UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended June 30, 2004 Commission File No. 0-25280
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THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
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(Exact name of registrant as specified in its charter)
New York 13-5570651
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1290 Avenue of the Americas, New York, New York 10104
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(Address of principal executive offices) (Zip Code)
(212) 554-1234
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Registrant's telephone number, including area code
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 | |
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes | | No | X |
No voting or non-voting common equity of the registrant is held by
non-affiliates of the registrant as of August 12, 2004.
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 12, 2004
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Common Stock, $1.25 par value 2,000,000
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 36
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2004
TABLE OF CONTENTS
Page
PART I FINANCIAL INFORMATION
Item 1: Unaudited Consolidated Financial Statements
o Consolidated Balance Sheets, June 30, 2004 and
December 31, 2003............................................. 3
o Consolidated Statements of Earnings, Three Months
and Six Months Ended June 30, 2004 and 2003................... 4
o Consolidated Statements of Shareholder's Equity,
Six Months Ended June 30, 2004 and 2003....................... 5
o Consolidated Statements of Cash Flows, Six Months Ended
June 30, 2004 and 2003........................................ 6
o Notes to Consolidated Financial Statements.................... 7
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations ("Management Narrative")................... 23
Item 3: Quantitative and Qualitative Disclosures About Market Risk*...... 30
Item 4: Controls and Procedures.......................................... 30
PART II OTHER INFORMATION
Item 1: Legal Proceedings................................................ 31
Item 2: Changes in Securities............................................ 35
Item 3: Defaults Upon Senior Securities.................................. 35
Item 4: Submission of Matters to a Vote of Security Holders.............. 35
Item 5: Other Information................................................ 35
Item 6: Exhibits and Reports on Form 8-K................................. 35
SIGNATURES ................................................................. 36
*Omitted pursuant to General Instruction H to Form 10-Q.
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PART I FINANCIAL INFORMATION
ITEM 1: UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
JUNE 30, December 31,
2004 2003
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(IN MILLIONS)
ASSETS
Investments:
Fixed maturities available for sale, at estimated fair value.... $ 29,142.8 $ 29,095.5
Mortgage loans on real estate................................... 3,179.8 3,503.1
Equity real estate, held for the production of income........... 646.1 656.5
Policy loans.................................................... 3,870.8 3,894.3
Other equity investments........................................ 920.7 789.1
Other invested assets........................................... 1,133.7 1,101.6
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Total investments.......................................... 38,893.9 39,040.1
Cash and cash equivalents.......................................... 1,438.5 722.7
Cash and securities segregated, at estimated fair value............ 1,196.1 1,285.8
Broker-dealer related receivables.................................. 2,116.4 2,284.7
Deferred policy acquisition costs.................................. 6,699.1 6,290.4
Goodwill and other intangible assets, net.......................... 3,705.4 3,513.4
Amounts due from reinsurers........................................ 2,487.7 2,460.4
Loans to affiliates, at estimated fair value....................... 400.0 400.0
Other assets....................................................... 3,717.1 3,829.7
Separate Accounts' assets.......................................... 55,645.9 54,438.1
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TOTAL ASSETS....................................................... $ 116,300.1 $ 114,265.3
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LIABILITIES
Policyholders' account balances.................................... $ 26,224.0 $ 25,307.7
Future policy benefits and other policyholders liabilities......... 13,883.8 13,934.7
Broker-dealer related payables..................................... 1,256.1 1,261.8
Customers related payables......................................... 2,004.9 1,897.5
Amounts due to reinsurers.......................................... 950.9 936.5
Short-term and long-term debt...................................... 1,254.9 1,253.2
Federal income taxes payable....................................... 2,316.6 2,362.8
Other liabilities.................................................. 1,681.6 2,006.9
Separate Accounts' liabilities..................................... 55,645.9 54,300.6
Minority interest in equity of consolidated subsidiaries........... 2,002.9 1,744.9
Minority interest subject to redemption rights..................... 391.0 488.1
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Total liabilities.......................................... 107,612.6 105,494.7
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Commitments and contingencies (Note 12)
SHAREHOLDER'S EQUITY
Common stock, $1.25 par value, 2.0 million shares authorized,
issued and outstanding.......................................... 2.5 2.5
Capital in excess of par value..................................... 4,866.1 4,848.2
Retained earnings.................................................. 3,274.2 3,027.1
Accumulated other comprehensive income............................. 544.7 892.8
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Total shareholder's equity................................. 8,687.5 8,770.6
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TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY......................... $ 116,300.1 $ 114,265.3
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See Notes to Consolidated Financial Statements.
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THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
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2004 2003 2004 2003
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(IN MILLIONS)
REVENUES
Universal life and investment-type
product policy fee income.......................... $ 374.5 $ 334.0 $ 747.1 $ 650.0
Premiums.............................................. 221.1 214.3 452.4 458.0
Net investment income................................. 628.5 589.6 1,280.7 1,175.7
Investment gains (losses), net........................ 9.0 28.8 53.6 (96.2)
Commissions, fees and other income.................... 786.6 660.1 1,610.1 1,314.0
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Total revenues................................ 2,019.7 1,826.8 4,143.9 3,501.5
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BENEFITS AND OTHER DEDUCTIONS
Policyholders' benefits............................... 450.3 395.1 903.6 879.2
Interest credited to policyholders' account
balances........................................... 239.9 242.2 511.9 478.0
Compensation and benefits............................. 367.5 330.3 738.7 650.8
Commissions........................................... 251.5 251.8 496.9 485.9
Distribution plan payments............................ 92.8 91.9 189.9 181.0
Amortization of deferred sales commissions............ 46.7 52.3 95.2 105.3
Interest expense...................................... 21.5 20.7 42.9 41.2
Amortization of deferred policy acquisition costs..... 57.6 88.4 180.3 175.6
Capitalization of deferred policy acquisition costs... (256.3) (259.9) (483.1) (482.1)
Rent expense.......................................... 43.1 40.8 89.6 82.4
Amortization of other intangible assets, net.......... 5.8 5.5 11.4 11.0
Other operating costs and expenses.................... 228.0 190.6 448.9 390.2
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Total benefits and other deductions........... 1,548.4 1,449.7 3,226.2 2,998.5
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Earnings from continuing operations before
income taxes and minority interest................. 471.3 377.1 917.7 503.0
Income tax expense.................................... (119.8) (85.0) (243.4) (112.8)
Minority interest in net income of
consolidated subsidiaries.......................... (82.2) (82.4) (177.6) (144.8)
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Earnings from continuing operations................... 269.3 209.7 496.7 245.4
Earnings from other discontinued operations, net
of income tax expense............................. 1.2 .1 3.3 .1
Cumulative effect of accounting changes, net of
income tax benefit................................. - - (2.9) -
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Net Earnings.......................................... $ 270.5 $ 209.8 $ 497.1 $ 245.5
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See Notes to Consolidated Financial Statements.
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THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
SIX MONTHS ENDED JUNE 30, 2004 AND 2003
(UNAUDITED)
2004 2003
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(IN MILLIONS)
SHAREHOLDER'S EQUITY
Common stock, at par value, beginning of year and end of period............. $ 2.5 $ 2.5
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Capital in excess of par value, beginning of year as previously reported.... 4,848.2 4,753.8
Prior period adjustment related to deferred Federal income taxes............ - 59.0
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Capital in excess of par value, beginning of year as restated............... 4,848.2 4,812.8
Increase in additional paid in capital in excess of par value............... 17.9 19.2
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Capital in excess of par value, end of period............................... 4,866.1 4,832.0
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Retained earnings, beginning of year as previously reported................. 3,027.1 2,740.6
Prior period adjustment related to deferred Federal income taxes............ - 162.1
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Retained earnings, beginning of year as restated............................ 3,027.1 2,902.7
Net earnings................................................................ 497.1 245.5
Shareholder dividends paid.................................................. (250.0) (150.0)
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Retained earnings, end of period............................................ 3,274.2 2,998.2
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Accumulated other comprehensive income, beginning of year................... 892.8 681.1
Other comprehensive (loss) income........................................... (348.1) 526.8
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Accumulated other comprehensive income, end of period....................... 544.7 1,207.9
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TOTAL SHAREHOLDER'S EQUITY, END OF PERIOD................................... $ 8,687.5 $ 9,040.6
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See Notes to Consolidated Financial Statements.
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THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2004 AND 2003
(UNAUDITED)
2004 2003
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(IN MILLIONS)
Net earnings................................................................. $ 497.1 $ 245.5
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Interest credited to policyholders' account balances.................... 511.9 478.0
Universal life and investment-type product policy fee income............ (747.1) (650.0)
Net change in broker-dealer and customer related receivables/payables... (39.5) 163.9
Investment (gains) losses, net.......................................... (53.6) 96.2
Change in segregated cash and securities, net........................... 89.7 (133.9)
Change in deferred policy acquisition costs............................. (302.8) (306.5)
Change in future policy benefits........................................ 75.4 (64.1)
Change in property and equipment........................................ (16.4) (27.1)
Change in income tax payable............................................ 135.2 107.8
Minority interest in net income of consolidated subsidiaries............ 177.6 144.8
Change in fair value of guaranteed minimum
income benefit reinsurance contracts.................................. (8.0) 18.0
Amortization of deferred sales commissions.............................. 95.2 105.3
Amortization of other intangible assets, net............................ 11.4 11.0
Change in accounts payable and accrued expenses......................... (185.9) (10.2)
Other, net.............................................................. 120.2 173.6
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Net cash provided by operating activities.................................... 360.4 352.3
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Cash flows from investing activities:
Maturities and repayments................................................. 1,821.5 2,020.1
Sales..................................................................... 2,562.1 2,308.6
Purchases................................................................. (4,252.7) (5,340.3)
Change in short-term investments.......................................... 261.4 241.3
Purchase of minority interest in consolidated subsidiary.................. (308.7) -
Other, net................................................................ 108.6 49.2
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Net cash provided (used) by investing activities............................. 192.2 (721.1)
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Cash flows from financing activities:
Policyholders' account balances:
Deposits................................................................ 1,872.9 3,148.4
Withdrawals and transfers to Separate Accounts.......................... (1,431.8) (1,407.9)
Net increase (decrease) in short-term financings.......................... 1.3 (17.2)
Shareholder dividends paid................................................ (250.0) (150.0)
Other, net................................................................ (29.2) (132.9)
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Net cash provided by financing activities.................................... 163.2 1,440.4
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Change in cash and cash equivalents.......................................... 715.8 1,071.6
Cash and cash equivalents, beginning of year................................. 722.7 269.6
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Cash and Cash Equivalents, End of Period..................................... $ 1,438.5 $ 1,341.2
======================= ======================
Supplemental cash flow information
Interest Paid............................................................. $ 45.6 $ 43.3
======================= ======================
Income Taxes Paid (Refunded).............................................. $ 220.7 $ (7.8)
======================= ======================
See Notes to Consolidated Financial Statements.
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THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
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
necessary in the opinion of management to present fairly the consolidated
financial position of the Company and its consolidated results of
operations and cash flows for the periods presented. All significant
intercompany transactions and balances except those with other discontinued
operations (see Note 7) have been eliminated in consolidation. These
statements should be read in conjunction with the consolidated financial
statements of the Company for the year ended December 31, 2003. The results
of operations for the six months ended June 30, 2004 are not necessarily
indicative of the results to be expected for the full year.
The terms "second quarter 2004" and "second quarter 2003" refer to the
three months ended June 30, 2004 and 2003, respectively. The terms "first
half of 2004" and "first half of 2003" refer to the six months ended June
30, 2004 and 2003, respectively.
Certain reclassifications have been made in the amounts presented for prior
periods to conform these periods to the current presentation.
2) PRIOR PERIOD ADJUSTMENT
A review by the Company of Federal income tax assets and liabilities during
second quarter 2003 identified an overstatement of the deferred Federal
income tax liability related to the years ended December 31, 2000 and
earlier. As a result, the Federal income tax liability as of December 31,
2001 and 2002 and June 30, 2003 was reduced by $221.1 million and the
consolidated shareholder's equity as of such dates was increased by $221.1
million, with no impact on the consolidated statements of earnings for the
years ended December 31, 2000, 2001, and 2002, the six months ended June
30, 2003 or any prior period after the adoption on January 1, 1992 of SFAS
No. 109, "Accounting for Income Taxes". This adjustment has been reported
in the accompanying financial statements as an increase in consolidated
shareholder's equity as of January 1, 2002.
