................................... $ 1,245.4 $ 1,296.4
================= ===================
Policyholders liabilities.............................................. $ 939.3 $ 966.8
Allowance for future losses............................................ 169.6 159.8
Other liabilities...................................................... 136.5 169.8
----------------- -------------------
Total Liabilities...................................................... $ 1,245.4 $ 1,296.4
================= ===================
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------------- ---------------------------------
2001 2000 2001 2000
--------------- --------------- --------------- ---------------
(In Millions)
STATEMENTS OF EARNINGS
Investment income (net of investment
expenses of $5.8, $8.7, $18.3
and $28.4)............................. $ 21.5 $ 33.4 $ 73.3 $ 85.7
Investment gains (losses), net........... 2.7 (1.9) 14.7 .1
Policy fees, premiums and
other income........................... .3 - .2 .2
--------------- --------------- --------------- ---------------
Total revenues........................... 24.5 31.5 88.2 86.0
Benefits and other deductions............ 24.3 27.1 76.1 81.6
Earnings credited to allowance for
future losses.......................... .2 4.4 12.1 4.4
--------------- --------------- --------------- ---------------
Pre-tax results from operations.......... - - - -
Pre-tax (loss) earnings from
(strengthening) releasing the allowance
for future losses...................... (.9) - 11.8 (9.8)
Federal income tax benefit (expense)..... .4 - (4.1) 3.4
--------------- --------------- --------------- ---------------
(Loss) Income from Other Discontinued
Operations............................. $ (.5) $ - $ 7.7 $ (6.4)
=============== =============== =============== ===============
AXA Financial's quarterly process for evaluating the allowance for future
losses applies the current period's results of other discontinued
operations against the allowance, re-estimates future losses, and adjusts
the allowance, if appropriate. The evaluations performed as of September
30, 2001 and 2000 resulted in management's decision to release the
allowance by $11.8 million and strengthen the allowance by $9.8 million for
the nine months ended September 30, 2001 and 2000, respectively. This
resulted in after-tax earnings of $7.7 million for the first nine months of
2001 and after-tax losses of $6.4 million for the first nine months of
2000.
12
Management believes the allowance for future losses at September 30, 2001
is adequate to provide for all future losses; however, the determination of
the allowance involves numerous estimates and subjective judgments
regarding the expected performance of Discontinued Operations Investment
Assets. There can be no assurance the losses provided for will not differ
from the losses ultimately realized. To the extent actual results or future
projections of Other Discontinued Operations differ from management's
current estimates and assumptions underlying the allowance for future
losses, the difference would be reflected in the consolidated statements of
earnings in Other Discontinued Operations. In particular, to the extent
income, sales proceeds and holding periods for equity real estate differ
from management's previous assumptions, periodic adjustments to the loss
allowance are likely to result.
Investment valuation allowances amounted to $4.1 million and $2.9 million
on mortgage loans and $11.2 million and $11.4 million on equity real estate
at September 30, 2001 and December 31, 2000, 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) STOCK APPRECIATION RIGHTS
Following completion of the merger of AXA Merger Corp. with and into the
Holding Company, certain employees exchanged AXA ADR options for tandem
Stock Appreciation Rights ("SARs") and at-the-money AXA ADR options of
equivalent intrinsic value. The maximum obligation for the SARs is $85.3
million, based upon the underlying price of AXA ADRs at January 2, 2001,
the closing date of the aforementioned merger transaction. AXA Financial
recorded a reduction in the SARs liability of $40.7 million for the third
quarter of 2001 and $80.0 million for the first nine months of 2001,
reflecting the variable accounting for the SARs, based on the change in the
market value of AXA ADRs for the respective periods ended September 30,
2001.
10) LITIGATION
There have been no new material legal proceedings and no material
developments in specific litigations previously reported in AXA Financial's
Notes to Consolidated Financial Statements for the year ended December 31,
2000, except as described below:
Annuity Contract Case
In June 2001, the District Court granted defendants' motion to dismiss AXA
Client Solutions and the Holding Company from the amended complaint, and
dismissed the conversion claims. The District Court denied defendants'
motion to dismiss the remaining claims. Equitable Life has answered the
amended complaint.
