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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
X OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2000
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 0-25280
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
(Exact name of registrant as specified in its charter)
New York 13-5570651
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1290 Avenue of the Americas, New York, New York 10104
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 554-1234
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
- ---------------------------------------------- --------------------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock (Par Value $1.25 Per Share)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
No voting or non-voting common equity of the registrant is held by
non-affiliates of the registrant as of March 26, 2001.
As of March 26, 2001, 2,000,000 shares of the registrant's Common Stock were
outstanding.
REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION (I)(1)(a) AND
(b) OF FORM 10-K AND IS THEREFORE FILING THIS FORM WITH THE REDUCED DISCLOSURE
FORMAT.
TABLE OF CONTENTS
Part I Page
Item 1. Business......................................................... 1-1
Overview......................................................... 1-1
Recent Events.................................................... 1-1
Segment Information.............................................. 1-2
Discontinued Operations.......................................... 1-5
General Account Investment Portfolio............................. 1-5
Employees and Financial Professionals............................ 1-6
Competition...................................................... 1-6
Regulation....................................................... 1-6
Parent Company................................................... 1-8
Item 2. Properties....................................................... 2-1
Item 3. Legal Proceedings................................................ 3-1
Item 4. Submission of Matters to a Vote of Security Holders*............. 4-1
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholders
Matters........................................................ 5-1
Item 6. Selected Financial Data*......................................... 6-1
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations ("Management Narrative")................. 7-1
Item 7A. Quantitative and Qualitative Disclosures about Market Risk....... 7A-1
Item 8. Financial Statements and Supplementary Data...................... FS-1
Item 9. Changes In and Disagreements With Accountants On Accounting and
Financial Disclosure........................................... 9-1
Part III
Item 10. Directors and Executive Officers of the Registrant*.............. 10-1
Item 11. Executive Compensation*.......................................... 11-1
Item 12. Security Ownership of Certain Beneficial Owners and
Management*.................................................... 12-1
Item 13. Certain Relationships and Related Transactions*.................. 13-1
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K....................................................... 14-1
Signatures ................................................................. S-1
Index to
Exhibits ................................................................. E-1
*Omitted pursuant to General Instruction I to Form 10-K
Part I, Item 1.
BUSINESS 1
Overview
Equitable Life, which was established in the State of New York in 1859, is among
the largest life insurance companies in the United States, with more than three
million policy and contractholders as of December 31, 2000. Equitable Life,
through its ownership of an approximate 39% economic interest in Alliance and
its affiliation with AXA, AXA Advisors and AXA Network, is part of a diversified
financial services organization offering a broad spectrum of financial advisory,
insurance and investment management services. The Company is one of the world's
largest asset managers, with total assets under management of approximately $
483.08 billion at December 31, 2000. Equitable Life's insurance business,
conducted principally by Equitable Life and its subsidiaries EOC and EDI, is
reported in the Insurance segment. The investment management business conducted
by Alliance Capital Management L.P., a Delaware limited partnership
("Alliance"), is reported in the Investment Services segment. For additional
information on Equitable Life's business segments, see the management narrative
("Management Narrative") provided in lieu of "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Combined Operating
Results by Segment" and Notes 1 and 18 of Notes to Consolidated Financial
Statements. Operating results and segment information are presented on a basis
which adjusts amounts as reported in the consolidated GAAP financial statements
to include Discontinued Operations and to exclude investment gains/losses, net
of related DAC and other charges, and the effect of unusual or non-recurring
events and transactions. For additional information relating to these
adjustments, see "Management Narrative - General". Since Equitable Life's
demutualization in 1992, it has been a wholly owned subsidiary of the Holding
Company. AXA, a French holding company for an international group of insurance
and related financial services companies, is the Holding Company's sole
shareholder. AXA is subject to the reporting requirements of the Securities
Exchange Act of 1934 and files annual reports on Form 20-F. See "Parent
Company".
Recent Events
In July 2000, Equitable Life transferred, at no gain or loss, all the risk of
its directly written disability income business for years 1993 and prior to
Centre Life Insurance Company, a subsidiary of Zurich Financial Services. The
transfer of risk to Centre Life was accomplished through an indemnity
reinsurance contract. The cost of the arrangement will be amortized over the
expected lives of the contracts reinsured and will not have a significant impact
on the results of operations in any specific period.
In October 2000, Alliance completed its acquisition of Sanford C. Bernstein,
Inc. ("Bernstein") for an aggregate value of $3.50 billion ($1.48 billion in
cash and 40.8 million newly issued Alliance Units). The Holding Company provided
Alliance with the cash portion of the consideration by purchasing approximately
32.6 million newly issued Alliance Units for $1.60 billion in June 2000. AXA
Financial's consolidated economic interest in Alliance was approximately 53%
upon consummation of the Bernstein acquisition, including the 39% held by the
Company.
On November 3, 2000, the Company and the Holding Company sold their 63.0%
interest in Donaldson, Lufkin & Jenrette, Inc. ("DLJ") to Credit Suisse Group
("CSG"). The Company received $1.05 billion in cash and $2.19 billion (or 11.4
million shares) in CSG common stock. The value of the stock consideration was
based on the exchange rate and stock price at the time the transaction closed.
CSG repurchased $530.2 million (2.8 million shares) of its common stock from the
Company at closing, and the Company has since disposed of all of the CSG common
stock acquired in the transaction.
[FN]
1 As used in this Form 10-K, the term "Equitable Life" refers to The Equitable
Life Assurance Society of the United States, a New York stock life insurance
corporation, "Holding Company" refers to AXA Financial, Inc., a Delaware
corporation formerly known as The Equitable Companies Incorporated, "AXA
Financial" refers to the Holding Company and its subsidiaries, and the "Company"
refers to Equitable Life and its consolidated subsidiaries. The term "Insurance
Group" refers collectively to Equitable Life and certain of its subsidiaries
engaged in insurance-related businesses, including The Equitable of Colorado,
Inc. ("EOC") and Equitable Distributors, Inc. ("EDI"). The term "Financial
Advisory/Insurance Group" refers collectively to Equitable Life, EOC, EDI, AXA
Advisors, LLC, a Delaware limited liability company ("AXA Advisors"), and AXA
Network, LLC, a Delaware limited liability company and its subsidiaries
(collectively "AXA Network"). The term "General Account" refers to the assets
held in the respective general accounts of Equitable Life and EOC and all of the
investment assets held in certain of Equitable Life's separate accounts on which
the Insurance Group bears the investment risk. The term "Separate Accounts"
refers to the Separate Account investment assets of Equitable Life excluding the
assets held in those separate accounts on which the Insurance Group bears the
investment risk. The term "General Account Investment Assets" refers to assets
held in the General Account associated with the Insurance Group's continuing
operations (which includes the Closed Block) and does not include assets held in
the General Account associated primarily with the Insurance Group's discontinued
Wind-Up Annuity line of business ("Discontinued Operations").
1-1
In November 2000, AXA and AXA Merger Corp. (a wholly owned subsidiary of AXA)
commenced a joint exchange offer for all outstanding publicly held shares of
common stock of the Holding Company for 0.295 of an American Depositary Share of
AXA and $35.75 net to the seller in cash per Holding Company common share. After
giving effect to the acquisition of Holding Company shares tendered during the
initial and subsequent offering periods, AXA and its subsidiaries owned
approximately 92.4% of the issued and outstanding Holding Company shares as of
December 31, 2000. On January 2, 2001, AXA Merger Corp. was merged with and into
the Holding Company, resulting in the Holding Company becoming a wholly owned
subsidiary of AXA.
In recent years AXA Financial has implemented a number of strategic initiatives.
In 1999, the Holding Company changed its name to "AXA Financial, Inc." to better
communicate the broad range of products and services offered by its subsidiaries
and to embody the positive attributes of a global company with significant
resources. AXA Advisors, the successor to EQ Financial Consultants, Inc., is a
significant new brand for AXA Financial that focuses on the development and
management of retail customer relationships with a greater emphasis on advice
and financial planning. AXA Network, successor to EquiSource of New York, Inc.
and its subsidiaries, was established in first quarter 2000 as an insurance
general agency for the sale, on a retail basis, of insurance products of
Equitable Life and unaffiliated insurance companies.
Segment Information
Insurance
The Insurance Group offers a variety of traditional, variable and
interest-sensitive life insurance products and variable and fixed-interest
annuity products to individuals, small groups, small and medium-size businesses,
state and local governments and not-for-profit organizations. It also
administers traditional participating group annuity contracts with conversion
features, generally for corporate qualified pension plans, and association plans
which provide full service retirement programs for individuals affiliated with
professional and trade associations. This segment includes Separate Accounts for
individual and group insurance and annuity products. The Insurance segment
accounted for approximately $5.66 billion (or 68.9% of total segment revenues)
for the year ended December 31, 2000. AXA Advisors, a broker-dealer, and AXA
Network, an insurance general agency, market Insurance segment products on a
retail basis in all 50 states, the District of Columbia, Puerto Rico and the
U.S. Virgin Islands through more than 7,500 financial professionals. In
addition, EDI, a broker-dealer subsidiary of Equitable Life, distributes
Equitable Life products on a wholesale basis through major securities firms,
other broker-dealers and banks. Association plans are marketed directly to
clients by the Insurance Group. For additional information on this segment, see
"Management Narrative - Combined Operating Results by Segment - Insurance", Note
18 of Notes to Consolidated Financial Statements, as well as "Employees and
Agents", "Competition" and "Regulation".
Products and Services. The Insurance Group offers a portfolio of insurance,
annuity and investment products designed to meet a broad range of its customers'
needs throughout their financial life-cycles. These products include individual
variable and interest-sensitive life insurance policies and variable annuity
contracts, which in 2000 accounted for 18.2% and 66.6%, respectively of total
life insurance and annuity sales. The Insurance Group is among the country's
leading issuers of variable life insurance and variable annuity products.
Variable life insurance products include Incentive Life sm, Equitable Life's
flagship life insurance product, as well as a second-to-die policy and a product
for the corporate owned life insurance ("COLI") market. Equitable Life also
offers traditional whole life insurance, universal life insurance and term life
insurance policies.
Variable annuity products include Equi-Vest(R) and Accumulator sm, which are
individual variable deferred annuities, and the Momentumsm series of group
annuities for the employer retirement plan market. Individual deferred annuities
may be purchased on either a single or flexible premium basis; group annuities
generally have recurring premium from the retirement plans they fund. Most
individual variable annuity products offer one or more enhanced features, such
as an extra-credit to the initial account value, a dollar cost averaging account
that pays an above-market rate of interest while new money is being transferred
into investment portfolios, an enhanced death benefit (Protection Plus(R)) and
Equitable Life's baseBuilder(R) minimum guaranteed income benefit. Equitable
Life also offers individual single premium deferred annuities, which credit an
initial and subsequent annually declared interest rates, and payout annuity
products which include traditional life annuities, variable life annuities,
which provide lifetime periodic payments that fluctuate with the performance of
underlying investment portfolios, and the Income Manager sm, which provides
guaranteed lifetime payments with cash values during an initial period.
1-2
The continued growth of third-party assets under management remains a strategic
objective of the Insurance Group, which seeks to increase the percentage of its
income that is fee-based and derived from managing funds, including Separate
Account assets, for its clients (who bear the investment risk and reward). Over
the past five years, Separate Account assets for individual variable life and
variable annuities have increased by $30.29 billion to $43.45 billion at
December 31, 2000, including approximately $41.43 billion invested through EQ
Advisors Trust ("EQAT"), a mutual fund offering variable life and annuity
contractholders investment portfolios advised by Alliance and by unaffiliated
investment advisors. At December 31, 2000, EQAT had 44 investment portfolios, 16
of which were managed by Alliance, representing 81.2% of the assets in EQAT, and
28 of which were managed by unaffiliated investment advisors. Equitable Life
serves as Investment Manager of EQAT and is in the process of developing a brand
of retail mutual funds.
In addition to products issued by the Insurance Group, AXA Advisors and AXA
Network provide their financial professionals with access to products and
services from unaffiliated insurers and from other financial services firms. AXA
Advisors also offers financial planning services, an asset management account
and money management products.
Markets. Targeted customers for the Company's products include affluent and
emerging affluent individuals such as professionals and owners of small
businesses, as well as employees of public schools, universities, not-for-profit
entities and certain other tax-exempt organizations, and existing customers.
Variable life insurance is targeted particularly at executive benefit plans, the
estate planning market and the market for business continuation needs (e.g., the
use of variable life insurance to fund buy/sell agreements and similar
arrangements), as well as the middle-to-upper income life protection markets.
Target markets for variable annuities include, in addition to the personal
retirement savings market, the tax-exempt markets (particularly retirement plans
for educational and non-profit organizations), corporate pension plans
(particularly 401(k) defined contribution plans covering 25 to 3,000 employees)
and the IRA retirement planning market. The Income Manager series of annuity
products includes products designed to address the growing market of those at or
near retirement who need to convert retirement savings into retirement income.
Mutual funds and other investment products are intended for new and existing
financial planning, annuity and brokerage clients to add breadth and depth to
the range of products the Insurance Group is able to provide.
Distribution. Retail distribution of products and services is accomplished by
more than 7,500 financial professionals of AXA Advisors and/or AXA Network
organized into 18 geographic regions across the United States. Wholesale
distribution of products is undertaken through EDI, which at year end 2000 had
461 selling agreements, including arrangements with five major securities firms,
61 banks or similar financial institutions, and 395 broker-dealers. Three major
securities firms were responsible for approximately 18.0%, 11.2% and 6.4%
respectively of EDI's 2000 premiums. In 2000, EDI was responsible for
approximately 40.3% of product sales.
Equitable Life has entered into agreements pursuant to which it compensates AXA
Advisors and AXA Network for distributing and servicing Equitable Life's
products. The agreements provide that compensation will not exceed any
limitations imposed by applicable law. Equitable Life agreements provide to each
of AXA Advisors and AXA Network personnel, property, and services reasonably
necessary for their operations. AXA Advisors and AXA Network pay Equitable Life
their actual costs (direct and indirect) and expenses under the respective
agreements.
Reinsurance. The Insurance Group now cedes 90% of mortality risk on
substantially all new variable life, universal life and term life policies, and
generally limits risk retention on new policies to a maximum of $5.0 million on
single-life policies, and $15.0 million on second-to-die policies. New policies
are automatically reinsured, subject to limits that range from $25.0 million to
$50.0 million per policy, depending upon the product. A contingent liability
exists with respect to reinsurance ceded should the reinsurers be unable to meet
their obligations. Therefore, the Insurance Group carefully evaluates the
financial condition of its reinsurers to minimize its exposure to significant
losses from reinsurer insolvencies. The Insurance Group is not party to any risk
reinsurance arrangement with any reinsurer pursuant to which the amount of
reserves on reinsurance ceded to such reinsurer equals more than 2% of the total
policy life reserves of the Insurance Group (including Separate Accounts).
1-3
The Insurance Group acts as a retrocessionaire by assuming life reinsurance from
reinsurers. Mortality risk through reinsurance assumed is limited to $5.0
million on single-life policies and on second-to-die policies. For additional
information on the Insurance Group's reinsurance agreements, see Note 11 of
Notes to Consolidated Financial Statements.
Investment Services
General. The Investment Services segment comprises the operations of Alliance,
which provides diversified investment management and related services to the
Insurance Group and to a broad range of other clients, including (a)
institutional investors, consisting of unaffiliated entities such as corporate
and public employee pension funds, endowment funds, domestic and foreign
institutions and governments, by means of separate accounts, sub-advisory
relationships resulting from the efforts of the institutional marketing
department, structured products, group trusts, and mutual funds and classes of
mutual fund shares sold exclusively to institutional investors and high net
worth individuals, (b) private clients, consisting of high net worth
individuals, trusts and estates, charitable foundations, partnerships, private
and family corporations and other entities, by means of separate accounts, hedge
funds, and certain other vehicles, (c) individual investors by means of retail
mutual funds sponsored by Alliance, its subsidiaries and affiliated joint
venture companies including cash management products such as money market funds
and deposit accounts and sub-advisory relationships in respect of mutual funds
sponsored by third parties resulting from the efforts of Alliance's mutual fund
marketing department and "wrap" products and (d) institutional investors by
means of in-depth research, portfolio strategy trading and brokerage-related
services. Alliance and its subsidiaries provide investment management,
distribution and shareholder and administrative services to the mutual funds
described in this paragraph. The acquisition of Bernstein, a leading value
investment manager, complements Alliance's growth investment orientation, adds
significantly to the base of high net worth clients and provides Alliance with a
new institutional research function. The Investment Services segment in 2000
accounted for approximately $2.55 billion (or 31.1% of total segment revenues).
As of December 31, 2000, Alliance had approximately $453.68 billion in assets
under management including approximately $253.54 billion from institutional
investors, $36.83 billion for private clients and approximately $163.31 billion
from retail mutual fund accounts. As of December 31, 2000, assets of AXA, the
Holding Company and the Insurance Group, including investments in EQAT,
represented approximately 15% of Alliance's total assets under management, and
approximately 6% of Alliance's total revenues.
Interest in Alliance. At December 31, 2000, the Holding Company, Equitable Life
and certain subsidiaries had combined holdings equaling an approximate 53%
economic interest in Alliance's operations, including the general partnership
interest held indirectly by Equitable Life as the sole shareholder of the
general partner of Alliance Holding and Alliance. Alliance Holding is subject to
an annual 3.5% Federal tax on its proportionate share of the gross business
income of Alliance. Alliance, as a private partnership, is not subject to this
3.5% tax. Alliance Holding and Alliance are generally not subject to state and
local income taxes, with the exception of the New York City unincorporated
business tax of 4%.
For additional information about Alliance, including its results of operations,
see "Regulation" and "Management Narrative - Combined Results of Operations by
Segment - Investment Management" and Alliance's Annual Report on Form 10-K for
the year ended December 31, 2000.
Assets Under Management and Fees. The Company continues to pursue its strategy
of increasing third party assets under management. The Investment Services
segment continues to add third party assets under management, and to provide
asset management services to the Insurance Group. Of the $483.08 billion of
assets under management at December 31, 2000, $445.34 billion (or 92.2%) were
managed for third parties, including $393.63 billion from unaffiliated third
parties and $51.71 billion for the Insurance Group's Separate Accounts, and
$37.74 billion were managed principally for the Insurance Group's General
Accounts and invested assets of subsidiaries. Of the $1.69 billion of fees for
assets under management received for the year ended December 31, 2000, $1.65
billion were received from third parties, including $1.54 billion from
unaffiliated third parties and $113.3 million in respect of Separate Accounts,
and $38.6 million in respect of the General Account. For additional information
on assets under management, see "Management Narrative - Combined Operating
Results by Segment - Assets Under Management."
1-4
Discontinued Operations
Discontinued Operations includes primarily Wind-Up Annuity products, the terms
of which were fixed at issue, which were sold to corporate sponsors of
terminating qualified defined benefit plans. These contracts have fixed maturity
dates on which funds are to be returned to the contractholder. At December 31,
2000, $966.8 million of contractholder liabilities were outstanding. For
additional information about discontinued operations, see Note 8 of Notes to
Consolidated Financial Statements.
General Account Investment Portfolio
General. The Insurance Group's General Accounts consist of a diversified
portfolio of investments. The General Account liabilities can be divided into
two primary types, participating and non-participating. For participating
products, the investment results of the underlying assets determine, to a large
extent, the return to the policyholder, and the Insurance Group's profits are
earned from investment management, mortality and other charges. For
non-participating or interest-sensitive products, the Insurance Group's profits
are earned from a positive spread between the investment return and the
crediting or reserve interest rate.
The Insurance Group has developed an asset/liability management approach with
separate investment objectives for specific classes of product liabilities, such
as insurance, annuity and group pension. As part of this approach, the Insurance
Group develops investment guidelines for each product line which form the basis
for investment strategies to manage such product line's investment return and
liquidity requirements, consistent with management's overall investment
objectives for the General Account Investment Portfolio. Investments frequently
meet the investment objectives of more than one class of product liabilities;
each such class may be allocated a pro rata interest in such investments and the
returns therefrom.
The Closed Block assets are a part of continuing operations and have been
combined in the Management Narrative on a line-by-line basis with assets outside
of the Closed Block. Therefore, the Closed Block assets are included in the
table below. Most individual investments in the portfolios of Discontinued
Operations are also included in General Account Investment Assets. For more
information on the Closed Block, see Notes 2 and 7 of Notes to Consolidated
Financial Statements.
The following table summarizes General Account Investment Assets by asset
category at December 31, 2000.
General Account Investment Assets
Net Amortized Cost
(Dollars in Millions)
Amount % of Total
------------------ ------------------
Fixed maturities(1).................... $ 21,477.0 61.8%
Mortgages.............................. 5,090.8 14.6
Equity real estate..................... 1,025.5 3.0
Other equity investments............... 1,000.4 2.9
Policy loans........................... 4,034.0 11.6
Cash and short-term investments(2)..... 2,136.3 6.1
----------------- ------------------
Total.................................. $ 34,764.0 100.0%
================= ==================
(1) Excludes unrealized gains of $48.4 million on fixed maturities classified as
available for sale. Fixed maturities includes approximately $2.20 billion net
amortized cost of below investment grade securities.
(2) Comprised of "Cash and cash equivalents" and short-term investments included
within the "Other invested assets" caption on the consolidated balance sheet.
Investment Surveillance. As part of the Insurance Group's investment management
process, management, with the assistance of its investment advisors, constantly
monitors General Account investment performance. This internal review process
culminates with a quarterly review of certain assets by the Insurance Group's
Surveillance Committee which evaluates whether any investments are other than
temporarily impaired, whether specific investments should be classified as
problems, potential problems or restructures, and whether specific investments
should be put on an interest non-accrual basis.
1-5
Employees and Financial Professionals
As of December 31, 2000, the Insurance Group had approximately 5,500 employees
and Alliance had approximately 4,400 employees. In addition, the Financial
Advisory/Insurance Group had more than 7,500 financial professionals, including
approximately 350 field force managers.
Competition
Insurance Group. There is strong competition among companies seeking clients for
the types of insurance, annuity and group pension products sold by the Insurance
Group. Many other insurance companies offer one or more products similar to
those offered by the Insurance Group and in some cases through similar marketing
techniques. In addition, there is competition with banks and other financial
institutions for sales of insurance, annuity and other investment products and
with mutual funds, investment advisers and other financial entities for the
investment of savings dollars. The principal competitive factors affecting the
Insurance Group's business are price, financial and claims-paying ratings, size,
strength, professionalism and objectivity of the sales force, range of product
lines, product quality, reputation and visibility in the marketplace, quality of
service and, with respect to variable insurance and annuity products, mutual
funds and other investment products, investment management performance.
Ratings are an important factor in establishing the competitive position of
insurance companies. As of December 31, 2000, the financial strength or
claims-paying rating of Equitable Life was AA from Standard & Poor's Corporation
(3rd highest of 22 ratings), Aa3 from Moody's Investors Service (4th highest of
21 ratings), A+ from A.M. Best Company, Inc. (2nd highest of 16 ratings), and AA
from Fitch Investors Service, L.P. (3rd highest of 24 ratings).
Management from time to time explores selective acquisition opportunities in AXA
Financial's insurance and investment management businesses.
Investment Services. The financial services industry is highly competitive and
new entrants continually are attracted to it. No single competitor, or any small
group of competitors, is dominant in the industry. Alliance is subject to
substantial competition in all aspects of its business. Pension fund,
institutional and corporate assets are managed by investment management firms,
broker-dealers, banks and insurance companies. Many of these financial
institutions have substantially greater resources than Alliance. Alliance
competes with other providers of institutional investment products primarily on
the basis of the range of investment products offered, the investment
performance of such products, and the services provided to clients. Consultants
also play a major role in the selection of managers for pension funds.
Many of the firms competing with Alliance for institutional clients also offer
mutual fund shares and cash management services to individual investors.
Competitiveness in this area is chiefly a function of the range of mutual funds
and cash management services offered, investment performance, quality in
servicing customer accounts and the capacity to provide financial incentives to
financial intermediaries through distribution assistance and administrative
services payments funded by "Rule 12b-1" distribution plans and the investment
adviser's own resources.
AXA, AXA Financial, Equitable Life and certain of their direct and indirect
subsidiaries provide financial products and services, some of which are
competitive with those offered by Alliance. Alliance's partnership agreement
specifically allows Equitable Life and its subsidiaries (other than the general
partner of Alliance ) to compete with Alliance and to exploit opportunities that
may be available to Alliance. In addition, Alliance provides investment
management services to unaffiliated insurance companies.
Regulation
State Supervision. Members of the Insurance Group are licensed to transact
insurance business in, and are subject to extensive regulation and supervision
by, insurance regulators in all 50 of the United States, the District of
Columbia, Puerto Rico, the U.S. Virgin Islands and Canada and nine of Canada's
twelve provinces and territories. Equitable Life is domiciled in New York and is
primarily regulated by the Superintendent (the "Superintendent") of the New York
Insurance Department (the "NYID"). EOC is domiciled in Colorado and is primarily
regulated by the Commissioner of Insurance of the Colorado Division of
Insurance. The extent of state regulation varies, but most jurisdictions have
laws and regulations governing sales practices, standards of solvency, levels of
reserves, risk-based capital, permitted types and concentrations of investments,
and business conduct to be maintained by insurance companies as well as agent
licensing, approval of policy forms and, for certain lines of insurance,
approval or filing of rates. Additionally, the New York Insurance Law limits
1-6
sales commissions and certain other marketing expenses that may be incurred by
Equitable Life. Each of Equitable Life and EOC is required to file detailed
annual financial statements, prepared on a statutory accounting basis, with
supervisory agencies in each of the jurisdictions in which it does business.
Such agencies may conduct regular or targeted examinations of Equitable Life's
and EOC's operations and accounts, and make occasional requests for particular
information from the Insurance Group. In January 1998 the Florida Attorney
General and the Florida Department of Insurance issued subpoenas to Equitable
Life, and in December 1999 the Florida Attorney General issued an additional
subpoena to Equitable Life, in each case requesting, among other things,
documents relating to various sales practices. Equitable Life has responded to
the subpoenas. A number of states have enacted legislation requiring insurers
who sold policies in Europe prior to and during the Second World War to file
information concerning those policies with state authorities. Although Equitable
Life intends to comply with these laws with respect to its own activities, the
ability of AXA and its European affiliates to comply may be impacted by privacy
laws in effect in various European countries, which could result in state
regulatory authorities seeking to take enforcement actions against AXA and its
U.S. affiliates, including Equitable Life, even though Equitable Life does not
control AXA.
Holding Company and Shareholder Dividend Regulation. Several states, including
New York, regulate transactions between an insurer and its affiliates under
insurance holding company acts. These acts contain certain reporting
requirements and restrictions on provision of services and on transactions, such
as asset transfers, loans and shareholder dividend payments by insurers.
Depending on their size, such transactions and payments may be subject to prior
notice or approval by the NYID. Equitable Life has agreed with the NYID that
similar approval requirements also apply to transactions between (i) material
subsidiaries of Equitable Life and (ii) AXA Client Solutions, LLC and the
Holding Company (and certain affiliates, including AXA). In 2000 Equitable Life
paid shareholder dividends of $250 million, and expects to pay substantial
additional dividends in 2001, including $1.5 billion in early April 2001.
Statutory Surplus and Capital. Insurance regulators have the discretionary
authority to limit or prohibit new issuances of business to policyholders within
their jurisdiction when, in their judgment, such regulators determine that the
issuing company is not maintaining adequate statutory surplus or capital.
In 1998, the NAIC adopted the Codification of Statutory Accounting Principles
("Codification"). Codification provides regulators and insurers with uniform
statutory guidance, addressing areas where statutory accounting was previously
silent and changing certain existing statutory positions. The NYID recently
adopted Regulation 72 implementing a version of Codification, effective January
1, 2001, but did not adopt several key provisions of Codification, including
deferred income taxes and the establishment of goodwill as an asset. The
application of these rules as adopted by New York currently is estimated to have
no significant effect on Equitable Life. The Insurance Group expects that
statutory surplus after adoption will continue to be in excess of the minimum
regulatory risk-based capital levels required to avoid regulatory action.
Federal Initiatives. Although the Federal government generally does not directly
regulate the insurance business, many Federal laws affect the business in a
variety of ways. There are a number of existing, newly enacted or recently
proposed Federal initiatives which may significantly affect the Insurance Group,
including employee benefits regulation, removal of barriers preventing banks
from engaging in the insurance and mutual fund businesses and the taxation of
insurance products. The Administration's tax proposals announced in February
2001 contain provisions which, if enacted, could have an adverse impact on sales
of life insurance in connection with estate planning. Other proposals could have
a positive impact on funding levels of tax qualified retirement products.
Management cannot predict what other proposals may be made, what legislation, if
any, may be introduced or enacted or what the effect of any such legislation
might be.