3) PURCHASE OF MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY
In March 2004, a wholly owned subsidiary of the Company, designated by the
Holding Company, acquired 8.16 million Alliance Units at the aggregated
market price of $308.7 million from SCB Inc. and SCB Partners, Inc. under a
preexisting agreement. As a result of the transaction, the Company recorded
goodwill of $162.1 million and other intangible assets of $20.0 million.
Other intangible assets are amortized on a straight-line basis over their
estimated useful lives of twenty years. Upon completion of this
transaction, the Company's economic interest in Alliance increased to
approximately 45.6% and, when combined with the Holding Company's interest,
their total economic interest in Alliance increased to approximately 58.4%.
4) ACCOUNTING CHANGES AND NEW ACCOUNTING PRONOUNCEMENTS
At March 31, 2004, the Company completed its transition to the
consolidation and disclosure requirements of FIN No. 46(R), "Consolidation
of Variable Interest Entities, Revised".
At June 30, 2004, the Insurance Group's General Account held $87.5 million
of investment assets issued by VIEs and determined to be significant
variable interests under FIN No. 46(R). As reported in the consolidated
balance sheet, these investments included $45.3 million of fixed maturities
(collateralized debt and loan obligations) and $42.2 million of other
equity investments (principally investment limited partnership interests)
and are subject to ongoing review for impairment in value. These VIEs do
not require consolidation
-7-
because management has determined that the Insurance Group is not the
primary beneficiary. These variable interests and approximately $17.1
million of funding commitments to the investment limited partnerships at
June 30, 2004 represent the Insurance Group's maximum exposure to loss from
its direct involvement with the VIEs. The Insurance Group has no further
economic interest in these VIEs in the form of related guarantees,
commitments, derivatives, credit enhancements or similar instruments and
obligations.
Management of Alliance has reviewed its investment management agreements
and its investments in and other financial arrangements with certain
entities that hold client assets under management to determine the entities
that Alliance is required to consolidate under FIN No. 46(R). These
included the Offshore Funds, hedge funds, structured products, group trusts
and joint ventures.
As a result of its review, Alliance consolidated an investment in a joint
venture and two of the joint venture's mezzanine funds as of March 31,
2004. The joint venture and mezzanine funds have client assets under
management totaling approximately $162 million at June 30, 2004. Alliance's
maximum exposure to loss is limited to its investments in and prospective
investment management fees earned from these entities. Consolidation of
these entities resulted in increases in the Company's assets, principally
investments, and in its liabilities, principally minority interest in
consolidated entities, each of approximately $122.5 million, at June 30,
2004.
Alliance has significant variable interests in certain other VIEs with
approximately $.8 billion in client assets under management. However, these
VIEs do not require consolidation because management has determined that
Alliance is not the primary beneficiary. Alliance's maximum exposure to
loss in these entities is limited to its nominal investments in and
prospective investment management fees earned from these entities.
Alliance derives no direct benefit from client assets under management of
these entities other than investment management fees and cannot utilize
those assets in its operations.
Effective January 1, 2004, the Company adopted SOP 03-1, "Accounting and
Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration
Contracts and for Separate Accounts". SOP 03-1 required a change in the
Company's accounting policies relating to (a) general account interests in
separate accounts, (b) assets and liabilities associated with market value
adjusted fixed rate investment options available in certain variable
annuity contracts issued by Equitable Life, (c) liabilities related to
group pension participating contracts, and (d) liabilities related to
certain mortality and annuitization benefits, such as the no lapse
guarantee feature contained in variable and interest-sensitive life
policies.
The adoption of SOP 03-1 required changes in several of the Company's
accounting policies relating to separate account assets and liabilities.
The Company now reports the General Account's interests in separate
accounts as trading account securities within Other equity investments in
the consolidated balance sheet; prior to the adoption of SOP 03-1, such
interests were included in Separate Accounts' assets. Also, the assets and
liabilities of two Separate Accounts are now presented and accounted for as
General Account assets and liabilities, effective January 1, 2004.
Investment assets in these Separate Accounts principally consist of fixed
maturities that are classified as available for sale in the accompanying
2004 consolidated financial statements. These two Separate Accounts hold
assets and liabilities associated with market value adjusted fixed rate
investment options available in certain variable annuity contracts. In
addition, liabilities associated with the market value adjustment feature
are now reported at the accrued account balance. Prior to the adoption of
SOP 03-1, such liabilities had been reported at market adjusted value.
Prior to the adoption of SOP 03-1, the liabilities for group pension
participating contracts were adjusted only for changes in the fair value of
certain related investment assets that were reported at fair value in the
balance sheet (including fixed maturities and equity securities classified
as available for sale, but not equity real estate nor mortgage loans) with
changes in the liabilities recorded directly in Accumulated other
comprehensive income to offset the unrealized gains and losses on the
related assets. SOP 03-1 also required an adjustment to the liabilities for
group pension participating contracts to reflect the fair value of all the
assets on which those contracts' returns are based, regardless of whether
those assets are reported at fair value in the balance sheet. Changes in
the liability related to fluctuations in asset fair values are now reported
as Interest credited to policyholders' account balances in the consolidated
statements of earnings.
In addition, the adoption of SOP 03-1 resulted in a change in the method of
determining liabilities associated with the no lapse guarantee feature
contained in variable and interest-sensitive life contracts. While both the
Company's previous method of establishing the no lapse guarantee reserve
and the SOP 03-1 method are based
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on accumulation of a portion of the charges for the no lapse guarantee
feature, SOP 03-1 specifies a different approach for identifying the
portion of the fee to be accrued and establishing the related reserve.
The adoption of SOP 03-1 as of January 1, 2004 resulted in a decrease in
first half of 2004 net earnings of $2.9 million and an increase in other
comprehensive income of $12.4 million related to the cumulative effect of
the required changes in accounting. The determination of liabilities
associated with group pension participating contracts and mortality and
annuitization benefits, as well as related impacts on deferred acquisition
costs, is based on models that involve numerous estimates and subjective
judgments. There can be no assurance that the ultimate actual experience
will not differ from management's estimates.
5) INVESTMENTS
Investment valuation allowances for mortgage loans and equity real estate
and changes thereto follow:
SIX MONTHS ENDED
JUNE 30,
----------------------------------------------
2004 2003
-------------------- --------------------
(IN MILLIONS)
Balances, beginning of year............................... $ 20.5 $ 55.0
Additions charged to income............................... 2.8 6.0
Deductions for writedowns and asset dispositions.......... (4.7) (3.7)
Deduction for transfer of held for sale real estate
to held for production of income real estate........... - (31.5)
-------------------- --------------------
Balances, End of Period................................... $ 18.6 $ 25.8
==================== ====================
Balances, end of period comprise:
Mortgage loans on real estate.......................... $ 18.1 $ 23.4
Equity real estate..................................... .5 2.4
-------------------- --------------------
Total..................................................... $ 18.6 $ 25.8
==================== ====================
For the second quarter and first half of 2004 and of 2003, investment
income is shown net of investment expenses of $43.5 million, $56.9 million,
$86.8 million and $108.5 million, respectively.
As of June 30, 2004 and December 31, 2003, respectively, fixed maturities
classified as available for sale had amortized costs of $27,943.8 million
and $27,151.6 million. Also at June 30, 2004 and December 31, 2003,
respectively, Other equity investments included the General Account's
investments in Separate Accounts and other trading securities having
carrying values of $103.7 million and $1.0 million and costs of $100.5
million and $1.9 million and other equity securities with carrying values
of $2.2 million and $12.6 million and costs of $1.2 million and $11.6
million.
In the second quarter and first half of 2004 and of 2003, respectively, net
unrealized and realized holding gains on trading account equity securities
of $.9 million, $2.2 million, $4.2 million and $2.3 million were included
in net investment income in the consolidated statements of earnings.
For the first half of 2004 and of 2003, proceeds received on sales of fixed
maturities classified as available for sale amounted to $2,511.0 million
and $2,290.1 million, respectively. Gross gains of $35.3 million and $65.1
million and gross losses of $7.4 million and $24.5 million were realized on
these sales for the first half of 2004 and 2003, respectively. Unrealized
net investment gains (losses) related to fixed maturities classified as
available for sale decreased by $745.0 million during the first half of
2004, resulting in a balance of $1,198.9 million at June 30, 2004.
Impaired mortgage loans along with the related investment valuation
allowances for losses follow:
-9-
JUNE 30, December 31,
2004 2003
-------------------- -----------------------
(IN MILLIONS)
Impaired mortgage loans with investment valuation allowances......... $ 155.4 $ 149.4
Impaired mortgage loans without investment valuation allowances...... 17.3 29.1
--------------------- ----------------------
Recorded investment in impaired mortgage loans....................... 172.7 178.5
Investment valuation allowances...................................... (18.1) (18.8)
--------------------- ----------------------
Net Impaired Mortgage Loans.......................................... $ 154.6 $ 159.7
===================== ======================
During the first half of 2004 and 2003, respectively, the Company's average
recorded investment in impaired mortgage loans was $176.3 million and
$164.9 million. Interest income recognized on these impaired mortgage loans
totaled $6.1 million and $5.1 million for the first half of 2004 and 2003,
respectively.
Mortgage loans on real estate are placed on nonaccrual status once
management believes the collection of accrued interest is doubtful. Once
mortgage loans on real estate are classified as nonaccrual loans, interest
income is recognized under the cash basis of accounting and the resumption
of the interest accrual would commence only after all past due interest has
been collected or the mortgage loan on real estate has been restructured to
where the collection of interest is considered likely. At June 30, 2004 and
December 31, 2003, respectively, the carrying value of mortgage loans on
real estate that had been classified as nonaccrual loans was $138.8 million
and $143.2 million.
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) represents the expected maximum future post-tax earnings from the
Closed Block that would be recognized in income from continuing operations
over the period the policies and contracts in the Closed Block remain in
force. As of January 1, 2001, the Company has developed an actuarial
calculation of the expected timing of the Closed Block earnings.
If the actual cumulative earnings from the Closed Block are greater than
the expected cumulative earnings, only the expected earnings will be
recognized in net income. Actual cumulative earnings in excess of expected
cumulative earnings at any point in time are recorded as a policyholder
dividend obligation because they will ultimately be paid to Closed Block
policyholders as an additional policyholder dividend unless offset by
future performance that is less favorable than originally expected. If a
policyholder dividend obligation has been previously established and the
actual Closed Block earnings in a subsequent period are less than the
expected earnings for that period, the policyholder dividend obligation
would be reduced (but not below zero). If, over the period the policies and
contracts in the Closed Block remain in force, the actual cumulative
earnings of the Closed Block are less than the expected cumulative
earnings, only actual earnings would be recognized in income from
continuing operations. If the Closed Block has insufficient funds to make
guaranteed policy benefit payments, such payments will be made from assets
outside the Closed Block.
Many expenses related to Closed Block operations, including amortization of
DAC, are charged to operations outside of the Closed Block; accordingly,
net revenues of the Closed Block do not represent the actual profitability
of the Closed Block operations. Operating costs and expenses outside of the
Closed Block are, therefore, disproportionate to the business outside of
the Closed Block.