Discrimination Case
In connection with the tentative settlement agreement reached by the
parties in November 2000, the case has been dismissed in the United States
District Court for the Northern District of Alabama, Southern Division and
has been refiled in the United States District Court for the Northern
District of Georgia, Atlanta Division. The final settlement requires notice
to be given to class members and is subject to court approval. Preliminary
approval was granted in October 2001. A hearing has been scheduled for
January 2002, at which time objections, if any, will be considered and
ruled upon.
Agent Health Benefits Case
In May 2001, plaintiffs filed a second amended complaint which, among other
things, alleges that Equitable Life failed to comply with plan amendment
procedures and deletes the promissory estoppel claim. Equitable Life
answered the complaint in June 2001. In September 2001, Equitable Life
filed a motion for summary judgment on all of plaintiffs' claims, and
plaintiffs filed a motion for partial summary judgment on all claims except
their claim for breach of fiduciary duty. Oral argument on plaintiffs'
appeal to the Court of Appeals for the Ninth Circuit contesting the
District Court's award of legal fees to the plaintiffs' counsel in
connection with a previously settled count of the complaint unrelated to
the health benefit claims was heard in November 2001.
13
Alliance Reorganization Case
In April 2001, the court issued a decision granting in part and denying in
part defendants' motion to dismiss; the claim alleging that the partnership
agreement of Alliance Holding was not validly amended was one of the claims
dismissed. In October 2001, an amended and restated memorandum of
understanding was executed, setting forth the terms of a settlement in
principle. The settlement is subject to a number of conditions, including
preparation of definitive documentation and approval, after a hearing, by
the Delaware Court of Chancery.
Prime Property Fund Case
This action was settled in June 2001 and the plaintiff's claims were
dismissed with prejudice.
AXA's Purchase of Holding Company Minority Interest
In the consolidated Delaware cases challenging the adequacy of AXA's offer
to purchase the outstanding shares of AXA Financial Common Stock it did not
already own, counsel for the parties have signed the Stipulation of
Settlement. In November 2001, the Stipulation of Settlement and a motion
seeking approval of the settlement were filed with the Delaware Court of
Chancery.
Disposal of DLJ
In October 2001, the court granted defendants' motion, dismissing all
claims, and entered judgment for the defendants in the putative class
action lawsuit filed in the United States District Court, Southern District
of New York.
In April 2001, a putative class action was filed in Delaware Chancery Court
on behalf of the holders of CSFBdirect tracking stock. Named defendants
include AXA Financial, Credit Suisse First Boston (USA), Inc., the former
directors of DLJ and the directors of Credit Suisse First Boston (USA),
Inc. The complaint challenges the sale of DLJ common stock as well as the
March 2001 offer by Credit Suisse to purchase the publicly owned CSFBdirect
tracking stock for $4 per share and asserts claims for breaches of
fiduciary duties and breach of contract. Plaintiffs seek injunctive relief,
an unspecified amount of compensatory damages, and costs and expenses,
including attorneys' fees. This action, along with the actions previously
reported, have been consolidated. In May 2001, the Delaware Chancery Court
ordered that this new complaint be the operative complaint in the
consolidated actions. A memorandum of understanding outlining the terms of
a proposed settlement was executed in July 2001.
Retirement Plan Case
A putative class action was filed in the District Court for the Southern
District of New York in August 2001 against The Equitable Retirement Plan
for Employees, Managers and Agents (the "Retirement Plan") and The Officers
Committee on Benefit Plans of Equitable Life, as Plan Administrator. The
action was brought by five participants in the Retirement Plan and purports
to be on behalf of "all Plan participants, whether active or retired, their
beneficiaries and Estates, whose accrued benefits or pension benefits are
based on the Plan's Cash Balance Formula." The complaint challenges the
change, effective January 1, 1989, in the pension benefit formula from a
final average pay formula to a cash balance formula. Plaintiffs allege that
the change to the cash balance formula violates ERISA by reducing the rate
of accruals based on age, failing to comply with ERISA's notice
requirements and improperly applying the formula to retroactively reduce
accrued benefits. The relief sought includes a declaration that the cash
balance plan violates ERISA, an order enjoining the enforcement of the cash
balance formula, reformation and damages. Defendants answered the complaint
in October 2001.
Outcome of Litigation
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.