Securities Laws. Equitable Life, EOC, and certain policies and contracts offered
by the Insurance Group are subject to regulation under the Federal securities
laws administered by the Securities and Exchange Commission (the "SEC") and
under certain state securities laws. The SEC conducts regular examinations of
the Insurance Group's operations, and makes occasional requests for particular
information from the Insurance Group. Certain Separate Accounts of Equitable
Life are registered as investment companies under the Investment Company Act of
1940, as amended (the "Investment Company Act"). Separate Account interests
under certain annuity contracts and insurance policies issued by Equitable Life
are also registered under the Securities Act of 1933, as amended (the
"Securities Act"). AXA Advisors, EDI, Alliance Fund Distributors, Inc., Sanford
C. Bernstein & Co., LLC and certain other subsidiaries of AXA Financial are
registered as broker-dealers (collectively the "Broker-Dealers") under the
Securities Exchange Act of 1934, as amended (the "Exchange Act").
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The Broker-Dealers are subject to extensive regulation by the SEC, and are
members of, and subject to regulation by, the NASD. Broker-dealers are subject
to regulation by state securities administrators in those states in which they
conduct business. The SEC, other governmental regulatory authorities, including
state securities administrators, and the NASD may institute administrative or
judicial proceedings which may result in censure, fine, the issuance of
cease-and-desist orders, the suspension or expulsion of a broker-dealer or
member, its officers or employees or other similar consequences.
As broker-dealers registered with the SEC, the Broker-Dealers are subject to the
capital requirements of the SEC and/or NASD. These capital requirements specify
minimum levels of capital, computed in accordance with regulatory requirements
("net capital"), that the Broker-Dealers are required to maintain and also limit
the amount of leverage that the Broker-Dealers are able to obtain in their
businesses.
Equitable Life, AXA Advisors, Alliance and certain affiliates of Alliance also
are registered as investment advisors under the Investment Advisers Act of 1940,
as amended (the "Investment Advisers Act"). Many of the investment companies
managed by Alliance, including a variety of mutual funds and other pooled
investment vehicles, are registered with the SEC under the Investment Company
Act. All aspects of the investment advisory activities of Equitable Life, AXA
Advisors and Alliance are subject to various Federal and state laws and
regulations and to the laws in those foreign countries in which they conduct
business.
Parent Company
AXA, the sole shareholder of the Holding Company, is the holding company for an
international group of insurance and related financial services companies. AXA's
insurance operations include activities in life insurance, property and casualty
insurance and reinsurance. The insurance operations are diverse geographically,
with activities principally in Western Europe, North America, and the
Asia/Pacific area and, to a lesser extent, in Africa and South America. AXA is
also engaged in asset management, brokerage, real estate and other financial
services activities principally in the United States, Western Europe and the
Asia/Pacific area.
Neither AXA nor any affiliate of AXA has any obligation to provide additional
capital or credit support to the Holding Company or any of its subsidiaries.
Voting Trust. In connection with AXA's application to the Superintendent for
approval of its acquisition of capital stock of the Holding Company, AXA and the
initial Trustees of the Voting Trust (Claude Bebear, Patrice Garnier and Henri
de Clermont-Tonnerre) entered into a Voting Trust Agreement dated as of May 12,
1992 (as amended by the First Amendment dated January 22, 1997, the "Voting
Trust Agreement"). Pursuant to the Voting Trust Agreement, AXA and its
affiliates ("AXA Parties") have deposited the shares of the Holding Company's
Common Stock held by them in the Voting Trust. The purpose of the Voting Trust
is to ensure for insurance regulatory purposes that certain indirect minority
shareholders of AXA will not be able to exercise control over the Holding
Company or Equitable Life.
AXA and any other holder of voting trust certificates will remain the beneficial
owner of the shares deposited by it, except that the Trustees will be entitled
to exercise all voting rights attaching to the deposited shares so long as such
shares remain subject to the Voting Trust. In voting the deposited shares, the
Trustees must act to protect the legitimate economic interests of AXA and any
other holders of voting trust certificates (but with a view to ensuring that
certain indirect minority shareholders of AXA do not exercise control over the
Holding Company or Equitable Life). All dividends and distributions (other than
those which are paid in the form of shares required to be deposited in the
Voting Trust) in respect of deposited shares will be paid directly to the
holders of voting trust certificates. If a holder of voting trust certificates
sells or transfers deposited shares to a person which is not an AXA Party and is
not (and does not, in connection with such sale or transfer, become) a holder of
voting trust certificates, the shares sold or transferred will be released from
the Voting Trust. The Voting Trust has an initial term ending in 2002 and is
subject to extension with the prior approval of the Superintendent.
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Part I, Item 2.
PROPERTIES
Insurance
Equitable Life leases on a long-term basis approximately 830,000 square feet of
office space located at 1290 Avenue of the Americas, New York, NY, which serves
as the Holding Company's and Equitable Life's headquarters. Additionally,
Equitable Life leases an aggregate of approximately 250,000 square feet of
office space at four other locations in New York, NY. Equitable Life also has
the following significant leases: 244,000 square feet in Secaucus, NJ under a
lease that expires in 2011 for its Annuity Operations use; 185,000 square feet
in Charlotte, NC, under a lease that expires in 2013 for use by its National
Operations Center; 104,000 square feet in Alpharetta, GA, under a lease that
expires in 2006 for its Distribution Organizations' training and support use;
and 67,800 square feet in Leonia, NJ, under a lease that expires in 2009 for its
Information Technology processing use. In addition, Equitable Life leases
property both domestically and abroad, the majority of which houses sales and
distribution operations. Management believes its facilities are adequate for its
present needs in all material respects. For additional information, see Notes 19
and 20 of Notes to Consolidated Financial Statements.
Equitable Life subleases its office space at 1290 Avenue of the Americas to the
New York City Industrial Development Agency (the "IDA"), and sub-subleases that
space back from the IDA, in connection with the IDA's granting of sales tax
benefits to Equitable Life.
Investment Services
Alliance's principal executive offices at 1345 Avenue of the Americas, New York,
NY are occupied pursuant to a lease that extends until 2019. Alliance currently
occupies approximately 494,127 square feet of space at this location. Alliance
also occupies approximately 114,097 square feet of space at 135 West 50th
Street, New York, NY, and approximately 161,340 square feet of space at 767
Fifth Avenue, New York, NY, under leases expiring in 2016, and 2002 and 2005,
respectively. Alliance also occupies approximately 4,594 square feet of space at
709 Westchester Avenue, White Plains, NY, 42,254 square feet of space at 925
Westchester Avenue, White Plains, NY, 4,341 square feet of space at One North
Broadway, White Plains, NY, and 128,587 square feet of space at One North
Lexington, White Plains, NY, under leases expiring in 2008, 2008, 2008 and 2013,
respectively. Alliance and two of its subsidiaries occupy approximately 134,211
square feet of space in Secaucus, New Jersey, approximately 92,067 square feet
of space in San Antonio, Texas, and approximately 60,653 square feet of space in
Scranton, Pennsylvania, under leases expiring in 2016, 2009, and 2005,
respectively.
Alliance also leases space in 10 cities in the United States and its
subsidiaries and affiliates lease space in London, England, Tokyo, Japan and 24
other cities outside the United States.
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Part I, Item 3.
LEGAL PROCEEDINGS
A number of lawsuits have been filed against life and health insurers in the
jurisdictions in which Equitable Life and its subsidiaries do business involving
insurers' sales practices, alleged agent misconduct, alleged 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. Equitable Life,
Equitable Variable Life Insurance Company ("EVLICO," which was merged into
Equitable Life effective January 1, 1997, but whose existence continues for
certain limited purposes, including the defense of litigation) and The Equitable
of Colorado, Inc. ("EOC"), like other life and health insurers, from time to
time are involved in such litigation. Among litigations against Equitable Life,
EVLICO and EOC of the type referred to in this paragraph are the litigations
described in the following six paragraphs.
In January 1996, an amended complaint was filed in an action entitled Frank
Franze Jr. and George Busher, individually and on behalf of all others similarly
situated v. The Equitable Life Assurance Society of the United States, and
Equitable Variable Life Insurance Company in the United States District Court
for the Southern District of Florida. The action was brought by two individuals
who purchased variable life insurance policies. The plaintiffs purport to
represent a nationwide class consisting of all persons who purchased variable
life insurance policies from Equitable Life and EVLICO since September 30, 1991.
The amended complaint alleges that Equitable Life's and EVLICO's agents were
trained not to disclose fully that the product being sold was life insurance.
Plaintiffs allege violations of the Federal securities laws and seek rescission
of the contracts or compensatory damages and attorneys' fees and expenses.
Equitable Life and EVLICO have answered the amended complaint, denying the
material allegations and asserting certain affirmative defenses. In May 1999,
the Magistrate Judge issued a Report and Recommendation recommending that the
District Judge deny Equitable Life's and EVLICO's motion for summary judgment
and grant plaintiffs' motion for class certification. In July 1999, Equitable
Life and EVLICO filed Objections to the Report and Recommendation and urged that
the District Judge reject the Magistrate's recommendations and grant Equitable
Life's and EVLICO's motion for summary judgment and deny plaintiffs' motion for
class certification. In October 2000, the District Judge affirmed the
Magistrate's Report and Recommendation and, accordingly, denied Equitable Life's
and EVILCO's motion for summary judgment and granted plaintiffs' motion for
class certification. Equitable Life and EVLICO have filed a petition for
permission to appeal the order denying summary judgment and granting class
certification.
In March 2000, an action entitled Brenda McEachern v. The Equitable Life
Assurance Society of the United States and Gary Raymond, Jr. was commenced
against Equitable Life and one of its agents in Circuit Court, Mobile County,
Alabama, and asserts claims under state law. The action was brought by an
individual who alleges that she purchased a variable annuity from Equitable Life
in 1997. The action purports to be on behalf of a class consisting of all
persons who from January 1, 1989 (i) purchased a variable annuity from Equitable
Life to fund a qualified retirement plan, (ii) were charged allegedly
unnecessary fees for tax deferral for variable annuities held in qualified
retirement accounts, or (iii) were sold a variable annuity while owning a
qualified retirement plan from Equitable Life. The complaint alleges various
improper sales practices, including misrepresentations in connection with the
use of variable annuities in a qualified retirement plan or similar arrangement,
charging inflated or hidden fees, and failure to disclose unnecessary tax
deferral fees. Plaintiff seeks damages, including punitive damages, in an
unspecified amount and attorneys' fees and expenses. In May 2000, Equitable Life
removed the case to the United States District Court for the Southern District
of Alabama and filed a motion to dismiss the complaint, and the plaintiff has
filed a motion to remand the case to state court.
In June 2000, an action entitled Raymond Patenaude v. The Equitable Life
Assurance Society of the United States, AXA Advisors, LLC and Equitable
Distributors, Inc. was commenced in the Superior Court of California, County of
San Diego. The complaint alleges that the defendants engaged in fraudulent and
deceptive practices in connection with the marketing and sale of deferred
annuity products to fund tax-qualified contributory retirement plans. The named
plaintiff purports to act as a private attorney general on behalf of the general
public of the State of California under California consumer protection statutes
and also asserts individual common-law claims. On behalf of the named plaintiff
and the general public, the complaint asserts claims for unlawful, unfair or
fraudulent business acts and practices and for false or misleading advertising.
On behalf of the named plaintiff alone, the complaint alleges claims for fraud,
fraudulent concealment and deceit, negligent misrepresentation and negligence.
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The complaint seeks injunctive relief, restitution for members of the general
public of the State of California who have been harmed by defendants' conduct,
compensatory and punitive damages on behalf of the named plaintiff, and
attorneys' fees, costs and expenses. In July 2000, the defendants removed the
case to the United States District Court for the Southern District of California
and filed a motion to dismiss the complaint. In August 2000, the plaintiff filed
a motion to remand the case to state court. In October 2000, the District Court
denied plaintiff's motion to remand and granted defendants' motion to dismiss
the action. In November 2000, the plaintiff filed a notice of appeal, and the
defendants thereafter filed a motion to dismiss the appeal. By order filed in
February 2001, defendants' motion to dismiss the appeal was denied; defendants
filed a motion for reconsideration in March 2001.
In October 2000, an action entitled Sham Malhotra, et al. v. The Equitable Life
Assurance Society of the United States, AXA Advisors, LLC and Equitable
Distributors, Inc. was commenced in the Supreme Court of the State of New York,
County of Nassau. The action was brought by two individuals who purchased
Equitable Life deferred annuity products. The action purports to be on behalf of
a class consisting of all persons who purchased an individual deferred annuity
contract or who received a certificate to a group deferred annuity contract,
sold by one of the defendants, which was used to fund a contributory retirement
plan or arrangement qualified for favorable income tax treatment; excluded from
the class are officers, directors and agents of the defendants. The complaint
alleges that the defendants engaged in fraudulent and deceptive practices in
connection with the marketing and sale of deferred annuity products to fund
tax-qualified contributory retirement plans. The complaint asserts claims for:
deceptive business acts and practices in violation of the New York General
Business Law ("GBL"); use of misrepresentations and misleading statements in
violation of the New York Insurance Law; false or misleading advertising in
violation of the GBL; fraud, fraudulent concealment and deceit; negligent
misrepresentation; negligence; unjust enrichment and imposition of a
constructive trust; declaratory and injunctive relief; and reformation of the
annuity contracts. The complaint seeks injunctive and declaratory relief, an
unspecified amount of compensatory and punitive damages, restitution for all
members of the class, and an award of attorneys' fees, costs and expenses. In
October 2000, the defendants removed the action to the United States District
Court for the Eastern District of New York, and thereafter filed a motion to
dismiss. Plaintiffs filed a motion to remand the case to state court.
In March 2001, an action entitled John E. Wood, on behalf of himself and all
others similarly situated v. Equitable Variable Life Insurance Company was
commenced in the Superior Court of California, County of San Diego. The
plaintiff purports to represent a class consisting of all policyholders with
Flexible Premium Variable Life Insurance Policies similar to the plaintiff's
policy "issued at any time on or before May 1987 up to the present." The
complaint alleges that, beginning in or about July 1991, EVLICO improperly
increased the cost of insurance under the policies at issue in order to recover
expenses incurred as a result of tax legislation that changed the manner by
which life insurance companies could deduct policy acquisition costs. The
complaint alleges claims under California common law for breach of contract and
breach of the duty of good faith and fair dealing, and, on behalf of the general
public, a claim for unfair, deceptive or fraudulent business practices under
California consumer protection statutes. The relief requested includes
compensatory and punitive damages, injunctive relief, restitution, and
attorneys' fees and expenses. EVLICO has not yet responded to the complaint.
In three previously disclosed actions, Sidney C. Cole, et al. v. The Equitable
Life Assurance Society of the United States and The Equitable of Colorado, Inc.,
Elton F. Duncan, III v. The Equitable Life Assurance Society of the United
States and Michael Bradley v. Equitable Variable Life Insurance Company, the
parties have agreed to settle the plaintiffs' claims on an individual basis and
the actions have been dismissed. In February 2001, the six named plaintiffs in
the Duncan case moved, in both the Civil District Court for the Parish of
Orleans and the Fourth Circuit Court of Appeal for the State of Louisiana, to
set aside the orders of dismissal with prejudice in that case and to reinstate
their individual claims. A hearing has been scheduled in the District Court for
May 2001.
In October 2000, an action entitled American National Bank and Trust Company of
Chicago, as trustee f/b/o Emerald Investments LP and Emerald Investments LP v.
AXA Client Solutions, LLC; The Equitable Life Assurance Society of the United
States; and AXA Financial, Inc. was commenced in the United States District
Court for the Northern District of Illinois. The complaint alleges that the
defendants (i) in connection with certain annuities issued by Equitable Life
breached an agreement with the plaintiffs involving the execution of mutual fund
transfers, and (ii) wrongfully withheld withdrawal charges in connection with
the termination of such annuities. Plaintiffs seek unspecified lost profits and
injunctive relief, punitive damages and attorneys' fees. Plaintiffs also seek
return of the withdrawal charges. In February 2001, the District Court granted
in part and denied in part defendants' motion to dismiss the complaint. In late
March, plaintiffs filed an amended complaint. Defendants have not yet responded.
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On September 12, 1997, the United States District Court for the Northern
District of Alabama, Southern Division, entered an order certifying James Brown
as the representative of a class consisting of "[a]ll African-Americans who
applied but were not hired for, were discouraged from applying for, or would
have applied for the position of Sales Agent in the absence of the
discriminatory practices, and/or procedures in the [former] Southern Region of
AXA Financial from May 16, 1987 to the present." The second amended complaint in
James W. Brown, on behalf of others similarly situated v. The Equitable Life
Assurance Society of the United States alleges, among other things, that
Equitable Life discriminated on the basis of race against African-American
applicants and potential applicants in hiring individuals as sales agents.
Plaintiffs seek a declaratory judgment and affirmative and negative injunctive
relief, including the payment of back-pay, pension and other compensation. The
court referred the case to mediation, which has been successful. The parties
have reached a tentative agreement for the settlement of this case as a
nationwide class action. In connection with the proposed settlement, the case
will be dismissed in the United States District Court for the Northern District
of Alabama, Southern Division and will be refiled in the United States District
Court for Georgia, Atlanta Division. The final settlement requires notice to
class members and is subject to court approval.
In November 1997, an amended complaint was filed in Peter Fischel, et al. v. The
Equitable Life Assurance Society of the United States alleging, among other
things, that Equitable Life violated ERISA by eliminating certain alternatives
pursuant to which agents of Equitable Life could qualify for health care
coverage. In March 1999, the United States District Court for the Northern
District of California entered an order certifying a class consisting of "[a]ll
current, former and retired Equitable agents, who while associated with
Equitable satisfied [certain alternatives] to qualify for health coverage or
contributions thereto under applicable plans." Plaintiffs allege various causes
of action under ERISA, including claims for enforcement of alleged promises
contained in plan documents and for enforcement of agent bulletins, breach of a
unilateral contract, breach of fiduciary duty and promissory estoppel. The
parties completed discovery in February 2001. In June 2000, plaintiffs appealed
to the Court of Appeals for the Ninth Circuit contesting the District Court's
award of legal fees to plaintiffs' counsel in connection with a previously
settled count of the complaint unrelated to the health benefit claims. In that
appeal, plaintiffs have challenged the District Court's subject matter
jurisdiction over the health benefit claims. Briefing has been completed, but
the appeal has not yet been decided.
In September 1999, a complaint was filed in an action entitled R.S.M. Inc., et
al. v. Alliance Capital Management L.P., et al. in the Chancery Court of the
State of Delaware. The action was brought on behalf of a purported class of
owners of limited partnership units of Alliance Capital Management Holding L.P.
("Alliance Holding") challenging the then-proposed reorganization of Alliance
Holding. Named defendants include Alliance Holding, four Alliance Holding
executives, the general partner of Alliance Holding and Alliance, which is a
wholly owned indirect subsidiary of Equitable Life, and Alliance, which is the
operating partnership whose units are not publicly traded. Equitable Life is
obligated to indemnify the defendants for losses and expenses arising out of the
litigation. Plaintiffs allege, inter alia, inadequate and misleading
disclosures, breaches of fiduciary duties, and the improper adoption of an
amended partnership agreement by Alliance Holding. The complaint seeks, inter
alia, payment of unspecified money damages and an accounting of all benefits
alleged to have been improperly obtained by the defendants. In August 2000,
plaintiffs filed a first amended and supplemental class action complaint. The
amended complaint alleges in connection with the reorganization that, inter
alia, the partnership agreement of Alliance Holding was not validly amended, the
reorganization of Alliance Holding was not validly effected, the information
disseminated to holders of units of limited partnership interests in Alliance
Holding was materially false and misleading, and the defendants breached their
fiduciary duties by structuring the reorganization in a manner that was grossly
unfair to plaintiffs. Plaintiffs seek declaratory, monetary and injunctive
relief relating to the allegations contained in the amended complaint. In
September 2000, all defendants other than Robert H. Joseph, Jr., filed an answer
to the amended complaint denying the material allegations contained therein. In
lieu of joining in the answer to the amended complaint, Mr. Joseph filed a
motion to dismiss in September 2000. In November 2000, defendants, other than
Mr. Joseph, filed a motion to dismiss the amended complaint. In December 2000,
plaintiffs filed a motion for partial summary judgment on the claim that the
Alliance Holding partnership agreement was not validly amended. Oral argument of
the motions was held in January 2001.
In January 2000, the California Supreme Court denied Equitable Life's petition
for review of an October 1999 decision by the California Court of Appeal which
reversed the dismissal by the Superior Court of Orange County, California of an
action entitled BT-I v. The Equitable Life Assurance Society of the United
States. The action was commenced in 1995 by a real estate developer in
connection with a limited partnership formed in 1991 with Equitable Life on
behalf of Prime Property Fund ("PPF"). Equitable Life serves as investment
manager for PPF, an open-end, commingled real estate separate account of
Equitable Life for pension clients. Plaintiff alleges, among other claims, that
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Equitable Life breached its fiduciary duty as general partner of the limited
partnership principally in connection with the 1995 purchase and subsequent
foreclosure by Equitable Life on behalf of PPF of the loan which financed the
partnership's property. The plaintiff seeks compensatory and punitive damages.
In reversing the Superior Court's dismissal of the plaintiff's claims, the Court
of Appeal held that a general partner who acquires a partnership obligation
breaches its fiduciary duty by foreclosing on partnership assets. The case was
remanded to the Superior Court for further proceedings. In August 2000,
Equitable Life filed a motion for summary adjudication on plaintiff's claims,
based on the purchase and subsequent foreclosure of the loan which financed the
partnership's property, for punitive damages. In November 2000, the Superior
Court granted Equitable Life's motion as to one of plaintiff's claims,
dismissing the claim for punitive damages sought in conjunction with plaintiff's
claim for breach of the covenant of good faith and fair dealing. The Superior
Court denied Equitable Life's motion with respect to plaintiff's claim for
punitive damages sought in conjunction with its claim for breach of fiduciary
duty. In March 2001, plaintiff filed an amended supplemental complaint that,
among other things, adds allegations that the post-foreclosure transfers of
certain funds from the partnership to Equitable Life constitute self-dealing and
breach of fiduciary duty. Plaintiff seeks compensatory and punitive damages
based on such conduct. Equitable Life has not yet responded to the amended
supplemental complaint. A jury trial previously scheduled for February 2001
tentatively has been rescheduled for March 2001.
Subsequent to the August 30, 2000 announcement of AXA's proposal to purchase the
outstanding shares of AXA Financial common stock that it did not already own,
the following fourteen putative class action lawsuits were commenced in the
Delaware Court of Chancery: Fred Buff v. AXA Financial, Inc., et al., Sarah
Wolhendler v. Claude Bebear, et al.; Jerome and Selma Stone v. AXA Financial,
Inc., et al.; Louis Deranieri v. AXA Financial, Inc., et al.; Maxine Phillips v.
AXA Financial, Inc., et al.; Ruth Ravnitsky v. AXA Financial, Inc., et al.;
Richard Kager v. AXA Financial, Inc., et al.; Mortimer Cohen v. AXA Financial,
Inc., et al.; Lee Koneche, et al. v. AXA Financial, Inc., et al.; Denver
Employees Retirement Plan v. AXA Financial, Inc., et al.; Harry Hoffman v. AXA
Financial, Inc., et al.; Joseph Villari v. AXA Financial, Inc., et al.; Max
Boimal v. AXA Financial, Inc., et al.; and Jay Gottlieb v. AXA Financial, Inc.,
et al. AXA Financial, AXA, and directors and/or officers of AXA Financial are
named as defendants in each of these lawsuits. The various plaintiffs each
purport to represent a class consisting of owners of AXA Financial common stock
and their successors in interest, excluding the defendants and any person or
entity related to or affiliated with any of the defendants. They challenge the
adequacy of the offer announced by AXA and allege that the defendants have
engaged or will engage in unfair dealing, overreaching and/or have breached or
will breach fiduciary duties owed to the minority shareholders of AXA Financial.
The complaints seek declaratory and injunctive relief, an accounting, and
unspecified compensatory damages, costs and expenses, including attorneys' fees.
The Delaware suits have been consolidated. A similar lawsuit was filed in the
Supreme Court of the State of New York, County of New York, after the filing of
the first Delaware action; it is captioned Harbor Finance Partners v. AXA
Financial, Inc., et al. In December 2000, the parties to the Delaware suits
reached a tentative agreement for settlement and executed a Memorandum of
Understanding. Shortly thereafter, agreement was reached with the plaintiff in
the New York suit to stay proceedings in New York and to participate in and be
bound by the terms of the settlement of the Delaware suits. The settlement,
which does not involve any payment by AXA Financial, is subject to a number of
conditions, including confirmatory discovery, the preparation of definitive
documentation and approval by the Delaware Court of Chancery after a hearing.
Subsequent to the August 30, 2000 announcement of the proposed sale of DLJ, four
putative class action lawsuits have been filed in the Delaware Court of Chancery
naming AXA Financial as one of the defendants and challenging the sale of DLJ
because the transaction did not include the sale of DLJdirect tracking stock.
These actions are captioned Irvin Woods, et al. v. Joe L. Roby, et al.; Thomas
Rolle v. Joe L. Roby, et al.; Andrew Loguercio v. Joe L. Roby, et al.; and
Robert Holschen v. Joe L. Roby, et al. The plaintiffs in these cases purport to
represent a class consisting of the holders of DLJdirect tracking stock and
their successors in interest, excluding the defendants and any person or entity
related to or affiliated with any of the defendants. Named as defendants are AXA
Financial, DLJ and the DLJ directors. The complaints assert claims for breaches
of fiduciary duties, and seek an unspecified amount of compensatory damages and
costs and expenses, including attorneys' fees. The parties in these cases have
agreed to extend the time for defendants to respond to the complaints.
Subsequent to the August 30, 2000 announcement of the proposed sale of DLJ, a
putative class action lawsuit was filed in the United States District Court,
Southern District of New York, captioned Siamac Sedighim v. Donaldson, Lufkin &
Jenrette, Inc., et al. This action challenges the sale of DLJ (for omitting the
DLJdirect tracking stock) and also alleges Federal securities law claims
relating to the initial public offering of the DLJdirect tracking stock. The
complaint alleges claims for violations of the securities laws, breaches of the
fiduciary duties of loyalty, good faith and due care, aiding and abetting such
breaches, and breach of contract. The plaintiff purports to represent a class
consisting of: all purchasers of DLJdirect tracking stock in the initial public
offering and thereafter (with respect to the securities law claims); and all
3-4
owners of DLJdirect tracking stock who allegedly have been or will be injured by
the sale of DLJ (with respect to all other claims). Named as defendants are AXA
Financial, Equitable Life, AXA, DLJ, Donaldson, Lufkin & Jenrette Securities
Corporation, Credit Suisse Group, Diamond Acquisition Corp., and DLJ's
directors. The complaint seeks declaratory and injunctive relief, an unspecified
amount of damages, and costs and expenses, including attorney's fees. In
February 2001, defendants moved to dismiss the complaint.
Since AXA Financial sold its interest in DLJ to the Credit Suisse Group on
November 3, 2000, neither AXA Financial nor the Company will continue to
disclose in its Exchange Act reports and filings legal proceedings and related
matters arising out of DLJ's and its subsidiaries' operations.
Although the outcome of litigation generally cannot be predicted with certainty,
the Company's management believes that (i) the settlement of the Brown
litigation will not have a material adverse effect on the consolidated financial
position or results of operations of the Company and (ii) the ultimate
resolution of the other litigations 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 any of such other litigations described above will have a material
adverse effect on the Company's consolidated results of operations in any
particular period.
In addition to the matters described above, Equitable Life 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.
3-5
Part I, Item 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Omitted pursuant to General Instruction I to Form 10-K.
4-1
Part II, Item 5.
MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
All of Equitable Life's common equity is owned by AXA Client Solutions, LLC, a
wholly owned direct subsidiary of AXA Financial, Inc. which is a wholly owned
subsidiary of AXA. Consequently, there is no established public trading market
for Equitable Life's common equity. In 2000, Equitable Life paid shareholder
dividends of $250 million. For information on Equitable Life's present and
future ability to pay dividends, see Note 17 of Notes to Consolidated Financial
Statements (Item 8 of this report).
5-1
Part II, Item 6.
SELECTED FINANCIAL DATA
Omitted pursuant to General Instruction I to Form 10-K.
6-1
Part I, Item 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management's discussion and analysis is omitted pursuant to General Instruction
I(2)(a) of Form 10-K. The management narrative for the Company that follows
should be read in conjunction with the consolidated financial statements and
related footnotes included elsewhere in this report.
General
The discussions of the Insurance and Investment Services segments that follow
are presented on a pre-tax adjusted earnings basis, which is a non-GAAP measure.
Amounts reported in the GAAP financial statements have been adjusted to include
Discontinued Operations and to exclude the amortization of acquisition related
goodwill and intangible assets and investment gains/losses, net of related DAC
and other charges, as well as the effect of unusual or non-recurring events and
transactions. These adjustments are discussed below. Certain prior period
reclassifications have been made to conform the 1999 period with the current
presentation. The excluded items are important to an understanding of our
overall results of operations. The following table presents the Company's
operating results of continuing operations outside of the Closed Block combined
on a line-by-line basis with the operating results of both the Closed Block and
Discontinued Operations. This management narrative addresses the combined
operating results unless otherwise noted.