-10-
Summarized financial information for the Closed Block is as follows:
JUNE 30, December 31,
2004 2003
---------------------- ----------------------
(IN MILLIONS)
CLOSED BLOCK LIABILITIES:
Future policy benefits, policyholders' account balances and other..... $ 8,935.8 $ 8,972.1
Policyholder dividend obligation...................................... 150.7 242.1
Other liabilities..................................................... 143.0 129.5
---------------------- ----------------------
Total Closed Block liabilities........................................ 9,229.5 9,343.7
---------------------- ----------------------
ASSETS DESIGNATED TO THE CLOSED BLOCK:
Fixed maturities, available for sale, at estimated fair value
(amortized cost of $5,305.4 and $5,061.0).......................... 5,530.3 5,428.5
Mortgage loans on real estate......................................... 1,210.9 1,297.6
Policy loans.......................................................... 1,359.6 1,384.5
Cash and other invested assets........................................ 85.0 143.3
Other assets.......................................................... 182.3 199.2
---------------------- ----------------------
Total assets designated to the Closed Block.......................... 8,368.1 8,453.1
---------------------- ----------------------
Excess of Closed Block liabilities over assets designated to
the Closed Block................................................... 861.4 890.6
Amounts included in accumulated other comprehensive income:
Net unrealized investment gains, net of deferred income tax
expense of $26.0 and $43.9 and policyholder dividend
obligation of $150.7 and $242.1................................. 48.3 81.6
---------------------- ----------------------
Maximum Future Earnings To Be Recognized From Closed Block
Assets and Liabilities............................................ $ 909.7 $ 972.2
====================== ======================
Closed Block revenues and expenses were as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------------------- --------------------------------------
2004 2003 2004 2003
----------------- ----------------- ----------------- -----------------
(IN MILLIONS)
REVENUES:
Premiums and other income............... $ 119.7 $ 128.3 $ 242.3 $ 259.9
Investment income (net of investment
expenses of $.1, $0, $.3
and $1.7)............................ 136.0 137.0 277.8 278.5
Investment gains (losses), net.......... 3.4 (11.3) 16.5 (30.1)
----------------- ----------------- ----------------- -----------------
Total revenues.......................... 259.1 254.0 536.6 508.3
----------------- ----------------- ----------------- -----------------
BENEFITS AND
OTHER DEDUCTIONS:
Policyholders' benefits and dividends... 220.9 229.9 431.1 459.6
Other operating costs and expenses...... 4.3 3.6 8.5 8.4
----------------- ----------------- ----------------- -----------------
Total benefits and other deductions..... 225.2 233.5 439.6 468.0
----------------- ----------------- ----------------- -----------------
Net revenues before
income tax expense................... 33.9 20.5 97.0 40.3
Income tax expense...................... (12.2) (7.5) (34.5) (14.8)
----------------- ----------------- ----------------- -----------------
Net Revenues............................ $ 21.7 $ 13.0 $ 62.5 $ 25.5
================= ================= ================= =================
-11-
Reconciliation of the policyholder dividend obligation is as follows:
SIX MONTHS ENDED
JUNE 30,
----------------------------------------------------
2004 2003
----------------------- -----------------------
(IN MILLIONS)
Balances, beginning of year....................... $ 242.1 $ 213.3
Unrealized investment (losses) gains.............. (91.4) 186.7
----------------------- -----------------------
Balances, End of Period........................... $ 150.7 $ 400.0
======================= =======================
7) OTHER DISCONTINUED OPERATIONS
Summarized financial information for Other Discontinued Operations follows:
JUNE 30, December 31,
2004 2003
----------------------- ----------------------
(IN MILLIONS)
BALANCE SHEETS
Fixed maturities, available for sale, at estimated fair value
(amortized cost of $634.6 and $644.7)........................... $ 682.9 $ 716.4
Equity real estate................................................. 194.7 198.2
Mortgage loans on real estate...................................... 44.8 63.9
Other equity investments........................................... 6.1 7.5
Other invested assets.............................................. .2 .2
----------------------- ----------------------
Total investments............................................... 928.7 986.2
Cash and cash equivalents.......................................... 54.8 63.0
Other assets....................................................... 124.5 110.9
----------------------- ----------------------
Total Assets....................................................... $ 1,108.0 $ 1,160.1
======================= ======================
Policyholders liabilities.......................................... $ 863.2 $ 880.3
Allowance for future losses........................................ 137.5 173.4
Other liabilities.................................................. 107.3 106.4
----------------------- ----------------------
Total Liabilities.................................................. $ 1,108.0 $ 1,160.1
======================= ======================
-12-
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------------- --------------------------------
2004 2003 2004 2003
-------------- -------------- -------------- --------------
(IN MILLIONS)
STATEMENTS OF EARNINGS
Investment income (net of investment
expenses of $4.3, $5.0, $8.6
and $11.4)..................................... $ 17.2 $ 17.2 $ 34.5 $ 36.1
Investment gains (losses), net.................... .8 (.4) 3.3 .2
-------------- -------------- -------------- --------------
Total revenues.................................... 18.0 16.8 37.8 36.3
Benefits and other deductions..................... 24.6 23.4 50.3 46.4
Losses charged to allowance for future losses.... (6.6) (6.6) (12.5) (10.1)
-------------- -------------- -------------- --------------
Pre-tax results from operations................... - - - -
Pre-tax earnings from
releasing the allowance
for future losses.............................. 1.8 .2 5.0 .2
Income tax expense................................ (.6) (.1) (1.7) (.1)
-------------- -------------- -------------- --------------
Income from Other Discontinued
Operations.................................... $ 1.2 $ .1 $ 3.3 $ .1
============== ============== ============== ==============
The Company'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. These updated assumptions and estimates
resulted in a release of the allowance in each of the periods presented
above.
Management believes the allowance for future losses at June 30, 2004 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.
Valuation allowances of $2.4 million and $2.5 million on mortgage loans on
real estate were held at June 30, 2004 and December 31, 2003, respectively.
8) GMDB, GMIB, AND NO LAPSE GUARANTEE FEATURES
Variable Annuity Contracts - GMDB and GMIB
------------------------------------------
Equitable Life issues certain variable annuity contracts with GMDB and GMIB
features that guarantee either:
a) Return of Premium: the benefit is the greater of current account
value or premiums paid (adjusted for withdrawals);
b) Ratchet: the benefit is the greatest of current account value,
premiums paid (adjusted for withdrawals), or the highest account
value on any anniversary up to contractually specified ages
(adjusted for withdrawals);
c) Roll-Up: the benefit is the greater of current account value or
premiums paid (adjusted for withdrawals) accumulated at
contractually specified interest rates up to specified ages; or
d) Combo: the benefit is the greater of the ratchet benefit or the
roll-up benefit.
-13-
The following table summarizes the GMDB and GMIB liabilities, before
reinsurance ceded, reflected in the General Account in future policy
benefits and other policyholders liabilities in 2004:
GMDB GMIB TOTAL
----------------------- ----------------------- ----------------------
(IN MILLIONS)
Balance at December 31, 2003.................... $ 69.3 $ 85.6 $ 154.9
Paid guarantee benefits...................... (24.0) - (24.0)
Other changes in reserve..................... 18.5 3.2 21.7
----------------------- ----------------------- ----------------------
Balance at June 30, 2004........................ $ 63.8 $ 88.8 $ 152.6
======================= ======================= ======================
Related GMDB reinsurance ceded amounts were:
GMDB
---------------------------
(IN MILLIONS)
Balance at December 31, 2003.................... $ 17.2
Paid guarantee benefits ceded................ (6.8)
Other changes in reserve..................... 1.3
---------------------------
Balance at June 30, 2004........................ $ 11.7
===========================
The GMIB reinsurance contracts are considered derivatives and are reported
at fair value.
The June 30, 2004 values for those variable contracts with GMDB and GMIB
features are presented in the following table. Since variable contracts
with GMDB guarantees may also offer GMIB guarantees in each contract, the
GMDB and GMIB amounts listed are not mutually exclusive:
RETURN
OF
PREMIUM RATCHET ROLL-UP COMBO TOTAL
------------- --------------- ------------ ------------- ------------
(DOLLARS IN MILLIONS)
GMDB:
-----
Account value (1)............................. $ 28,122 $ 5,648 $ 8,037 $ 8,277 $ 50,084
Net amount at risk, gross..................... $ 1,610 $ 836 $ 2,091 $ 46 $ 4,583
Net amount at risk, net of amounts
reinsured.................................. $ 1,607 $ 561 $ 1,269 $ 46 $ 3,483
Average attained age of
contractholders............................ 49.5 59.9 62.1 60.1 51.9
Percentage of contractholders
over age 70................................ 7.2% 21.3% 27.0% 20.2% 10.6%
Range of guaranteed minimum return rates...... N/A N/A 3%-6% 3%-6% N/A
GMIB:
-----
Account value (2)............................. N/A N/A $ 5,704 $ 11,290 $ 16,994
Net amount at risk, gross..................... N/A N/A $ 326 $ - $ 326
Net amount at risk, net of amounts
reinsured.................................. N/A N/A $ 80 $ - $ 80
Weighted average years remaining until
earliest annuitization..................... N/A N/A 4.1 9.5 7.3
Range of guaranteed minimum return rates...... N/A N/A 3%-6% 3%-6% 3%-6%
(1) Included General Account balances of $11,432 million, $202 million,
$149 million and $401 million, respectively, for a total of $12,184
million.
-14-
(2) Included General Account balances of $2 million and $579 million,
respectively, for a total of $581 million.
For contracts with the GMDB feature, the net amount at risk in the event of
death as of June 30, 2004 is the amount by which the GMDB benefits exceed
related account values.
For contracts with the GMIB feature, the net amount at risk in the event of
annuitization as of June 30, 2004 is defined as the amount by which the
present value of the GMIB benefits exceeds related account values, taking
into account the relationship between current annuity purchase rates and
the GMIB guaranteed annuity purchase rates.
In 2003, Equitable Life initiated a program to hedge certain risks
associated with the GMDB feature of the Accumulator(R) series of annuity
products sold beginning April 2002. In 2004, the program was expanded to
include hedging for certain risks associated with the GMIB feature of the
Accumulator(R) series of annuity products sold beginning 2004. This program
currently utilizes exchange-traded futures contracts that are dynamically
managed in an effort to reduce the economic impact of unfavorable changes
in GMDB and GMIB exposures attributable to movements in the equity and
fixed income markets. At June 30, 2004, the total account value and net
amount at risk of contracts were $16,374.0 million and $63.0 million,
respectively, for the GMDB hedge program and $1,085.0 million and zero,
respectively, for the GMIB hedge program.
The following table presents the aggregate fair value of assets, by major
investment fund option, held by Separate Accounts that are subject to GMDB
and GMIB benefits and guarantees. Since variable contracts with GMDB
guarantees may also offer GMIB guarantees in each contract, the GMDB and
GMIB amounts listed are not mutually exclusive:
INVESTMENT IN VARIABLE INSURANCE TRUST MUTUAL FUNDS
JUNE 30, December 31,
2004 2003
---------------------- ------------------------
(IN MILLIONS)
GMDB:
Equity................................... $ 28,807 $ 26,159
Fixed income............................. 3,871 3,815
Balanced................................. 3,743 2,761
Other.................................... 1,479 1,497
---------------------- ------------------------
Total.................................... $ 37,900 $ 34,232
====================== ========================
GMIB:
Equity................................... $ 12,172 $ 10,025
Fixed income............................. 2,184 2,319
Balanced................................. 1,517 725
Other.................................... 540 711
---------------------- ------------------------
Total.................................... $ 16,413 $ 13,780
====================== ========================
Variable and Interest-Sensitive Life Insurance Policies - No Lapse
Guarantee
The no lapse guarantee feature contained in variable and interest-sensitive
life insurance policies keeps them in force in situations where the policy
value is not sufficient to cover monthly charges then due. The no lapse
guarantee remains in effect so long as the policy meets a contractually
specified premium funding test and certain other requirements.
The following table summarizes the no lapse guarantee liabilities reflected
in the General Account in future policy benefits and other policyholders
liabilities, and related reinsurance ceded:
-15-
DIRECT LIABILITY REINSURANCE CEDED NET
----------------------- ----------------------- ----------------------
(IN MILLIONS)
Balance at December 31, 2003................ $ 37.4 $ - $ 37.4
Impact of adoption of SOP 03-1........... (23.4) (1.7) (25.1)
Other changes in reserve................. 2.0 (2.5) (.5)
----------------------- ----------------------- ----------------------
Balance at June 30, 2004.................... $ 16.0 $ (4.2) $ 11.8
======================= ======================= ======================
9) EMPLOYEE BENEFIT PLANS
The Company sponsors qualified and non-qualified defined benefit plans
covering substantially all employees (including certain qualified part-time
employees), managers and certain agents.