14
Alliance Investment Company Act Case
In April 2001, an amended class action complaint was filed in Federal
District Court in the Southern District of Illinois against Alliance,
Alliance Fund Distributors, Inc. ("AFD"), a wholly owned subsidiary of
Alliance, and other defendants alleging violations of the Federal
Investment Company Act of 1940, as amended ("ICA"), and breaches of common
law fiduciary duty. The allegations in the amended complaint concern six
mutual funds with which Alliance has investment advisory agreements,
including Alliance Premier Growth Fund, Alliance Health Care Fund, Alliance
Growth Fund, Alliance Quasar Fund, Alliance Fund and Alliance Disciplined
Value Fund. The amended complaint alleges principally that (i) certain
advisory agreements concerning these funds were negotiated, approved, and
executed in violation of the ICA, in particular because certain directors
of these funds should be deemed interested under the ICA; (ii) the
distribution plans for these funds were negotiated, approved, and executed
in violation of the ICA; and (iii) the advisory fees and distribution fees
paid to Alliance and AFD, respectively, are excessive and, therefore,
constitute a breach of fiduciary duty. Alliance and AFD believe that
plaintiffs' allegations are without merit and intend to vigorously defend
against these allegations. At the present time, management of Alliance and
AFD are unable to estimate the impact, if any, that the outcome of this
action may have on Alliance's results of operations or financial condition
and AXA Financial's management is unable to estimate the impact, if any, of
the outcome of this action on its consolidated results of operations or
financial condition.
Other Matters
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. However, it should be noted
that the frequency of large damage awards, including large punitive damage
awards that bear little or no relation to actual economic damages incurred
by plaintiffs in some jurisdictions, continues to create the potential for
an unpredictable judgment in any given matter.
15
11) BUSINESS SEGMENT INFORMATION
The following tables reconcile segment revenues and earnings from
continuing operations before Federal income taxes to total revenues and
earnings as reported on the consolidated statements of earnings and segment
assets to total assets on the consolidated balance sheets, respectively.
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------------- ----------------------------------
2001 2000 2001 2000
--------------- --------------- --------------- ----------------
(In Millions)
Segment revenues:
Financial Advisory/Insurance............ $ 1,131.2 $ 1,391.7 $ 3,690.6 $ 4,133.4
Investment Management................... 726.3 632.2 2,235.0 1,752.2
Consolidation/elimination............... (21.9) (30.0) (69.6) (93.0)
--------------- --------------- --------------- ----------------
Total Revenues.......................... $ 1,835.6 $ 1,993.9 $ 5,856.0 $ 5,792.6
=============== =============== =============== ================
Segment earnings from continuing
operations before Federal income taxes
and minority interest:
Financial Advisory/Insurance............ $ 30.3 $ 227.6 $ 342.3 $ 583.2
Investment Management................... 121.6 149.4 373.5 455.0
--------------- --------------- --------------- ----------------
Total Earnings from Continuing
Operations before Federal Income
Taxes and Minority Interest............ $ 151.9 $ 377.0 $ 715.8 $ 1,038.2
=============== =============== =============== ================
September 30, December 31,
2001 2000
---------------- ------------------
(In Millions)
Assets:
Financial Advisory/Insurance............................................ $ 81,300.2 $ 91,685.0
Investment Management................................................... 15,115.8 17,672.3
Consolidation/elimination............................................... (34.3) (96.5)
---------------- ------------------
Total Assets............................................................ $ 96,381.7 $ 109,260.8
================ ==================
12) RELATED PARTY TRANSACTIONS
In September 2001, Equitable Life loaned $400.0 million to AXA Insurance
Holding Co. Ltd., a subsidiary of AXA. This investment has an interest rate
of 5.89% and matures on June 15, 2007. All payments, including interest
payable semi-annually, are guaranteed by AXA.