Combined Operating Results (In Millions) 2000 1999
------------------ ----------------
Operating Results:
Policy fee income and premiums........................................... $ 2,588.5 $ 2,431.2
Net investment income.................................................... 2,897.3 2,908.4
Commissions, fees and other income....................................... 2,731.2 2,178.1
------------------ ----------------
Total revenues....................................................... 8,217.0 7,517.7
------------------ ----------------
Interest credited to policyholders' account balances..................... 1,048.5 1,095.7
Policyholders' benefits.................................................. 2,058.3 2,079.4
Other operating costs and expenses....................................... 3,092.9 2,744.8
------------------ ----------------
Total benefits and other deductions.................................. 6,199.7 5,919.9
------------------ ----------------
Pre-tax adjusted earnings before minority interest....................... 2,017.3 1,597.8
Minority interest........................................................ (337.8) (216.8)
------------------ ----------------
Pre-tax adjusted earnings................................................ 1,679.5 1,381.0
Pre-tax Adjustments:
Gain on sale of DLJ...................................................... 1,962.0 -
Investment gains (losses), net of related DAC and other charges.......... (731.9) (109.7)
Minority purchase related expenses....................................... (493.9) -
Investment income (loss) on CSG shares................................... (43.2) -
Amortization of goodwill and intangible assets........................... (34.6) (3.2)
Non-recurring DAC adjustments............................................ - (131.7)
------------------ ----------------
Total pre-tax adjustments............................................ 658.4 (244.6)
Minority interest........................................................ 337.8 216.8
Discontinued Operations.................................................. (90.2) (43.3)
------------------ ----------------
GAAP Reported:
Earnings from continuing operations before
Federal income taxes and minority interest............................ 2,585.5 1,309.9
Federal income taxes..................................................... (958.3) (332.0)
Minority interest in net income of consolidated subsidiaries............. (330.3) (199.4)
------------------ ----------------
Earnings from continuing operations...................................... 1,296.9 778.5
Earnings from discontinued operations, net of Federal income taxes....... 58.6 28.1
------------------ ----------------
Net Earnings............................................................. $ 1,355.5 $ 806.6
================== ================
7-1
Adjustments to GAAP pre-tax reported earnings from continuing operations before
Federal income taxes and minority interest for 2000 resulted in the exclusion of
the $1.96 billion gain recognized by Equitable Life when it sold its shares in
DLJ to CSG in fourth quarter 2000. See Note 5 of Notes to Consolidated Financial
Statements for further information on that transaction. The 2000 adjustments
also excluded $731.9 million in net investment losses (net of related DAC and
other charges totaling $77.0 million). The losses in 2000 included $639.9
million of writedowns and $159.2 million of realized losses on fixed maturities
sold from the General Account's portfolio. These writedowns principally occurred
in fourth quarter 2000, when broad weakness in credit markets from a slowing
economy resulted in management's determination that a large number of securities
with sustained declines in current market prices were permanently impaired.
These losses were partially offset by gains of $42.7 million from the exercise
of subsidiaries' options. In the 1999 period, net investment losses of $109.7
million (net of related DAC and other charges and credits totaling $12.9
million) were excluded. The 1999 investment losses were primarily due to losses
of $309.5 million on writedowns and sales of General Account fixed maturities,
partially offset by gains of $87.8 million on other equity investments. The 1999
writedowns were primarily on domestic and emerging market high-yield securities.
Gains of $95.8 million related to the sale of DLJdirect's tracking stock, $83.5
million recognized in first quarter 1999 upon reclassifying publicly-traded
common equities to a trading portfolio and $14.7 million resulting from the
exercise of subsidiaries' options and DLJ RSU conversions further offset these
1999 losses.
There were two non-recurring events in 2000 that resulted in adjustments. AXA
acquired the minority interest shares of the Holding Company's Common Stock. As
a result of this purchase, management amended the terms of substantially all of
the outstanding stock options. See Note 1 of Notes to Consolidated Financial
Statements for further information. The approximately $493.9 million of
expenses, principally related to modifications to and accelerated vesting of
employee stock options that resulted from the AXA minority interest buyout are
excluded from pre-tax adjusted earnings. Also in 2000, the Company received CSG
stock as well as cash when it sold its shares of DLJ. See Note 5 of Notes to
Consolidated Financial Statements for further information. Realized and
unrealized holding losses on the CSG shares of $43.2 million have been excluded
from pre-tax adjusted earnings.
In addition, in October 2000, Alliance purchased Bernstein. For further
information on the Bernstein acquisition, see Note 1 of Notes to Consolidated
Financial Statements. The amortization of goodwill and intangible assets,
substantially related to the acquisition of Bernstein, totaling $34.6 million
was excluded from pre-tax adjusted earnings in 2000 as compared to $3.2 million
of amortization in 1999.
In second quarter 1999, there was a $131.7 million non-recurring DAC adjustment
resulting from the revisions to estimated future gross profits related to the
investment asset reallocation.
GAAP net earnings increased $548.9 million to $1.36 billion in 2000 primarily
due to the $1.96 billion net gain on the sale of DLJ partially offset by lower
equity in DLJ's earnings through the date of sale and by the after-tax effect of
the adjustments mentioned above. The increase in minority interest in net income
of consolidated subsidiaries was principally due to the Company's lower economic
ownership interest in Alliance (approximately 39.4% at December 31, 2000),
principally due to the Bernstein acquisition.
7-2
Combined Operating Results By Segment
Insurance.
Insurance - Combined Operating Results
(In Millions)
2000
-------------------------------------------------------------
Insurance Closed Discontinued 1999
Operations Block Operations Combined Combined
--------------- --------------- -------------- -------------- -------------
Operating Results:
Universal life and investment-type
product policy fee income........... $ 1,413.3 $ - $ - $ 1,413.3 $ 1,253.9
Premiums.............................. 579.9 595.1 .2 1,175.2 1,177.3
Net investment income................. 2,117.6 578.7 102.2 2,798.5 2,843.7
Commissions, fees and other income.... 275.3 (.4) .5 275.4 213.9
Contribution from the Closed
Block(1)............................ 99.9 (99.9) - - -
--------------- --------------- -------------- -------------- -------------
Total revenues.................... 4,486.0 1,073.5 102.9 5,662.4 5,488.8
--------------- --------------- -------------- -------------- -------------
Interest credited to policyholders'
account balances.................... 1,034.3 14.2 - 1,048.5 1,095.7
Policyholders' benefits............... 1,049.3 1,011.0 (2.0) 2,058.3 2,079.4
Deferred policy acquisition costs..... (422.5) 43.1 (12.7) (392.1) (304.2)
All other operating costs
and expenses........................ 1,735.5 5.2 8.1 1,748.8 1,667.1
--------------- --------------- -------------- -------------- -------------
Total benefits and
other deductions................ 3,396.6 1,073.5 (6.6) 4,463.5 4,538.0
--------------- --------------- -------------- -------------- -------------
Pre-tax adjusted earnings............. 1,089.4 - 109.5 1,198.9 950.8
Pre-tax Adjustments:
Investment (losses) gains, net of
related DAC and other charges....... (737.6) (7.2)(1) (19.3) (764.1) (220.2)
Minority interest purchase related
expenses............................ (493.9) - - (493.9) -
Investment (loss) income on
CSG shares.......................... (43.2) - - (43.2) -
Non-recurring DAC adjustments......... - - - - (131.7)
--------------- --------------- -------------- -------------- -------------
Total pre-tax adjustments......... (1,274.7) (7.2) (19.3) (1,301.2) (351.9)
Contribution from the Closed
Block(1)............................. (7.2) 7.2 - - -
Discontinued Operations................. - - (90.2) (90.2) (43.3)
--------------- --------------- -------------- -------------- -------------
GAAP Reported:
Earnings from Continuing
Operations before Federal
Income Taxes ....................... $ (192.5) $ - $ - $ (192.5) $ 555.6
=============== =============== ============== ============== =============
(1) When investment losses net of related DAC and other charges are excluded,
the Insurance segment's contribution from the Closed Block totaled $92.7
million on a GAAP reported basis for 2000.
7-3
2000 Compared to 1999 - For 2000, Insurance pre-tax adjusted earnings reflected
an increase of $248.1 million from the prior year period. Higher policy fees on
individual annuity contracts, favorable life mortality and the impact of
projected favorable investment results on Discontinued Operations' reserve
requirement contributed to improved earnings, partially offset by higher
expenses.
Segment revenues increased $173.6 million (3.2%) over the prior year period due
to a $159.4 million net increase in policy fee income and a $61.5 million
increase in commissions, fees and other income, offset by a $45.2 million
decrease in investment income. Policy fee income increased to $1.41 billion due
to higher average annuity account balances. Commissions, fees and other income
increased 28.8% in 2000 as compared to 1999 principally due to higher gross
investment management fees received from EQ Advisors Trust and higher mutual
fund and investment product sales. The increase in gross investment management
fees was partially offset by an increase in subadvisory fees included in total
benefits and other deductions. Net investment income declined 1.6% as the
positive effect of an overall yield increase from 8.31% to 8.40% was more than
offset by a $2.27 billion decline in General Account investment assets to $34.16
billion at December 31, 2000. During 2000, net investment income in three of the
investment categories declined $42.3 million, $35.1 million and $24.8 million,
respectively, to totals of $1.80 billion for fixed maturities, $90.0 million for
equity real estate and $426.1 million for mortgages. While other equity
investments grew $117.0 million to $1.00 billion, there was a $4.9 million
decline in their net investment principally due to equity market performance in
the last half of 2000. Income on policy loans and cash and short-term
investments grew $11.5 million and $6.8 million, respectively, principally due
to higher asset bases. The cash and short-term investment balance of $2.14
billion at December 31, 2000 reflects the cash proceeds from the sales of DLJ
and of CSG stock in the fourth quarter.
Total benefits and other deductions in 2000 decreased $74.5 million from 1999 as
$81.7 million higher other operating costs and expenses were more than offset by
higher DAC capitalization, a $47.2 million decrease in interest credited and a
$21.1 million decrease in policyholder benefits. The increase in all other
operating costs and expenses was principally due to $113.5 million higher
subadvisory fees and increases in expenses related to the national roll-out of
fee based financial planning, enhanced service delivery initiatives and
strategic information technology and E-commerce expenditures in 2000 as compared
to 1999 partially offset by charges to AXA Distribution and its subsidiaries,
AXA Advisors and AXA Network, for their applicable share of the operating
expenses.
First year premiums and deposits for life and annuity products in 2000 decreased
from prior year levels by $7.0 million to $5.92 billion primarily due to $290.7
million lower retail sales of individual annuities which was partially offset by
increases in wholesale sales. Sales of variable annuities slowed in the second
half of 2000. Fourth quarter 2000 annuity deposits decreased 17% from the
comparable prior year's quarter. Renewal premiums and deposits increased by
$99.1 million to $4.55 billion in 2000 due to increases in the block of annuity
and variable life business which were partially offset by decreases in other
products and in traditional life policies. Mutual fund sales increased $789.7
million to $3.58 billion in 2000.
Policy and contract surrenders and withdrawals increased $1.15 billion to $5.66
billion during 2000 compared to 1999 principally due to the growing size and
maturity of the book of annuities and variable and interest-sensitive life
business. The annuities' surrender rate increased from 8.8% in 1999 to 9.6% in
2000, while the surrender rate for fourth quarter 2000 was 9.3% compared to 9.2%
for fourth quarter 1999. The trends in surrenders and withdrawals discussed
above continue to fall within the range of expected experience.
7-4
Investment Services. The table below presents the operating results of the
Investment Services segment, consisting principally of Alliance's operations.
Information on the 1999 Alliance reorganization can be found in Notes 1 and 18
of Notes to Consolidated Financial Statements and in the Alliance Holding Annual
Report on Form 10-K for the year ended December 31, 2000.
Investment Services - Operating Results
(In Millions)
2000 1999
--------------- ----------------
Operating Results:
Investment advisory and services fees(1).............................. $ 1,689.9 $ 1,331.7
Distribution revenues................................................. 621.6 441.8
Equity in DLJ's earnings 139.1 183.0
Other revenues(1)..................................................... 217.1 96.2
--------------- ----------------
Total revenues.................................................... 2,667.7 2,052.7
--------------- ----------------
Promotion and servicing............................................... 844.4 620.7
Employee compensation and benefits.................................... 651.9 508.6
All other operating expenses.......................................... 353.0 276.4
--------------- ----------------
Total expenses.................................................... 1,849.3 1,405.7
--------------- ----------------
Pre-tax adjusted earnings before minority interest.................... 818.4 647.0
Minority interest..................................................... (337.8) (216.8)
--------------- ----------------
Pre-tax adjusted earnings............................................. 480.6 430.2
Pre-tax Adjustments:
Gain on sale of DLJ 1,962.0 -
Amortization of goodwill and intangible assets........................ (34.6) (3.2)
Investment gains (losses), net of DAC................................. 32.2 110.5
--------------- ----------------
Total pre-tax adjustments......................................... 1,959.6 107.3
Minority interest....................................................... 337.8 216.8
--------------- ----------------
GAAP Reported:
Earnings from Continuing Operations before
Federal Income Taxes and Minority Interest.......................... $ 2,778.0 $ 754.3
=============== ================
(1) Includes fees earned by Alliance totaling $39.6 million and $44.3 million
in 2000 and 1999, respectively, for services provided to the Insurance
Group.
2000 Compared to 1999 - Investment Services' pre-tax adjusted earnings for 2000
were $480.6 million, an increase of $50.4 million from the prior year. Bernstein
contributed $65.7 million to the segment's earnings before minority interest in
fourth quarter 2000. Revenues totaled $2.67 billion in 2000, an increase of
$615.0 million from 1999, principally due to $358.2 million higher investment
advisory and services fees and $179.8 million higher distribution revenues. The
increase in investment advisory and services fees primarily resulted from
increases in average assets under management partially offset by a decline in
performance fees of $89.7 million to $72.5 million in 2000. These lower
performance fees were principally the result of the market decline in growth and
technology stocks during 2000. The growth in distribution revenues was
principally due to higher average mutual fund assets under management attributed
to continuing sales. Other revenues include $56.3 million of institutional
research services revenues for both the fourth quarter and full year 2000 as a
result of the Bernstein acquisition. Also included in other revenues for 2000
was $29.8 million of interest earned on the proceeds of the Holding Company's
purchase of Alliance Units in June 2000. The resolution of a class action
lawsuit resulted in the recognition of a one-time, non-cash gain of $23.9
million in 2000, which reduced all other operating expenses for the 2000 period.
When this one-time gain is excluded, Investment Services' total expenses
increased $467.5 million in 2000 primarily due to increases in mutual fund
promotional expenditures and employee compensation and benefits. Promotion and
servicing increased 36.0% primarily due to increased distribution plan payments
resulting from higher average domestic, offshore and cash management assets
under management and higher amortization of deferred sales commissions, as well
as higher travel, entertainment and promotional expenses incurred in connection
with mutual fund sales initiatives. Higher compensation and benefits were the
result of higher incentive and base compensation and commissions reflecting
increased headcounts, principally due to the Bernstein acquisition, along with
salary increases.
7-5
Assets Under Management
A breakdown of assets under management follows:
Assets Under Management
(In Millions)
December 31,
--------------------------------------
2000 1999
------------------ ------------------
Third party(1)........................................................... $ 393,633 $ 301,366
Equitable Life General Account, the Holding Company
and its other affiliates(2)............................................ 37,740 38,249
Separate Accounts........................................................ 51,706 54,454
------------------ ------------------
Total Assets Under Management........................................ $ 483,079 $ 394,069
================== ==================
(1) Includes $4.91 billion and $2.47 billion of assets managed on behalf of
AXA affiliates at December 31, 2000 and 1999, respectively. Third party
assets under management include 100% of the estimated fair value of real
estate owned by joint ventures in which third party clients own an
interest.
(2) Includes invested assets of the Company and AXA Financial not managed by
Alliance, principally cash and short-term investments and policy loans,
totaling approximately $9.02 billion and $4.76 billion at December 31,
2000 and 1999, respectively, as well as mortgages and equity real estate
totaling $6.41 billion and $7.11 billion December 31, 2000 and 1999,
respectively.
General Account and other assets under management declined $509.0 million as the
proceeds on the sale of DLJ were more than offset by asset reductions related to
the DI indemnity reinsurance and to tax settlements. The decrease in Separate
Account assets under management resulted from market depreciation which more
than offset net new deposits.
Alliance's assets under management grew to $453.68 billion in 2000 from $368.32
billion in 1999 primarily as a result of the Bernstein acquisition, which added
$85.8 billion at October 2, 2000, and continuing net sales of mutual funds,
offset by $29.05 billion in net market depreciation.
LIQUIDITY AND CAPITAL RESOURCES
Equitable Life
The principal sources of Equitable Life's cash flows are premiums, deposits and
charges on policies and contracts, investment income, repayments of principal
and proceeds from maturities and sales of General Account Investment Assets and
dividends and distributions from subsidiaries.
Equitable Life's liquidity requirements principally relate to the liabilities
associated with its various life insurance, annuity and group pension products
in its continuing operations; the liabilities of discontinued operations;
shareholder dividends to AXA Financial; and operating expenses, including debt
service. Equitable Life's liabilities include the payment of benefits under life
insurance, annuity and group pension products, as well as cash payments in
connection with policy surrenders, withdrawals and loans. Management from time
to time explores selective acquisition opportunities in insurance and investment
management businesses.
Sources of Liquidity. Equitable Life's primary source of short-term liquidity to
support continuing and discontinued insurance operations is a pool of highly
liquid, high quality short-term instruments structured to provide liquidity in
excess of the expected cash requirements. At December 31, 2000, this asset pool
included an aggregate of $2.14 billion in highly liquid short-term investments,
as compared to $1.39 billion at December 31, 1999. In addition, a substantial
portfolio of public bonds including U.S. Treasury and agency securities and
other investment grade fixed maturities is available to meet Equitable Life's
liquidity needs.
In fourth quarter 2000, Equitable Life received cash proceeds of $1.05 billion
from the sale of its shares in DLJ and a further $557.3 million from sales of a
portion of the CSG shares through December 31, 2000. All remaining shares of CSG
stock were sold during first quarter 2001.
7-6
Other liquidity sources include dividends and distributions from Alliance. In
2000, Equitable Life received cash distributions from Alliance of $341.2 million
as compared to $203.5 million in 1999.
Management believes there is sufficient liquidity in the form of short-term
assets and its bond portfolio together with cash flows from operations,
scheduled maturities of fixed maturities and borrowings available under its
commercial paper program and bank credit facilities to satisfy Equitable Life's
liquidity needs.
Factors Affecting Liquidity. Equitable Life's liquidity needs are affected by
fluctuations in the level of surrenders and withdrawals previously discussed in
"Combined Operating Results by Segment - Insurance". In 2000, Equitable Life
paid dividends totaling $250.0 million to AXA Financial, up from $150.0 million
in 1999. In 2001, Equitable Life expects to pay substantial additional
shareholder dividends, including $1.5 billion in early April 2001. Management
believes the Insurance Group has adequate internal sources of funds for its
presently anticipated needs.
Alliance
Alliance's principal sources of liquidity have been cash flows from operations
and the issuance, both publicly and privately, of debt and Units. Alliance
requires financial resources to fund commissions paid on certain back-end load
mutual fund sales, to fund distributions to Unitholders, to fund capital
expenditures and for general working capital purposes. In 2000, subsidiaries of
Alliance purchased Alliance Holding units totaling $146.6 million for deferred
compensation plans. Management believes Alliance's substantial equity base, its
access to public and private debt and its cash flows from operations will
provide the financial resources to meet its capital and general business
requirements. For further information, see Alliance's Annual Report on Form 10-K
for the year ended December 31, 2000.
FORWARD-LOOKING STATEMENTS
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 condition. 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 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
factors that could cause such differences.
Market Risk. The Company's businesses are subject to market risks arising from
its insurance asset/liability management, investment management and trading
activities. Primary market risk exposures exist in the Insurance segment and
result from interest rate fluctuations, equity price movements and changes in
credit quality. The nature of each of these risks is discussed under the caption
"Quantitative and Qualitative Disclosures About Market Risk" contained herein
and in Note 13 of Notes to Consolidated Financial Statements.
Insurance. The Insurance Group's future sales of life insurance and annuity
products and financial planning services are dependent on numerous factors
including: the successful implementation of the Company's strategic initiatives;
the intensity of competition from other insurance companies, banks and other
financial institutions; conditions in the securities markets; the strength and
professionalism of distribution channels; the continued development of
additional channels; the financial and claims paying ratings of Equitable Life;
its reputation and visibility in the market place; its ability to develop,
distribute and administer competitive products and services in a timely,
cost-effective manner; and its investment management performance. In addition,
the nature and extent of competition and the markets for products sold by the
Insurance Group may be materially affected by changes in laws and regulations,
including changes relating to savings, retirement funding and taxation. See
"Business - Regulation". 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; secular trends; the Company's mortality,
morbidity, persistency and claims experience, and profit margins between
investment results from General Account Investment Assets and interest credited
on individual insurance and annuity products; and the adequacy of reserves and
the extent to which subsequent experience differs from management's estimates
7-7
and assumptions used in determining those reserves. The performance of General
Account Investment Assets depends, among other things, on levels of interest
rates and the markets for equity securities and real estate, the need for asset
valuation allowances and writedowns, and the performance of equity investments
which have created, and in the future may create, significant volatility in
investment income. The ability of the Company to continue its accelerated real
estate sales program without incurring net losses will depend on real estate
markets for the remaining properties held for sale and the negotiation of
transactions which confirm management's expectations on property values.
Investment Services. Alliance's revenues are largely dependent on the total
value and composition of assets under its management and are, therefore,
affected by market appreciation and depreciation, additions and withdrawals of
assets, purchases and redemptions of mutual funds and shifts of assets between
accounts or products with different fee structures. See "Combined Operating
Results by Segment - Investment Services".
Discontinued Operations. The determination of the allowance for future losses
for the discontinued Wind-Up Annuities continues to involve numerous estimates
and subjective judgments including those regarding expected performance of
investment assets, ultimate mortality experience and other factors which affect
investment and benefit projections. There can be no assurance the losses
provided for will not differ from the losses ultimately realized. To the extent
actual results or future projections of Discontinued Operations differ from
management's current best estimates underlying the allowance, the difference
would be reflected as earnings or loss from discontinued operations within the
consolidated statements of earnings. In particular, to the extent income, sales
proceeds and holding periods for equity real estate differ from management's
previous assumptions, periodic adjustments to the allowance are likely to
result.
Technology and Information Systems. 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
information purposes. Any significant difficulty associated with the operation
of such systems, or any material delay or inability to develop needed system
capabilities, could have a material adverse effect on 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. While no such lawsuit
has resulted in an award or settlement of any material amount against the
Company to date, its results of operations and financial condition could be
affected by defense and settlement costs and any unexpected material adverse
outcomes in such litigations as well as in other material litigations pending
against the Holding Company and its subsidiaries. In addition, examinations by
Federal and state regulators could result in adverse publicity, sanctions and
fines. For further information, see "Business - Regulation" and "Legal
Proceedings".
Future Accounting Pronouncements. In the future, new 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 for pronouncements issued but not effective at December 31, 2000. In
addition, the NAIC's Codification guidance became effective January 1, 2001.
Codification addresses areas where statutory accounting previously was silent
and changed certain existing statutory positions. Equitable Life is subject to
Codification to the extent and in the form adopted in New York State. Equitable
Life's application of the codification rules adopted by New York is not expected
to have a significant effect.
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 and investment advisors. Changes in the regulatory environment could
have a material impact on operations and results. The activities of the
Insurance Group are subject to the supervision of the insurance regulators of
each of the 50 states. See "Business - Regulation".
7-8
Part II, Item 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
The Company's businesses are subject to market risks arising from its insurance
asset/liability management and asset management. Such risks are evaluated and
managed by each business on a decentralized basis. Primary market risk exposures
result from interest rate fluctuations, equity price movements and changes in
credit quality.
Investment Services
Alliance's investments are divided into two portfolios: available for sale
investments and other investments. Alliance's available for sale portfolio
primarily includes equity and fixed income mutual funds and money market
investments. The carrying value of money market investments approximates fair
value. Although these assets are purchased for long-term investment, the
portfolio strategy considers them available for sale due to changes in market
interest rates, equity prices and other relevant factors. Other investments
include Alliance's hedge fund investments. At December 31, 2000, Alliance's
interest rate, equity price, derivative and credit quality risks were not
material to the Company. For further information, see Alliance Holding's and
Alliance's Annual Reports on Form 10-K for the year ended December 31, 2000.
Insurance Group
Insurance Group results significantly depend on profit margins between
investment results from General Account Investment Assets and interest credited
on individual insurance and annuity products. Management believes its fixed rate
liabilities should be supported by a portfolio principally composed of fixed
rate investments that can generate predictable, steady rates of return. Although
these assets are purchased for long-term investment, the portfolio management
strategy considers them available for sale in response to changes in market
interest rates, changes in prepayment risk, changes in relative values of asset
sectors and individual securities and loans, changes in credit quality outlook
and other relevant factors. The objective of portfolio management is to maximize
returns, taking into account interest rate and credit risks. Insurance
asset/liability management includes strategies to minimize exposure to loss as
interest rates and economic and market conditions change. As a result, the fixed
maturity portfolio has modest exposure to call and prepayment risk and the vast
majority of mortgage holdings are fixed rate mortgages that carry yield
maintenance and prepayment provisions.
Insurance Group assets with interest rate risk include fixed maturities and
mortgage loans which make up 77.6% of the carrying value of General Account
Investment Assets. As part of its asset/liability management, quantitative
analyses are used to model the impact various changes in interest rates have on
assets with interest rate risk. The table that follows shows the impact an
immediate 100 basis point increase in interest rates at December 31, 2000 would
have on the fair value of fixed maturities and mortgage loans:
7A-1
Interest Rate Risk Exposure
(In Millions)
December 31, 2000 December 31, 1999
---------------------------------------- ------------------------------------
Fair +100 Basis Fair +100 Basis
Value Point Change Value Point Change
-------------------- ------------------- ---------------- -------------------
Continuing Operations:
Fixed maturities:
Fixed rate........................ $ 20,254.0 $ 19,265.3 $ 21,498.2 $ 20,341.1
Floating rate..................... 610.0 610.0 1,241.2 1,206.1
Mortgage loans...................... 4,767.0 4,584.7 4,889.6 4,700.7
Discontinued Operations:
Fixed maturities:
Fixed rate........................ $ 336.5 $ 317.0 $ 85.4 $ 81.4
Floating rate..................... - - .1 .1
Mortgage loans...................... 347.7 339.4 467.0 454.2
A 100 basis point fluctuation in interest rates is a hypothetical rate scenario
used to demonstrate potential risk; it does not represent management's view of
future market changes. While these fair value measurements provide a
representation of interest rate sensitivity of fixed maturities and mortgage
loans, they are based on various portfolio exposures at a particular point in
time and may not be representative of future market results. These exposures
will change as a result of ongoing portfolio activities in response to
management's assessment of changing market conditions and available investment
opportunities.
The investment portfolios also have direct holdings of public and private equity
securities. In addition, the General Account is exposed to equity price risk
from the excess of Separate Accounts assets over Separate Accounts liabilities.
The following table shows the potential exposure from those equity security
investments, measured in terms of fair value, to an immediate 10% drop in equity
prices from those prevailing at December 31, 2000 and 1999:
Equity Price Risk Exposure
(In Millions)
December 31, 2000 December 31, 1999
---------------------------------------- ------------------------------------
Fair -10% Equity Fair -10% Equity
Value Price Change Value Price Change
------------------ --------------------- -------------- ---------------------
Insurance Group:
Continuing operations............... $ 1,596.6 $ 1,436.9 $ 33.2 $ 29.9
Discontinued Operations............. 2.5 2.2 5.7 5.1
Excess of Separate Accounts assets
over Separate Accounts
liabilities....................... 73.8 66.4 121.4 109.3
7A-2
A 10% decrease in equity prices is a hypothetical scenario used to calibrate
potential risk and does not represent management's view of future market
changes. The fair value measurements shown are based on the equity securities
portfolio exposures at a particular point in time and these exposures will
change as a result of ongoing portfolio activities in response to management's
assessment of changing market conditions and available investment opportunities.
At the end of 2000 and of 1999, the aggregate carrying value of policyholders
liabilities were $34,780.0 million and $36,134.0 million, respectively,
including $11,515.2 million and $12,796.4 million, respectively, of the General
Account's investment contracts. The aggregate fair value of those investment
contracts at the end of 2000 and of 1999 were $11,687.2 million and $12,850.5
million, respectively. The impact of a relative 1% decrease in interest rates
would be an increase in the fair value of those investment contracts to
$11,837.3 million and $12,977.7 million, respectively. Those investment
contracts represent only a portion of total policyholders liabilities. As such,
meaningful assessment of net market risk exposure cannot be made by comparing
the results of the invested assets sensitivity analyses presented herein to the
potential exposure from the policyholders' liabilities quantified in this
paragraph.