Components of net periodic pension expense (credit) for the qualified plans
follow:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------------- -------------------------------------
2004 2003 2004 2003
------------------ ----------------- ----------------- -----------------
(IN MILLIONS)
Service cost..................................... $ 8.4 $ 8.7 $ 17.8 $ 17.3
Interest cost on projected benefit obligation.... 30.6 31.4 61.1 62.8
Expected return on assets........................ (43.4) (43.7) (85.5) (87.4)
Net amortization and deferrals................... 13.9 10.5 32.6 21.0
------------------ ----------------- ----------------- -----------------
Net Periodic Pension Expense..................... $ 9.5 $ 6.9 $ 26.0 $ 13.7
================== ================= ================= =================
10) 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 and at-the-money AXA ADR options of equivalent
intrinsic value. The maximum obligation for the Stock Appreciation Rights
is $73.3 million, based upon the underlying price of AXA ADRs at January 2,
2001, the closing date of the aforementioned merger. The Company recorded
an increase in the Stock Appreciation Rights liability of $4.8 million and
$.3 million for the second quarter of 2004 and 2003, and of $2.8 million
and $.3 million for the first half of 2004 and 2003, respectively,
reflecting the variable accounting for Stock Appreciation Rights, based on
the changes in the market value of AXA ADRs for the periods then ended. At
June 30, 2004, the Stock Appreciation Rights liability was $14.8 million.
11) INCOME TAXES
Income taxes for interim periods have been computed using an estimated
annual effective tax rate. This rate is revised, if necessary, at the end
of each successive interim period to reflect the current estimate of the
annual effective tax rate.
12) LITIGATION
There have been no new material legal proceedings and no material
developments in specific litigations previously reported in Note 16 of the
Company's Notes to Consolidated Financial Statements for the year ended
December 31, 2003 (the "Litigation Note"), except as described below:
In AMERICAN NATIONAL BANK, in April 2004, Emerald filed a motion for
summary judgment on liability. Also in April 2004, Emerald filed a motion
to amend its complaint to attempt to cure a defect in diversity
jurisdiction. In April 2004, Equitable Life filed its opposition to this
motion and Emerald filed its reply. In July 2004, the court denied
Emerald's motion and dismissed Emerald's complaint for lack of subject
matter (diversity)
-16-
jurisdiction. In June 2004, Emerald Investments L.P. filed a substantially
similar complaint as the dismissed action against Equitable Life, AXA
Client Solutions, LLC, and AXA Financial in the United States District
Court for the Northern District of Illinois. In July 2004, Emerald filed an
amended complaint, to which Equitable Life filed an answer asserting
several affirmative defenses; Equitable Life also filed a partial motion to
dismiss the amended complaint.
In the action Equitable Life commenced against Emerald in December 2001,
the court granted Emerald's motion for summary judgment in March 2004. In
July 2004, Equitable Life filed a motion to dismiss this action on the
ground that there is no subject matter (diversity) jurisdiction.
In DH2, the complaint was served on Equitable Life and EQ Advisors Trust in
May 2004. In July 2004, DH2 filed an amended complaint adding the
individual trustees as defendants.
In FISCHEL, in April 2004, the District Court denied Equitable Life's
motion for reconsideration. In May 2004, the Ninth Circuit entered an order
directing the District Court to award plaintiffs' counsel certain of their
attorneys' fees in connection with the previous settlement of a second
count of the complaint which is unrelated to the health benefits claims
that remain before the court. Equitable Life will pay those attorneys' fees
out of a settlement fund already set aside as part of that previous
settlement. Following its decision to deny the motion for reconsideration,
the District Court has now scheduled a hearing for September 2004 to
address the relief that plaintiffs are entitled to on the health benefits
claims.
In HIRT, in July 2004, the parties filed cross motions for summary judgment
asking the court to find in their respective favors on plaintiffs' claim
that (1) the cash balance formula of the retirement plan violates ERISA's
age discrimination provisions and (2) the notice of plan amendment
distributed by Equitable Life violated ERISA's notice rules.
In BERGER, in March 2004, the District Court entered an order certifying a
class consisting of "[a]ll present, former and retired Equitable agents who
(a) lost eligibility for benefits under any Equitable ERISA plan during any
period on or after January 1, 1999 because of the application of the policy
adopted by Equitable of using compliance with specified sales goals as the
test of who was a "full time life insurance salesman" and thereby eligible
for benefits under any such plan, or (b) remain subject to losing such
benefits in the future because of the potential application to them of that
policy." Discovery is ongoing. The case has been placed on the January 2005
pooled trial calendar.
In ECKERT, in June 2004, plaintiff, in connection with a settlement of a
proceeding entitled ECKERT V. AXA ADVISORS, LLC, ET AL. filed with the
National Association of Securities Dealers, Inc., released his putative
class action claim against the Company. In June 2004, Plaintiff's counsel
filed a motion for withdrawal of plaintiff from the putative class action
lawsuit and intervention by another member of the putative class as
plaintiff.
In the MONY STOCKHOLDER LITIGATION, on April 6, 2004, the Delaware Court of
Chancery heard plaintiffs' second preliminary injunction motion, brought on
the basis of the new allegations in their second amended complaint. In
their motion, plaintiffs sought an order (i) enjoining AXA Financial and
MONY's directors and officers from voting their shares at the May 18, 2004
MONY Shareholder Meeting, (ii) compelling additional disclosure by MONY,
and (iii) enjoining MONY from counting the votes cast by shareholders on
proxy cards submitted in connection with the original February 24, 2004
Shareholder Meeting date (the "original proxies"). On April 9, 2004, Vice
Chancellor Lamb denied plaintiffs' motion and granted summary judgment to
defendants on the issue regarding the legal validity of the original
proxies. On April 14, 2004, plaintiffs filed a motion to expedite the
proceedings and to schedule a hearing on a third motion for a preliminary
injunction regarding the use by MONY of the original proxies. Prior to the
scheduling of a hearing on the plaintiffs' third motion for a preliminary
injunction, the parties engaged in arms-length negotiations concerning a
possible settlement of the litigation. Those negotiations resulted in the
execution of a Memorandum of Understanding dated May 17, 2004, which set
forth the terms of an agreement in principle to settle the litigation,
subject to, among other things, certification of a class for settlement
purposes, release of claims against all defendants and plaintiffs'
participation in the preparation of, and monitoring compliance with, agreed
procedures for the tabulation of proxies cast by retail shareholders at the
May 18, 2004 MONY Shareholder Meeting. On or about July 13, 2004, counsel
for the parties executed a Stipulation of Settlement setting forth the
terms of a definitive settlement, subject to, among other things, approval
by the Delaware Chancery Court. On July 13, 2004, the parties filed the
Stipulation of Settlement with the Delaware Chancery Court and requested
that the Court schedule a hearing to approve the settlement and authorize
notice of the terms of the Stipulation of Settlement, the date of the
hearing, and the procedures for class members to object to the settlement.
On July 19, 2004, the Delaware Chancery Court entered an order, among other
things, certifying a class for settlement purposes only and scheduling a
hearing on the fairness of the proposed settlement for September 28, 2004.
-17-
In April 2004, a purported nationwide class action lawsuit was filed in the
Circuit Court for Madison County, Illinois entitled MATTHEW WIGGENHORN V.
EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES. The lawsuit alleges
that Equitable Life uses stale prices of the foreign securities within the
investment divisions of its variable insurance products. The complaint
further alleges that Equitable Life's use of stale pricing diluted the
returns of the purported class. The complaint also alleges that Equitable
Life breached its fiduciary duty to the class by allowing market timing in
general within Equitable Life's variable insurance products, thereby
diluting the returns of the class. The lawsuit asserts causes of action for
negligence, gross negligence, breach of contract, and breach of fiduciary
duty and seeks unspecified compensatory and punitive damages, plus
prejudgment interest, attorneys' fees and costs. In June 2004, Equitable
Life removed the case to federal court and in July 2004 filed a motion to
dismiss. In July 2004, plaintiff filed a motion to remand the action to
state court.
Although the outcome of litigation cannot be predicted with certainty, the
Company's management believes that, subject to the foregoing, the ultimate
resolution of the matters described above should not have a material
adverse effect on the consolidated financial position of the Company. The
Company's management cannot make an estimate of loss, if any, or predict
whether or not such litigations will have a material adverse effect on the
Company's consolidated results of operations in any particular period.
ALLIANCE LITIGATIONS
In BENAK, plaintiffs have not filed a notice of appeal.
In the SEBI matter with Mr. Arora, in March 2004, SEBI issued a final order
against Mr. Arora barring him from dealing directly or indirectly in the
Indian securities markets for a period of five years commencing from August
9, 2003. Alliance understands that Mr. Arora has appealed the order.
In the SEBI matter with Alliance, in May 2004, SEBI issued an Order of
Adjudicating Officer in respect of Alliance, ACAML and its local Indian
mutual fund whereby it levied a fine, jointly and severally, against
Alliance and ACAML in an amount of approximately $630,000 for not filing
the required notices in a timely manner. In June 2004, Alliance and ACAML
filed an appeal with respect to such order with SAT, which is still
pending.
In ERB, in June 2004, plaintiff filed an amended complaint ("Amended Erb
Complaint") in the Circuit Court of St. Clair County, Illinois. The Amended
Erb Complaint allegations are substantially similar to those contained in
the previous complaint; however, the Amended Erb Complaint adds a new
plaintiff and seeks to allege claims on behalf of a purported class of
persons or entities holding an interest in any portfolio managed by
Alliance's Large Cap Growth Team. The Amended Erb Complaint alleges that
Alliance breached its contracts with these persons or entities by
impermissibly purchasing shares of stocks that were not 1-rated. Plaintiffs
seek rescission of all purchases of any non-1-rated stocks Alliance made
for Premier Growth Fund and other Large Cap Growth Team clients' portfolios
over the past eight years, as well as an unspecified amount of damages. In
July 2004, Alliance removed the Erb action to the United States District
Court for the Southern District of Illinois on the basis that plaintiffs'
claims are preempted under the Securities Litigation Uniform Standards Act.
In the MUTUAL FUND TRADING LITIGATIONS (i.e., the Hindo Complaint and
similar lawsuits), three lawsuits making factual allegations generally
similar to those in the Hindo Complaint have been filed against Alliance
and certain other defendants in addition to the forty such lawsuits already
reported in the Litigation Note. As a result, between October 3, 2003 and
August 4, 2004, forty-three lawsuits, in addition to the Hindo Complaint,
have been filed. AXA Financial is named as a defendant, primarily as a
control person of Alliance, in thirty-five of these lawsuits (including the
Hindo Complaint). The three additional lawsuits are as follows:
Federal Court Class Actions: Two of the three additional lawsuits have
been brought as class actions filed in Federal court, increasing the
total number of such lawsuits to twenty-seven (twenty-three in the
United States District Court for the Southern District of New York,
two in the United States District Court for the District of New
Jersey, one in the United States District Court for the Northern
District of California and one in the United States District Court for
the District of Connecticut). Certain of these lawsuits allege claims
under the Securities Act, the Exchange Act, the Advisers Act, the ICA
and common law. All of these lawsuits are brought on behalf of
shareholders of AllianceBernstein Funds, except four. Of these four,
one was brought on behalf of a unitholder of Alliance Holding, and
three were brought on behalf of participants in the Profit Sharing
Plan for
-18-
Employees of Alliance Capital ("Plan"). The latter three lawsuits
allege claims under Sections 404, 405 and 406 of The Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), on the
grounds that defendants violated fiduciary obligations to the Plan by
failing to disclose the alleged market timing and late trading
activities in AllianceBernstein Funds, and by permitting the Plan to
invest in funds subject to those activities. One of these ERISA
actions has been voluntarily dismissed.
State Court Derivative Actions: The third additional lawsuit has been
brought as a derivative action in state court, increasing the total
number of such actions to four (one in the Supreme Court of the State
of New York, County of New York and three in the Superior Court of the
State of Massachusetts, County of Suffolk). The New York action was
brought derivatively on behalf of Alliance Holding and alleges that,
in connection with alleged market timing and late trading
transactions, defendants breached their fiduciary duties to Alliance
Holding and its unitholders by failing to maintain adequate controls
and employing improper practices in managing unspecified
AllianceBernstein Funds. The Massachusetts actions were brought
derivatively on behalf of certain AllianceBernstein Funds and allege
state common law claims for breach of fiduciary duty, abuse of
control, gross mismanagement, waste and unjust enrichment.