16
13) COMPREHENSIVE INCOME
The components of comprehensive income for the third quarters of 2001 and
2000 and the first nine months of 2001 and 2000 are as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------------- ---------------------------------
2001 2000 2001 2000
--------------- --------------- --------------- ---------------
(In Millions)
Net earnings (loss)...................... $ 51.4 $ (106.4) $ 324.1 $ 483.3
--------------- --------------- --------------- ---------------
Change in unrealized gains,
net of reclassification adjustment..... 337.0 146.9 418.3 101.4
--------------- --------------- --------------- ---------------
Other comprehensive income............... 337.0 146.9 418.3 101.4
--------------- --------------- --------------- ---------------
Comprehensive Income..................... $ 388.4 $ 40.5 $ 742.4 $ 584.7
=============== =============== =============== ===============
14) PURCHASE OF INTERESTS IN AFFILIATES
During second quarter 2000, Alliance sold approximately 32.6 million newly
issued Alliance Units to the Holding Company for $1.60 billion. Alliance
used the cash proceeds primarily to fund the cash portion of the
consideration of its fourth quarter acquisition of the assets and
liabilities of Sanford C. Bernstein. At September 30, 2001 and 2000,
respectively, AXA Financial's consolidated economic interest in Alliance
was approximately 52.3% and 63.2%.
17
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The management narrative for AXA Financial that follows should be read in
conjunction with the Unaudited Consolidated Financial Statements and the related
Notes to Unaudited Consolidated Financial Statements included elsewhere herein,
and with the management narrative found in the Management's Discussion and
Analysis ("MD&A") section included in AXA Financial's Annual Report on Form 10-K
for the year ended December 31, 2000 ("2000 Form 10-K").
CONSOLIDATED RESULTS OF OPERATIONS
Nine Months Ended September 30, 2001 Compared to Nine Months Ended September 30,
2000
Earnings from continuing operations before Federal income taxes and minority
interest were $715.8 million for the first nine months of 2001, a decrease of
$322.4 million from the year earlier period. Net earnings for AXA Financial
totaled $324.1 million for the first nine months of 2001, down $159.2 million
from $483.3 million for the 2000 period. Net earnings for the 2001 period
included a $(3.5) million cumulative effect adjustment related to the January 1,
2001 adoption of SFAS No. 133 while the 2000 period included a $407.0 million
tax provision related to the planned disposition of the discontinued Investment
Banking and Brokerage segment which more than offset the $376.2 million of net
earnings from this segment.
Revenues. Total revenues increased $63.4 million as higher commissions, fees and
other income and lower investment losses in the 2001 period more than offset
decreases in net investment income and premiums.
Premiums declined $151.2 million principally related to lower individual DI
premiums due to the indemnity reinsurance agreement entered into in July 2000.
Net investment income decreased $384.4 million primarily attributable to other
equity securities and fixed maturity investments in the Financial
Advisory/Insurance segment in the first nine months of 2001. The fixed maturity
impact was primarily attributable to a declining interest rate environment and a
smaller asset balance in the General Account, while the decrease in income from
equity securities reflected equity market declines.
Investment losses, net totaled $147.4 million in the 2001 period compared to
$267.0 million in the first nine months of 2000. The investment losses in both
periods were primarily related to fixed maturities.
The 27.1% growth in commissions, fees and other income was principally due to a
$348.3 million increase in investment advisory and service fees and to $199.2
million in institutional research service fees related to Bernstein activities
(purchased in fourth quarter 2000), partially offset by $57.1 million lower
distribution revenues at Alliance. The increase in investment advisory and
service fees was primarily due to higher average assets under management, higher
performance fees and transaction charges principally due to the Bernstein
acquisition, partially offset by a decline in the retail sector's advisory fees
as a result of lower average assets under management in this sector and a shift
to lower fee cash management products. The lower distribution revenues at
Alliance reflected lower average daily mutual funds outstanding due to market
depreciation.
Benefits and Other Deductions. Total benefits and other deductions increased
$385.8 million primarily due to the inclusion of Bernstein in the 2001 results.
Policyholders' benefits decreased $189.3 million due primarily to the decline in
DI benefits that were reinsured in July 2000 and the reserve impact of lower
premiums in the first nine months of 2001, partially offset by less favorable
mortality including provisions for expected policyholders' benefits associated
with the September 11, 2001 terrorist attacks. Interest credited to
policyholders' account balances decreased $46.9 million primarily due to lower
General Account Investment Asset balances and to lower crediting rates.