Asset/liability management is integrated into many aspects of the Insurance
Group's operations, including investment decisions, product development and
determination of crediting rates. As part of its risk management process,
numerous economic scenarios are modeled, including cash flow testing required
for insurance regulatory purposes, to determine if existing assets would be
sufficient to meet projected liability cash flows. Key variables include
policyholder behavior, such as persistency, under differing crediting rate
strategies. On the basis of these more comprehensive analyses, management
believes there is no material solvency risk to Equitable Life with respect to
interest rate movements up or down of 100 basis points from year end 2000 levels
or with respect to a 10% drop in equity prices from year end 2000 levels.
As more fully described in Notes 2 and 13 of Notes to Consolidated Financial
Statements, various derivative financial instruments are used to manage exposure
to fluctuations in interest rates, including interest rate caps and floors to
hedge crediting rates on interest-sensitive products, and interest rate futures
to offset a decline in interest rates between receipt of funds and purchase of
appropriate assets. To minimize credit risk exposure associated with its
derivative, transactions, each counterparty's credit is appraised and approved
and risk control limits and monitoring procedures are applied. Credit limits are
established and monitored on the basis of potential exposures which take into
consideration current market values and estimates of potential future movements
in market values given potential fluctuations in market interest rates.
While notional amount is the most commonly used measure of volume in the
derivatives market, it is not used by the Insurance Group as a measure of risk
because the notional amount greatly exceeds the possible credit and market loss
that could arise from such transactions. Mark to market exposure is a
point-in-time measure of the value of a derivative contract in the open market.
A positive value indicates existence of credit risk for the Insurance Group
because the counterparty would owe money to the Insurance Group if the contract
were closed. Alternatively, a negative value indicates the Insurance Group would
owe money to the counterparty if the contract were closed. If there is more than
one derivatives transaction outstanding with a counterparty, a master netting
arrangement exists with the counterparty. In that case, the market risk
represents the net of the positive and negative exposures with the single
counterparty. In management's view, the net potential exposure is the better
measure of credit risk.
At the end of 2000 and of 1999, the net market value exposure of the Insurance
Group's derivatives was $7.5 million and $53.7 million, respectively. There were
no swaps outstanding at December 31, 2000. The table that follows shows the
interest rate sensitivity of those derivatives, measured in terms of fair value.
These exposures will change as a result of ongoing portfolio and risk management
activities.
7A-3
Insurance Group - Derivative Financial Instruments
(In Millions, Except for Weighted Average Term)
Weighted
Average
Notional Term -100 Basis Fair +100 Basis
Amount (Years) Point Change Value Point Change
--------------- -------------- ----------------- ---------------- -------------------
December 31, 2000
Options:
Caps................... $ 6,775.0 2.61 $ 1.4 $ 7.2 $ 24.3
Floors................. 2,000.0 1.28 1.6 .3 -
--------------- ----------------- ---------------- -------------------
Total.................... $ 8,775.0 2.31 $ 3.0 $ 7.5 $ 24.3
=============== ============== ================= ================ ===================
December 31, 1999
Swaps:
Floating to fixed
rate................. $ 92.3 0.35 $ 41.4 $ 9.8 $ (19.5)
Fixed to floating
rate................. 705.0 5.58 (2.1) (1.8) (1.9)
Options:
Caps................... 7,775.0 3.25 16.0 45.5 103.1
Floors................. 2,000.0 2.28 .8 .2 -
--------------- ----------------- ---------------- -------------------
Total.................... $ 10,572.3 3.20 $ 56.1 $ 53.7 $ 81.7
=============== ============== ================= ================ ===================
At the end of 2000 and of 1999, the aggregate fair values of long-term debt
issued by Equitable Life were $949.6 million and $936.8 million, respectively.
The table below shows the potential fair value exposure to an immediate 100
basis point decrease in interest rates from those prevailing at the end of 2000
and of 1999.
Interest Rate Risk Exposure
(In Millions)
December 31, 2000 December 31, 1999
--------------------------------------- --------------------------------------
Fair -100 Basis Fair -100 Basis
Value Point Change Value Point Change
------------------ -------------------- ----------------- --------------------
Continuing Operations:
Fixed rate....................... $ 599.7 $ 635.4 $ 583.5 $ 621.4
Floating rate.................... 248.3 248.3 251.4 251.3
Discontinued Operations:
Floating rate.................... $ 101.7 $ 101.7 $ 101.9 $ 101.9
7A-4
Part II, Item 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
Report of Independent Accountants........................................................... F-1
Consolidated Financial Statements:
Consolidated Balance Sheets, December 31, 2000 and 1999................................... F-2
Consolidated Statements of Earnings, Years Ended December 31, 2000, 1999 and 1998......... F-3
Consolidated Statements of Shareholder's Equity, Years Ended December 31, 2000,
1999 and 1998........................................................................... F-4
Consolidated Statements of Cash Flows, Years Ended December 31, 2000, 1999 and 1998....... F-5
Notes to Consolidated Financial Statements................................................ F-7
Report of Independent Accountants on Financial Statement Schedules.......................... F-43
Consolidated Financial Statement Schedules:
Schedule I - Summary of Investments - Other than Investments in Related Parties,
December 31, 2000......................................................................... F-44
Schedule II - Balance Sheets (Parent Company), December 31, 2000 and 1999................... F-45
Schedule II - Statements of Earnings (Parent Company), Years Ended December 31, 2000,
1999 and 1998............................................................................. F-47
Schedule II - Statements of Cash Flows (Parent Company), Years Ended December 31, 2000,
1999 and 1998............................................................................. F-48
Schedule III - Supplementary Insurance Information, Years Ended December 31, 2000,
1999 and 1998............................................................................. F-49
Schedule IV - Reinsurance, Years Ended December 31, 2000, 1999 and 1998..................... F-52
FS-1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholder of
The Equitable Life Assurance Society of the United States
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of earnings, of shareholder's equity and comprehensive
income and of cash flows present fairly, in all material respects, the financial
position of The Equitable Life Assurance Society of the United States and its
subsidiaries ("Equitable Life") at December 31, 2000 and December 31, 1999, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 2000 in conformity with accounting principles
generally accepted in the United States of America. These financial statements
are the responsibility of Equitable Life's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
/s/PricewaterhouseCoopers LLP
New York, New York
February 5, 2001
F-1
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2000 AND 1999
2000 1999
----------------- -----------------
(IN MILLIONS)
ASSETS
Investments:
Fixed maturities:
Available for sale, at estimated fair value............................. $ 16,251.4 $ 18,599.7
Held to maturity, at amortized cost..................................... 204.6 133.2
Mortgage loans on real estate............................................. 3,130.8 3,270.0
Equity real estate........................................................ 975.5 1,160.2
Policy loans.............................................................. 2,476.9 2,257.3
Other equity investments.................................................. 2,392.8 671.2
Investment in and loans to affiliates..................................... - 1,201.8
Other invested assets..................................................... 762.5 911.6
----------------- -----------------
Total investments..................................................... 26,194.5 28,205.0
Cash and cash equivalents................................................... 2,022.1 628.0
Cash and securities segregated, at estimated fair value..................... 1,306.3 -
Broker-dealer related receivables........................................... 1,900.3 521.3
Deferred policy acquisition costs........................................... 4,429.1 4,033.0
Intangible assets, net...................................................... 3,525.8 114.5
Amounts due from reinsurers................................................. 1,989.2 881.5
Other assets................................................................ 3,594.3 2,351.0
Closed Block assets......................................................... 8,659.0 8,607.3
Separate Accounts assets.................................................... 51,705.9 54,453.9
----------------- -----------------
TOTAL ASSETS................................................................ $ 105,326.5 $ 99,795.5
================= =================
LIABILITIES
Policyholders' account balances............................................. $ 19,866.4 $ 21,351.4
Future policy benefits and other policyholders liabilities.................. 4,920.4 4,777.6
Broker-dealer related payables.............................................. 1,283.0 319.3
Customers related payables.................................................. 1,636.9 -
Amounts due to reinsurers................................................... 730.3 682.5
Short-term and long-term debt............................................... 1,630.1 1,407.9
Federal income taxes payable................................................ 1,988.2 496.0
Other liabilities........................................................... 1,642.1 1,379.0
Closed Block liabilities.................................................... 9,050.2 9,025.0
Separate Accounts liabilities............................................... 51,632.1 54,332.5
Minority interest in equity of consolidated subsidiaries.................... 1,820.4 256.8
Minority interest subject to redemption rights.............................. 681.1 -
----------------- -----------------
Total liabilities..................................................... 96,881.2 94,028.0
----------------- -----------------
Commitments and contingencies (Notes 11, 13, 14, 15 and 16)
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.............................................. 4,723.8 3,557.2
Retained earnings........................................................... 3,706.2 2,600.7
Accumulated other comprehensive income (loss)............................... 12.8 (392.9)
----------------- -----------------
Total shareholder's equity............................................ 8,445.3 5,767.5
----------------- -----------------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY.................................. $ 105,326.5 $ 99,795.5
================= =================
See Notes to Consolidated Financial Statements.
F-2
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
CONSOLIDATED STATEMENTS OF EARNINGS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
2000 1999 1998
----------------- ----------------- -----------------
(IN MILLIONS)
REVENUES
Universal life and investment-type product policy fee
income...................................................... $ 1,413.3 $ 1,257.5 $ 1,056.2
Premiums...................................................... 579.9 558.2 588.1
Net investment income......................................... 2,173.2 2,240.9 2,228.1
Gain on sale of equity investee............................... 1,962.0 - -
Investment (losses) gains, net................................ (756.0) (96.9) 100.2
Commissions, fees and other income............................ 2,731.1 2,177.9 1,503.0
Contribution from the Closed Block............................ 92.7 86.4 87.1
----------------- ----------------- -----------------
Total revenues.......................................... 8,196.2 6,224.0 5,562.7
----------------- ----------------- -----------------
BENEFITS AND OTHER DEDUCTIONS
Interest credited to policyholders' account balances.......... 1,034.3 1,078.2 1,153.0
Policyholders' benefits....................................... 1,049.3 1,038.6 1,024.7
Compensation and benefits..................................... 1,081.2 1,010.6 772.0
Commissions................................................... 779.2 549.5 478.1
Distribution plan payments.................................... 476.0 346.6 266.4
Amortization of deferred sales commissions.................... 219.7 163.9 108.9
Interest expense.............................................. 116.3 93.0 110.7
Amortization of deferred policy acquisition costs............. 294.5 314.5 292.7
Capitalization of deferred policy acquisition costs........... (778.1) (709.9) (609.1)
Writedown of deferred policy acquisition costs................ - 131.7 -
Rent expense.................................................. 146.4 113.9 100.0
Expenses related to AXA's minority interest acquisition
of the Holding Company..................................... 493.9 - -
Other operating costs and expenses............................ 698.0 783.5 681.5
----------------- ----------------- -----------------
Total benefits and other deductions..................... 5,610.7 4,914.1 4,378.9
----------------- ----------------- -----------------
Earnings from continuing operations before Federal
income taxes and minority interest.......................... 2,585.5 1,309.9 1,183.8
Federal income taxes.......................................... (958.3) (332.0) (353.1)
Minority interest in net income of consolidated subsidiaries.. (330.3) (199.4) (125.2)
----------------- ----------------- -----------------
Earnings from continuing operations........................... 1,296.9 778.5 705.5
Earnings from discontinued operations, net of Federal
income taxes............................................... 58.6 28.1 2.7
----------------- ----------------- -----------------
Net Earnings.................................................. $ 1,355.5 $ 806.6 $ 708.2
================= ================= =================
See Notes to Consolidated Financial Statements.
F-3
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY AND COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
2000 1999 1998
----------------- ----------------- -----------------
(IN MILLIONS)
Common stock, at par value, beginning and end of year......... $ 2.5 $ 2.5 $ 2.5
----------------- ----------------- -----------------
Capital in excess of par value, beginning of year............. 3,557.2 3,110.2 3,105.8
Capital contributions......................................... 1,166.6 447.0 4.4
----------------- ----------------- -----------------
Capital in excess of par value, end of year................... 4,723.8 3,557.2 3,110.2
----------------- ----------------- -----------------
Retained earnings, beginning of year.......................... 2,600.7 1,944.1 1,235.9
Net earnings.................................................. 1,355.5 806.6 708.2
Dividends paid to AXA Financial............................... (250.0) (150.0) -
----------------- ----------------- -----------------
Retained earnings, end of year................................ 3,706.2 2,600.7 1,944.1
----------------- ----------------- -----------------
Accumulated other comprehensive (loss) income,
beginning of year........................................... (392.9) 355.8 516.3
Other comprehensive income (loss)............................. 405.7 (748.7) (160.5)
----------------- ----------------- -----------------
Accumulated other comprehensive income (loss), end of year.... 12.8 (392.9) 355.8
----------------- ----------------- -----------------
Total Shareholder's Equity, End of Year....................... $ 8,445.3 $ 5,767.5 $ 5,412.6
================= ================= =================
COMPREHENSIVE INCOME
Net earnings.................................................. $ 1,355.5 $ 806.6 $ 708.2
----------------- ----------------- -----------------
Change in unrealized gains (losses), net of reclassification
adjustments................................................ 405.7 (776.9) (149.5)
Minimum pension liability adjustment.......................... - 28.2 (11.0)
----------------- ----------------- -----------------
Other comprehensive income (loss)............................. 405.7 (748.7) (160.5)
----------------- ----------------- -----------------
Comprehensive Income.......................................... $ 1,761.2 $ 57.9 $ 547.7
================= ================= =================
See Notes to Consolidated Financial Statements.
F-4
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
2000 1999 1998
----------------- ----------------- -----------------
(IN MILLIONS)
Net earnings.................................................. $ 1,355.5 $ 806.6 $ 708.2
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Interest credited to policyholders' account balances........ 1,034.3 1,078.2 1,153.0
Universal life and investment-type product
policy fee income......................................... (1,413.3) (1,257.5) (1,056.2)
Investment losses (gains)................................... 756.0 96.9 (100.2)
Net change in broker-dealer and customer related
receivables/payables...................................... (422.9) (119.9) (17.5)
Gain on sale of equity investee............................. (1,962.0) - -
Change in Federal income tax payable........................ 2,078.4 157.4 123.1
Change in future policy benefits............................ (850.6) 22.8 66.8
Change in property and equipment............................ (321.0) (256.3) (81.8)
Change in deferred acquisition costs........................ (476.9) (260.7) (314.0)
Expenses related to AXA's acquisition
of the Holding Company's minority interest................ 493.9 - -
Purchase of segregated cash and securities, net............. (610.4) - -
Other, net.................................................. (560.8) (71.7) 21.6
----------------- ----------------- -----------------
Net cash (used) provided by operating activities.............. (54.0) 195.8 503.0
----------------- ----------------- -----------------
Cash flows from investing activities:
Maturities and repayments................................... 2,091.0 2,019.0 2,289.0
Sales....................................................... 7,810.2 7,572.9 16,972.1
Purchases................................................... (8,895.1) (10,737.3) (18,578.5)
Decrease (increase) in short-term investments............... 142.6 (178.3) 102.4
Decrease in loans to discontinued operations................ - - 660.0
Sale of equity investee..................................... 1,580.6 - -
Subsidiary acquisition ..................................... (1,480.0) - -
Other, net.................................................. (164.5) (134.8) (341.8)
----------------- ----------------- -----------------
Net cash provided (used) by investing activities.............. 1,084.8 (1,458.5) 1,103.2
----------------- ----------------- -----------------
Cash flows from financing activities:
Policyholders' account balances:
Deposits.................................................. 2,659.9 2,366.2 1,508.1
Withdrawals and transfers to Separate Accounts............ (3,887.7) (1,765.8) (1,724.6)
Net increase (decrease) in short-term financings............ 225.2 378.2 (243.5)
Repayments of long-term debt................................ - (41.3) (24.5)
Payment of obligation to fund accumulated deficit of
discontinued operations................................... - - (87.2)
Proceeds from newly issued Alliance Units................... 1,600.0 - -
Dividends paid to AXA Financial............................. (250.0) (150.0) -
Other, net.................................................. 15.9 (142.1) (89.5)
----------------- ----------------- -----------------
Net cash provided (used) by financing activities.............. 363.3 645.2 (661.2)
----------------- ----------------- -----------------
Change in cash and cash equivalents........................... 1,394.1 (617.5) 945.0
Cash and cash equivalents, beginning of year.................. 628.0 1,245.5 300.5
----------------- ----------------- -----------------
Cash and Cash Equivalents, End of Year........................ $ 2,022.1 $ 628.0 $ 1,245.5
================= ================= =================
F-5
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
CONTINUED
2000 1999 1998
----------------- ----------------- -----------------
(IN MILLIONS)
Supplemental cash flow information
Interest Paid............................................... $ 97.0 $ 92.2 $ 130.7
================= ================= =================
Income Taxes Paid........................................... $ 358.2 $ 116.5 $ 254.3
================= ================= =================
See Notes to Consolidated Financial Statements.
F-6
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1) ORGANIZATION
The Equitable Life Assurance Society of the United States ("Equitable
Life") is an indirect, wholly owned subsidiary of AXA Financial, Inc.
(the "Holding Company," and collectively with its consolidated
subsidiaries, "AXA Financial"). Equitable Life's insurance business is
conducted principally by Equitable Life and its wholly owned life
insurance subsidiary, Equitable of Colorado ("EOC"). Equitable Life's
investment management business, which comprises the Investment Services
segment, is principally conducted by Alliance Capital Management L.P.
("Alliance"), and, through November 3, 2000, Donaldson, Lufkin &
Jenrette, Inc. ("DLJ"), an investment banking and brokerage affiliate
which was sold. On September 20, 1999, as part of AXA Financial's
"branding" strategic initiative, EQ Financial Consultants, Inc., a
broker-dealer subsidiary of Equitable Life, was merged into a new
company, AXA Advisors, LLC ("AXA Advisors"). Also, on September 21,
1999, AXA Advisors was transferred by Equitable Life to AXA Distribution
Holding Corporation ("AXA Distribution"), a wholly owned indirect
subsidiary of the Holding Company, for $15.3 million. The excess of the
sales price over AXA Advisors' book value has been recorded in Equitable
Life's books as a capital contribution. Equitable Life continues to
develop and market the "Equitable" brand of life and annuity products,
while AXA Distribution and its subsidiaries provide financial planning
services, distribute products and manage customer relationships. In
February 2000, Equitable Life transferred AXA Network, LLC ("AXA
Network") to AXA Distribution, an indirect wholly owned subsidiary of
the Holding Company for $8.7 million. The excess of sales price over AXA
Network's book value has been recorded in Equitable Life's financial
statements as a capital contribution.
In October 2000, Alliance acquired substantially all of the assets and
liabilities of Sanford C. Bernstein Inc. ("Bernstein") for an aggregate
current value of approximately $3.50 billion ($1.48 billion in cash and
40.8 million newly issued Alliance units). The Holding Company provided
Alliance with the cash portion of the consideration by purchasing
approximately 32.6 million newly issued Alliance Units for $1.60 billion
in June 2000. Equitable Life and, collectively with its consolidated
subsidiaries (the "Company"), recorded a non-cash gain of $416.2 million
(net of related Federal income tax of $224.1 million) related to the
Holding Company's purchase of Alliance Units which is reflected as an
addition to capital in excess of par value. The acquisition was
accounted for under the purchase method with the results of Bernstein
included in the consolidated financial statements from the acquisition
date. The excess of the purchase price over the fair value of net assets
acquired resulted in the recognition of goodwill and intangible assets
of approximately $3.40 billion and is being amortized over an estimated
overall 20 year life. In connection with the issuance of Alliance Units
to former Bernstein shareholders, the Company recorded a non-cash gain
of $393.5 million (net of related Federal income tax of $211.9 million)
which is reflected as an addition to capital in excess of par value. The
Company's consolidated economic interest in Alliance was 39.43% at
December 31, 2000. In 1999, Alliance reorganized into Alliance Capital
Management Holding L.P. ("Alliance Holding") and Alliance. Alliance
Holding's principal asset is its interest in Alliance and it functions
as a holding entity through which holders of its publicly traded units
own an indirect interest in Alliance, the operating partnership. The
Company exchanged substantially all of its Alliance Holding units for
units in Alliance ("Alliance Units").
AXA, a French holding company for an international group of insurance
and related financial services companies, has been the Holding Company's
largest shareholder since 1992. In October 2000, the Board of Directors
of the Holding Company, acting upon a unanimous recommendation of a
special committee of independent directors, approved an agreement with
AXA for the acquisition of the approximately 40% of outstanding Holding
Company common stock ("Common Stock") it did not already own. Under
terms of the agreement, the minority shareholders of the Holding Company
would receive $35.75 in cash and 0.295 of an AXA American Depositary
Share ("ADS") for each Holding Company share. When the tender offer
expired on December 29, 2000, approximately 148.1 million shares of
Common Stock had been acquired by AXA and its wholly owned subsidiary,
AXA Merger Corp. On January 2, 2001, AXA Merger Corp. was merged with
and into the Holding Company, resulting in the Holding Company becoming
a wholly owned subsidiary of AXA.
F-7
2) SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Principles of Consolidation
The accompanying consolidated financial statements are prepared in
conformity with generally accepted accounting principles ("GAAP") which
require management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
The accompanying consolidated financial statements include the accounts
of Equitable Life and its subsidiary engaged in insurance related
businesses (collectively, the "Insurance Group"); other subsidiaries,
principally Alliance; and those partnerships and joint ventures in which
Equitable Life or its subsidiaries has control or a majority economic
interest. The Company's investment in DLJ was reported on the equity
basis of accounting. Closed Block assets, liabilities and results of
operations are presented in the consolidated financial statements as
single line items (see Note 7). Unless specifically stated, all other
footnote disclosures contained herein exclude the Closed Block related
amounts.
All significant intercompany transactions and balances except those with
the Closed Block, DLJ and discontinued operations (see Note 8) have been
eliminated in consolidation. The years "2000," "1999" and "1998" refer
to the years ended December 31, 2000, 1999 and 1998, respectively.
Certain reclassifications have been made in the amounts presented for
prior periods to conform these periods with the 2000 presentation.
Closed Block
When it demutualized on July 22, 1992, Equitable Life established a
Closed Block for the benefit of certain individual participating
policies which were in force on that date. The assets allocated to the
Closed Block, together with anticipated revenues from policies included
in the Closed Block, were reasonably expected to be sufficient to
support such business, including provision for the payment of claims,
certain expenses and taxes, and for continuation of dividend scales
payable in 1991, assuming the experience underlying such scales
continues.
Assets allocated to the Closed Block inure solely to the benefit of the
Closed Block policyholders and will not revert to the benefit of the
Holding Company. No reallocation, transfer, borrowing or lending of
assets can be made between the Closed Block and other portions of
Equitable Life's General Account, any of its Separate Accounts or any
affiliate of Equitable Life without the approval of the New York
Superintendent of Insurance (the "Superintendent"). Closed Block assets
and liabilities are carried on the same basis as similar assets and
liabilities held in the General Account. The excess of Closed Block
liabilities over Closed Block assets represents the expected future
post-tax contribution from the Closed Block which would be recognized in
income over the period the policies and contracts in the Closed Block
remain in force.
Discontinued Operations
In 1991, management discontinued the business of certain pension
operations ("Discontinued Operations"). Discontinued Operations at
December 31, 2000 principally consists of the Group Non-Participating
Wind-Up Annuities ("Wind-Up Annuities"), for which a premium deficiency
reserve has been established. Management reviews the adequacy of the
allowance for future losses each quarter and makes adjustments when
necessary. Management believes the allowance for future losses at
December 31, 2000 is adequate to provide for all future losses; however,
the quarterly allowance review continues to involve numerous estimates
and subjective judgments regarding the expected performance of invested
assets ("Discontinued Operations Investment Assets") held by
Discontinued Operations. There can be no assurance the losses provided
for will not differ from the losses ultimately realized. To the extent
actual results or future projections of discontinued operations differ
from management's current best estimates and assumptions underlying the
allowance for future losses, the difference would be reflected in the
consolidated statements of earnings in discontinued operations. In
particular, to the extent income, sales proceeds and holding periods for
equity real estate differ from management's previous assumptions,
periodic adjustments to the allowance are likely to result (see Note 8).
F-8
New Accounting Pronouncements
As required beginning January 1, 2001, the Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities", as amended, that
establishes new accounting and reporting standards for all derivative
instruments, including certain derivatives embedded in other contracts,
and for hedging activities. As further described and quantified in Note
13, the only free-standing derivative instruments maintained by the
Company at January 1, 2001 were interest rate caps, floors and collars
intended to hedge crediting rates on interest-sensitive individual
annuities contracts. However, based upon guidance from the Financial
Accounting Standards Board ("FASB") and the Derivatives Implementation
Group ("DIG"), these contracts cannot be designated in a qualifying
hedging relationship under FAS 133 and, consequently, require
mark-to-market accounting through earnings for changes in their fair
values beginning January 1, 2001. With respect to adoption of the
requirements on embedded derivatives, the Company elected a January 1,
1999 transition date, thereby effectively "grandfathering" existing
accounting for derivatives embedded in hybrid instruments acquired,
issued, or substantively modified on or before that date. As a
consequence of this election, coupled with recent interpretive guidance
from the FASB and the DIG with respect to issues specifically related to
insurance contracts and features, adoption of the new requirements for
embedded derivatives did not have a material impact on the Company's
consolidated financial position or earnings.
In September 2000, the FASB issued SFAS No. 140, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities, a replacement of SFAS No. 125". SFAS No. 140 specifies the
accounting and reporting requirements for securitizations and other
transfers of financial assets and collateral, the recognition and
measurement of servicing assets and liabilities and the extinguishment
of liabilities. SFAS No. 140 is effective for transfers and servicing of
financial assets and extinguishments of liabilities occurring after
March 31, 2001 and is to be applied prospectively with certain
exceptions. This statement is effective for recognition and
reclassification of collateral and for disclosures relating to
securitization transactions and collateral for fiscal years ending after
December 15, 2000. Adoption of the new requirements is not expected to
have a significant impact on the Company's consolidated financial
position or earnings.
In December 2000, the American Institute of Certified Public Accountants
(the "AICPA") issued Statement of Position ("SOP") 00-3, "Accounting by
Insurance Enterprises for Demutualizations and Formations of Mutual
Insurance Holding Companies and for Certain Long-Duration Participating
Contracts". Since Equitable Life's July 1992 demutualization occurred
before December 31, 2000, SOP 00-3 should be applied retroactively
through restatement or reclassification, as appropriate, of all
previously issued financial statements no later than the end of the
fiscal year that begins after December 15, 2000. However, if
implementation is impracticable because the demutualization occurred
many years prior to January 1, 2001 no retroactive restatement is
required. The Company has determined it is not practicable to produce an
actuarial calculation as of the July 1992 demutualization date.
Therefore, SOP 00-3 will be adopted prospectively as of January 1, 2001
with no financial impact associated with its initial implementation.
However, future earnings will be affected to the extent actual Closed
Block earnings exceed those assumed at January 1, 2001. Additionally,
the presentation of all previously issued financial statements will be
revised to include Closed Block assets and liabilities on a line-by-line
basis as required by SOP 00-3.
In December 1999, the staff of the Securities and Exchange Commission
(the "SEC") issued Staff Accounting Bulletin ("SAB") No. 101, "Revenue
Recognition in Financial Statements," which was effective fourth quarter
2000. SAB No. 101 addresses revenue recognition issues; its
implementation did not have a material impact on the Company's
consolidated financial position or earnings.
Investments
Fixed maturities identified as available for sale are reported at
estimated fair value. Those fixed maturities which the Company has both
the ability and the intent to hold to maturity, are stated principally
at amortized cost. The amortized cost of fixed maturities is adjusted
for impairments in value deemed to be other than temporary.
F-9
Mortgage loans on real estate are stated at unpaid principal balances,
net of unamortized discounts and valuation allowances. Valuation
allowances are based on the present value of expected future cash flows
discounted at the loan's original effective interest rate or on its
collateral value if the loan is collateral dependent. However, if
foreclosure is or becomes probable, the collateral value measurement
method is used.
Impaired mortgage loans without provision for losses are loans where the
fair value of the collateral or the net present value of the expected
future cash flows related to the loan equals or exceeds the recorded
investment. Interest income earned on loans where the collateral value
is used to measure impairment is recorded on a cash basis. Interest
income on loans where the present value method is used to measure
impairment is accrued on the net carrying value amount of the loan at
the interest rate used to discount the cash flows. Changes in the
present value attributable to changes in the amount or timing of
expected cash flows are reported as investment gains or losses.