All of these lawsuits seek an unspecified amount of damages. All of the
Federal actions discussed above as well as those described in the
Litigation Note (i.e., the Hindo Complaint, Federal Court Class Actions and
Federal Court Derivative Actions) were the subject of a petition of
tag-along notices filed by Alliance before the Judicial Panel on
Multidistrict Litigation ("MDL Panel") seeking to have all of the actions
centralized in a single forum for pre-trial proceedings. On February 20,
2004, the MDL Panel transferred all of the actions to the United States
District Court for the District of Maryland ("Mutual Fund MDL"). On May 24,
2004, the Court appointed lead counsel and lead plaintiffs for each of the
various claim types asserted against the Alliance defendants. The Court has
ordered plaintiffs to file consolidated complaints by September 29, 2004.
Defendants have removed each of the State Court Representative Actions and
the State Court Individual Action (discussed in the Litigation Note), and
thereafter submitted the actions to the MDL Panel through notices of
tag-along action. On March 3, 2004 and April 6, 2004, the MDL Panel issued
orders conditionally transferring these cases and numerous others to the
District of Maryland. Transfer of all of these actions subsequently became
final. The plaintiffs in three of these four actions have moved to remand
the actions back to state court. On June 18, 2004, the Court issued an
interim opinion deferring decision on plaintiffs' motions to remand until a
later stage in the proceedings. Subsequently, the plaintiff in the State
Court Individual Action moved the Court for reconsideration of that interim
opinion and for immediate remand of her case to state court, and that
motion is pending.
Alliance recorded charges to income totaling $330 million during the second
half of 2003 in connection with establishing a $250 million restitution
fund, as described in the Litigation Note. During the first half of 2004,
Alliance paid $290 million related to certain Alliance matters (including
$250 million to the restitution fund as described above) and has
cumulatively paid $296 million. Alliance's management, however, cannot
determine at this time the eventual outcome, timing or impact of such
Alliance matters. Accordingly, it is possible that additional charges in
the future may be required.
On June 22, 2004, a purported class action complaint entitled AUCOIN, ET
AL. V. ALLIANCE CAPITAL MANAGEMENT L.P., ET AL. ("Aucoin Complaint") was
filed against Alliance, Alliance Holding, ACMC, AXA Financial, ABIRM,
certain current and former directors of the AllianceBernstein Funds, and
unnamed Doe defendants. The Aucoin Complaint names the AllianceBernstein
Funds as nominal defendants. The Aucoin Complaint also names AXA Financial
as a defendant as a control person of Alliance under the federal securities
laws. The Aucoin Complaint was filed in the United States District Court
for the Southern District of New York by an alleged shareholder of the
AllianceBernstein Growth & Income Fund. The Aucoin Complaint alleges, among
other things, (i) that certain of the defendants improperly authorized the
payment of excessive commissions and other fees from AllianceBernstein Fund
assets to broker-dealers in exchange for preferential marketing services,
(ii) that certain of the defendants misrepresented and omitted from
registration statements and other reports material facts concerning such
payments, and (iii) that certain defendants caused such conduct as control
persons of other defendants. The Aucoin Complaint asserts claims for
violation of Sections 34(b), 36(b) and 48(a) of the ICA, Sections 206 and
215 of the Advisers Act, breach of common law fiduciary duties, and aiding
and abetting breaches of common law fiduciary duties. Plaintiffs seek an
unspecified amount of compensatory damages and punitive damages, rescission
of their contracts with Alliance, including recovery of all fees paid to
Alliance pursuant to such contracts, an
-19-
accounting of all AllianceBernstein Fund-related fees, commissions and
soft dollar payments, and restitution of all unlawfully or discriminatorily
obtained fees and expenses.
Between June 22, 2004 and August 4, 2004, nine additional lawsuits making
factual allegations substantially similar to those in the Aucoin Complaint
were filed against Alliance and certain other defendants (including AXA
Financial), and others may be filed. All nine of the lawsuits (i) were
brought as class actions filed in the United States District Court for the
Southern District of New York, (ii) assert claims substantially identical
to the Aucoin Complaint and (iii) are brought on behalf of shareholders of
AllianceBernstein Funds.
With respect to certain matters discussed under "Alliance Litigations"
either herein or in the Litigation Note (other than the MUTUAL FUND TRADING
LITIGATIONS and the SEBI matters), management of Alliance is unable to
estimate the impact, if any, that the outcome of these matters may have on
Alliance's results of operations or financial condition and the Company's
management is unable to estimate the impact, if any, that the outcome of
these matters may have on the Company's results of operations or financial
position.
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 the Company's consolidated
financial position or results of operations. However, it should be noted
that the frequency of large damage awards, including large punitive damage
awards that bear little or no relation to actual economic damages incurred
by plaintiffs in some jurisdictions, continues to create the potential for
an unpredictable judgment in any given matter.
13) BUSINESS SEGMENT INFORMATION
The following tables reconcile segment revenues and earnings from
continuing operations before Federal income taxes and minority interest to
total revenues and earnings as reported on the consolidated statements of
earnings and segment assets to total assets on the consolidated balance
sheets, respectively.
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------------------- -------------------------------------
2004 2003 2004 2003
----------------- ------------------ ---------------- -----------------
(IN MILLIONS)
SEGMENT REVENUES:
Insurance............................ $ 1,301.4 $ 1,176.7 $ 2,700.0 $ 2,266.1
Investment Services.................. 739.1 665.9 1,485.0 1,268.5
Consolidation/elimination............ (20.8) (15.8) (41.1) (33.1)
----------------- ------------------ ----------------- -----------------
Total Revenues....................... $ 2,019.7 $ 1,826.8 $ 4,143.9 $ 3,501.5
================= ================== ================= =================
SEGMENT EARNINGS FROM CONTINUING
OPERATIONS BEFORE INCOME
TAXES AND MINORITY INTEREST:
Insurance............................ $ 309.7 $ 229.5 $ 581.9 $ 251.8
Investment Services.................. 162.1 147.6 336.3 251.2
Consolidation/elimination............ (.5) - (.5) -
----------------- ------------------ ----------------- -----------------
Total Earnings from Continuing
Operations before Income
Taxes and Minority Interest...... $ 471.3 $ 377.1 $ 917.7 $ 503.0
================= ================== ================= =================
-20-
JUNE 30, December 31,
2004 2003
------------------------ -----------------------
(IN MILLIONS)
ASSETS:
Insurance...................................... $ 102,443.5 $ 98,822.1
Investment Services............................ 13,882.7 15,410.1
Consolidation/elimination...................... (26.1) 33.1
------------------------ -----------------------
Total Assets................................... $ 116,300.1 $ 114,265.3
======================== =======================
14) RELATED PARTY TRANSACTIONS
Beginning January 1, 2000, the Company reimburses the Holding Company for
expenses relating to the Excess Retirement Plan, Supplemental Executive
Retirement Plan and certain other employee benefit plans that provide
participants with medical, life insurance, and deferred compensation
benefits. Such reimbursement was based on the cost to the Holding Company
of the benefits provided which totaled $13.6 million, $29.0 million, $13.6
million and $30.5 million, respectively, for the second quarter and first
six months of 2004 and of 2003.
The Company paid $158.7 million, $328.3 million, $158.4 million and $317.8
million, respectively, of commissions and fees to AXA Distribution and its
subsidiaries for sales of insurance products for the second quarter and
first six months of 2004 and of 2003. The Company charged AXA
Distribution's subsidiaries $72.6 million, $143.8 million, $72.9 million
and $146.8 million, respectively, for their applicable share of operating
expenses for the second quarter and first six months of 2004 and of 2003,
pursuant to the Agreements for Services.
15) STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation using the intrinsic value
method prescribed in APB No. 25. Compensation expense is not reflected in
the statement of earnings for options granted under the Holding Company's
Stock Incentive Plans as all had an exercise price equal to the market
value of the underlying common stock on the date of the grant and vest
solely with the passage of time. The following table illustrates the effect
on net income had compensation expense as related to options awarded under
those plans been determined based on SFAS No. 123's fair value based
method:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------------- ------------------------------------
2004 2003 2004 2003
------------- --------------- --------------- ---------------
(IN MILLIONS)
Net earnings as reported.................. $ 270.5 $ 209.8 $ 497.1 $ 245.5
Less: Total stock-based
employee compensation expense
determined under fair value method
for all awards, net of income tax
benefit................................. (7.3) (7.7) (14.7) (17.2)
------------- --------------- --------------- ---------------
Pro Forma Net Earnings.................... $ 263.2 $ 202.1 $ 482.4 $ 228.3
============= =============== =============== ===============
-21-
16) COMPREHENSIVE INCOME
The components of comprehensive income for second quarter 2004 and 2003 and
the first half of 2004 and of 2003 are as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------------ --------------------------------------
2004 2003 2004 2003
---------------- ---------------- ---------------- ------------------
(IN MILLIONS)
Net earnings.............................. $ 270.5 $ 209.8 $ 497.1 $ 245.5
---------------- ---------------- ---------------- ------------------
Change in unrealized (losses) gains,
net of reclassification adjustment..... (607.8) 356.4 (348.1) 526.8
---------------- ---------------- ---------------- ------------------
Other comprehensive (loss) income......... (607.8) 356.4 (348.1) 526.8
---------------- ---------------- ---------------- ------------------
Comprehensive (Loss) Income............... $ (337.3) $ 566.2 $ 149.0 $ 772.3
================ ================ ================ ==================
-22-
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Management's discussion and analysis is omitted pursuant to General Instruction
H of Form 10-Q. The management narrative for the Company that follows should be
read in conjunction with the Consolidated Financial Statements, the related
Notes to Consolidated Financial Statements and the information discussed under
Forward-Looking Statements included in this Form 10-Q, and with the management
narrative found in the Management's Discussion and Analysis ("MD&A") section
included in the Company's Annual Report on Form 10-K for the year ended December
31, 2003 ("2003 Form 10-K").
CONSOLIDATED RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2004 COMPARED TO SIX MONTHS ENDED JUNE 30, 2003
Earnings from continuing operations before income taxes and minority interest
were $917.7 million for the first six months of 2004, an increase of $414.7
million from the 2003 period, with $330.1 million and $85.1 million higher
earnings reported by the Insurance and Investment Services segments,
respectively. In first quarter 2004, the Company recorded a $2.9 million charge
(net of related income taxes of $1.6 million) for the cumulative effect of the
January 1, 2004 adoption of SOP 03-1. Net earnings for the Company totaled
$482.5 million for the first six months of 2004, up $237.0 million from the 2003
period.
Revenues. Total revenues for the first half of 2004 increased $642.4 million as
revenues for both the Insurance and Investment Services segments increased
$433.9 million and $216.5 million, respectively, as compared to the first six
months of 2003.
Policy fee income was $747.1 million, $97.1 million higher than in the 2003
period, largely due to higher average Separate Account balances resulting from
market appreciation and positive net cash flows.
Net investment income increased $105.0 million to $1.28 billion, reflecting a
higher level of fixed maturity and other equity investments in the General
Account, $84.6 million higher earnings from other equity investments due to
market improvement and prepayment gains of $23.4 million partially offset by
lower yields due to lower reinvestment rates. Higher short-term investment
positions in the General Account were maintained during 2003 pending investment
into longer-term securities, meeting our investment parameters, which support
underlying life and annuity products.
Investment gains, net totaled $53.6 million in the 2004 period compared to net
losses of $96.2 million in the first six months of 2003 principally due to lower
writedowns on fixed maturities partially offset by lower gains on sales of fixed
maturities. Net gains on sales of General Account fixed maturities were $41.9
million for the first half of 2004 as compared to $46.6 million in the 2003
period while writedowns on the fixed maturity portfolio of the General Account
totaled $20.3 million for the 2004 period compared to $162.4 million for the
prior year period.