The $429.7 million increase in compensation and benefits was primarily due to
the Bernstein acquisition and to severance benefits for certain former AXA
Financial senior officers and employees associated with cost reduction programs,
partially offset by the $80.0 million credit recognized in the 2001 period
resulting from the reduction of the SARs liability. The $52.0 million reduction
of commissions was due to lower sales of insurance and mutual fund products
principally in the Financial Advisory/Insurance segment in 2001. Higher
distribution plan payments and amortization of deferred sales commissions
resulted from Alliance sales of sponsored mutual funds and cash management
18
services' products, including ongoing sales of back-end load mutual funds. The
increases of $142.3 million in amortization of goodwill and intangibles and
$33.3 million in rent expense were primarily attributable to the Bernstein
acquisition.
Interest expense increased $17.6 million to $172.9 million principally due to
additional borrowings at the Holding Company level, including the $480.0 million
7.75% Senior Notes issued in July 2000.
Other operating costs and expenses grew $45.3 million primarily due to higher
general and administrative expenses at Alliance, principally related to the
Bernstein acquisition, as well as in the Financial Advisory/Insurance segment.
Premiums and Deposits. Total premiums and deposits for insurance and annuity
products for the first nine months of 2001 decreased from prior year levels by
$1.24 billion to $6.51 billion primarily due to lower sales of individual
annuities. Management believes the $1.16 billion decline in individual annuity
sales in the first nine months of 2001 was primarily due to the weak equity
market and comparisons to a strong performance in the first half of 2000.
Surrenders and Withdrawals. When totals for the first nine months of 2001 are
compared to the comparable 2000 period, surrenders and withdrawals were down,
from $4.27 billion to $3.58 billion. The annualized annuities surrender rate
declined to 8.7% in the 2001 period from 9.7% in the same period in 2000, while
the individual life surrender rates showed a modest improvement to 3.8% from
3.9%. The trends in surrender and withdrawal rates described above continue to
fall within the range of expected experience.
Assets Under Management. An analysis of assets under management follows:
Assets Under Management
(In Millions)
September 30,
-------------------------------
2001 2000
-------------- ----------------
Third party (1).............................................................. $ 367,696 $ 324,070
Separate Accounts............................................................ 42,666 55,779
General Account and other (1)................................................ 36,916 37,502
--------------- ----------------
Total Assets Under Management................................................ $ 447,278 $ 417,351
=============== ================
<FN>
(1) September 30, 2000 amounts exclude DLJ related assets.
</FN>
Third party assets under management at September 30, 2001 increased $43.63
billion primarily due to the Bernstein acquisition, which added $85.8 billion at
October 2, 2000, and net asset inflows, offset by the effects the general
downturn in the equity markets had on the overall portfolio values. The decline
in Separate Account assets under management resulted from continued market
depreciation which more than offset net new deposits.
Alliance assets under management at September 30, 2001 totaled $421.40 billion,
as compared to $388.39 billion at September 30, 2000. Non-US clients accounted
for 14.1% of the September 30, 2001 total.
LIQUIDITY AND CAPITAL RESOURCES
Holding Company. In January 2001, upon the merger of AXA Merger Corp. into the
Holding Company, the 53.4 million shares of Holding Company Common Stock held by
AXA Merger Corp. were cancelled and 20.7 million shares of treasury stock were
retired. In addition, the $3.0 billion loan to AXA Merger by the Holding Company
was extinguished. The loan proceeds had been used to fund a portion of the AXA
minority interest buyout in December 2000. Also in first quarter 2001, the
Holding Company borrowed $1.10 billion from AXA under a renewable financing
agreement and used the proceeds to partially fund second quarter 2001 tax
payments related to the gain on the sale of DLJ. The borrowings were repaid in
April 2001.
19
Equitable Life. During first quarter 2001, Equitable Life sold its remaining
holdings of CSG stock received upon the sale of DLJ.
In April 2001, Equitable Life paid a $1.50 billion shareholder dividend.
In June 2001, Equitable Life renewed its 364-day credit facility, reducing its
credit line from $350.0 million to $250.0 million. At September 30, 2001, no
amounts were outstanding under Equitable Life's commercial paper program or its
revolving credit facility.
Alliance. At September 30, 2001, Alliance had $173.0 million of short-term debt
outstanding, principally under its commercial paper and ECN programs. In August
2001, Alliance issued $400.0 million 5.625% notes due 2006 under its July 11,
2001 shelf registration statement. The net proceeds were used to reduce
commercial paper and credit facilities borrowings and other general partnership
purposes.