Real estate, including real estate acquired in satisfaction of debt, is
stated at depreciated cost less valuation allowances. At the date of
foreclosure (including in-substance foreclosure), real estate acquired
in satisfaction of debt is valued at estimated fair value. Impaired real
estate is written down to fair value with the impairment loss being
included in investment gains (losses), net. Valuation allowances on real
estate held for sale are computed using the lower of depreciated cost or
current estimated fair value, net of disposition costs. Depreciation is
discontinued on real estate held for sale.
Depreciation of real estate held for production of income is computed
using the straight-line method over the estimated useful lives of the
properties, which generally range from 40 to 50 years.
Valuation allowances are netted against the asset categories to which
they apply.
Policy loans are stated at unpaid principal balances.
Partnerships and joint venture interests in which the Company has
control or a majority economic interest (that is, greater than 50% of
the economic return generated by the entity) are consolidated; those in
which the Company does not have control or a majority economic interest
are reported on the equity basis of accounting and are included either
with equity real estate or other equity investments, as appropriate.
Equity securities includes common stock classified as both trading and
available for sale securities and non-redeemable preferred stock; they
are carried at estimated fair value and are included in other equity
investments.
Short-term investments are stated at amortized cost which approximates
fair value and are included with other invested assets.
Cash and cash equivalents includes cash on hand, amounts due from banks
and highly liquid debt instruments purchased with an original maturity
of three months or less.
All securities owned as well as United States government and agency
securities, mortgage-backed securities, futures and forwards
transactions are recorded in the consolidated financial statements on a
trade date basis.
Net Investment Income, Investment Gains (Losses), Net
and Unrealized Investment Gains (Losses)
Net investment income and realized investment gains (losses) related to
certain participating group annuity contracts which are passed through
to the contractholders are reflected as interest credited to
policyholders' account balances.
Realized investment gains (losses) are determined by identification with
the specific asset and are presented as a component of revenue. Changes
in the valuation allowances are included in investment gains or losses.
Realized and unrealized holding gains (losses) on trading securities are
reflected in net investment income.
Unrealized investment gains and losses on fixed maturities and equity
securities available for sale held by the Company are accounted for as a
separate component of accumulated comprehensive income, net of related
deferred Federal income taxes, amounts attributable to Discontinued
Operations, participating group annuity contracts and deferred policy
acquisition costs ("DAC") related to universal life and investment-type
products and participating traditional life contracts.
F-10
Net investment income and investment gains (losses), net related to
investment assets are collectively referred to as "investment results."
Recognition of Insurance Income and Related Expenses
Premiums from universal life and investment-type contracts are reported
as deposits to policyholders' account balances. Revenues from these
contracts consist of amounts assessed during the period against
policyholders' account balances for mortality charges, policy
administration charges and surrender charges. Policy benefits and claims
that are charged to expense include benefit claims incurred in the
period in excess of related policyholders' account balances.
Premiums from participating and non-participating traditional life and
annuity policies with life contingencies generally are recognized as
income when due. Benefits and expenses are matched with such income so
as to result in the recognition of profits over the life of the
contracts. This match is accomplished by means of the provision for
liabilities for future policy benefits and the deferral and subsequent
amortization of policy acquisition costs.
For contracts with a single premium or a limited number of premium
payments due over a significantly shorter period than the total period
over which benefits are provided, premiums are recorded as income when
due with any excess profit deferred and recognized in income in a
constant relationship to insurance in force or, for annuities, the
amount of expected future benefit payments.
Premiums from individual health contracts are recognized as income over
the period to which the premiums relate in proportion to the amount of
insurance protection provided.
The Insurance Group assumes and cedes reinsurance with other insurance
companies. The Insurance Group evaluates the financial condition of its
reinsurers to minimize its exposure to significant losses from reinsurer
insolvencies. Ceded reinsurance does not relieve the originating insurer
of liability.
Deferred Policy Acquisition Costs
Acquisition costs, including commissions, underwriting, agency and
policy issue expenses, all of which vary with and primarily are related
to new business, are deferred. DAC is subject to recoverability testing
at the time of policy issue and loss recognition testing at the end of
each accounting period.
For universal life products and investment-type products, DAC is
amortized over the expected total life of the contract group as a
constant percentage of estimated gross profits arising principally from
investment results, mortality and expense margins and surrender charges
based on historical and anticipated future experience, updated at the
end of each accounting period. The effect on the amortization of DAC of
revisions to estimated gross profits is reflected in earnings in the
period such estimated gross profits are revised. The effect on the DAC
asset that would result from realization of unrealized gains (losses) is
recognized with an offset to accumulated comprehensive income in
consolidated shareholder's equity as of the balance sheet date.
For participating traditional life policies (substantially all of which
are in the Closed Block), DAC is amortized over the expected total life
of the contract group as a constant percentage based on the present
value of the estimated gross margin amounts expected to be realized over
the life of the contracts using the expected investment yield. At
December 31, 2000, the expected investment yield, excluding policy
loans, was 7.6% over a 40 year period. Estimated gross margin includes
anticipated premiums and investment results less claims and
administrative expenses, changes in the net level premium reserve and
expected annual policyholder dividends. The effect on the amortization
of DAC of revisions to estimated gross margins is reflected in earnings
in the period such estimated gross margins are revised. The effect on
the DAC asset that would result from realization of unrealized gains
(losses) is recognized with an offset to accumulated comprehensive
income in consolidated shareholder's equity as of the balance sheet
date.
For non-participating traditional life policies, DAC is amortized in
proportion to anticipated premiums. Assumptions as to anticipated
premiums are estimated at the date of policy issue and are consistently
applied during the life of the contracts. Deviations from estimated
experience are reflected in earnings in the period such deviations
occur. For these contracts, the amortization periods generally are for
the total life of the policy.
F-11
In second quarter 1999, management completed a study of the cash flows
and liability characteristics of its insurance product lines as compared
to the expected cash flows of the underlying assets. That analysis
reflected an assessment of the potential impact on future operating cash
flows from current economic conditions and trends, including rising
interest rates and securities market volatility and the impact of
increasing competitiveness within the insurance marketplace (evidenced,
for example, by the proliferation of bonus annuity products) on in-force
business. The review indicated that changes to the then-current invested
asset allocation strategy were required to reposition assets with
greater price volatility away from products with demand liquidity
characteristics to support those products with lower liquidity needs. To
implement these findings, the existing investment portfolio was
reallocated, and prospective investment allocation targets were revised.
The reallocation of the assets impacted investment results by product,
thereby impacting the future gross margin estimates utilized in the
amortization of DAC for universal life and investment-type products. The
revisions to estimated future gross profits resulted in an after-tax
writedown of DAC of $85.6 million (net of a Federal income tax benefit
of $46.1 million) in 1999.
Policyholders' Account Balances and Future Policy Benefits
Policyholders' account balances for universal life and investment-type
contracts are equal to the policy account values. The policy account
values represent an accumulation of gross premium payments plus credited
interest less expense and mortality charges and withdrawals.
For participating traditional life policies, future policy benefit
liabilities are calculated using a net level premium method on the basis
of actuarial assumptions equal to guaranteed mortality and dividend fund
interest rates. The liability for annual dividends represents the
accrual of annual dividends earned. Terminal dividends are accrued in
proportion to gross margins over the life of the contract.
For non-participating traditional life insurance policies, future policy
benefit liabilities are estimated using a net level premium method on
the basis of actuarial assumptions as to mortality, persistency and
interest established at policy issue. Assumptions established at policy
issue as to mortality and persistency are based on the Insurance Group's
experience which, together with interest and expense assumptions,
includes a margin for adverse deviation. When the liabilities for future
policy benefits plus the present value of expected future gross premiums
for a product are insufficient to provide for expected future policy
benefits and expenses for that product, DAC is written off and
thereafter, if required, a premium deficiency reserve is established by
a charge to earnings. Benefit liabilities for traditional annuities
during the accumulation period are equal to accumulated contractholders'
fund balances and after annuitization are equal to the present value of
expected future payments. Interest rates used in establishing such
liabilities range from 2.25% to 10.9% for life insurance liabilities and
from 2.25% to 8.15% for annuity liabilities.
Individual health benefit liabilities for active lives are estimated
using the net level premium method and assumptions as to future
morbidity, withdrawals and interest. Benefit liabilities for disabled
lives are estimated using the present value of benefits method and
experience assumptions as to claim terminations, expenses and interest.
While management believes its disability income ("DI") reserves have
been calculated on a reasonable basis and are adequate, there can be no
assurance reserves will be sufficient to provide for future liabilities.
F-12
Claim reserves and associated liabilities for individual DI and major
medical policies were $120.3 million and $948.4 million at December 31,
2000 and 1999, respectively. At December 31, 2000, $1,046.5 million of
DI reserves and associated liabilities were ceded through an indemnity
reinsurance agreement (see Note 14). Incurred benefits (benefits paid
plus changes in claim reserves) and benefits paid for individual DI and
major medical are summarized as follows:
2000 1999 1998
----------------- ---------------- -----------------
(IN MILLIONS)
Incurred benefits related to current year.......... $ 56.1 $ 150.7 $ 140.1
Incurred benefits related to prior years........... 15.0 64.7 84.2
----------------- ---------------- -----------------
Total Incurred Benefits............................ $ 71.1 $ 215.4 $ 224.3
================= ================ =================
Benefits paid related to current year.............. $ 14.8 $ 28.9 $ 17.0
Benefits paid related to prior years............... 106.0 189.8 155.4
----------------- ---------------- -----------------
Total Benefits Paid................................ $ 120.8 $ 218.7 $ 172.4
================= ================ =================
Policyholders' Dividends
The amount of policyholders' dividends to be paid (including dividends
on policies included in the Closed Block) is determined annually by
Equitable Life's board of directors. The aggregate amount of
policyholders' dividends is related to actual interest, mortality,
morbidity and expense experience for the year and judgment as to the
appropriate level of statutory surplus to be retained by Equitable Life.
At December 31, 2000, participating policies, including those in the
Closed Block, represent approximately 20.8% ($41.1 billion) of directly
written life insurance in force, net of amounts ceded.
Separate Accounts
Separate Accounts established under New York State Insurance Law
generally are not chargeable with liabilities that arise from any other
business of the Insurance Group. Separate Accounts assets are subject to
General Account claims only to the extent Separate Accounts assets
exceed Separate Accounts liabilities.
Assets and liabilities of the Separate Accounts represent the net
deposits and accumulated net investment earnings less fees, held
primarily for the benefit of contractholders, and for which the
Insurance Group does not bear the investment risk. They are shown as
separate lines in the consolidated balance sheets. The Insurance Group
bears the investment risk on assets held in one Separate Account;
therefore, such assets are carried on the same basis as similar assets
held in the General Account portfolio. Assets held in the other Separate
Accounts are carried at quoted market values or, where quoted values are
not available, at estimated fair values as determined by the Insurance
Group.
The investment results of Separate Accounts on which the Insurance Group
does not bear the investment risk are reflected directly in Separate
Accounts liabilities. For 2000, 1999 and 1998, investment results of
such Separate Accounts were $8,051.7 million, $6,045.5 million and
$4,591.0 million, respectively.
Deposits to Separate Accounts are reported as increases in Separate
Accounts liabilities and are not reported in revenues. Mortality, policy
administration and surrender charges on all Separate Accounts are
included in revenues.
Other Accounting Policies
In accordance with regulations of the SEC, securities with a fair value
of $1.31 billion have been segregated in a special reserve bank custody
account for the exclusive benefit of customers under Rule 15c-3-3 at
December 31, 2000.
F-13
Intangible assets consist principally of goodwill resulting from
acquisitions and costs assigned to contracts of businesses acquired.
Goodwill is being amortized on a straight-line basis over estimated
useful lives ranging from twenty to forty years. Costs assigned to
investment contracts of businesses acquired are being amortized on a
straight-line basis over estimated useful lives of twenty years.
Impairment of intangible assets is evaluated by comparing the
undiscounted cash flows expected to be realized from those intangible
assets to their recorded values, pursuant to SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of". If the expected future cash flows are less than the
carrying value of intangible assets, an impairment loss is recognized
for the difference between the carrying amount and the estimated fair
value of those intangible assets.
Capitalized internal-use software is amortized on a straight-line basis
over the estimated useful life of the software.
The Company files a consolidated Federal income tax return with the
Holding Company and its consolidated subsidiaries. Current Federal
income taxes are charged or credited to operations based upon amounts
estimated to be payable or recoverable as a result of taxable operations
for the current year. Deferred income tax assets and liabilities are
recognized based on the difference between financial statement carrying
amounts and income tax bases of assets and liabilities using enacted
income tax rates and laws.
Minority interest subject to redemption rights represents the 40.8
million private Alliance Units issued to former Bernstein shareholders
in connection with Alliance's acquisition of Bernstein. The Holding
Company has agreed to provide liquidity to these former Bernstein
shareholders after a two-year period by allowing the 40.8 million
Alliance Units to be sold to the Holding Company over the subsequent
eight years but generally not more than 20% of such Units in any one
annual period.
Commissions, fees and other income principally include Investment
Management advisory and service fees. Investment Management advisory and
service fees are recorded as revenue as the related services are
performed. Certain investment advisory contracts provide for a
performance fee, in addition to or in lieu of a base fee, that is
calculated as a percentage of the related investment results over a
specified period of time. Performance fees are recorded as revenue at
the end of the measurement period.
Sales commissions paid to financial intermediaries in connection with
the sale of shares of open-end Alliance mutual funds sold without a
front-end sales charge are capitalized and amortized over periods not
exceeding five and one-half years, the period of time during which
deferred sales commissions are expected to be recovered from
distribution plan payments received from those funds upon the redemption
of their shares. Contingent deferred sales charges reduce unamortized
deferred sales commissions when received. At December 31, 2000 and 1999,
respectively, deferred sales commissions totaled $715.7 million and
$604.7 million and are included with other assets.
The Company accounts for its stock option plans in accordance with the
provisions of Accounting Principles Board Opinion ("APB") No. 25,
"Accounting for Stock Issued to Employees," and related interpretations.
In accordance with the opinion, compensation expense is recorded on the
date of grant only if the current market price of the underlying stock
exceeds the option strike price at the grant date. See Note 20 for the
pro forma disclosures required by SFAS No. 123, "Accounting for
Stock-Based Compensation".
F-14
3) INVESTMENTS
The following tables provide additional information relating to fixed
maturities and equity securities:
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
----------------- ----------------- ---------------- -----------------
(IN MILLIONS)
DECEMBER 31, 2000
Fixed Maturities:
Available for Sale:
Corporate.......................... $ 12,481.0 $ 241.5 $ 298.9 $ 12,423.6
Mortgage-backed.................... 2,215.1 19.2 7.8 2,226.5
U.S. Treasury, government and
agency securities................ 938.1 40.2 .5 977.8
States and political subdivisions.. 110.4 4.5 1.0 113.9
Foreign governments................ 177.4 17.3 5.2 189.5
Redeemable preferred stock......... 315.5 13.4 8.7 320.1
----------------- ----------------- ---------------- -----------------
Total Available for Sale............... $ 16,237.5 $ 336.1 $ 322.1 $ 16,251.4
================= ================= ================ =================
Held to Maturity: Corporate......... $ 204.6 $ 6.0 $ .1 $ 210.5
================= ================= ================ =================
Equity Securities:
Available for sale................... $ 22.0 $ 1.7 $ 4.7 $ 19.0
Trading securities................... 1,606.3 1.8 46.2 1,561.9
----------------- ----------------- ---------------- -----------------
Total Equity Securities................ $ 1,628.3 $ 3.5 $ 50.9 $ 1,580.9
================= ================= ================ =================
December 31, 1999
Fixed Maturities:
Available for Sale:
Corporate.......................... $ 14,866.8 $ 139.5 $ 787.0 $ 14,219.3
Mortgage-backed.................... 2,554.5 2.3 87.8 2,469.0
U.S. Treasury, government and
agency securities................ 1,194.1 18.9 23.4 1,189.6
States and political subdivisions.. 110.0 1.4 4.9 106.5
Foreign governments................ 361.8 16.2 14.8 363.2
Redeemable preferred stock......... 286.4 1.7 36.0 252.1
----------------- ----------------- ---------------- -----------------
Total Available for Sale............... $ 19,373.6 $ 180.0 $ 953.9 $ 18,599.7
================= ================= ================ =================
Held to Maturity: Corporate......... $ 133.2 $ - $ - $ 133.2
================= ================= ================ =================
Equity Securities:
Available for sale................... $ 25.5 $ 1.5 $ 17.8 $ 9.2
Trading securities................... 7.2 9.1 2.2 14.1
----------------- ----------------- ---------------- -----------------
Total Equity Securities................ $ 32.7 $ 10.6 $ 20.0 $ 23.3
================= ================= ================ =================
For publicly-traded fixed maturities and equity securities, estimated
fair value is determined using quoted market prices. For fixed
maturities without a readily ascertainable market value, the Company
determines estimated fair values using a discounted cash flow approach,
including provisions for credit risk, generally based on the assumption
such securities will be held to maturity. Such estimated fair values do
not necessarily represent the values for which these securities could
have been sold at the dates of the consolidated balance sheets. At
December 31, 2000 and 1999, securities without a readily ascertainable
market value having an amortized cost of $2,820.2 million and $3,322.2
million, respectively, had estimated fair values of $2,838.2 million and
$3,177.7 million, respectively.
F-15
The contractual maturity of bonds at December 31, 2000 is shown below:
AVAILABLE FOR SALE
------------------------------------
AMORTIZED ESTIMATED
COST FAIR VALUE
---------------- -----------------
(IN MILLIONS)
Due in one year or less................................................ $ 568.2 $ 568.2
Due in years two through five.......................................... 2,850.0 2,848.1
Due in years six through ten........................................... 5,277.2 5,239.9
Due after ten years.................................................... 5,011.6 5,048.6
Mortgage-backed securities............................................. 2,215.1 2,226.5
---------------- -----------------
Total.................................................................. $ 15,922.1 $ 15,931.3
================ =================
Corporate bonds held to maturity with an amortized cost and estimated
fair value of $142.4 million are due from one to five years.
Bonds not due at a single maturity date have been included in the above
table in the year of final maturity. Actual maturities will differ from
contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
The Insurance Group's fixed maturity investment portfolio includes
corporate high yield securities consisting of public high yield bonds,
redeemable preferred stocks and directly negotiated debt in leveraged
buyout transactions. The Insurance Group seeks to minimize the higher
than normal credit risks associated with such securities by monitoring
concentrations in any single issuer or a particular industry group.
Certain of these corporate high yield securities are classified as other
than investment grade by the various rating agencies, i.e., a rating
below Baa or National Association of Insurance Commissioners ("NAIC")
designation of 3 (medium grade), 4 or 5 (below investment grade) or 6
(in or near default). At December 31, 2000, approximately 12% of the
$16,126.6 million aggregate amortized cost of bonds held by the Company
was considered to be other than investment grade.
The Insurance Group holds equity in limited partnership interests which
primarily invest in securities considered to be other than investment
grade. The carrying values at December 31, 2000 and 1999 were $811.9
million and $647.9 million, respectively.
At December 31, 2000, the carrying value of fixed maturities which are
non-income producing for the twelve months preceding the consolidated
balance sheet date was $60.3 million.
The payment terms of mortgage loans on real estate may from time to time
be restructured or modified. The investment in restructured mortgage
loans on real estate, based on amortized cost, amounted to $92.9 million
and $106.0 million at December 31, 2000 and 1999, respectively. Gross
interest income on these loans included in net investment income
aggregated $7.8 million, $8.2 million and $8.3 million in 2000, 1999 and
1998, respectively. Gross interest income on restructured mortgage loans
on real estate that would have been recorded in accordance with the
original terms of such loans amounted to $8.7 million, $9.5 million and
$10.3 million in 2000, 1999 and 1998, respectively.
Impaired mortgage loans along with the related provision for losses were
as follows:
DECEMBER 31,
----------------------------------------
2000 1999
------------------- -------------------
(IN MILLIONS)
Impaired mortgage loans with provision for losses.................. $ 144.2 $ 142.4
Impaired mortgage loans without provision for losses............... 1.8 2.2
------------------- -------------------
Recorded investment in impaired mortgage loans..................... 146.0 144.6
Provision for losses............................................... (37.0) (23.0)
------------------- -------------------
Net Impaired Mortgage Loans........................................ $ 109.0 $ 121.6
=================== ===================
F-16
During 2000, 1999 and 1998, respectively, the Company's average recorded
investment in impaired mortgage loans was $138.8 million, $141.7 million
and $161.3 million. Interest income recognized on these impaired
mortgage loans totaled $10.4 million, $12.0 million and $12.3 million
($.5 million, $.0 million and $.9 million recognized on a cash basis)
for 2000, 1999 and 1998, respectively.
The Insurance Group's investment in equity real estate is through direct
ownership and through investments in real estate joint ventures. At
December 31, 2000 and 1999, the carrying value of equity real estate
held for sale amounted to $526.3 million and $382.2 million,
respectively. For 2000, 1999 and 1998, respectively, real estate of $.3
million, $20.5 million and $7.1 million was acquired in satisfaction of
debt. At December 31, 2000 and 1999, the Company owned $322.3 million
and $443.9 million, respectively, of real estate acquired in
satisfaction of debt.
Accumulated depreciation on real estate was $208.8 million and $251.6
million at December 31, 2000 and 1999, respectively. Depreciation
expense on real estate totaled $21.7 million, $21.8 million and $30.5
million for 2000, 1999 and 1998, respectively.
Investment valuation allowances and changes thereto are shown below:
2000 1999 1998
----------------- ---------------- -----------------
(IN MILLIONS)
Balances, beginning of year........................ $ 148.6 $ 230.6 $ 384.5
Additions charged to income........................ 53.7 68.2 86.2
Deductions for writedowns and
asset dispositions............................... (102.4) (150.2) (240.1)
----------------- ---------------- -----------------
Balances, End of Year.............................. $ 99.9 $ 148.6 $ 230.6
================= ================ =================
Balances, end of year comprise:
Mortgage loans on real estate.................... $ 41.4 $ 27.5 $ 34.3
Equity real estate............................... 58.5 121.1 196.3
----------------- ---------------- -----------------
Total.............................................. $ 99.9 $ 148.6 $ 230.6
================= ================ =================
F-17
4) JOINT VENTURES AND PARTNERSHIPS
Summarized combined financial information for unconsolidated real estate
joint ventures (14 individual ventures at both December 31, 2000 and
1999) and for limited partnership interests accounted for under the
equity method, in which the Company has an investment of $10.0 million
or greater and an equity interest of 10% or greater, follows:
DECEMBER 31,
------------------------------------
2000 1999
---------------- -----------------
(IN MILLIONS)
BALANCE SHEETS
Investments in real estate, at depreciated cost........................ $ 730.1 $ 861.1
Investments in securities, generally at estimated fair value........... 226.6 262.0
Cash and cash equivalents.............................................. 43.9 68.4
Other assets........................................................... 65.5 232.5
---------------- -----------------
Total Assets........................................................... $ 1,066.1 $ 1,424.0
================ =================
Borrowed funds - third party........................................... $ 249.9 $ 354.2
Borrowed funds - AXA Financial......................................... 12.9 28.9
Other liabilities...................................................... 26.3 191.2
---------------- -----------------
Total liabilities...................................................... 289.1 574.3
---------------- -----------------
Partners' capital...................................................... 777.0 849.7
---------------- -----------------
Total Liabilities and Partners' Capital................................ $ 1,066.1 $ 1,424.0
================ =================
Equity in partners' capital included above............................. $ 272.3 $ 298.5
Equity in limited partnership interests not included above and other... 720.7 542.1
---------------- -----------------
Carrying Value......................................................... $ 993.0 $ 840.6
================ =================
2000 1999 1998
----------------- ---------------- -----------------
(IN MILLIONS)
STATEMENTS OF EARNINGS
Revenues of real estate joint ventures............. $ 187.1 $ 180.5 $ 246.1
Revenues of other limited partnership interests.... 16.5 85.0 128.9
Interest expense - third party..................... (32.5) (26.6) (33.3)
Interest expense - AXA Financial................... (2.0) (2.5) (2.6)
Other expenses..................................... (126.4) (133.0) (197.0)
----------------- ---------------- -----------------
Net Earnings....................................... $ 42.7 $ 103.4 $ 142.1
================= ================ =================
Equity in net earnings included above.............. $ 17.7 $ 9.4 $ 44.4
Equity in net earnings of limited partnership
interests not included above..................... 216.3 77.1 37.9
----------------- ---------------- -----------------
Total Equity in Net Earnings....................... $ 234.0 $ 86.5 $ 82.3
================= ================ =================
F-18
5) NET INVESTMENT INCOME AND INVESTMENT GAINS (LOSSES)
The sources of net investment income follows:
2000 1999 1998
----------------- ---------------- -----------------
(IN MILLIONS)
Fixed maturities................................... $ 1,439.2 $ 1,499.8 $ 1,489.0
Mortgage loans on real estate...................... 257.3 253.4 235.4
Equity real estate................................. 191.6 250.2 356.1
Other equity investments........................... 129.8 165.1 83.8
Policy loans....................................... 156.7 143.8 144.9
Other investment income............................ 199.3 161.3 185.7
----------------- ---------------- -----------------
Gross investment income.......................... 2,373.9 2,473.6 2,494.9
Investment expenses.............................. (200.7) (232.7) (266.8)
----------------- ---------------- -----------------
Net Investment Income.............................. $ 2,173.2 $ 2,240.9 $ 2,228.1
================= ================ =================
Investment (losses) gains, net, including changes in the valuation
allowances, follow:
2000 1999 1998
----------------- ---------------- -----------------
(IN MILLIONS)
Fixed maturities................................... $ (766.1) $ (290.9) $ (24.3)
Mortgage loans on real estate...................... (15.1) (3.3) (10.9)
Equity real estate................................. 4.8 (2.4) 74.5
Other equity investments........................... (22.6) 88.1 29.9
Sale of subsidiaries............................... - - (2.6)
Issuance and sales of Alliance Units............... 3.9 5.5 19.8
Issuance and sales of DLJ common stock............. 38.8 106.0 18.2
Other.............................................. .3 .1 (4.4)
----------------- ---------------- -----------------
Investment (Losses) Gains, Net..................... $ (756.0) $ (96.9) $ 100.2
================= ================ =================
Writedowns of fixed maturities amounted to $607.8 million, $223.2
million and $101.6 million for 2000, 1999 and 1998, respectively,
including $472.2 million in fourth quarter 2000.
For 2000, 1999 and 1998, respectively, proceeds received on sales of
fixed maturities classified as available for sale amounted to $7,361.5
million, $7,138.6 million and $15,961.0 million. Gross gains of $78.7
million, $74.7 million and $149.3 million and gross losses of $215.4
million, $214.3 million and $95.1 million, respectively, were realized
on these sales. The change in unrealized investment gains (losses)
related to fixed maturities classified as available for sale for 2000,
1999 and 1998 amounted to $789.1 million, $(1,313.8) million and
$(331.7) million, respectively.
On November 3, 2000, the Company sold its interest in DLJ to Credit
Suisse Group ("CSG"). The Company received $1.05 billion in cash and
$2.19 billion (or 11.4 million shares) in CSG common stock, 2.8 million
shares of which were immediately repurchased by CSG at closing. The CSG
shares have been designated as trading account securities. The remaining
8.2 million shares held by the Company had a carrying value of $1.56
billion at December 31, 2000 and were sold in January 2001. Net
investment income for 2000 included holding losses of $43.2 million on
the CSG shares.
On January 1, 1999, investments in publicly-traded common equity
securities in the General Account portfolio within other equity
investments amounting to $102.3 million were transferred from available
for sale securities to trading securities. As a result of this transfer,
unrealized investment gains of $83.3 million ($43.2 million net of
related DAC and Federal income taxes) were recognized as realized
investment gains in the consolidated statements of earnings. In 2000 and
1999, respectively, net unrealized holding (losses) gains of $(44.4)
million and $6.9 million were included in net investment income in the
F-19
consolidated statements of earnings. These trading securities had a
carrying value of $1,561.9 million and $14.1 million and costs of
$1,606.3 million and $7.2 million at December 31, 2000 and 1999,
respectively.
For 2000, 1999 and 1998, investment results passed through to certain
participating group annuity contracts as interest credited to
policyholders' account balances amounted to $110.6 million, $131.5
million and $136.9 million, respectively.