There was a $296.1 million increase in commissions, fees and other income to
$1.61 billion in the first half of 2004 from $1.31 billion in the 2003 period.
The $211.5 million higher fees in the Investment Services segment were primarily
due to the $166.2 million increase in Alliance's investment advisory and
services fees to $1.02 billion due to an approximately 20.3% increase in average
AUM, the $13.7 million increase in brokerage transaction charges due to higher
volume and a $7.1 million performance based institutional investment management
fee, partially offset by approximately $36 million in revenue reductions. These
reductions resulted from reductions in advisory fees implemented for certain
Alliance-sponsored retail mutual funds in connection with the settlement of
market timing-related matters. Distribution revenues at Alliance were $228.2
million in the first six months of 2004, $19.5 million higher than in the
comparable 2003 period primarily due to higher average daily mutual fund AUM.
When compared to the first half of 2003, there was a $23.9 million increase in
revenues from institutional research services due generally to higher market
share and higher revenues from growth in European operations partially offset by
a decrease in NYSE average daily non-program trading volumes. The increase of
$92.5 million in the Insurance segment in the first six months of 2004 was
primarily due to higher gross investment management fees received from EQAT and
VIP Trust due to a higher asset base.
Benefits and Other Deductions. Total benefits and other deductions increased
$227.7 million to $3.23 billion for the first six months of 2004 as the
Insurance and the Investment Services segments posted increases of $103.8
million and $131.4 million, respectively.
-23-
The policyholders' benefits increase of $24.4 million to $903.6 million in the
first half of 2004 principally resulted from higher GMDB/GMIB benefits and
reserves due to growth in the business partially offset by lower policyholder
dividends due to reductions in the dividend scale.
The $33.9 million increase in interest credited to policyholders' account
balances to $511.9 million in the first half of 2004 was principally due to
higher account balances and the pass through of changes in the fair value of the
investment asset portfolio supporting group pension annuity participating
contracts that resulted from the implementation of SOP 03-1, partially offset by
the impact of lower crediting rates.
When compared to the first half of 2003, there was a $87.9 million increase
in compensation and benefits in the first six months of 2004 to $738.7 million,
as the $92.1 million higher expenses in the Investment Services segment were
partially offset by a $4.2 million decrease in the Insurance segment. The
increase in compensation and benefits in the Investment Services segment was due
to higher Alliance incentive compensation from higher earnings and higher
commissions reflecting higher sales in institutional research services and
Alliance's private client distribution channel, as well as the impact of new
business activity primarily in the second half of 2003 in the institutional
investment management channel. The decrease in compensation and benefit costs in
the Insurance segment was due in part to a decrease in salaries that was
partially offset by higher benefit costs. Additionally, compensation and
benefits for the Insurance segment included $2.8 million of expenses resulting
from changes in the Stock Appreciation Rights' liability in the 2004 period as
compared to $0.3 million of expenses in the comparable 2003 period.
Commissions increased $11.0 million to $496.9 million as a higher commission
rate on renewal life premiums in the 2004 period and higher commissions on
higher life product sales were partially offset by declines in first year
annuity commissions.
Distribution plan payments totaled $189.9 million for the first six months of
2004, up $8.9 million from the comparable prior year's period due to higher
average mutual fund AUM. Amortization of deferred sales commissions was $95.2
million, $10.1 million lower than in the first six months of 2003 primarily due
to declines in net amortizable assets due to lower U.S. sales.
DAC amortization increased $4.7 million to $180.3 million for the first six
months of 2004. Despite increases in current margins, DAC amortization remains
relatively flat due to the unlocking impact from recognition of higher expected
future margins driven by higher fees in variable insurance and annuity
contracts.
DAC capitalization, interest expense, rent expense and amortization of
intangible assets remained level from the first half of 2003 to the first half
of 2004.
Other operating costs and expenses totaled $448.9 million for the six months
ended June 30, 2004, with increases of $38.0 million and $28.2 million noted for
the Investment Services and Insurance segments, respectively. The Insurance
segment increase was primarily due to higher EQAT and VIP Trust subadvisory fees
due to higher asset values partially offset by lower amortization of capitalized
software in the 2004 period. Increases in the Investment Services segment were
principally due to the write-off of capitalized software, higher occupancy
costs, higher transaction processing expenses from OTC trading, higher
unrealized foreign exchange losses and higher travel and entertainment costs,
partially offset by incremental insurance recoveries related to previously
incurred legal expenses reported at Alliance.
Premiums and Deposits. Total premiums and deposits for insurance and annuity
products for the first six months of 2004 decreased from prior year levels by
$594.3 million to $6.79 billion. Sales of annuities in the first half of 2004
decreased 9.9% from the strong 2003 period, which had increased by 51% over the
comparable 2002 period's sales. This decline was primarily due to $658.6 million
lower premiums and deposits from variable annuities in the wholesale channels,
partially offset by $57.1 million higher variable annuity premiums and deposits
in the retail channel.
Surrenders and Withdrawals. When totals for the first six months of 2004 are
compared to the comparable 2003 period, surrenders and withdrawals increased
from $2.38 billion to $2.91 billion with respective increases of $461.8 million
and $71.0 million reported for individual annuities and variable and
interest-sensitive life product lines partially offset by $7.3 million lower
surrenders for traditional life insurance products. The annualized annuities
surrender rate decreased to 8.1% in the 2004 period from 8.8% in the comparable
period in 2003, while the individual life surrender rates showed an increase to
4.7% from 4.6%. The dollar increase in annuity surrenders resulted from higher
account balances driven by market appreciation and positive net cash flows. The
2004 individual life surrender rate included the impact of the surrender of a
single large COLI contract in first quarter
-24-
2004. 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)
JUNE 30,
--------------------------------------------
2004 2003
-------------------- --------------------
Third party.............................................. $ 423,902 $ 372,464
General Account, Holding Company Group and other......... 39,917 39,486
Separate Accounts........................................ 56,405 45,578
-------------------- --------------------
Total Assets Under Management............................ $ 520,224 $ 457,528
==================== ====================
Third party assets under management at June 30, 2004 increased $51.44 billion
primarily due to increases at Alliance. General Account, Holding Company Group
and other assets under management increased $431 million from the amounts
reported at June 30, 2003 due to higher sales of General Account based products.
The $10.83 billion increase in Separate Account assets under management resulted
from market appreciation and net new deposits, partially offset by the
conversion of an institutional real estate Separate Account into a private REIT
in second quarter 2004.
Alliance assets under management at June 30, 2004 totaled $480.6 billion as
compared to $426.2 billion at June 30, 2003. This increase during the 12 month
period ended June 30, 2004 resulted from market appreciation of $16.4 billion,
$36.1 billion and $5.6 billion, respectively, in retail, institutional and
private client AUM and net asset inflows of $1.1 billion and $4.9 billion,
respectively, in the institutional investment management and private client
distribution channels partially offset by $5.1 million and $4.6 million of net
long-term outflows and net cash management redemptions, respectively, in the
retail channel. Non-US clients accounted for 21.5% of Alliance's June 30, 2004
assets under management total.
LIQUIDITY AND CAPITAL RESOURCES
Equitable Life. In second quarter 2004, Equitable Life paid cash dividends of
$250.0 million, as compared to $150.0 million in the prior year's comparable
period.
In first quarter 2004, Equitable Life amended the terms of its $350.0 million
credit facility to extend its March 31, 2004 maturity date to October 15, 2004;
no other agreement terms were affected. At June 30, 2004, no amounts were
outstanding under Equitable Life's commercial paper program or its revolving
credit facility.
Alliance. As a result of charges for market timing-related matters and legal
proceedings recorded in the second half of 2003, there were no cash
distributions paid in first quarter 2004; cash distributions in second quarter
totaled $75.9 million.
In the first half of 2004, subsidiaries of Alliance paid approximately $38.4
million to purchase 841,760 Alliance Holding Units to fund deferred compensation
plans.
FORWARD-LOOKING STATEMENTS AND RISK CONSIDERATIONS
The Company'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 the Company's operations,
economic performance and financial position. Forward-looking statements include,
among other things, discussions concerning the Company'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. The Company 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
-25-
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 the Company's other public filings, press releases, oral
presentations and discussions. The following discussion highlights some of the
more important risk and other factors that could cause such differences and/or,
if realized, could have a material adverse effect on the Company's consolidated
financial position and/or results of operations.
Market Risk. The Company's businesses are subject to market risks arising from
its insurance asset/liability management, investment management and trading
activities. The primary market risk exposures 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 14 of Notes to
Consolidated Financial Statements, both contained in the 2003 Form 10-K.
Increased volatility of equity markets can impact profitability of the Insurance
and Investment Services segments. For the Insurance Group, in addition to
impacts on equity securities held in the General Account, significant changes in
equity markets impact asset-based policy fees charged on variable life and
annuity products. Moreover, for variable life and annuity products with
GMDB/GMIB features, sustained periods with declines in the value of underlying
Separate Account investments would increase the Insurance Group's net exposure
to guaranteed benefits under those contracts (increasing claims and reserves,
net of any reinsurance) at a time when fee income for these benefits is also
reduced from prior period levels. Increased volatility of equity markets also
will result in increased volatility of the fair value of the GMIB reinsurance
contracts.
Equity market volatility also may impact DAC amortization on variable and
universal life insurance contracts, variable annuities and participating
traditional life contracts. To the extent that actual market trends, and
reasonable expectations as to future performance drawn from those trends, lead
to reductions in the investment return and/or other related estimates underlying
the DAC amortization rates, DAC amortization could be accelerated. Volatile
equity markets can also impact the level of contractholder surrender activity,
which, in turn, can impact future profitability.
Interest rate fluctuations, equity price movements and changes in credit quality
may also affect invested assets held in the qualified pension plan which could
impact future pension plan costs.
The effects of significant equity market fluctuations on the Insurance Group's
operating results can be complex and subject to a variety of estimates and
assumptions, such as assumed rates of long-term equity market performance,
making it difficult to reliably predict effects on operating earnings over a
broad range of equity market performance alternatives. Further, these effects
may not always be proportional for market increases and market decreases.
Margins on interest-sensitive annuities and universal life insurance can be
affected by interest rate fluctuations. In a declining interest rate
environment, credited rates can generally be adjusted more quickly than the
related invested asset portfolio is affected by declining reinvestment rates,
tending to result in higher net interest margins on interest-sensitive products
in the short term. However, under scenarios in which interest rates fall and
remain at significantly lower levels, minimum guarantees on interest-sensitive
annuities and universal life insurance (generally 1.5% to 4.5%) could cause the
spread between the yield on the portfolio and the interest rate credited to
policyholders to deteriorate and in some cases, potentially, to become negative.
For both interest-sensitive annuities and universal life insurance, a rapid and
sustained rise in interest rates poses risks of deteriorating spreads and high
surrenders. In such an environment, there is pressure to increase credited rates
on interest-sensitive products to match competitors' new money rates. However,
such changes in credited rates generally occur more quickly than the earned
rates on the related invested asset portfolios reflect changes in market yields.
The greater and faster the rise in interest rates, the more the earned rates
will tend to lag behind market rates.
For the Investment Services segment, significant changes in equity markets can
impact revenues and the recoverability of deferred costs. See "Other Risks of
the Investment Services Segment" below.
Other Risks of the Insurance Segment. 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 the Company's strategy;
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 existing
and additional channels; the financial and claims-paying ratings of Equitable
-26-
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; its ability to provide effective financial planning
services that meet its customers' expectations; its ability to obtain
reinsurance for certain products, the offering of which products depends upon
the ability to reinsure all or a substantial portion of the risks; its
investment management performance; and unanticipated changes in industry trends.