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 segment and result from interest rate fluctuations, equity
price movements and changes in credit quality. The nature of each of these risks
is discussed under the caption "Quantitative and Qualitative Disclosures About
Market Risk" and in Note 16 of Notes to Consolidated Financial Statements, both
contained in the 2000 Form 10-K.
Financial Advisory/Insurance. The Insurance Group's future sales of life
insurance and annuity products and financial planning services are dependent on
numerous factors including: successful implementation of AXA Financial's
strategic initiatives; the intensity of competition from other insurance
companies, banks and other financial institutions; conditions in the securities
markets; the strength and professionalism of distribution channels; the
continued development of additional channels; the financial and claims paying
ratings of Equitable Life; its reputation and visibility in the market place;
its ability to develop, distribute and administer competitive products and
services in a timely, cost-effective manner; and its investment management
performance. In addition, the 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. See "Business - Regulation" contained in the 2000 Form
10-K. The profitability of the Insurance Group depends on a number of factors,
including levels of gross operating expenses and the amount which can be
deferred as DAC, successful implementation of expense-reduction initiatives,
secular trends, AXA Financial's mortality, morbidity, persistency and claims
experience, and profit margins between investment results from General Account
Investment Assets and interest credited on individual insurance and annuity
products, and the adequacy of reserves and the extent to which subsequent
experience differs from management's estimates and assumptions used in
determining those reserves. 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. The ability
of AXA Financial to continue its accelerated 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.
20
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" contained in the 2000 Form 10-K.
Other Discontinued Operations. The determination of the allowance for future
losses for the discontinued Wind-Up Annuities continues to involve numerous
estimates and subjective judgments including those regarding expected
performance of investment assets, 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 Other
Discontinued Operations differ from management's current best estimates
underlying the allowance, the difference would be reflected as earnings or loss
from discontinued operations within the consolidated statements of earnings. In
particular, to the extent income, sales proceeds and holding periods for equity
real estate differ from management's previous assumptions, periodic adjustments
to the allowance are likely to result.
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 effect on AXA Financial's results of
operations and, ultimately, its ability to achieve its strategic goals.
Legal Environment. A number of lawsuits have been filed against life and health
insurers involving insurers' sales practices, alleged agent misconduct, failure
to properly supervise agents and other matters. Some of the lawsuits have
resulted in the award of substantial judgments against other insurers, including
material amounts of punitive damages, or in substantial settlements. In some
states, juries have substantial discretion in awarding punitive damages. AXA
Financial's insurance subsidiaries, like other life and health insurers, are
involved in such litigation. While no such lawsuit has resulted in an award or
settlement of any material amount against AXA Financial to date, its results of
operations and financial condition could be affected by defense and settlement
costs and any unexpected material adverse outcomes in such litigations as well
as in other material litigations pending against the Holding Company and its
subsidiaries. The frequency of large damage awards, including large punitive
damage awards that bear little or no relation to actual economic damages
incurred by plaintiffs in some jurisdictions, continues to create the potential
for an unpredictable judgment in any given matter. In addition, examinations by
Federal and state regulators could result in adverse publicity, sanctions and
fines. For further information, see "Business - Regulation," contained in the
2000 Form 10-K, and "Legal Proceedings," contained in the 2000 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 contained in the 2000 Form 10-K for pronouncements issued but not
effective at December 31, 2000, as well as Notes 3 and 4 of Notes to Unaudited
Consolidated Financial Statements included elsewhere herein.
Regulation. The businesses conducted by AXA Financial's subsidiaries are subject
to extensive regulation and supervision by state insurance departments and
Federal and state agencies regulating, among other things, insurance and
annuities, securities transactions, investment companies and investment
advisors. Changes in the regulatory environment could have a material impact on
operations and results. The activities of the Insurance Group are subject to the
supervision of the insurance regulators of each of the 50 states. See "Business
- - Regulation" contained in the 2000 Form 10-K.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Omitted pursuant to General Instruction H to Form 10-Q.
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PART II OTHER INFORMATION
Item 1. Legal Proceedings.
There have been no new material legal proceedings and no material developments
in matters which were previously reported in the Registrant's Form 10-K for the
year ended December 31, 2000, except as described below:
In Franze, in March 2001, the United States Court of Appeals for the Eleventh
Circuit granted the petition of Equitable Life and EVLICO for permission to
appeal the order denying summary judgment and granting class certification. In
May 2001, Equitable Life and EVLICO appealed that order.