Net unrealized investment gains (losses), included in the consolidated
balance sheets as a component of accumulated comprehensive income and
the changes for the corresponding years including Closed Block and
Discontinued Operations on a line-by-line basis, follow:
2000 1999 1998
----------------- ---------------- -----------------
(IN MILLIONS)
Balance, beginning of year......................... $ (392.8) $ 384.1 $ 533.6
Changes in unrealized investment (losses) gains.... 979.7 (1,821.3) (168.7)
Changes in unrealized investment losses
(gains) attributable to:
Participating group annuity contracts
and other..................................... (18.3) 25.0 (5.4)
DAC............................................ (262.1) 493.1 (28.8)
Deferred Federal income taxes.................. (293.6) 526.3 53.4
----------------- ---------------- -----------------
Balance, End of Year............................... $ 12.9 $ (392.8) $ 384.1
================= ================ =================
Balance, end of year comprises:
Unrealized investment gains (losses) on:
Fixed maturities............................... $ 65.9 $ (904.6) $ 766.0
Other equity investments....................... (2.3) (22.2) 86.5
Other.......................................... (1.2) 9.4 51.6
----------------- ---------------- -----------------
Total........................................ 62.4 (917.4) 904.1
Amounts of unrealized investment (losses) gains
attributable to:
Participating group annuity contracts
and other.................................... (15.3) 3.0 (22.0)
DAC.......................................... (28.3) 233.8 (259.3)
Deferred Federal income taxes................ (5.9) 287.8 (238.7)
----------------- ---------------- -----------------
Total.............................................. $ 12.9 $ (392.8) $ 384.1
================= ================ =================
Changes in unrealized gains (losses) reflect changes in fair value of
only those fixed maturities and equity securities classified as
available for sale and do not reflect any changes in fair value of
policyholders' account balances and future policy benefits.
F-20
6) ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Accumulated other comprehensive income (loss) represents cumulative
gains and losses on items that are not reflected in earnings. The
balances for the past three years follow:
2000 1999 1998
----------------- ---------------- -----------------
(IN MILLIONS)
Unrealized gains (losses) on investments........... $ 12.9 $ (392.8) $ 384.1
Minimum pension liability.......................... (.1) (.1) (28.3)
----------------- ---------------- -----------------
Total Accumulated Other
Comprehensive Income (Loss)...................... $ 12.8 $ (392.9) $ 355.8
================= ================ =================
The components of other comprehensive income (loss) for the past three
years follow:
2000 1999 1998
----------------- ---------------- -----------------
(IN MILLIONS)
Net unrealized gains (losses) on investments:
Net unrealized gains (losses) arising during
the period..................................... $ 191.0 $ (1,625.6) $ (112.4)
Losses (gains) reclassified into net earnings
during the period.............................. 788.7 (195.7) (56.3)
----------------- ---------------- -----------------
Net unrealized gains (losses) on investments....... 979.7 (1,821.3) (168.7)
Adjustments for policyholders liabilities,
DAC and deferred Federal income taxes.......... (574.0) 1,044.4 19.2
----------------- ---------------- -----------------
Change in unrealized gains (losses), net of
adjustments.................................... 405.7 (776.9) (149.5)
Change in minimum pension liability................ - 28.2 (11.0)
----------------- ---------------- -----------------
Total Other Comprehensive Income (Loss)............ $ 405.7 $ (748.7) $ (160.5)
================= ================ =================
F-21
7) CLOSED BLOCK
Summarized financial information for the Closed Block follows:
DECEMBER 31,
--------------------------------------
2000 1999
----------------- -----------------
(IN MILLIONS)
BALANCE SHEETS
Fixed Maturities:
Available for sale, at estimated fair value (amortized cost,
$4,373.5 and $4,144.8)........................................... $ 4,408.0 $ 4,014.0
Mortgage loans on real estate........................................ 1,581.8 1,704.2
Policy loans......................................................... 1,557.7 1,593.9
Cash and other invested assets....................................... 174.7 194.4
Deferred policy acquisitions costs................................... 699.7 895.5
Other assets......................................................... 237.1 205.3
----------------- -----------------
Total Assets......................................................... $ 8,659.0 $ 8,607.3
================= =================
Future policy benefits and policyholders' account balances........... $ 9,026.4 $ 9,011.7
Other liabilities.................................................... 23.8 13.3
----------------- -----------------
Total Liabilities.................................................... $ 9,050.2 $ 9,025.0
================= =================
2000 1999 1998
----------------- ---------------- -----------------
(IN MILLIONS)
STATEMENTS OF EARNINGS
Premiums and other revenue......................... $ 594.7 $ 619.1 $ 661.7
Investment income (net of investment
expenses of $8.1, $15.8 and $15.5)............... 578.7 574.2 569.7
Investment (losses) gains, net..................... (35.8) (11.3) .5
----------------- ---------------- -----------------
Total revenues............................... 1,137.6 1,182.0 1,231.9
----------------- ---------------- -----------------
Policyholders' benefits and dividends.............. 1,025.2 1,024.7 1,082.0
Other operating costs and expenses................. 19.7 70.9 62.8
----------------- ---------------- -----------------
Total benefits and other deductions.......... 1,044.9 1,095.6 1,144.8
----------------- ---------------- -----------------
Contribution from the Closed Block................. $ 92.7 $ 86.4 $ 87.1
================= ================ =================
Impaired mortgage loans along with the related provision for losses
follows:
DECEMBER 31,
------------------------------------
2000 1999
---------------- -----------------
(IN MILLIONS)
Impaired mortgage loans with provision for losses...................... $ 26.7 $ 26.8
Impaired mortgage loans without provision for losses................... 4.0 4.5
---------------- -----------------
Recorded investment in impaired mortgages.............................. 30.7 31.3
Provision for losses................................................... (8.7) (4.1)
---------------- -----------------
Net Impaired Mortgage Loans............................................ $ 22.0 $ 27.2
================ =================
During 2000, 1999 and 1998, the Closed Block's average recorded
investment in impaired mortgage loans was $31.0 million, $37.0 million
and $85.5 million, respectively. Interest income recognized on these
impaired mortgage loans totaled $2.0 million, $3.3 million and $4.7
million ($.1 million, $.3 million and $1.5 million recognized on a cash
basis) for 2000, 1999 and 1998, respectively.
F-22
Valuation allowances amounted to $9.1 million and $4.6 million on
mortgage loans on real estate and $17.2 million and $24.7 million on
equity real estate at December 31, 2000 and 1999, respectively.
Writedowns of fixed maturities amounted to $27.7 million and 3.3 million
for 2000 and 1999, respectively, including $20.0 million in fourth
quarter 2000.
Many expenses related to Closed Block operations are charged to
operations outside of the Closed Block; accordingly, the contribution
from the Closed Block does 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.
8) DISCONTINUED OPERATIONS
Summarized financial information for Discontinued Operations follows:
DECEMBER 31,
--------------------------------------
2000 1999
----------------- -----------------
(IN MILLIONS)
BALANCE SHEETS
Mortgage loans on real estate........................................ $ 330.9 $ 454.6
Equity real estate................................................... 350.9 426.6
Fixed maturities, available for sale, at estimated fair value
(amortized cost of $321.5 and $85.3)............................... 336.5 85.5
Other equity investments............................................. 43.1 55.8
Other invested assets................................................ 1.9 1.6
----------------- -----------------
Total investments.................................................. 1,063.3 1,024.1
Cash and cash equivalents............................................ 84.3 164.5
Other assets......................................................... 148.8 213.0
----------------- -----------------
Total Assets......................................................... $ 1,296.4 $ 1,401.6
================= =================
Policyholder liabilities............................................. $ 966.8 $ 993.3
Allowance for future losses.......................................... 159.8 242.2
Other liabilities.................................................... 169.8 166.1
----------------- -----------------
Total Liabilities.................................................... $ 1,296.4 $ 1,401.6
================= =================
2000 1999 1998
----------------- ---------------- -----------------
(IN MILLIONS)
STATEMENTS OF EARNINGS
Investment income (net of investment
expenses of $37.0, $49.3 and $63.3).............. $ 102.2 $ 98.7 $ 160.4
Investment (losses) gains, net..................... (6.6) (13.4) 35.7
Policy fees, premiums and other income............. .7 .2 (4.3)
----------------- ---------------- -----------------
Total revenues..................................... 96.3 85.5 191.8
Benefits and other deductions...................... 106.9 104.8 141.5
(Losses charged) earnings credited to allowance
for future losses................................ (10.6) (19.3) 50.3
----------------- ---------------- -----------------
Pre-tax loss from operations....................... - - -
Pre-tax earnings from releasing the allowance
for future losses................................ 90.2 43.3 4.2
Federal income tax expense......................... (31.6) (15.2) (1.5)
----------------- ---------------- -----------------
Earnings from
Discontinued Operations.......................... $ 58.6 $ 28.1 $ 2.7
================= ================ =================
F-23
The Company's quarterly process for evaluating the allowance for future
losses applies the current period's results of discontinued operations
against the allowance, re-estimates future losses and adjusts the
allowance, if appropriate. Additionally, as part of the Company's annual
planning process which takes place in the fourth quarter of each year,
investment and benefit cash flow projections are prepared. These updated
assumptions and estimates resulted in a release of allowance in each of
the three years presented.
Benefits and other deductions included $26.6 million of interest expense
related to amounts borrowed from continuing operations in 1998.
Valuation allowances of $2.9 million and $1.9 million on mortgage loans
on real estate and $11.4 million and $54.8 million on equity real estate
were held at December 31, 2000 and 1999, respectively. During 2000, 1999
and 1998, other discontinued operations' average recorded investment in
impaired mortgage loans was $11.3 million, $13.8 million and $73.3
million, respectively. Interest income recognized on these impaired
mortgage loans totaled $.9 million, $1.7 million and $4.7 million ($.5
million, $.0 million and $3.4 million recognized on a cash basis) for
2000, 1999 and 1998, respectively.
At December 31, 2000 and 1999, Discontinued Operations had real estate
acquired in satisfaction of debt with carrying values of $4.5 million
and $24.1 million, respectively.
9) SHORT-TERM AND LONG-TERM DEBT
Short-term and long-term debt consists of the following:
DECEMBER 31,
--------------------------------------
2000 1999
----------------- -----------------
(IN MILLIONS)
Short-term debt...................................................... $ 782.2 $ 557.0
----------------- -----------------
Long-term debt:
Equitable Life:
Surplus notes, 6.95% due 2005...................................... 399.6 399.5
Surplus notes, 7.70% due 2015...................................... 199.7 199.7
Other.............................................................. .3 .4
----------------- -----------------
Total Equitable Life........................................... 599.6 599.6
----------------- -----------------
Wholly Owned and Joint Venture Real Estate:
Mortgage notes, 5.43% - 9.5%, due through 2017..................... 248.3 251.3
----------------- -----------------
Total long-term debt................................................. 847.9 850.9
----------------- -----------------
Total Short-term and Long-term Debt.................................. $ 1,630.1 $ 1,407.9
================= =================
Short-term Debt
---------------
Equitable Life has a $350.0 million 5-year bank credit facility and a
$350.0 million 364-day credit facility. The interest rates are based on
external indices dependent on the type of borrowing ranging from 6.93%
to 6.97%. No amounts were outstanding under these credit facilities at
December 31, 2000.
Equitable Life has a commercial paper program with an issue limit of
$1.0 billion. This program is available for general corporate purposes
used to support Equitable Life's liquidity needs and is supported by
Equitable Life's existing $700.0 million bank credit facilities. At
December 31, 2000, there were no amounts outstanding under this program.
Alliance has a $425.0 million five-year revolving credit facility and a
$200.0 million three-year revolving credit facility with a group of
commercial banks. Borrowings from the revolving credit facility and the
original commercial paper program may not exceed $425.0 million in the
aggregate. Under the facilities, the interest rate, at the option of
Alliance, is a floating rate generally based upon a defined prime rate,
a rate related to the London Interbank Offered Rate ("LIBOR") or the
Federal Funds Rate. A facility fee is payable on the total facility. In
October 2000, Alliance entered into a $250.0 million two-year revolving
credit facility using terms substantially similar to the $425.0 million
and $200.0 million revolving credit facilities. The revolving credit
facilities will be used to provide backup liquidity for Alliance's
F-24
commercial program, to fund commission payments to financial
intermediaries for the sale of certain mutual funds and for general
working capital purposes. The revolving credit facilities contain
covenants that require Alliance to, among other things, meet certain
financial ratios. At December 31, 2000, Alliance had commercial paper
outstanding totaling $396.9 million at an effective interest rate of
6.7%; and $284.0 million at an effective interest rate of 7.0% in
borrowings outstanding under Alliance's revolving credit facilities.
In December 1999, Alliance established a $100.0 million extendible
commercial notes ("ECN") program to supplement its commercial paper
program. ECN's are short-term debt instruments that do not require any
back-up liquidity support. At December 31, 2000, $98.2 million was
outstanding under the ECN program with an effective interest rate of
6.8%.
Long-term Debt
Several of the long-term debt agreements have restrictive covenants
related to the total amount of debt, net tangible assets and other
matters. At December 31, 2000, the Company is in compliance with all
debt covenants.
At December 31, 2000 and 1999, respectively, the Company has pledged
real estate of $298.8 million and $323.6 million as collateral for
certain long-term debt.
At December 31, 2000, aggregate maturities of the long-term debt based
on required principal payments at maturity is $248.6 million for 2001,
$400.0 million for 2005 and $200.0 million for 2006 and thereafter.
10) FEDERAL INCOME TAXES
A summary of the Federal income tax expense in the consolidated
statements of earnings follows:
2000 1999 1998
----------------- ---------------- -----------------
(IN MILLIONS)
Federal income tax expense:
Current.......................................... $ 820.6 $ 174.0 $ 283.3
Deferred......................................... 137.7 158.0 69.8
----------------- ---------------- -----------------
Total.............................................. $ 958.3 $ 332.0 $ 353.1
================= ================ =================
The Federal income taxes attributable to consolidated operations are
different from the amounts determined by multiplying the earnings before
Federal income taxes and minority interest by the expected Federal
income tax rate of 35%. The sources of the difference and their tax
effects follow:
2000 1999 1998
----------------- ---------------- -----------------
(IN MILLIONS)
Expected Federal income tax expense................ $ 904.9 $ 458.4 $ 414.3
Minority interest.................................. (117.9) (47.8) (33.2)
Non deductible stock option compensation
expense.......................................... 34.4 - -
Subsidiary gains................................... 161.4 (37.1) (6.4)
Adjustment of tax audit reserves................... 17.9 27.8 16.0
Equity in unconsolidated subsidiaries.............. (48.7) (64.0) (39.3)
Other.............................................. 6.3 (5.3) 1.7
----------------- ---------------- -----------------
Federal Income Tax Expense......................... $ 958.3 $ 332.0 $ 353.1
================= ================ =================
F-25
The components of the net deferred Federal income taxes are as follows:
DECEMBER 31, 2000 DECEMBER 31, 1999
--------------------------------- ---------------------------------
ASSETS LIABILITIES ASSETS LIABILITIES
--------------- ---------------- --------------- ---------------
(IN MILLIONS)
Compensation and related benefits...... $ - $ 79.7 $ - $ 37.7
Other.................................. 4.9 - - 20.6
DAC, reserves and reinsurance.......... - 733.0 - 329.7
Investments............................ - 229.2 115.1 -
--------------- ---------------- --------------- ---------------
Total.................................. $ 4.9 $ 1,041.9 $ 115.1 $ 388.0
=============== ================ =============== ===============
At December 31, 1999, $236.8 million in deferred tax assets were
transferred to the Holding Company in conjunction with its assumption of
the non-qualified employee benefit liabilities. See Note 12 for
discussion of the benefit plans transferred.
The deferred Federal income taxes impacting operations reflect the net
tax effects of temporary differences between the carrying amounts of
assets and liabilities for financial reporting purposes and the amounts
used for income tax purposes. The sources of these temporary differences
and their tax effects follow:
2000 1999 1998
----------------- ---------------- -----------------
(IN MILLIONS)
DAC, reserves and reinsurance...................... $ 403.3 $ 83.2 $ (7.7)
Investments........................................ (140.7) 3.2 46.8
Compensation and related benefits.................. (96.4) 21.0 28.6
Other.............................................. (28.5) 50.6 2.1
----------------- ---------------- -----------------
Deferred Federal Income Tax
Expense.......................................... $ 137.7 $ 158.0 $ 69.8
================= ================ =================
Federal income taxes payable at December 31, 2000 included $858.2
million of taxes related to the gain on disposal of DLJ.
The Internal Revenue Service (the "IRS") is in the process of examining
the Holding Company's consolidated Federal income tax returns for the
years 1992 through 1996. Management believes these audits will have no
material adverse effect on the Company's results of operations.
11) REINSURANCE AGREEMENTS
The effect of reinsurance (excluding group life and health) is
summarized as follows:
2000 1999 1998
----------------- ---------------- -----------------
(IN MILLIONS)
Direct premiums.................................... $ 508.6 $ 420.6 $ 438.8
Reinsurance assumed................................ 194.2 206.7 203.6
Reinsurance ceded.................................. (122.9) (69.1) (54.3)
----------------- ---------------- -----------------
Premiums........................................... $ 579.9 $ 558.2 $ 588.1
================= ================ =================
Universal Life and Investment-type Product
Policy Fee Income Ceded.......................... $ 92.1 $ 69.7 $ 75.7
================= ================ =================
Policyholders' Benefits Ceded...................... $ 202.6 $ 99.6 $ 85.9
================= ================ =================
Interest Credited to Policyholders' Account
Balances Ceded................................... $ 46.5 $ 38.5 $ 39.5
================= ================ =================
F-26
Since 1997, the Company reinsures on a yearly renewal term basis 90% of
the mortality risk on new issues of certain term, universal and variable
life products. The Company's retention limit on joint survivorship
policies is $15.0 million. All other in force business above $5.0
million is reinsured. The Insurance Group also reinsures the entire risk
on certain substandard underwriting risks and in certain other cases.
During July 2000, Equitable Life transferred, at no gain or loss, all
the risk of its directly written DI business for years 1993 and prior
through an indemnity reinsurance contract. The cost of the arrangement
will be amortized over the expected lives of the contracts reinsured and
will not have a significant impact on the results of operations in any
specific period.
At December 31, 2000 and 1999, respectively, reinsurance recoverables
related to insurance contracts outside of the Closed Block amounting to
$1,989.2 million and $881.5 million are included in the consolidated
balance sheets in other assets and reinsurance payables related to
insurance contracts outside of the Closed Block amounting to $730.3
million and $682.5 million are included in other liabilities.
The Insurance Group cedes 100% of its group life and health business to
a third party insurer. Insurance liabilities ceded totaled $487.7
million and $510.5 million at December 31, 2000 and 1999, respectively.
12) 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. The pension plans are
non-contributory. Equitable Life's benefits are based on a cash balance
formula or years of service and final average earnings, if greater,
under certain grandfathering rules in the plans. Alliance's benefits are
based on years of credited service, average final base salary and
primary social security benefits. The Company's funding policy is to
make the minimum contribution required by the Employee Retirement Income
Security Act of 1974 ("ERISA").
Effective December 31, 1999, the Holding Company legally assumed primary
liability from Equitable Life for all current and future obligations of
its Excess Retirement Plan, Supplemental Executive Retirement Plan and
certain other employee benefit plans that provide participants with
medical, life insurance, and deferred compensation benefits; Equitable
Life remains secondarily liable. The amount of the liability associated
with employee benefits transferred was $676.5 million, including $183.0
million of non-qualified pension benefit obligations and $394.1 million
of postretirement benefits obligations at December 31, 1999. This
transfer was recorded as a non-cash capital contribution to Equitable
Life.
Components of net periodic pension credit for the qualified and
non-qualified plans follow:
2000 1999 1998
----------------- ---------------- -----------------
(IN MILLIONS)
Service cost....................................... $ 29.5 $ 36.7 $ 33.2
Interest cost on projected benefit obligations..... 124.2 131.6 129.2
Actual return on assets............................ (223.2) (189.8) (175.6)
Net amortization and deferrals..................... (.6) 7.5 6.1
----------------- ---------------- -----------------
Net Periodic Pension Credit........................ $ (70.1) $ (14.0) $ (7.1)
================= ================ =================
F-27
The projected benefit obligations under the qualified and non-qualified
pension plans were comprised of:
DECEMBER 31,
------------------------------------
2000 1999
---------------- -----------------
(IN MILLIONS)
Benefit obligations, beginning of year................................. $ 1,659.6 $ 1,933.4
Service cost........................................................... 29.5 36.7
Interest cost.......................................................... 124.2 131.6
Actuarial losses (gains)............................................... 6.5 (53.3)
Benefits paid.......................................................... (110.0) (123.1)
---------------- -----------------
Subtotal before transfer............................................... 1,709.8 1,925.3
Transfer of Non-qualified Pension Benefit Obligation
to the Holding Company............................................... - (265.7)
---------------- -----------------
Benefit Obligation, End of Year........................................ $ 1,709.8 $ 1,659.6
================ =================
The funded status of the qualified and non-qualified pension plans was
as follows:
DECEMBER 31,
------------------------------------
2000 1999
---------------- -----------------
(IN MILLIONS)
Plan assets at fair value, beginning of year........................... $ 2,341.6 $ 2,083.1
Actual return on plan assets........................................... (107.7) 369.0
Contributions.......................................................... - .1
Benefits paid and fees................................................. (114.6) (108.5)
---------------- -----------------
Plan assets at fair value, end of year................................. 2,119.3 2,343.7
Projected benefit obligations.......................................... 1,709.8 1,925.3
---------------- -----------------
Excess of plan assets over projected benefit obligations............... 409.5 418.4
Unrecognized prior service cost........................................ 1.2 (5.2)
Unrecognized net gain (loss) from past experience different
from that assumed.................................................... 61.2 (197.3)
Unrecognized net asset at transition................................... (1.9) (.1)
-----------------
----------------
Subtotal before transfer............................................... 470.0 215.8
Transfer of Accrued Non-qualified Pension Benefit Obligation
to the Holding Company............................................... - 184.3
---------------- -----------------
Prepaid Pension Cost, Net.............................................. $ 470.0 $ 400.1
================ =================
The prepaid pension cost for pension plans with assets in excess of
projected benefit obligations was $483.5 million and $412.2 million and
the accrued liability for pension plans with projected benefit
obligations in excess of plan assets was $13.5 million and $12.2 million
at December 31, 2000 and 1999, respectively.
The pension plan assets include corporate and government debt
securities, equity securities, equity real estate and shares of group
trusts managed by Alliance. The discount rate and rate of increase in
future compensation levels used in determining the actuarial present
value of projected benefit obligations were 7.75% and 7.19%,
respectively, at December 31, 2000 and 8.0% and 6.38%, respectively, at
December 31, 1999. As of January 1, 2000 and 1999, the expected
long-term rate of return on assets for the retirement plan was 10.5% and
10.0%, respectively.
The Company recorded, as a reduction of shareholder's equity, an
additional minimum pension liability of $.1 million, $.1 million and
$28.3 million, net of Federal income taxes, at December 31, 2000, 1999
and 1998, respectively, primarily representing the excess of the
accumulated benefit obligation of the non-qualified pension plan over
the accrued liability. The aggregate accumulated benefit obligation and
fair value of plan assets for pension plans with accumulated benefit
obligations in excess of plan assets were $333.5 million and $42.1
million, respectively, at December 31, 2000 and $325.7 million and $36.3
million, respectively, at December 31, 1999.
F-28
Prior to 1987, the qualified plan funded participants' benefits through
the purchase of non-participating annuity contracts from Equitable Life.
Benefit payments under these contracts were approximately $28.7 million,
$30.2 million and $31.8 million for 2000, 1999 and 1998, respectively.
The Company provides certain medical and life insurance benefits
(collectively, "postretirement benefits") for qualifying employees,
managers and agents retiring from the Company (i) on or after attaining
age 55 who have at least 10 years of service or (ii) on or after
attaining age 65 or (iii) whose jobs have been abolished and who have
attained age 50 with 20 years of service. The life insurance benefits
are related to age and salary at retirement. The costs of postretirement
benefits are recognized in accordance with the provisions of SFAS No.
106. The Company continues to fund postretirement benefits costs on a
pay-as-you-go basis and, for 2000, 1999 and 1998, the Company made
estimated postretirement benefits payments of $.9 million, $29.5 million
and $28.4 million, respectively.
The following table sets forth the postretirement benefits plan's
status, reconciled to amounts recognized in the Company's consolidated
financial statements:
2000 1999 1998
----------------- ---------------- -----------------
(IN MILLIONS)
Service cost....................................... $ - $ 4.7 $ 4.6
Interest cost on accumulated postretirement
benefits obligation.............................. .7 34.4 33.6
Unrecognized prior service costs................... - (7.0) -
Net amortization and deferrals..................... (.2) 8.4 .5
----------------- ---------------- -----------------
Net Periodic Postretirement Benefits Costs......... $ .5 $ 40.5 $ 38.7
================= ================ =================
DECEMBER 31,
------------------------------------
2000 1999
---------------- -----------------
(IN MILLIONS)
Accumulated postretirement benefits obligation, beginning
of year.............................................................. $ 17.8 $ 490.4
Service cost........................................................... - 4.7
Interest cost.......................................................... .5 34.4
Contributions and benefits paid........................................ (.9) (29.5)
Actuarial gains........................................................ - (29.0)
---------------- -----------------
Accumulated postretirement benefits obligation, end of year............ 17.4 471.0
Unrecognized prior service cost........................................ - 26.9
Unrecognized net gain from past experience different
from that assumed and from changes in assumptions.................... - (86.0)
---------------- -----------------
Subtotal before transfer............................................... 17.4 411.9
Transfer to the Holding Company........................................ - (394.1)
---------------- -----------------
Accrued Postretirement Benefits Cost................................... $ 17.4 $ 17.8
================ =================
Since January 1, 1994, costs to the Company for providing these medical
benefits available to retirees under age 65 are the same as those
offered to active employees and medical benefits will be limited to 200%
of 1993 costs for all participants.
The assumed health care cost trend rate used in measuring the
accumulated postretirement benefits obligation was 7.0% in 2000,
gradually declining to 4.25% in the year 2010, and in 1999 was 7.5%,
gradually declining to 4.75% in the year 2009. The discount rate used in
determining the accumulated postretirement benefits obligation was 7.75%
and 8.0% at December 31, 2000 and 1999, respectively.
F-29
If the health care cost trend rate assumptions were increased by 1%, the
accumulated postretirement benefits obligation as of December 31, 2000
would be increased 3.5%. The effect of this change on the sum of the
service cost and interest cost would be an increase of 3.5%. If the
health care cost trend rate assumptions were decreased by 1% the
accumulated postretirement benefits obligation as of December 31, 2000
would be decreased by 4.4%. The effect of this change on the sum of the
service cost and interest cost would be a decrease of 4.4%.
13) DERIVATIVES AND FAIR VALUE OF FINANCIAL INSTRUMENTS
The Insurance Group primarily uses derivatives for asset/liability risk
management and for hedging individual securities. Derivatives mainly are
utilized to reduce the Insurance Group's exposure to interest rate
fluctuations. Accounting for interest rate swap transactions is on an
accrual basis. Gains and losses related to interest rate swap
transactions are amortized as yield adjustments over the remaining life
of the underlying hedged security. Income and expense resulting from
interest rate swap activities are reflected in net investment income.
There were no swaps outstanding as of December 31, 2000. The notional
amount of matched interest rate swaps outstanding at December 31, 1999
was $797.3 million. Equitable Life maintains an interest rate cap
program designed to offset crediting rate increases on
interest-sensitive individual annuities contracts. The outstanding
notional amounts at December 31, 2000 of contracts purchased and sold
were $6,775.0 million and $375.0 million, respectively. The net premium
paid by Equitable Life on these contracts was $46.7 million and is being
amortized ratably over the contract periods ranging from 1 to 3 years.
Income and expense resulting from this program are reflected as an
adjustment to interest credited to policyholders' account balances.
Fair Value of Financial Instruments
The Company defines fair value as the quoted market prices for those
instruments that are actively traded in financial markets. In cases
where quoted market prices are not available, fair values are estimated
using present value or other valuation techniques. The fair value
estimates are made at a specific point in time, based on available
market information and judgments about the financial instrument,
including estimates of the timing and amount of expected future cash
flows and the credit standing of counterparties. Such estimates do not
reflect any premium or discount that could result from offering for sale
at one time the Company's entire holdings of a particular financial
instrument, nor do they consider the tax impact of the realization of
unrealized gains or losses. In many cases, the fair value estimates
cannot be substantiated by comparison to independent markets, nor can
the disclosed value be realized in immediate settlement of the
instrument.
Certain financial instruments are excluded, particularly insurance
liabilities other than financial guarantees and investment contracts.
Fair market value of off-balance-sheet financial instruments of the
Insurance Group was not material at December 31, 2000 and 1999.
Fair values for mortgage loans on real estate are estimated by
discounting future contractual cash flows using interest rates at which
loans with similar characteristics and credit quality would be made.
Fair values for foreclosed mortgage loans and problem mortgage loans are
limited to the estimated fair value of the underlying collateral if
lower.
Fair values of policy loans are estimated by discounting the face value
of the loans from the time of the next interest rate review to the
present, at a rate equal to the excess of the current estimated market
rates over the current interest rate charged on the loan.
The estimated fair values for the Company's association plan contracts,
supplementary contracts not involving life contingencies ("SCNILC") and
annuities certain, which are included in policyholders' account
balances, and guaranteed interest contracts are estimated using
projected cash flows discounted at rates reflecting expected current
offering rates.
The estimated fair values for variable deferred annuities and single
premium deferred annuities, which are included in policyholders' account
balances, are estimated by discounting the account value back from the
time of the next crediting rate review to the present, at a rate equal
to the excess of current estimated market rates offered on new policies
over the current crediting rates.