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. Recent legislative tax changes have included, among other items,
changes to the taxation of corporate dividends and capital gains. Management
cannot predict what other proposals may be made, what legislation, if any, may
be introduced or enacted or what the effect of any other such legislation might
be. See "Business - Regulation" contained in the 2003 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 and software capitalization; successful implementation of
expense-reduction initiatives; secular trends; the ability to reach sales
targets for key products including the continuing market receptivity of its
variable annuity product, Accumulator(R) `04; the Company's mortality,
morbidity, persistency and claims experience; margins between investment results
from General Account Investment Assets and interest credited on individual
insurance and annuity products, which are subject to contractual minimum
guarantees; the level of claims and reserves on contracts with GMDB/GMIB and
other guaranteed features, the impact of related reinsurance and the
effectiveness of any program to hedge certain risks associated with such
features; the account balances against which policy fees are assessed on
universal and variable life insurance and variable annuity products; the pattern
of DAC amortization which is based on models involving numerous estimates and
subjective judgments including those regarding investment, mortality and expense
margins, expected market rates of return, lapse rates and anticipated surrender
charges; the adequacy of reserves and the extent to which subsequent experience
differs from management's estimates and assumptions, including future
reinvestment rates, used in determining those reserves; and the effects of any
future terrorist attacks or the war on terrorism. With regard to terrorism
generally, in August 2004, the Federal government announced a heightened threat
level for financial institutions.
Recoverability of DAC is dependent on future contract cash flows (including
premiums and deposits, contract charges, benefits, surrenders, withdrawals, and
expenses), which can be affected by equity market and interest rate trends as
well as changes in contract persistency levels. 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
that have created, and in the future may create, significant volatility in
investment income.
Other Risks of the Investment Services Segment. Alliance's revenues are largely
dependent on the total value and composition of assets under its management and
are, therefore, affected by the performance of financial markets, the investment
performance of sponsored investment products and separately managed accounts,
additions and withdrawals of assets, purchases and redemptions of mutual funds
and shifts of assets between accounts or products with different fee structures,
as well as general economic conditions, future acquisitions, competitive
conditions and government regulations, including tax rates. See "Results of
Continuing Operations by Segment - Investment Services" contained in the 2003
Form 10-K. Recently, a number of regulators have been focusing attention on
various practices in or affecting the investment management and/or mutual fund
industries, including, among others, late trading, market timing, and revenue
sharing. In December 2003, Alliance resolved regulatory claims with the SEC and
NYAG related to market timing in certain of its mutual funds. Alliance's
involvement in the market timing investigations and related matters may have an
adverse effect on the Company's and Alliance's assets under management,
including an increase in mutual fund redemptions, and may cause general
reputational damage, both of which could adversely affect the Company's and
Alliance's results of operations.
Payments by Alliance made to financial intermediaries in connection with the
sale of back-end load shares under Alliance's mutual fund distribution system
are capitalized as deferred sales commissions and amortized over periods not
exceeding five and one-half years, the periods of time during which the deferred
sales commission asset is expected to be recovered from distribution services
fees received from those funds and from contingent deferred sales charges
("CDSC") received from shareholders of those funds upon redemption of their
shares. CDSC cash recoveries are recorded as reductions of unamortized deferred
sales commissions when received. The recorded amount of the net deferred sales
commission asset was $316.6 million at June 30, 2004. Payments of sales
commissions made to financial intermediaries in connection with the sale of
back-end load shares under Alliance's mutual fund
-27-
distribution system during the first half of 2004 and 2003, net of CDSC
received of $19.2 million and $17.6 million, respectively, totaled approximately
$24.6 million and $61.0 million, respectively.
Alliance's management tests the deferred sales commission asset for
recoverability quarterly, or monthly when events or changes in circumstances
occur that could significantly increase the risk of impairment of the asset. As
of June 30, 2004, Alliance's management determined that the deferred sales
commission asset was not impaired. If Alliance's management determines in the
future that the deferred sales commission asset is not recoverable, an
impairment condition would exist and a loss would be measured as the amount by
which the recorded amount of the asset exceeds its estimated fair value.
Estimated fair value is determined using Alliance management's best estimate of
future cash flows discounted to a present value amount.
During the three month and six month periods ended June 30, 2004, respectively,
equity markets increased by approximately 2% and 3% as measured by the change in
the Standard & Poor's 500 Stock Index. Fixed income markets increased by
approximately 2% in second quarter 2004 as measured by the change in the Lehman
Brothers' Aggregate Bond Index and remained flat for the six month 2004 period.
The redemption rate for domestic back-end load shares was 25.8% and 25.7%,
respectively, for the second quarter and first six months of 2004. Declines in
financial markets or higher redemption levels, or both, as compared to the
assumptions used to estimate undiscounted future cash flows, could result in the
impairment of the deferred sales commission asset. Due to the volatility of the
capital markets and changes in redemption rates, Alliance's management is unable
to predict whether or when a future impairment of the deferred sales commission
asset might occur. Should an impairment occur, any loss would reduce materially
the recorded amount of the asset with a corresponding charge to expense.
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, asset reinvestment rates, ultimate mortality
experience and other factors that affect investment and benefit projections.
There can be no assurance that the losses provided for will not differ from the
losses ultimately realized. To the extent actual results or future projections
of 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.
Disclosure and Internal Control System. There are inherent limitations in the
effectiveness of any system of disclosure and internal controls, including the
possibilities of faulty judgments in decision-making, simple error or mistake,
fraud, the circumvention of controls by individual acts or the collusion of two
or more people, or management override of controls. Accordingly, even an
effective disclosure and internal control system can provide only reasonable
assurance with respect to disclosures and financial statement preparation.
Furthermore, because of changes in conditions, the effectiveness of a disclosure
and internal control system may vary over time.
Technology and Information Systems. The Company'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
purposes in a secure and timely manner. These systems are maintained to provide
customer privacy and are tested to ensure the viability of business resumption
plans. 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 the Company'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. The
Holding Company's insurance subsidiaries, including Equitable Life, like other
life and health insurers, are involved in such litigation and the Holding
Company's or such subsidiaries' results of operations and financial position
could be affected by defense and settlement costs and any unexpected material
adverse outcomes in such litigations as well as in other material litigations
pending against 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. In the last year,
Equitable Life, EQAT, Premier Trust, VIP Trust, AXA
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Advisors, or AXA Distributors have received various requests for information and
documents from the SEC and NASD. The requests have sought information relating
to, among other things, market timing, late trading, valuation, replacements and
exchanges of variable life insurance and annuities, investment company "revenue
sharing" arrangements, directed brokerage arrangements, fund portfolio brokerage
commissions, mutual fund sales and marketing, and related matters. Each of the
requests has been or is being responded to, including through the provision of
requested documents. At this time, management cannot predict what other actions
the SEC, NASD and/or other regulators may take or what the impact of such
actions might be. For further information, see "Business - Regulation" and
"Legal Proceedings," contained in the 2003 Form 10-K and herein.
Future Accounting Pronouncements. In the future, new accounting pronouncements,
as well as new interpretations of accounting pronouncements, may have material
effects on the Company's consolidated statements of earnings and shareholder's
equity. See Note 2 of Notes to Consolidated Financial Statements in the 2003
Form 10-K for pronouncements issued but not effective at December 31, 2003 as
well as Note 4 of Notes to Consolidated Financial Statements contained herein.
Regulation. The businesses conducted by the Holding Company's subsidiaries,
including Equitable Life, are subject to extensive regulation and supervision by
state insurance departments and Federal and state agencies regulating, among
other things, insurance and annuities, securities transactions, investment
companies, investment advisors and anti-money laundering compliance programs.
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, the District
of Columbia and Puerto Rico. See "Business - Regulation" contained in the 2003
Form 10-K.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Omitted pursuant to General Instruction H to Form 10-Q.
ITEM 4. CONTROLS AND PROCEDURES
An evaluation was performed under the supervision and with the participation of
management, including the Chief Executive Officer and the Chief Financial
Officer, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures as of June 30, 2004. Based on that
evaluation, management, including the Chief Executive Officer and Chief
Financial Officer, concluded that the Company's disclosure controls and
procedures are effective. There has been no change in the Company's internal
control over financial reporting that occurred during the period covered by this
report that has materially affected, or is reasonably likely to materially
affect, the Company's internal control over financial reporting.
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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 specific litigations previously reported in Note 16 of the
Company's Notes to Consolidated Financial Statements for the year ended
December 31, 2003 (the "Litigation Note"), contained in the 2003 Form 10-K,
except as described below:
In AMERICAN NATIONAL BANK, in April 2004, Emerald filed a motion for
summary judgment on liability. Also in April 2004, Emerald filed a motion
to amend its complaint to attempt to cure a defect in diversity
jurisdiction. In April 2004, Equitable Life filed its opposition to this
motion and Emerald filed its reply. In July 2004, the court denied
Emerald's motion and dismissed Emerald's complaint for lack of subject
matter (diversity) jurisdiction. In June 2004, Emerald Investments L.P.
filed a substantially similar complaint as the dismissed action against
Equitable Life, AXA Client Solutions, LLC, and AXA Financial in the United
States District Court for the Northern District of Illinois. In July 2004,
Emerald filed an amended complaint, to which Equitable Life filed an answer
asserting several affirmative defenses; Equitable Life also filed a partial
motion to dismiss the amended complaint.
In the action Equitable Life commenced against Emerald in December 2001,
the court granted Emerald's motion for summary judgment in March 2004. In
July 2004, Equitable Life filed a motion to dismiss this action on the
ground that there is no subject matter (diversity) jurisdiction.
In DH2, the complaint was served on Equitable Life and EQ Advisors Trust in
May 2004. in July 2004, DH2 filed an amended complaint adding the
individual trustees as defendants.
In FISCHEL, in April 2004, the District Court denied Equitable Life's
motion for reconsideration. In May 2004, the Ninth Circuit entered an order
directing the District Court to award plaintiffs' counsel certain of their
attorneys' fees in connection with the previous settlement of a second
count of the complaint which is unrelated to the health benefits claims
that remain before the court. Equitable Life will pay those attorneys' fees
out of a settlement fund already set aside as part of that previous
settlement. Following its decision to deny the motion for reconsideration,
the District Court has now scheduled a hearing for September 2004 to
address the relief that plaintiffs are entitled to on the health benefits
claims.
In HIRT, in July 2004, the parties filed cross motions for summary judgment
asking the court to find in their respective favors on plaintiffs' claim
that (1) the cash balance formula of the retirement plan violates ERISA's
age discrimination provisions and (2) the notice of plan amendment
distributed by Equitable Life violated ERISA's notice rules.
In BERGER, in March 2004, the District Court entered an order certifying a
class consisting of "[a]ll present, former and retired Equitable agents who
(a) lost eligibility for benefits under any Equitable ERISA plan during any
period on or after January 1, 1999 because of the application of the policy
adopted by Equitable of using compliance with specified sales goals as the
test of who was a "full time life insurance salesman" and thereby eligible
for benefits under any such plan, or (b) remain subject to losing such
benefits in the future because of the potential application to them of that
policy." Discovery is ongoing. The case has been placed on the January 2005
pooled trial calendar.
In ECKERT, in June 2004, plaintiff, in connection with a settlement of a
proceeding entitled ECKERT V. AXA ADVISORS, LLC, ET AL. filed with the
National Association of Securities Dealers, Inc., released his putative
class action claim against the Company. In June 2004, Plaintiff's counsel
filed a motion for withdrawal of plaintiff from the putative class action
lawsuit and intervention by another member of the putative class as
plaintiff.
In the MONY STOCKHOLDER LITIGATION, on April 6, 2004, the Delaware Court of
Chancery heard plaintiffs' second preliminary injunction motion, brought on
the basis of the new allegations in their second amended complaint. In
their motion, plaintiffs sought an order (i) enjoining AXA Financial and
MONY's directors and officers from voting their shares at the May 18, 2004
MONY Shareholder Meeting, (ii) compelling additional disclosure by MONY,
and (iii) enjoining MONY from counting the votes cast by shareholders on
proxy cards submitted in connection with the original February 24, 2004
Shareholder Meeting date (the "original proxies"). On April 9, 2004, Vice
Chancellor Lamb denied plaintiffs' motion and granted summary judgment to
defendants on the issue regarding the legal validity of the original
proxies. On April 14, 2004, plaintiffs filed a motion to expedite the
proceedings and to schedule a hearing on a third motion for a preliminary
injunction regarding the use by MONY of the original proxies. Prior to the
scheduling of a hearing on the plaintiffs' third motion for a preliminary
injunction, the parties engaged in arms-length negotiations concerning a
possible
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settlement of the litigation. Those negotiations resulted in the execution
of a Memorandum of Understanding dated May 17, 2004, which set forth the
terms of an agreement in principle to settle the litigation, subject to,
among other things, certification of a class for settlement purposes,
release of claims against all defendants and plaintiffs' participation in
the preparation of, and monitoring compliance with, agreed procedures for
the tabulation of proxies cast by retail shareholders at the May 18, 2004
MONY Shareholder Meeting. On or about July 13, 2004, counsel for the
parties executed a Stipulation of Settlement setting forth the terms of a
definitive settlement, subject to, among other things, approval by the
Delaware Chancery Court. On July 13, 2004, the parties filed the
Stipulation of Settlement with the Delaware Chancery Court and requested
that the Court schedule a hearing to approve the settlement and authorize
notice of the terms of the Stipulation of Settlement, the date of the
hearing, and the procedures for class members to object to the settlement.