In Patenaude, in June 2001, defendants' motion for reconsideration was denied.
In Malhotra, in September 2001, the court issued a decision granting defendants'
motion to dismiss and denying plaintiffs' motion to remand, and judgment was
entered in favor of the defendants. In October 2001, plaintiffs filed a motion
under Rule 60(b) of the Federal Rules of Civil Procedure seeking leave to reopen
the case for the purpose of filing an amended complaint. In addition, plaintiffs
filed a new complaint in the United States District Court for the Eastern
District of New York, alleging a similar class and similar facts. The new
complaint, however, asserts causes of action for violations of the Federal
securities laws in addition to the state law causes of action asserted in the
previous complaint.
In Wood, in April 2001, EVLICO filed a notice of removal to the United States
District Court for the Southern District of California. Plaintiff filed an
amended complaint in June 2001 and, in August 2001, plaintiff voluntarily
dismissed the action without prejudice.
In American National Bank, in June 2001, the District Court granted defendants'
motion to dismiss AXA Client Solutions and the Holding Company from the amended
complaint, and dismissed the conversion claims. The District Court denied
defendants' motion to dismiss the remaining claims. Equitable Life has answered
the amended complaint.
In Duncan, plaintiffs' motions to set aside the orders of dismissal with
prejudice and to reinstate their individual claims have been withdrawn.
In Brown, in connection with the tentative settlement agreement reached by the
parties in November 2000, the case has been dismissed in the United States
District Court for the Northern District of Alabama, Southern Division and has
been refiled in the United States District Court for the Northern District of
Georgia, Atlanta Division. The final settlement requires notice to be given to
class members and is subject to court approval. Preliminary approval was granted
in October 2001. A hearing has been scheduled for January 2002, at which time
objections, if any, will be considered and ruled upon.
In Fischel, in May 2001, plaintiffs filed a second amended complaint which,
among other things, alleges that Equitable Life failed to comply with plan
amendment procedures and deletes the promissory estoppel claim. Equitable Life
answered the complaint in June 2001. In September 2001 Equitable Life filed a
motion for summary judgment on all of plaintiffs' claims, and plaintiffs filed a
motion for partial summary judgment on all claims except their claim for breach
of fiduciary duty. Oral argument on plaintiffs' appeal to the Court of Appeals
for the Ninth Circuit contesting the District Court's award of legal fees to
plaintiffs' counsel in connection with a previously settled count of the
complaint unrelated to the health benefit claims was heard in November 2001.
A putative class action entitled Stefanie Hirt, et al. v. The Equitable
Retirement Plan for Employees, Managers and Agents, et al. was filed in the
District Court for the Southern District of New York in August 2001 against The
Equitable Retirement Plan for Employees, Managers and Agents (the "Retirement
Plan") and The Officers Committee on Benefit Plans of Equitable Life, as Plan
Administrator. The action was brought by five participants in the Retirement
Plan and purports to be on behalf of "all Plan participants, whether active or
retired, their beneficiaries and Estates, whose accrued benefits or pension
benefits are based on the Plan's Cash Balance Formula." The complaint challenges
the change, effective January 1, 1989, in the pension benefit formula from a
final average pay formula to a cash balance formula. Plaintiffs allege that the
change to the cash balance formula violates ERISA by reducing the rate of
accruals based on age, failing to comply with ERISA's notice requirements and
improperly applying the formula to retroactively reduce accrued benefits. The
relief sought includes a declaration that the cash balance plan violates ERISA,
an order enjoining the enforcement of the cash balance formula, reformation and
damages. Defendants answered the complaint in October 2001.
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In R.S.M., in April 2001, the court issued a decision granting in part and
denying in part defendants' motion to dismiss; the claim alleging that the
partnership agreement of Alliance Holding was not validly amended was one of the
claims dismissed. In October 2001, an amended and restated memorandum of
understanding was executed, setting forth the terms of a settlement in
principle. The settlement is subject to a number of conditions, including
preparation of definitive documentation and approval, after a hearing, by the
Delaware Court of Chancery.
BT-I was settled in June 2001 and the plaintiff's claims were dismissed with
prejudice.