F-30
Fair values for long-term debt are determined using published market
values, where available, or contractual cash flows discounted at market
interest rates. The estimated fair values for non-recourse mortgage debt
are determined by discounting contractual cash flows at a rate which
takes into account the level of current market interest rates and
collateral risk. The estimated fair values for recourse mortgage debt
are determined by discounting contractual cash flows at a rate based
upon current interest rates of other companies with credit ratings
similar to the Company. The Company's carrying value of short-term
borrowings approximates their estimated fair value.
The carrying value and estimated fair value for financial instruments
not previously disclosed in Notes 3, 7 and 8:
DECEMBER 31,
--------------------------------------------------------------------
2000 1999
--------------------------------- ---------------------------------
CARRYING ESTIMATED Carrying Estimated
VALUE FAIR VALUE Value Fair Value
--------------- ---------------- --------------- ---------------
(IN MILLIONS)
Consolidated:
------------
Mortgage loans on real estate.......... $ 3,130.8 $ 3,184.4 $ 3,270.0 $ 3,239.3
Other limited partnership interests.... 811.9 811.9 647.9 647.9
Policy loans........................... 2,476.9 2,622.4 2,257.3 2,359.5
Policyholders' account balances -
investment contracts................. 11,468.6 11,643.7 12,740.4 12,800.5
Long-term debt......................... 847.9 847.5 850.9 834.9
Closed Block:
Mortgage loans on real estate.......... $ 1,581.8 $ 1,582.6 $ 1,704.2 $ 1,650.3
Other equity investments............... 34.4 34.4 36.3 36.3
Policy loans........................... 1,557.7 1,667.6 1,593.9 1,712.0
SCNILC liability....................... 20.2 20.1 22.8 22.5
Discontinued Operations:
-----------------------
Mortgage loans on real estate.......... $ 330.9 $ 347.7 $ 454.6 $ 467.0
Fixed maturities....................... 336.5 336.5 85.5 85.5
Other equity investments............... 43.1 43.1 55.8 55.8
Guaranteed interest contracts.......... 26.4 23.4 33.2 27.5
Long-term debt......................... 101.8 101.7 101.9 101.9
F-31
14) COMMITMENTS AND CONTINGENT LIABILITIES
From time to time, the Company has provided certain guarantees or
commitments to affiliates, investors and others. At December 31, 2000,
these arrangements include commitments by the Company, under certain
conditions: to make capital contributions of up to $9.3 million to
affiliated real estate joint ventures; and to provide equity financing
to certain limited partnerships of $303.1 million under existing loan or
loan commitment agreements. Management believes the Company will not
incur any material losses as a result of these commitments.
Equitable Life is the obligor under certain structured settlement
agreements which it had entered into with unaffiliated insurance
companies and beneficiaries. To satisfy its obligations under these
agreements, Equitable Life owns single premium annuities issued by
previously wholly owned life insurance subsidiaries. Equitable Life has
directed payment under these annuities to be made directly to the
beneficiaries under the structured settlement agreements. A contingent
liability exists with respect to these agreements should the previously
wholly owned subsidiaries be unable to meet their obligations.
Management believes the need for Equitable Life to satisfy those
obligations is remote.
The Insurance Group had $14.9 million of letters of credit outstanding
at December 31, 2000.
The Holding Company has entered into continuity agreements with
forty-three executives of the Company in connection with AXA's minority
interest acquisition. The continuity agreements generally provide cash
severance payments ranging from 1.5 times to 3 times an executive's base
salary plus bonus and other benefits. Such cash severance payments will
generally be made if an executive's employment is terminated at any time
within two years from December 27, 2000 for any reason other than the
executive's death, disability, retirement or for cause, or if the
executive resigns for good reason as defined in the agreements.
15) LITIGATION
Life Insurance and Annuity Sales Cases
A number of lawsuits are pending as individual claims and purported
class actions against Equitable Life, its subsidiary insurance company
and a former insurance subsidiary. These actions involve, among other
things, sales of life and annuity products for varying periods from 1980
to the present, and allege, among other things, (i) sales practice
misrepresentation primarily involving: the number of premium payments
required; the propriety of a product as an investment vehicle; the
propriety of a product as a replacement of an existing policy; and
failure to disclose a product as life insurance; and (ii) the use of
fraudulent and deceptive practices in connection with the marketing and
sale of deferred annuity products to fund tax-qualified contributory
retirement plans. Some actions are in state courts and others are in
U.S. District Courts in different jurisdictions, and are in varying
stages of discovery and motions for class certification.
In general, the plaintiffs request an unspecified amount of damages,
compensatory and punitive damages, recession of the contracts,
enjoinment from the described practices, prohibition against
cancellation of policies for non-payment of premium or other remedies,
as well as attorneys' fees and expenses. Similar actions have been filed
against other life and health insurers and have resulted in the award of
substantial judgments, including material amounts of punitive damages,
or in substantial settlements.
Annuity Contract Case
In October 2000, an action was commenced in the United States District
Court for the Northern District of Illinois. The complaint alleges that
the defendants (i) in connection with certain annuities issued by
Equitable Life breached an agreement with the plaintiffs involving the
execution of mutual fund transfers and (ii) wrongfully withheld
withdrawal charges in connection with the termination of such annuities.
Plaintiffs seek unspecified lost profits and injunctive relief, punitive
damages and attorneys' fees. The plaintiffs also seek return of the
withdrawal charges. In February 2001, the District Court granted in part
and denied in part defendants' motion to dismiss the complaint, without
prejudice to the plaintiffs to seek leave to file an amended complaint.
F-32
Discrimination Case
Equitable Life is a defendant in an action, certified as a class action
in September 1997, in the United States District Court for the Northern
District of Alabama, Southern Division, involving alleged discrimination
on the basis of race against African-American applicants and potential
applicants in hiring individuals as sales agents. Plaintiffs seek a
declaratory judgment and affirmative and negative injunctive relief,
including the payment of back-pay, pension and other compensation. The
court referred the case to mediation, which has been successful. The
parties have reached a tentative agreement for the settlement of this
case as a nationwide class action. In connection with the proposed
settlement, the case will be dismissed in the United States District
Court for the Northern District of Alabama, Southern Division and will
be refiled in the United States District Court for Georgia, Atlanta
Division. The final settlement requires notice to class members and is
subject to court approval. The Company's management believes that the
settlement of this matter will not have a material adverse effect on the
consolidated financial position or results of operations of the Company.
Agent Health Benefits Case
Equitable Life is a defendant in an action, certified as a class action
in March 1999, in the United States District Court for the Northern
District of California, alleging, among other things, that Equitable
Life violated ERISA by eliminating certain alternatives pursuant to
which agents of Equitable Life could qualify for health care coverage.
The class consists of "[a]ll current, former and retired Equitable
agents, who while associated with Equitable satisfied [certain
alternatives] to qualify for health coverage or contributions thereto
under applicable plans." Plaintiffs allege various causes of action
under ERISA, including claims for enforcement of alleged promises
contained in plan documents and for enforcement of agent bulletins,
breach of a unilateral contract, breach of fiduciary duty and promissory
estoppel. The parties are currently engaged in discovery. In June 2000,
plaintiffs appealed to the Court of Appeals for the Ninth Circuit
contesting the District Court's award of legal fees to plaintiffs'
counsel in connection with a previously settled count of the complaint
unrelated to the health benefit claims. In that appeal, plaintiffs have
challenged the District Court's subject matter jurisdiction over the
health benefit claims. Briefing has been completed, but the appeal has
not yet been decided.
Prime Property Fund Case
In January 2000, the California Supreme Court denied Equitable Life's
petition for review of an October 1999 decision by the California
Superior Court of Appeal. Such decision reversed the dismissal by the
Supreme Court of Orange County, California of an action which was
commenced in 1995 by a real estate developer in connection with a
limited partnership formed in 1991 with Equitable Life on behalf of
Prime Property Fund ("PPF"). Equitable Life serves as investment manager
for PPF, an open-end, commingled real estate separate account of
Equitable Life for pension clients. Plaintiff alleges breach of
fiduciary duty and other claims principally in connection with PPF's
1995 purchase and subsequent foreclosure of the loan which financed the
partnership's property. Plaintiff seeks compensatory and punitive
damages. In reversing the Superior Court's dismissal of the plaintiff's
claims, the Court of Appeal held that a general partner who acquires a
partnership obligation breaches its fiduciary duty by foreclosing on
partnership assets. The case was remanded to the Superior Court for
further proceedings. In August 2000, Equitable Life filed a motion for
summary adjudication on plaintiff's claims, based on the purchase and
subsequent foreclosure of the loan which financed the partnership's
property, for punitive damages. In November 2000, the Superior Court
granted Equitable Life's motion as to one of plaintiff's claims,
dismissing the claim for punitive damages sought in conjunction with
plaintiff's claim for breach of the covenant of good faith and fair
dealing. The Superior Court denied Equitable Life's motion with respect
to plaintiff's claim for punitive damages sought in conjunction with its
claim for breach of fiduciary duty. In December 2000, the Superior Court
granted plaintiff's motion for leave to file a supplemental complaint to
add allegations relating to the post-foreclosure transfer of certain
funds from the partnership to Equitable Life. The supplemental complaint
alleges, among other things, that such conduct constitutes self-dealing
and breach of fiduciary duty, and seeks compensatory and punitive
damages based on such conduct. A jury trial previously scheduled for
February 2001 tentatively has been rescheduled for May 2001.
F-33
Alliance Reorganization Case
In September 1999, an action was brought on behalf of a purported class
of owners of limited partnership units of Alliance Holding challenging
the then-proposed reorganization of Alliance Holding. Named defendants
include Alliance Holding, Alliance, four Alliance Holding executives and
the general partner of Alliance Holding and Alliance. Equitable Life is
obligated to indemnify the defendants for losses and expenses arising
out of the litigation. Plaintiffs allege inadequate and misleading
disclosures, breaches of fiduciary duties, and the improper adoption of
an amended partnership agreement by Alliance Holding and seek payment of
unspecified money damages and an accounting of all benefits alleged to
have been improperly obtained by the defendants. In August 2000,
plaintiffs filed a first amended and supplemental class action
complaint. The amended complaint alleges in connection with the
reorganization that the partnership agreement of Alliance Holding was
not validly amended, the reorganization of Alliance Holding was not
validly effected, the information disseminated to holders of units of
limited partnership interests in Alliance Holding was materially false
and misleading, and the defendants breached their fiduciary duties by
structuring the reorganization in a manner that was grossly unfair to
plaintiffs. Plaintiffs seek declaratory, monetary and injunctive relief
relating to the allegations contained in the amended complaint. In
September 2000, all defendants, except one Alliance Holding executive,
filed an answer to the amended complaint denying the material
allegations contained therein; in lieu of joining in the answer to the
amended complaint, the Alliance Holding executive filed a motion to
dismiss in September 2000. In November 2000, the remaining defendants
filed a motion to dismiss the amended complaint. In December 2000,
plaintiffs filed a motion for partial summary judgment on the claim that
the Alliance Holding partnership agreement was not validly amended. Oral
argument of the motions was held in January 2001.
Disposal of DLJ
Subsequent to the August 30, 2000 announcement of the proposed sale of
DLJ, four putative class action lawsuits have been filed in the Delaware
Court of Chancery naming AXA Financial as one of the defendants and
challenging the sale of DLJ because the transaction did not include the
sale of DLJdirect tracking stock. The plaintiffs in these cases purport
to represent a class consisting of the holders of DLJdirect tracking
stock and their successors in interest, excluding the defendants and any
person or entity related to or affiliated with any of the defendants.
AXA Financial, DLJ and the DLJ directors are named as defendants. The
complaints assert claims for breaches of fiduciary duties, and seek an
unspecified amount of compensatory damages and costs and expenses,
including attorneys' fees. The parties in these cases have agreed to
extend the time for defendants to respond to the complaints.
Subsequent to the August 30, 2000 announcement of the proposed sale of
DLJ, a putative class action lawsuit was filed in New York challenging
the sale of DLJ (for omitting the DLJdirect tracking stock) and also
alleges Federal securities law claims relating to the initial public
offering of the DLJdirect tracking stock. The complaint alleges claims
for violations of the securities laws, breaches of the fiduciary duties
of loyalty, good faith and due care, aiding and abetting such breaches,
and breach of contract. The plaintiff purports to represent a class
consisting of: all purchasers of DLJdirect tracking stock in the initial
public offering and thereafter (with respect to the securities law
claims); and all owners of DLJdirect tracking stock who allegedly have
been or will be injured by the proposed sale of DLJ (with respect to all
other claims). AXA Financial, Equitable Life, AXA, DLJ, Donaldson,
Lufkin & Jenrette Securities Corporation, CSG, Diamond Acquisition
Corp., and DLJ's directors are named as defendants. The complaint seeks
declaratory and injunctive relief, an unspecified amount of damages, and
costs and expenses, including attorney's fees. Defendants have until
February 28, 2001 to respond to plaintiffs' complaint.
AXA's Purchase of Holding Company Minority Interest
Subsequent to the August 30, 2000 announcement of AXA's proposal to
purchase the outstanding shares of Holding Company Common Stock that it
did not already own, fourteen putative class action lawsuits were
commenced in the Delaware Court of Chancery. The Holding Company, AXA,
and directors and/or officers of the Holding Company are named as
defendants in each of these lawsuits. The various plaintiffs each
purport to represent a class consisting of owners of Holding Company
Common Stock and their successors in interest, excluding the defendants
and any person or entity related to or affiliated with any of the
defendants. They challenge the adequacy of the offer announced by AXA
and allege that the defendants have engaged or will engage in unfair
dealing, overreaching and/or have breached or will breach fiduciary
duties owed to the minority shareholders of the Holding Company. The
complaints seek declaratory and
F-34
injunctive relief, an accounting, and unspecified compensatory damages,
costs and expenses, including attorneys' fees. A similar lawsuit was
filed in the Supreme Court of the State of New York, County of New York,
after the filing of the first Delaware action. In December 2000, the
parties to the Delaware suits reached a tentative agreement for
settlement and executed a Memorandum of Understanding. Shortly
thereafter, agreement was reached with the plaintiff in the New York
suit to stay proceedings in New York and to participate in and be bound
by the terms of the settlement of the Delaware suits. The settlement,
which does not involve any payment by the Holding Company, is subject to
a number of conditions, including confirmatory discovery, the
preparation of definitive documentation and approval by the Delaware
Court of Chancery after a hearing.
Outcome of Litigation
Although the outcome of litigation cannot be predicted with certainty,
particularly in the early stages of an action, the Company's management
believes that the ultimate resolution of the matters described above
should not have a material adverse effect on the consolidated financial
position of the Company. The Company's management cannot make an
estimate of loss, if any, or predict whether or not any such litigation
will have a material adverse effect on the Company's consolidated
results of operations in any particular period.
Other Matters
In addition to the matters described above, the 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.
16) LEASES
The Company has entered into operating leases for office space and
certain other assets, principally information technology equipment and
office furniture and equipment. Future minimum payments under
noncancelable leases for 2001 and the four successive years are $123.9
million, $110.8 million, $101.6 million, $108.5 million, $97.4 million
and $896.5 million thereafter. Minimum future sublease rental income on
these noncancelable leases for 2001 and the four successive years is
$5.2 million, $4.3 million, $5.1 million, $3.3 million, $2.9 million and
$22.0 million thereafter.
At December 31, 2000, the minimum future rental income on non-cancelable
operating leases for wholly owned investments in real estate for 2001
and the four successive years is $95.2 million, $61.4 million, $72.9
million, $66.2 million, $59.2 million and $76.6 million thereafter.
17) INSURANCE GROUP STATUTORY FINANCIAL INFORMATION
Equitable Life is restricted as to the amounts it may pay as dividends
to the Holding Company. Under the New York Insurance Law, the
Superintendent has broad discretion to determine whether the financial
condition of a stock life insurance company would support the payment of
dividends to its shareholders. For 2000, 1999 and 1998, statutory net
income (loss) totaled $1,068.6 million, $547.0 million and $384.4
million, respectively. Statutory surplus, capital stock and Asset
Valuation Reserve ("AVR") totaled $6,226.5 million and $5,570.6 million
at December 31, 2000 and 1999, respectively. In 2000 and 1999,
respectively, $250.0 million and $150.0 million in dividends were paid
to the Holding Company by Equitable Life.
At December 31, 2000, the Insurance Group, in accordance with various
government and state regulations, had $26.4 million of securities
deposited with such government or state agencies.
In 1998, the NAIC adopted the Codification of Statutory Accounting
Principles ("Codification"). Codification provides regulators and
insurers with uniform statutory guidance, addressing areas where
statutory accounting was previously silent and changing certain existing
statutory positions. The New York Insurance Department recently adopted
Regulation 172 concerning Codification, effective January 1, 2001, but
did not adopt several key provisions of Codification, including deferred
income taxes and the establishment of goodwill as an asset. The
application of the codification rules as adopted by New York currently
is estimated to have no significant effect on Equitable Life. The
Insurance Group expects that statutory surplus after adoption will
continue to be in excess of the regulatory risk-based capital
requirements.
F-35
The differences between statutory surplus and capital stock determined
in accordance with Statutory Accounting Principles ("SAP") and total
shareholders' equity under GAAP are primarily: (a) the inclusion in SAP
of an AVR intended to stabilize surplus from fluctuations in the value
of the investment portfolio; (b) future policy benefits and
policyholders' account balances under SAP differ from GAAP due to
differences between actuarial assumptions and reserving methodologies;
(c) certain policy acquisition costs are expensed under SAP but deferred
under GAAP and amortized over future periods to achieve a matching of
revenues and expenses; (d) external and certain internal costs incurred
to obtain or develop internal use computer software during the
application development stage is capitalized under GAAP but expensed
under SAP; (e) Federal income taxes are generally accrued under SAP
based upon revenues and expenses in the Federal income tax return while
under GAAP deferred taxes provide for timing differences between
recognition of revenues and expenses for financial reporting and income
tax purposes; (f) the valuation of assets under SAP and GAAP differ due
to different investment valuation and depreciation methodologies, as
well as the deferral of interest-related realized capital gains and
losses on fixed income investments; and (g) differences in the accrual
methodologies for post-employment and retirement benefit plans.
Accounting practices used to prepare statutory financial statements for
regulatory filings of stock life insurance companies differ in certain
instances from GAAP. The following reconciles the Insurance Group's
statutory change in surplus and capital stock and statutory surplus and
capital stock determined in accordance with accounting practices
prescribed by the New York Insurance Department with net earnings and
equity on a GAAP basis.
2000 1999 1998
----------------- ---------------- -----------------
(IN MILLIONS)
Net change in statutory surplus and
capital stock.................................... $ 1,321.4 $ 848.8 $ 709.2
Change in asset valuation reserves................. (665.5) (6.3) 111.8
----------------- ---------------- -----------------
Net change in statutory surplus, capital stock
and asset valuation reserves..................... 655.9 842.5 821.0
Adjustments:
Future policy benefits and policyholders'
account balances............................... 259.0 (85.0) (189.9)
DAC.............................................. 483.6 263.6 316.5
Deferred Federal income taxes.................... (128.3) (161.4) (67.6)
Valuation of investments......................... (126.2) 23.2 83.6
Valuation of investment subsidiary............... (29.2) (133.6) (419.5)
Limited risk reinsurance......................... - 128.4 83.7
Dividends paid to the Holding
Company........................................ 250.0 150.0 -
Capital contribution............................. - (470.8) -
Postretirement benefits.......................... - - 54.8
Stock option expense related to AXA's minority
Interest acquisition........................... (493.9) - -
Other, net....................................... 443.7 248.2 134.7
GAAP adjustments of Closed Block................. (13.4) (49.8) (27.1)
GAAP adjustments of discontinued
operations..................................... 54.3 51.3 (82.0)
----------------- ---------------- -----------------
Net Earnings of the Insurance Group................ $ 1,355.5 $ 806.6 $ 708.2
================= ================ =================
F-36
DECEMBER 31,
--------------------------------------------------------
2000 1999 1998
----------------- ---------------- -----------------
(IN MILLIONS)
Statutory surplus and capital stock................ $ 5,341.9 $ 4,020.5 $ 3,171.7
Asset valuation reserves........................... 884.6 1,550.1 1,556.4
----------------- ---------------- -----------------
Statutory surplus, capital stock and asset
valuation reserves............................... 6,226.5 5,570.6 4,728.1
Adjustments:
Future policy benefits and policyholders'
account balances............................... (1,363.0) (1,622.0) (1,526.0)
DAC.............................................. 4,429.1 4,033.0 3,563.8
Deferred Federal income taxes.................... (681.9) (283.9) (346.9)
Valuation of investments......................... 99.7 (568.2) 626.9
Valuation of investment subsidiary............... (1,082.9) (1,891.7) (1,758.1)
Limited risk reinsurance......................... - (39.6) (168.0)
Issuance of surplus notes........................ (539.1) (539.1) (539.1)
Postretirement benefits.......................... - - (262.7)
Other, net....................................... 844.1 544.8 313.4
GAAP adjustments of Closed Block................. 677.1 723.6 795.4
GAAP adjustments of discontinued operations...... (164.3) (160.0) (14.2)
----------------- ---------------- -----------------
Equity of the Insurance Group...................... $ 8,445.3 $ 5,767.5 $ 5,412.6
================= ================ =================
18) BUSINESS SEGMENT INFORMATION
The Company's operations consist of Insurance and Investment Services.
The Company's management evaluates the performance of each of these
segments independently and allocates resources based on current and
future requirements of each segment. Management evaluates the
performance of each segment based upon operating results adjusted to
exclude the effect of unusual or non-recurring events and transactions
and certain revenue and expense categories not related to the base
operations of the particular business net of minority interest. AXA's
acquisition of the Company's minority interest shares has resulted in a
change in the measurement of the Company's reportable operating
segments. Discontinued Operations, discontinued by the Company in 1991,
are included in the Life Insurance segment results reported by AXA in
their French GAAP financial statements. To more closely conform the
Company's management reporting to that of its parent, Discontinued
Operations is now reported together with continuing operations in
measuring profits or losses for the Company's Insurance segment. Prior
period amounts have been restated to conform to this presentation.
The Insurance segment offers a variety of traditional, variable and
interest-sensitive life insurance products, disability income, annuity
products, mutual fund and other investment products to individuals and
small groups. It also administers traditional participating group
annuity contracts with conversion features, generally for corporate
qualified pension plans, and association plans which provide full
service retirement programs for individuals affiliated with professional
and trade associations. This segment includes Separate Accounts for
individual insurance and annuity products.
The Investment Services segment includes Alliance and the results of DLJ
which are accounted for on an equity basis. In 1999, Alliance
reorganized into Alliance Capital Management Holding L.P. ("Alliance
Holding") and Alliance (the "Reorganization"). Alliance Holding's
principal asset is its interest in Alliance and it functions as a
holding entity through which holders of its publicly traded units own an
indirect interest in the operating partnership. The Company exchanged
substantially all of its Alliance Holding units for units in Alliance
("Alliance Units"). As a result of the reorganization, the Company was
the beneficial owner of approximately 2% of Alliance Holding and 37% of
Alliance. Alliance provides diversified investment fund management
services to a variety of institutional clients, including pension funds,
endowments, and foreign financial institutions, as well as to individual
investors, principally through a broad line of mutual funds. This
segment includes institutional Separate Accounts which provide various
investment options for large group pension clients, primarily deferred
benefit contribution plans, through pooled or single group accounts.
F-37
Intersegment investment advisory and other fees of approximately $153.2
million, $75.6 million and $61.8 million for 2000, 1999 and 1998,
respectively, are included in total revenues of the Investment Services
segment.
The following tables reconcile segment revenues and adjusted earnings to
consolidated revenues and earnings from continuing operations before
Federal income taxes as reported on the consolidated statements of
earnings and the segments' assets to total assets on the consolidated
balance sheets, respectively.
2000 1999 1998
-------------------- ------------------- ----------------------
(IN MILLIONS)
Segment revenues:
Insurance............................... $ 5,662.4 $ 5,488.8 5,330.2
Investment Services..................... 2,667.7 2,052.7 1,438.4
Consolidation/elimination............... (113.1) (23.8) (5.7)
-------------------- ------------------- ----------------------
Total segment revenues.................. 8,217.0 7,517.7 6,762.9
Loss on CSG shares...................... (43.2) - -
Investment (losses) gains, net of other
charges.............................. (798.4) (112.6) 136.4
Gain on sale of equity investee......... 1,962.0 - -
Closed Block............................ (1,044.9) (1,095.6) (1,144.8)
Discontinued Operations................. (96.3) (85.5) (191.8)
-------------------- ------------------- ----------------------
Total Consolidated Revenues............. $ 8,196.2 $ 6,224.0 $ 5,562.7
==================== =================== ======================
Pre-tax adjusted earnings:
Insurance............................... $ 1,198.9 $ 950.8 $ 656.9
Investment Services..................... 480.6 430.2 287.7
-------------------- ------------------- ----------------------
Total pre-tax adjusted earnings......... 1,679.5 1,381.0 944.6
Loss on CSG shares...................... (43.2) - -
Investment (losses) gains, net of
related DAC and other charges........ (731.9) (109.7) 105.3
Gain on sale of equity investee......... 1,962.0 - -
Amortization of acquisition related
goodwill and intangible assets....... (34.6) (3.2) (3.4)
Minority purchase transaction
related expenses..................... (493.9) - -
Discontinued Operations................. (90.2) (43.3) (4.2)
Pre-tax subsidiary minority interest.... 337.8 216.8 141.5
Non-recurring DAC adjustments........... - (131.7) -
-------------------- ------------------- ----------------------
Earnings from Continuing
Operations before Federal Income
Taxes and Minority Interest......... $ 2,585.5 $ 1,309.9 $ 1,183.8
==================== =================== ======================
Assets:
Insurance............................... $ 88,576.4 $ 86,842.7 $ 75,626.0
Investment Services..................... 16,807.2 12,961.7 12,379.2
Consolidation/elimination............... (57.1) (8.9) (64.4)
-------------------- ------------------- ----------------------
Total Assets............................ $ 105,326.5 $ 99,795.5 $ 87,940.8
==================== =================== ======================
F-38
19) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The quarterly results of operations for 2000 and 1999 are summarized
below:
THREE MONTHS ENDED
------------------------------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
----------------- ----------------- ------------------ ------------------
(IN MILLIONS)
2000
Total Revenues................ $ 1,622.5 $ 1,684.7 $ 1,728.3 $ 3,160.7
================= ================= ================== ==================
Earnings from Continuing
Operations.................. $ 226.6 $ 256.9 $ 70.5 $ 742.9
================= ================= ================== ==================
Net Earnings.................. $ 221.7 $ 255.4 $ 70.5 $ 807.9
================= ================= ================== ==================
1999
Total Revenues................ $ 1,489.0 $ 1,615.6 $ 1,512.1 $ 1,607.3
================= ================= ================== ==================
Earnings from Continuing
Operations.................. $ 187.3 $ 222.6 $ 186.5 $ 182.1
================= ================= ================== ==================
Net Earnings.................. $ 182.0 $ 221.3 $ 183.1 $ 220.2
================= ================= ================== ==================
F-39
20) ACCOUNTING FOR STOCK-BASED COMPENSATION
The Holding Company sponsors a stock incentive plan for employees of
Equitable Life. Alliance sponsors its own stock option plans for certain
employees. The Company has elected to continue to account for
stock-based compensation using the intrinsic value method prescribed in
APB No. 25. Had compensation expense for the Holding Company and
Alliance Stock Option Incentive Plan options been determined based on
SFAS No. 123's fair value based method, the Company's pro forma net
earnings for 2000, 1999 and 1998 would have been $1,627.3 million,
$757.1 million and $678.4 million, respectively.
In conjunction with approval of the agreement for AXA's acquisition of
the minority interest in the Holding Company's Common Stock, generally
all outstanding options awarded under the 1997 and 1991 Stock Incentive
Plans were amended to become immediately and fully exercisable pursuant
to their terms upon expiration of the initial tender offer. In addition,
the agreement provided that at the effective time of the merger, the
terms of all outstanding options granted under those Plans would be
further amended and converted into options of equivalent intrinsic value
to acquire a number of AXA ordinary shares in the form of American
Depository Shares (ADSs). Also pursuant to the agreement, holders of
non-qualified options were provided with an alternative to elect
cancellation of those options at the effective time of the merger in
exchange for a cash payment from the Holding Company. For the year ended
December 31, 2000, the Company recognized compensation expense of $493.9
million, representing the cost of these Plan amendments and
modifications offset by an addition to capital in excess of par value.