On July 19, 2004, the Delaware Chancery Court entered an order, among other
things, certifying a class for settlement purposes only and scheduling a
hearing on the fairness of the proposed settlement for September 28, 2004.
In April 2004, a purported nationwide class action lawsuit was filed in the
Circuit Court for Madison County, Illinois entitled MATTHEW WIGGENHORN V.
EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES. The lawsuit alleges
that Equitable Life uses stale prices of the foreign securities within the
investment divisions of its variable insurance products. The complaint
further alleges that Equitable Life's use of stale pricing diluted the
returns of the purported class. The complaint also alleges that Equitable
Life breached its fiduciary duty to the class by allowing market timing in
general within Equitable Life's variable insurance products, thereby
diluting the returns of the class. The lawsuit asserts causes of action for
negligence, gross negligence, breach of contract, and breach of fiduciary
duty and seeks unspecified compensatory and punitive damages, plus
prejudgment interest, attorneys' fees and costs. In June 2004, Equitable
Life removed the case to federal court and in July 2004 filed a motion to
dismiss. In July 2004, plaintiff filed a motion to remand the action to
state court.
Although the outcome of litigation cannot be predicted with certainty, the
Company's management believes that, subject to the foregoing, the ultimate
resolution of the matters described above should not have a material
adverse effect on the consolidated financial position of the Company. The
Company's management cannot make an estimate of loss, if any, or predict
whether or not such litigations will have a material adverse effect on the
Company's consolidated results of operations in any particular period.
ALLIANCE LITIGATIONS
In BENAK, plaintiffs have not filed a notice of appeal.
In the SEBI matter with Mr. Arora, in March 2004, SEBI issued a final order
against Mr. Arora barring him from dealing directly or indirectly in the
Indian securities markets for a period of five years commencing from August
9, 2003. Alliance understands that Mr. Arora has appealed the order.
In the SEBI matter with Alliance, in May 2004, SEBI issued an Order of
Adjudicating Officer in respect of Alliance, ACAML and its local Indian
mutual fund whereby it levied a fine, jointly and severally, against
Alliance and ACAML in an amount of approximately $630,000 for not filing
the required notices in a timely manner. In June 2004, Alliance and ACAML
filed an appeal with respect to such order with SAT, which is still
pending.
In ERB, in June 2004, plaintiff filed an amended complaint ("Amended Erb
Complaint") in the Circuit Court of St. Clair County, Illinois. The Amended
Erb Complaint allegations are substantially similar to those contained in
the previous complaint; however, the Amended Erb Complaint adds a new
plaintiff and seeks to allege claims on behalf of a purported class of
persons or entities holding an interest in any portfolio managed by
Alliance's Large Cap Growth Team. The Amended Erb Complaint alleges that
Alliance breached its contracts with these persons or entities by
impermissibly purchasing shares of stocks that were not 1-rated. Plaintiffs
seek rescission of all purchases of any non-1-rated stocks Alliance made
for Premier Growth Fund and other Large Cap Growth Team clients' portfolios
over the past eight years, as well as an unspecified amount of damages. In
July 2004, Alliance removed the Erb action to the United States District
Court for the Southern District of Illinois on the basis that plaintiffs'
claims are preempted under the Securities Litigation Uniform Standards Act.
In the MUTUAL FUND TRADING LITIGATIONS (i.e., the Hindo Complaint and
similar lawsuits), three lawsuits making factual allegations generally
similar to those in the Hindo Complaint have been filed against Alliance
and certain other defendants in addition to the forty such lawsuits already
reported in the Litigation Note. As a
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result, between October 3, 2003 and August 4, 2004, forty-three lawsuits,
in addition to the Hindo Complaint, have been filed. AXA Financial is named
as a defendant, primarily as a control person of Alliance, in thirty-five
of these lawsuits (including the Hindo Complaint). The three additional
lawsuits are as follows:
Federal Court Class Actions: Two of the three additional lawsuits have
been brought as class actions filed in Federal court, increasing the
total number of such lawsuits to twenty-seven (twenty-three in the
United States District Court for the Southern District of New York,
two in the United States District Court for the District of New
Jersey, one in the United States District Court for the Northern
District of California and one in the United States District Court for
the District of Connecticut). Certain of these lawsuits allege claims
under the Securities Act, the Exchange Act, the Advisers Act, the ICA
and common law. All of these lawsuits are brought on behalf of
shareholders of AllianceBernstein Funds, except four. Of these four,
one was brought on behalf of a unitholder of Alliance Holding, and
three were brought on behalf of participants in the Profit Sharing
Plan for Employees of Alliance Capital ("Plan"). The latter three
lawsuits allege claims under Sections 404, 405 and 406 of The Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), on the
grounds that defendants violated fiduciary obligations to the Plan by
failing to disclose the alleged market timing and late trading
activities in AllianceBernstein Funds, and by permitting the Plan to
invest in funds subject to those activities. One of these ERISA
actions has been voluntarily dismissed.
State Court Derivative Actions: The third additional lawsuit has been
brought as a derivative action in state court, increasing the total
number of such actions to four (one in the Supreme Court of the State
of New York, County of New York and three in the Superior Court of the
State of Massachusetts, County of Suffolk). The New York action was
brought derivatively on behalf of Alliance Holding and alleges that,
in connection with alleged market timing and late trading
transactions, defendants breached their fiduciary duties to Alliance
Holding and its unitholders by failing to maintain adequate controls
and employing improper practices in managing unspecified
AllianceBernstein Funds. The Massachusetts actions were brought
derivatively on behalf of certain AllianceBernstein Funds and allege
state common law claims for breach of fiduciary duty, abuse of
control, gross mismanagement, waste and unjust enrichment.
All of these lawsuits seek an unspecified amount of damages. All of the
Federal actions discussed above as well as those described in the
Litigation Note (i.e., the Hindo Complaint, Federal Court Class Actions and
Federal Court Derivative Actions) were the subject of a petition of
tag-along notices filed by Alliance before the Judicial Panel on
Multidistrict Litigation ("MDL Panel") seeking to have all of the actions
centralized in a single forum for pre-trial proceedings. On February 20,
2004, the MDL Panel transferred all of the actions to the United States
District Court for the District of Maryland ("Mutual Fund MDL"). On May 24,
2004, the Court appointed lead counsel and lead plaintiffs for each of the
various claim types asserted against the Alliance defendants. The Court has
ordered plaintiffs to file consolidated complaints by September 29, 2004.
Defendants have removed each of the State Court Representative Actions and
the State Court Individual Action (discussed in the Litigation Note, and
thereafter submitted the actions to the MDL Panel through notices of
tag-along action. On March 3, 2004 and April 6, 2004, the MDL Panel issued
orders conditionally transferring these cases and numerous others to the
District of Maryland. Transfer of all of these actions subsequently became
final. The plaintiffs in three of these four actions have moved to remand
the actions back to state court. On June 18, 2004, the Court issued an
interim opinion deferring decision on plaintiffs' motions to remand until a
later stage in the proceedings. Subsequently, the plaintiff in the State
Court Individual Action moved the Court for reconsideration of that interim
opinion and for immediate remand of her case to state court, and that
motion is pending.
Alliance recorded charges to income totaling $330 million during the second
half of 2003 in connection with establishing a $250 million restitution
fund, as described in the Litigation Note. During the first half of 2004,
Alliance paid $290 million related to certain Alliance matters (including
$250 million to the restitution fund as described above) and has
cumulatively paid $296 million. Alliance's management, however, cannot
determine at this time the eventual outcome, timing or impact of such
Alliance matters. Accordingly, it is possible that additional charges in
the future may be required.
On June 22, 2004, a purported class action complaint entitled AUCOIN, ET
AL. V. ALLIANCE CAPITAL MANAGEMENT L.P., ET AL. ("Aucoin Complaint") was
filed against Alliance, Alliance Holding, ACMC, AXA Financial, ABIRM,
certain current and former directors of the AllianceBernstein Funds, and
unnamed Doe defendants. The Aucoin Complaint names the AllianceBernstein
Funds as nominal defendants. The Aucoin Complaint
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also names AXA Financial as a defendant as a control person of Alliance
under the federal securities laws. The Aucoin Complaint was filed in the
United States District Court for the Southern District of New York by an
alleged shareholder of the AllianceBernstein Growth & Income Fund. The
Aucoin Complaint alleges, among other things, (i) that certain of the
defendants improperly authorized the payment of excessive commissions and
other fees from AllianceBernstein Fund assets to broker-dealers in exchange
for preferential marketing services, (ii) that certain of the defendants
misrepresented and omitted from registration statements and other reports
material facts concerning such payments, and (iii) that certain defendants
caused such conduct as control persons of other defendants. The Aucoin
Complaint asserts claims for violation of Sections 34(b), 36(b) and 48(a)
of the ICA, Sections 206 and 215 of the Advisers Act, breach of common law
fiduciary duties, and aiding and abetting breaches of common law fiduciary
duties. Plaintiffs seek an unspecified amount of compensatory damages and
punitive damages, rescission of their contracts with Alliance, including
recovery of all fees paid to Alliance pursuant to such contracts, an
accounting of all AllianceBernstein Fund-related fees, commissions and soft
dollar payments, and restitution of all unlawfully or discriminatorily
obtained fees and expenses.
Between June 22, 2004 and August 4, 2004, nine additional lawsuits making
factual allegations substantially similar to those in the Aucoin Complaint
were filed against Alliance and certain other defendants (including AXA
Financial), and others may be filed. All nine of the lawsuits (i) were
brought as class actions filed in the United States District Court for the
Southern District of New York, (ii) assert claims substantially identical
to the Aucoin Complaint and (iii) are brought on behalf of shareholders of
AllianceBernstein Funds.
With respect to certain matters discussed under "Alliance Litigations"
either herein or in the Litigation Note (other than the MUTUAL FUND TRADING
LITIGATIONS and the SEBI matters), management of Alliance is unable to
estimate the impact, if any, that the outcome of these matters may have on
Alliance's results of operations or financial condition and the Company's
management is unable to estimate the impact, if any, that the outcome of
these matters may have on the Company's results of operations or financial
position.
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 the Company's consolidated
financial position or results of operations. However, it should be noted
that the frequency of large damage awards, including large punitive damage
awards that bear little or no relation to actual economic damages incurred
by plaintiffs in some jurisdictions, continues to create the potential for
an unpredictable judgment in any given matter.
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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
Number Description and Method of Filing
---------- ----------------------------------------------------
31.1 Section 302 Certification made by the Registrant's
Chief Executive Officer, filed herewith
31.2 Section 302 Certification made by the Registrant's
Chief Financial Officer, filed herewith
32.1 Section 906 Certification made by the Registrant's
Chief Executive Officer, filed herewith
32.2 Section 906 Certification made by the Registrant's
Chief Financial Officer, filed herewith
(b) Reports on Form 8-K
None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, The
Equitable Life Assurance Society of the United States has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: August 12, 2004 THE EQUITABLE LIFE ASSURANCE SOCIETY
OF THE UNITED STATES
By: /s/ Stanley B. Tulin
---------------------------------------------
Name: Stanley B. Tulin
Title: Vice Chairman of the Board and
Chief Financial Officer
Date: August 12, 2004 /s/ Alvin H. Fenichel
---------------------------------------------
Name: Alvin H. Fenichel
Title: Senior Vice President and Controller
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