In In re AXA Financial, Inc. Shareholders Litigation, the consolidated Delaware
cases challenging the adequacy of AXA's offer to purchase the outstanding shares
of AXA Financial Common Stock it did not already own, counsel for the parties
have signed the Stipulation of Settlement. In November 2001, the Stipulation of
Settlement and a motion seeking approval of the settlement were filed with the
Delaware Court of Chancery.
In Siamac Sedighim, in October 2001, the court granted defendants' motion,
dismissing all claims, and entered judgment for the defendants.
In April 2001, a putative class action entitled David Uhrik v. Credit Suisse
First Boston (USA), Inc., et al. was filed in Delaware Chancery Court on behalf
of the holders of CSFBdirect tracking stock. Named defendants include AXA
Financial, Credit Suisse First Boston (USA), Inc., the former directors of DLJ
and the directors of Credit Suisse First Boston (USA), Inc. The complaint
challenges the sale of DLJ common stock as well as the March 2001 offer by
Credit Suisse to purchase the publicly owned CSFBdirect tracking stock for $4
per share and asserts claims for breaches of fiduciary duties and breach of
contract. Plaintiffs seek injunctive relief, an unspecified amount of
compensatory damages, and costs and expenses, including attorneys' fees. The
Uhrik action, along with the actions captioned Irvin Woods, et al. v. Joe L.
Roby, et al.; Thomas Rolle v. Joe L. Roby, et al.; Andrew Loguercio v. Joe L.
Roby, et al.; and Robert Holschen v. Joe. L. Roby, et al., are among the actions
that have been consolidated under the caption In re CSFB Direct Tracking Stock
Shareholders Litigation. In May 2001, the Delaware Chancery Court ordered that
the Uhrik complaint be the operative complaint in the consolidated actions. A
memorandum of understanding outlining the terms of a proposed settlement was
executed in July 2001.
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.
In April 2001, an amended class action complaint entitled Miller, et al. v.
Mitchell Hutchins Asset Management, Inc., et al. was filed in Federal District
Court in the Southern District of Illinois against Alliance, Alliance Fund
Distributors, Inc. ("AFD"), a wholly owned subsidiary of Alliance, and other
defendants alleging violations of the Federal Investment Company Act of 1940, as
amended ("ICA"), and breaches of common law fiduciary duty. The allegations in
the amended complaint concern six mutual funds with which Alliance has
investment advisory agreements, including Alliance Premier Growth Fund, Alliance
Health Care Fund, Alliance Growth Fund, Alliance Quasar Fund, Alliance Fund and
Alliance Disciplined Value Fund. The amended complaint alleges principally that
(i) certain advisory agreements concerning these funds were negotiated,
approved, and executed in violation of the ICA, in particular because certain
directors of these funds should be deemed interested under the ICA; (ii) the
distribution plans for these funds were negotiated, approved, and executed in
violation of the ICA; and (iii) the advisory fees and distribution fees paid to
Alliance and AFD, respectively, are excessive and, therefore, constitute a
breach of fiduciary duty. Alliance and AFD believe that plaintiffs' allegations
are without merit and intend to vigorously defend against these allegations. At
the present time, management of Alliance and AFD are unable to estimate the
impact, if any, that the outcome of this action may have on Alliance's results
of operations or financial condition and AXA Financial's management is unable to
estimate the impact, if any, of the outcome of this action on its consolidated
results of operations or financial condition.
23
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.
However, it should be noted that the frequency of large damage awards, including
large punitive damage awards that bear little or no relation to actual economic
damages incurred by plaintiffs in some jurisdictions, continues to create the
potential for an unpredictable judgment in any given matter.
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
10.17 Restated Employment Agreement dated as of July 5, 2001
between the Holding Company, Equitable Life and
Stanley B. Tulin.
(b) Reports on Form 8-K
None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, AXA
Financial, Inc. has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: November 9, 2001 AXA FINANCIAL, INC.
By: /S/Stanley B. Tulin
----------------------------------------
Name: Stanley B. Tulin
Title: Vice Chairman of the Board and
Chief Financial Officer
Date: November 9, 2001 /S/Alvin H. Fenichel
----------------------------------------
Name: Alvin H. Fenichel
Title: Senior Vice President and
Controller
25