The fair values of options granted after December 31, 1994, used as a
basis for the pro forma disclosures above, were estimated as of the
grant dates using the Black-Scholes option pricing model. The option
pricing assumptions for 2000, 1999 and 1998 follow:
HOLDING COMPANY ALLIANCE
----------------------------------------- -------------------------------
2000 1999 1998 2000 1999 1998
------------- ------------- ------------ --------------------- ---------
Dividend yield.... 0.32% 0.31% 0.32% 7.20% 8.70% 6.50%
Expected
volatility...... 28% 28% 28% 30% 29% 29%
Risk-free interest
rate............ 6.24% 5.46% 5.48% 5.90% 5.70% 4.40%
Expected life
in years........ 5 5 5 7.4 7 7.2
Weighted average
fair value per
option at
grant-date...... $11.08 $10.78 $11.32 $8.32 $3.88 $3.86
F-40
A summary of the Holding Company and Alliance's option plans follows:
HOLDING COMPANY ALLIANCE
----------------------------- -----------------------------------
Weighted Weighted
Average Average
Exercise Exercise
Price of Price of
Shares Options Units Options
(In Millions) Outstanding (In Millions) Outstanding
------------- ----------- ------------- -----------
Balance as of
January 1, 1998........ 15.8 $14.53 10.6 $11.41
Granted................ 8.6 $33.13 2.8 $26.28
Exercised.............. (2.2) $10.59 (.9) $ 8.91
Forfeited.............. (.8) $23.51 (.2) $13.14
--------------- ----------------
Balance as of
December 31, 1998...... 21.4 $22.00 12.3 $14.92
Granted................ 4.3 $31.70 2.0 $30.18
Exercised.............. (2.4) $13.26 (1.5) $ 9.51
Forfeited.............. (.6) $24.29 (.3) $17.79
--------------- ----------------
Balance as of
December 31, 1999...... 22.7 $24.60 12.5 $17.95
Granted................ 6.5 $31.06 4.7 $50.93
Exercised.............. (4.5) $18.57 (1.7) $10.90
Forfeited.............. (1.2) $26.15 (.1) $26.62
--------------- ----------------
Balance as of
December 31, 2000...... 23.5 $27.20 15.4 $17.95
=============== ================
Information about options outstanding and exercisable at December 31,
2000 follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------------- -------------------------------------
Weighted
Average Weighted Weighted
Range of Number Remaining Average Number Average
Exercise Outstanding Contractual Exercise Exercisable Exercise
Prices (In Millions) Life (Years) Price (In Millions) Price
--------------------------------------- ---------------- --------------- ------------------ ----------------
Holding
Company
----------------------
$ 9.06 -$13.88 3.4 3.3 $10.58 22.7 $27.14
$14.25 -$22.63 3.9 6.7 $20.81 - -
$25.32 -$34.59 13.0 8.4 $29.76 - -
$40.97 -$41.28 3.2 7.6 $41.28 - -
$52.25 -$52.25 .1 9.7 $52.25 - -
----------------- ------------------
$ 9.06 -$41.28 23.5 7.3 $27.20 22.7 $27.14
================= ================ =============== ================== ================
Alliance
----------------------
$ 6.63 -$11.13 3.6 3.6 $ 9.60 3.6 $ 9.60
$12.44 -$26.31 5.2 7.3 $21.29 2.6 $19.85
$27.31 -$30.94 1.9 8.9 $30.24 .4 $30.24
$48.50 -$53.75 2.5 9.5 $48.50 - -
$48.50 -$53.75 2.2 10.0 $53.75 - -
----------------- ------------------
$ 6.63 -$53.75 15.4 7.4 $28.73 6.6 $14.87
================= ================ =============== ================== ================
F-41
21) RELATED PARTY TRANSACTIONS
Beginning January 1, 2000, the Company reimbursed 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 $16.0 million for
2000. Also in 2000, the Company paid $678.9 million of commissions and
fees to AXA Distribution and its subsidiaries for sales of insurance
products in 2000. The Company charged AXA Distribution's subsidiaries
$395.0 million for their applicable share of operating expenses in 2000
pursuant to the Agreements for Services.
22) PRO FORMA FINANCIAL INFORMATION (UNAUDITED)
Assuming the Bernstein acquisition had occurred on January 1, 1999,
revenues for the Company would have been $8.79 billion and $7.05 billion
for 2000 and 1999, respectively, on a pro forma basis. The impact of the
acquisition on net earnings on a pro-forma basis would not have been
material.
This pro forma financial information does not necessarily reflect the
results of operations that would have resulted had the Bernstein
acquisition actually occurred on January 1, 1999, nor is the pro forma
financial information necessarily indicative of the results of
operations that may be achieved for any future period.
F-42
Report of Independent Accountants on
Consolidated Financial Statement Schedules
To the Board of Directors of
The Equitable Life Assurance Society of the United States
Our audits of the consolidated financial statements referred to in our report
dated February 5, 2001 appearing on page F-1 of this Annual Report on Form 10-K
also included an audit of the consolidated financial statement schedules listed
in Item 14.(A)2 of this Form 10-K. In our opinion, these consolidated financial
statement schedules present fairly, in all material respects, the information
set forth therein when read in conjunction with the related consolidated
financial statements.
/s/PricewaterhouseCoopers LLP
New York, New York
February 5, 2001
F-43
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
SCHEDULE I
SUMMARY OF INVESTMENTS - OTHER THAN INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 2000
Estimated Carrying
Type of Investment Cost (A) Fair Value Value
- ------------------ ----------------- ---------------- ---------------
(In Millions)
Fixed maturities:
U.S. government, agencies and authorities................. $ 938.1 $ 977.8 $ 977.8
State, municipalities and political subdivisions.......... 110.4 113.9 113.9
Foreign governments....................................... 177.4 189.5 189.5
Public utilities.......................................... 1,220.0 1,242.8 1,242.8
All other corporate bonds................................. 13,680.7 13,617.8 13,611.9
Redeemable preferred stocks............................... 315.5 320.1 320.1
----------------- ---------------- ---------------
Total fixed maturities.................................... 16,442.1 16,461.9 16,456.0
----------------- ---------------- ---------------
Equity securities:
Common stocks:
Industrial, miscellaneous and all other............... 1,628.3 1,580.9 1,580.9
Mortgage loans on real estate............................. 3,130.8 3,184.4 3,130.8
Real estate............................................... 472.1 xxx 472.1
Real estate acquired in satisfaction of debt.............. 322.3 xxx 322.3
Real estate joint ventures................................ 181.1 xxx 181.1
Policy loans.............................................. 2,476.9 2,622.4 2,476.9
Other limited partnership interests....................... 811.9 811.9 811.9
Other invested assets..................................... 762.5 762.5 762.5
----------------- ---------------- ---------------
Total Investments......................................... $ 26,228.0 $ 25,424.0 $ 26,194.5
================= ================ ===============
(A) Cost for fixed maturities represents original cost, reduced by repayments
and writedowns and adjusted for amortization of premiums or accretion of
discount; for equity securities, cost represents original cost reduced by
writedowns; for other limited partnership interests, cost represents
original cost adjusted for equity in earnings and distributions.
F-44
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
SCHEDULE II
BALANCE SHEETS (PARENT COMPANY)
DECEMBER 31, 2000 AND 1999
2000 1999
----------------- -----------------
(In Millions)
ASSETS
Investment:
Fixed maturities:
Available for sale, at estimated fair value (amortized cost of
$15,995.2 and $19,111.3, respectively)................................ $ 16,008.0 $ 18,345.8
Held to maturity, at amortized cost..................................... 204.6 133.2
Mortgage loans on real estate............................................. 3,130.8 3,270.0
Equity real estate........................................................ 1,105.2 1,280.7
Policy loans.............................................................. 2,267.1 2,054.8
Investments in and loans to affiliates.................................... 1,827.1 1,400.7
Other equity investments.................................................. 835.0 670.9
Other invested assets..................................................... 357.5 741.7
----------------- -----------------
Total investments..................................................... 25,735.3 27,897.8
Cash and cash equivalents................................................... 1,670.7 495.7
Deferred policy acquisition costs........................................... 4,372.3 3,977.4
Other assets................................................................ 3,809.9 1,737.2
Closed Block assets......................................................... 8,659.0 8,607.3
Separate Accounts assets.................................................... 51,705.9 54,453.9
----------------- -----------------
Total Assets................................................................ $ 95,953.1 $ 97,169.3
================= =================
LIABILITIES
Policyholders' account balances............................................. $ 19,490.5 $ 20,974.4
Future policy benefits and other policyholders liabilities.................. 4,854.4 4,714.4
Short-term and long-term debt............................................... 847.9 1,014.8
Federal income taxes payable................................................ 654.5 477.0
Other liabilities........................................................... 978.2 863.7
Closed Block liabilities.................................................... 9,050.2 9,025.0
Separate Accounts liabilities............................................... 51,632.1 54,332.5
----------------- -----------------
Total liabilities..................................................... 87,507.8 91,401.8
----------------- -----------------
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.............................................. 4,723.8 3,557.2
Retained earnings........................................................... 3,706.2 2,600.7
Accumulated other comprehensive income (loss)............................... 12.8 (392.9)
----------------- -----------------
Total shareholder's equity............................................ 8,445.3 5,767.5
----------------- -----------------
Total Liabilities and Shareholder's Equity.................................. $ 95,953.1 $ 97,169.3
================= =================
The financial information of The Equitable Life Assurance Society of the United
States (Parent Company) should be read in conjunction with the Consolidated
Financial Statements and Notes thereto. For information regarding capital in
excess of par value refer to Note 1 of Notes to Consolidated Financial
Statements.
F-45
Effective December 31, 1999, the Holding Company assumed primary liability from
Equitable Life for all current and future obligations of its Excess Retirement
Plan, Supplemental Executive Retirement Plan and certain other employee benefit
plans that provide participants with medical, life insurance and deferred
compensation benefits; Equitable Life remains secondarily liable. The amount of
liability associated with employee benefits assumed was $676.5 million,
including $183.0 million of non-qualified pension benefit obligations and $394.1
million of postretirement benefit obligations at December 31, 1999. In addition,
Equitable Life transferred to the Holding Company the deferred tax assets
totaling $236.8 million related to the assumed employee benefit plans.
F-46
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
SCHEDULE II
STATEMENTS OF EARNINGS (PARENT COMPANY)
YEARS ENDED DECEMBER 31, 2000, 1999, 1998
2000 1999 1998
----------------- ----------------- ---------------
(In Millions)
REVENUES
Universal life and investment-type product policy fee
income........................................................ $ 1,409.7 $ 1,252.5 $ 1,051.3
Premiums........................................................ 568.8 549.5 577.1
Net investment income........................................... 2,103.0 2,180.6 2,111.5
Investment (losses) gains, net.................................. (798.5) (223.9) 15.7
Equity in earnings of subsidiaries ............................. 1,409.9 411.2 269.7
Commissions, fees and other income.............................. 127.8 82.6 35.4
Contribution from the Closed Block.............................. 92.7 86.4 87.1
----------------- ----------------- ---------------
Total revenues............................................ 4,913.4 4,338.9 4,147.8
----------------- ----------------- ---------------
BENEFITS AND OTHER DEDUCTIONS
Interest credited to policyholders' account balances............ 1,010.8 1,056.1 1,122.6
Policyholders' benefits......................................... 1,043.5 1,029.1 1,014.5
Compensation and benefits....................................... 412.1 508.4 433.4
Commissions..................................................... 782.8 522.3 464.8
Interest Expense................................................ 89.6 77.6 91.5
Amortization of deferred policy acquisition costs............... 290.5 310.9 287.6
Capitalization of deferred policy acquisition costs............. (772.4) (704.3) (598.6)
Writedown of deferred policy acquisition costs.................. - 131.7 -
Rent expense.................................................... 85.7 70.4 65.7
Expenses related to AXA's minority interest acquisition
of the Holding Company....................................... 493.9 - -
Other operating costs and expenses.............................. 192.2 348.3 311.5
----------------- ----------------- ---------------
Total benefits and other deductions....................... 3,628.7 3,350.5 3,193.0
----------------- ----------------- ---------------
Earnings from continuing operations before Federal income
taxes......................................................... 1,284.7 988.4 954.8
Federal income tax benefit (expense)............................ 12.2 (209.9) (249.3)
----------------- ----------------- ---------------
Earnings from continuing operations............................. 1,296.9 778.5 705.5
Earnings from discontinued operations, net of Federal
income taxes................................................. 58.6 28.1 2.7
----------------- ----------------- ---------------
Net Earnings.................................................... $ 1,355.5 $ 806.6 $ 708.2
================= ================= ===============
F-47
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
SCHEDULE II
STATEMENTS OF CASH FLOWS (PARENT COMPANY)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
2000 1999 1998
----------------- ----------------- ----------------
(In Millions)
Net earnings.................................................... $ 1,355.5 $ 806.6 $ 708.2
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Interest credited to policyholders' account balances.......... 1,010.8 1,056.1 1,122.6
Universal life and investment-type policy fee income.......... (1,409.7) (1,252.5) (1,051.3)
Investment losses (gains), net................................ 798.5 223.9 (15.7)
Equity in net earnings of subsidiaries........................ (1,409.9) (411.2) (269.7)
Dividends from subsidiaries................................... 1,717.3 155.3 120.3
Change in deferred policy acquisition costs................... (475.2) (258.8) (308.6)
Change in future policy benefits and other policyholder
funds....................................................... (870.7) 61.7 81.6
Other, net.................................................... (758.5) (53.6) 5.2
----------------- ----------------- ----------------
Net cash (used) provided by operating activities................ (41.9) 327.5 392.6
----------------- ----------------- ----------------
Cash flows from investing activities:
Maturities and repayments..................................... 2,058.3 1,997.8 2,250.6
Sales......................................................... 7,752.2 7,494.2 16,883.8
Purchases..................................................... (7,216.7) (10,640.0) (18,347.2)
(Decrease) increase in loans to discontinued operations....... - (28.1) 660.0
Decrease (increase) in short-term investments................. 382.4 (100.3) 18.3
Increase in policy loans...................................... (212.1) (160.6) (153.7)
Other, net.................................................... 27.5 (142.0) (104.2)
----------------- ----------------- ----------------
Net cash provided (used) by investing activities................ 2,791.6 (1,579.0) 1,207.6
----------------- ----------------- ----------------
Cash flows from financing activities:
Policyholders' account balances:
Deposits.................................................... 2,693.5 2,405.7 1,535.1
Withdrawals and transfers to Separate Accounts.............. (3,852.3) (1,753.1) (1,713.5)
Net (decrease) increase in short-term financings.............. (167.6) 167.6 (351.1)
Repayments of long-term debt.................................. - (30.5) (16.7)
Payment of obligation to fund accumulated deficit of
discontinued operations..................................... - - (87.2)
Dividends paid to AXA Financial............................... (250.0) (150.0) -
Other, net.................................................... 1.7 .1 12.7
----------------- ----------------- ----------------
Net cash provided (used) by financing activities................ (1,574.7) 639.8 (620.7)
----------------- ----------------- ----------------
Change in cash and cash equivalents............................. 1,175.0 (611.7) 979.5
Cash and cash equivalents, beginning of year.................... 495.7 1,107.4 127.9
----------------- ----------------- ----------------
Cash and Cash Equivalents, End of Year.......................... $ 1,670.7 $ 495.7 $ 1,107.4
================= ================= ================
Supplemental cash flow information
Interest Paid................................................. $ 97.0 $ 92.2 $ 130.7
================= ================= ================
Income Taxes Paid............................................. $ 358.2 $ 116.5 $ 254.3
================= ================= ================
F-48
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
SCHEDULE III
SUPPLEMENTARY INSURANCE INFORMATION
AT AND FOR THE YEAR ENDED DECEMBER 31, 2000
Future Policy Policy Amortization
Deferred Benefits Charges (1) Policyholders' of Deferred (2)
Policy Policyholders' and Other and Net Benefits and Policy Other
Acquisition Account Policyholders' Premium Investment Interest Acquisition Operating
Segment Costs Balance Funds Revenue Income Credited Cost Expense
- -------------------- ----------- -------------- -------------- ---------- ----------- ------------- ------------- -----------
(In Millions)
Insurance.......... $ 4,429.1 $ 19,866.4 $ 4,920.4 $ 1,993.2 $ 2,074.4 $ 2,083.6 $ 294.5 $ 1,451.3
Investment
Services......... - - - - 67.5 - - 1,894.4
Consolidation/
Elimination...... - - - - 31.3 - - (113.1)
----------- -------------- -------------- ---------- ----------- ------------- ------------- -----------
Total.............. $ 4,429.1 $ 19,866.4 $ 4,920.4 $ 1,993.2 $ 2,173.2 $ 2,083.6 $ 294.5 $ 3,232.6
=========== ============== ============== ========== =========== ============= ============= ===========
(1) Net investment income is based upon specific identification of portfolios
within segments.
(2) Operating expenses are principally incurred directly by a segment.
F-49
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
SCHEDULE III
SUPPLEMENTARY INSURANCE INFORMATION
AT AND FOR THE YEAR ENDED DECEMBER 31, 1999
Future Policy Policy Amortization
Deferred Benefits Charges (1) Policyholders' of Deferred (2)
Policy Policyholders' and Other and Net Benefits and Policy Other
Acquisition Account Policyholders' Premium Investment Interest Acquisition Operating
Segment Costs Balance Funds Revenue Income Credited Cost Expense
- -------------------- ----------- -------------- -------------- ---------- ----------- -------------- ------------- -----------
(In Millions)
Insurance........... $ 4,033.0 $ 21,351.4 $ 4,777.6 $ 1,815.7 $ 2,176.2 $ 2,116.8 $ 446.2 $ 965.0
Investment
Services.......... - - - - 12.9 - - 1,409.9
Consolidation/
Elimination....... - - - - 51.8 - - (23.8)
----------- -------------- -------------- ---------- ----------- -------------- ------------- -----------
Total............... $ 4,033.0 $ 21,351.4 $ 4,777.6 $ 1,815.7 $ 2,240.9 $ 2,116.8 $ 446.2 $ 2,351.1
=========== ============== ============== ========== =========== ============== ============= ===========
(1) Net investment income is based upon specific identification of portfolios
within segments.
(2) Operating expenses are principally incurred directly by a segment.
F-50
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
SCHEDULE III
SUPPLEMENTARY INSURANCE INFORMATION
FOR THE YEAR ENDED DECEMBER 31, 1998
Policy Amortization
Charges (1) Policyholders' of Deferred (2)
and Net Benefits and Policy Other
Premium Investment Interest Acquisition Operating
Segment Revenue Income Credited Cost Expense
- ------------------------------------------------- ----------- ------------ --------------- ------------- ------------
(In Millions)
Insurance........................................ $ 1,644.3 $ 2,162.4 $ 2,177.6 $ 292.7 $ 894.0
Investment
Services....................................... - 12.2 .1 - 1,020.2
Consolidation/
Elimination.................................... - 53.5 - - (5.7)
----------- ------------ --------------- ------------- ------------
Total............................................ $ 1,644.3 $ 2,228.1 $ 2,177.7 $ 292.7 $ 1,908.5
=========== ============ =============== ============= ============
(1) Net investment income is based upon specific identification of portfolios
within segments.
(2) Operating expenses are principally incurred directly by a segment.
F-51
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
SCHEDULE IV
REINSURANCE (A)
AT AND FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
Assumed Percentage
Ceded to from of Amount
Gross Other Other Net Assumed
Amount Companies Companies Amount to Net
----------------- ---------------- ----------------- ----------------- ---------------
(Dollars In Millions)
2000
Life Insurance In Force(B)... $ 260,762.0 $ 54,418.0 $ 42,588.0 $ 248,932.0 17.11%
================= ================ ================= =================
Premiums:
Life insurance and
annuities.................. $ 344.4 $ 52.9 $ 130.8 $ 422.3 30.97%
Accident and health.......... 164.6 70.4 63.4 157.6 40.23%
----------------- ---------------- ----------------- -----------------
Total Premiums............... $ 509.0 $ 123.3 $ 194.2 $ 579.9 33.49%
================= ================ ================= =================
1999
Life Insurance In Force(B)... $ 256,231.0 $ 40,892.0 $ 44,725.0 $ 260,064.0 17.2%
================= ================ ================= =================
Premiums:
Life insurance and
annuities.................. $ 247.9 $ 42.6 $ 131.9 $ 337.2 39.12%
Accident and health.......... 172.8 26.6 74.8 221.0 33.85%
----------------- ---------------- ----------------- -----------------
Total Premiums............... $ 420.7 $ 69.2 $ 206.7 $ 558.2 37.03%
================= ================ ================= =================
1998
Life Insurance In Force(B)... $ 246,910.0 $ 34,471.0 $ 47,957.0 $ 260,396.0 18.42%
================= ================ ================= =================
Premiums:
Life insurance and
annuities.................. $ 254.6 $ 30.2 $ 122.7 $ 347.1 35.35%
Accident and health.......... 185.5 25.4 80.9 241.0 33.57%
----------------- ---------------- ----------------- -----------------
Total Premiums............... $ 440.1 $ 55.6 $ 203.6 $ 588.1 34.62%
================= ================ ================= =================
(A) Includes amounts related to the discontinued group life and health business.
(B) Includes in force business related to the Closed Block.
F-52
Part II, Item 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
9-1
Part III, Item 10.
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Omitted pursuant to General Instruction I to Form 10-K.
10-1
Part III, Item 11.
EXECUTIVE COMPENSATION
Omitted pursuant to General Instruction I to Form 10-K.
11-1
Part III, Item 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Omitted pursuant to General Instruction I to Form 10-K.
12-1
Part III, Item 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Omitted pursuant to General Instruction I to Form 10-K.
13-1
Part IV, Item 14.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K
(A) The following documents are filed as part of this report:
1. Financial Statements
The financial statements are listed in the Index to Consolidated
Financial Statements and Schedules on page FS-1.
2. Consolidated Financial Statement Schedules
The consolidated financial statement schedules are listed in the Index
to Consolidated Financial Statements and Schedules on page FS-1.
3. Exhibits:
The exhibits are listed in the Index to Exhibits which begins on page
E-1.
(B) Reports on Form 8-K
On November 17, 2000 Equitable Life filed a Current Report on Form 8-K
relating to its sale of the common stock of Donaldson, Lufkin &
Jenrette, Inc.
14-1
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: March 30, 2001 THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE
UNITED STATES
By:
/s/Edward D. Miller
----------------------------------------
Name: Edward D. Miller
Chairman of the Board and
Chief Executive Officer, Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Chairman of the Board and Chief March 30, 2001
/s/Edward D. Miller Executive
- ------------------------------------ Officer, Director
Edward D. Miller
/s/Michael Hegarty President and March 30, 2001
- ------------------------------------ Chief Operating Officer, Director
Michael Hegarty
/s/Stanley B. Tulin Vice Chairman of the Board and March 30, 2001
- ------------------------------------ Chief Financial Officer, Director
Stanley B. Tulin
/s/Alvin H. Fenichel Senior Vice President and Controller March 30, 2001
- ------------------------------------
Alvin H. Fenichel
/s/Henri de Castries Director March 30, 2001
- ------------------------------------
Henri de Castries
/s/Francoise Colloc'h Director March 30, 2001
- ------------------------------------
Francoise Colloc'h
/s/Claus-Michael Dill Director March 20, 2001
- ------------------------------------
Claus-Michael Dill
/s/Joseph L. Dionne Director March 30, 2001
- ------------------------------------
Joseph L. Dionne
/s/Denis Duverne Director March 30, 2001
- ------------------------------------
Denis Duverne
/s/Jean-Rene Fourtou Director March 30, 2001
- ------------------------------------
Jean-Rene Fourtou
/s/Norman C. Francis Director March 20, 2001
- ------------------------------------
Norman C. Francis
/s/Donald J. Greene Director March 23, 2001
- ------------------------------------
Donald J. Greene
S-1
/s/John T. Hartley Director March 30, 2001
- ------------------------------------
John T. Hartley
/s/John H. F. Haskell, Jr. Director March 20, 2001
- ------------------------------------
John H. F. Haskell, Jr.
/s/Nina Henderson Director March 30, 2001
- ------------------------------------
Nina Henderson
/s/W. Edwin Jarmain Director March 21, 2001
- ------------------------------------
W. Edwin Jarmain
/s/George T. Lowy Director March 19, 2001
- ------------------------------------
George T. Lowy
/s/Didier Pineau-Valencienne Director March 19, 2001
- ------------------------------------
Didier Pineau-Valencienne
/s/George J. Sella, Jr. Director March 30, 2001
- ------------------------------------
George J. Sella, Jr.
/s/Peter J. Tobin Director March 30, 2001
- ------------------------------------
Peter J. Tobin
/s/Dave H. Williams Director March 19, 2001
- ------------------------------------
Dave H. Williams
S-2
INDEX TO EXHIBITS
Tag
Number Description Method of Filing Value
- ---------- ----------------------------------------- --------------------------------------------- ----------
2.1 Stock Purchase Agreement dated as of Filed as Exhibit 2.1 to the Holding
August 30, 2000 among CSG, AXA, Company's Current Report on Form 8-K
Equitable Life, AXA Participations dated November 14, 2000 and incorporated
Belgium and the Holding Company herein by reference
2.2 Letter Agreement dated as of October 6, Filed as Exhibit 2.2 to the Holding
2000 to the Stock Purchase Agreement Company's Current Report on Form 8-K
among CSG, AXA, Equitable Life, AXA dated November 14, 2000 and incorporated
Participations Belgium and the Holding herein by reference
Company
3.1 Restated Charter of Equitable Life, as Filed as Exhibit 3.1(a) to registrant's
amended January 1, 1997 annual report on Form 10-K for the year
ended December 31, 1996 and incorporated
herein by reference
3.2 Restated By-laws of Equitable Life, as Filed as Exhibit 3.2(a) to registrant's
amended November 21, 1996 annual report on Form 10-K for the year
ended December 31, 1996 and incorporated
herein by reference
10.1 Cooperation Agreement, dated as of July Filed as Exhibit 10(d) to the Holding
18, 1991, as amended among Equitable Company's Form S-1 Registration Statement
Life, the Holding Company and AXA (No. 33-48115), dated May 26, 1992 and
incorporated herein by reference
10.2 Letter Agreement, dated May12, 1992, Filed as Exhibit 10(e) to the Holding
among the Holding Company, Equitable Company's Form S-1 Registration Statement
Life and AXA (No. 33-48115), dated May 26, 1992 and
incorporated herein by reference
10.3 Amended and Restated Reinsurance Filed as Exhibit 10(o) to the Holding
Agreement, dated as of March 29, 1990, Company's Form S-1 Registration Statement
between Equitable Life and First (No. 33-48115), dated May 26, 1992 and
Equicor Life Insurance Company incorporated herein by reference
10.4 Fiscal Agency Agreement between Filed as Exhibit 10.5 to registrant's
Equitable Life and The Chase Manhattan annual report on Form 10-K for the year
Bank, N.A. ended December 31, 1995 and incorporated
herein by reference
10.5(a) Lease, dated as of July 20, 1995, Filed as Exhibit 10.26(a) to the Holding
between 1290 Associates and Equitable Company's annual report on Form 10-K for
Life the year ended December 31, 1996 and
incorporated herein by reference
10.5(b) First Amendment of Lease Agreement, Filed as Exhibit 10.26(b) to the Holding
dated as of December 28, 1995, between Company's annual report on Form 10-K for
1290 Associates, L.L.C. and Equitable the year ended December 31, 1996 and
Life incorporated herein by reference
E-1
Tag
Number Description Method of Filing Value
- ---------- ----------------------------------------- --------------------------------------------- ----------
10.5(c) Amended and Restated Company Lease Filed as Exhibit 10.26(c) to the Holding
Agreement (Facility Realty), made as of Company's annual report on Form 10-K for
May 1, 1996, by and between Equitable the year ended December 31, 1996
and Life and the IDA incorporated herein by reference
10.5(d) Amended and Restated Company Lease Filed as Exhibit 10.26(d) to the Holding
Agreement (Project Property), made and Company's annual report on Form 10-K for
entered into as of May 1, 1996, by and the year ended December 31, 1996 and
and between the IDA, Equitable Life incorporated herein by reference
EVLICO
10.6 Distribution and Servicing Agreement Filed as Exhibit 10.7 to the registrant's
between AXA Advisors (as successor to annual report on Form 10-K for the year
Equico Securities, Inc.) and Equitable ended December 31, 1999 and incorporated
Life dated as of May 1, 1994 herein by reference
10.7 Agreement for Cooperative and Joint Use Filed as Exhibit 10.8 to the registrant's
of Personnel, Property and Services annual report on Form 10-K for the year
between Equitable Life and AXA Advisors ended December 31, 1999 and incorporated
dated as of September 21, 1999 herein by reference
10.8 General Agent Sales Agreement between Filed as Exhibit 10.9 to the registrant's
Equitable Life and AXA Network, LLC annual report on Form 10-K for the year
dated as of January 1, 2000 ended December 31, 1999 and incorporated
herein by reference
10.9 Agreement for Services by Equitable Filed as Exhibit 10.10 to the registrant's
Life to AXA Network dated as of January annual report on Form 10-K for the year
1, 2000 ended December 31, 1999 and incorporated
herein by reference
21 Subsidiaries of the registrant Omitted pursuant to General Instruction I
of Form 10-K
E-2