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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, 2002
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]
Indicted by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes [ ] No [X]
No voting or non-voting common equity of the registrant is held by
non-affiliates of the registrant as of March 27, 2003.
As of March 27, 2003, 2,000,000 shares of the registrant's Common Stock were
outstanding.
REDUCED DISCLOSURE FORMAT:
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.
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TABLE OF CONTENTS
Part I Page
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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...................................................................... 1-7
Parent Company.................................................................. 1-9
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 Stockholder 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
Item 14. Controls and Procedures......................................................... 14-1
Part IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K................. 15-1
Signatures ................................................................................ S-1
Certifications ................................................................................ C-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 approximately
three million policy and contractholders as of December 31, 2002. Equitable
Life, through its ownership of an approximate 42.8% economic interest in
Alliance and its affiliation with THE HOLDING COMPANY, AXA Advisors, AXA
Distributors 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 $415.31 billion at
December 31, 2002. Equitable Life's insurance business, conducted principally by
Equitable Life and its subsidiaries, EOC and AXA Distributors, is reported in
the Insurance segment. The investment management business conducted by Alliance
Capital Management L.P., a Delaware limited partnership, and its subsidiaries
("Alliance"), is reported in the Investment Services segment. Alliance is a
leading global investment management firm. For additional information on
Equitable Life's business segments, see "Results Of Continuing Operations By
Segment" included in the management narrative ("Management Narrative") provided
in lieu of "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and Note 19 of Notes to Consolidated Financial
Statements. 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, as amended (the "Exchange
Act"), and files annual reports on Form 20-F. For additional information
regarding AXA, see "Parent Company".
RECENT EVENTS
In 2001, AXA's management announced, in view of the decline in financial markets
and challenging overall economic environment, the implementation of a global
cost reduction program aimed at reducing administrative expenses by 10%
groupwide. In the United States in 2001, 2002 and early 2003, AXA Financial
reduced staff levels and other overhead costs and reorganized its field
operations from 18 regions to six divisions. These measures are designed to
reduce costs and achieve greater efficiencies.
The Company's losses, incurred in 2001, for insurance claims arising in
connection with the September 11, 2001 terrorist attacks were approximately
$14.2 million after reinsurance coverages, DAC amortization and taxes. These
terrorist attacks and the responsive actions have significantly adversely
affected general economic, market and political conditions. For additional
information, see "General Account Investment Portfolio".
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. As a result, as of December 31, 2000, AXA
and its subsidiaries owned approximately 92.4% of the issued and outstanding
Holding Company shares. AXA and its subsidiaries acquired the remaining issued
and outstanding Holding Company shares as of January 2, 2001, resulting in the
Holding Company becoming a wholly owned subsidiary of AXA.
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(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 affiliates
engaged in insurance-related businesses, including The Equitable of Colorado,
Inc. ("EOC") and AXA Distributors, LLC and its subsidiaries, successor to
Equitable Distributors, Inc. (collectively, "AXA Distributors"). The term
"Financial Advisory/Insurance Group" refers collectively to Equitable Life, EOC,
AXA Distributors, 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
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") for $2.29 billion in cash and $4.86 billion (or 25.2 million shares) in
CSG common stock. By January 26, 2001, the Company had disposed of all of the
CSG common stock acquired in the transaction. For additional information about
the DLJ sale, see "Management Narrative -- General" and Notes 1 and 5 of Notes
to the Consolidated Financial Statements.
In October 2000, Alliance acquired (the "Bernstein Acquisition") the business
and assets and assumed the liabilities of SCB Inc., formerly known as Sanford C.
Bernstein, Inc. ("Bernstein"), for an aggregate value of $3.50 billion ($1.48
billion in cash and 40.8 million newly issued units representing assignments of
beneficial ownership of limited partnership interests of Alliance ("Alliance
Units")). In November 2002, pursuant to Bernstein and SCB Partners Inc.'s
exercise of their rights to sell Alliance Units to AXA Financial or an entity
designated by AXA Financial, an indirectly wholly owned subsidiary of AXA
Financial purchased 8.16 million Alliance Units at a purchase price of
approximately $250 million. At December 31, 2002, AXA Financial's consolidated
economic interest in Alliance is approximately 55.7% after giving effect to
consummation of the Bernstein Acquisition and the November 2002 acquisition of
Alliance Units, and also includes the 42.8% held by the Company. For additional
information about the Bernstein Acquisition and the November 2002 acquisition,
see "Management Narrative -- General" and Note 1 of Notes to Consolidated
Financial Statements.
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. The Insurance segment, which includes
Separate Accounts for individual and group insurance and annuity products,
accounted for approximately $4.67 billion (or 63.6% of total revenues, after
intersegment eliminations) for the year ended December 31, 2002.
Insurance segment products are offered on a retail basis in all 50 states, the
District of Columbia, Puerto Rico and the U.S. Virgin Islands by AXA Advisors, a
broker-dealer, and AXA Network, an insurance general agency, through a retail
sales force of approximately 7,100 financial professionals. In addition, AXA
Distributors, a broker-dealer subsidiary of Equitable Life, distributes
Equitable Life products on a wholesale basis in all 50 states, the District of
Columbia, Puerto Rico and the U.S. Virgin Islands through major securities
firms, other broker-dealers and banks. Association and corporate pension plans
are marketed directly to clients by the Insurance Group. For additional
information on this segment, see "Management Narrative - Results Of Continuing
Operations By Segment- Insurance", Note 19 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. The Insurance Group is among the
country's leading issuers of variable life insurance and variable annuity
products. In 2002, individual variable and interest-sensitive life insurance
policies and variable annuity contracts accounted for 15.9% and 66.0%,
respectively of total premiums and deposits of life insurance and 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 a
series of individual variable deferred annuities, and the Momentum(sm) series of
group annuities for the employer retirement plan market. Individual variable
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, which may include an extra-credit to the initial account
value, dollar cost averaging programs, enhanced death benefits and a guaranteed
minimum income benefit. In addition, in April 2002, Equitable Life introduced a
new Accumulator(sm) series of annuities that offer a menu of various contract
features that may be selected by customers.
1-2
Equitable Life also offers individual single premium deferred annuities
including Guaranteed Growth Annuity, introduced in September 2001, which credit
an initial and subsequent annually declared interest rates, and payout annuity
products, including traditional immediate annuities and variable immediate
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.
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 upon
surrender). Over the past five years, Separate Account assets for individual
variable life and variable annuities have increased by $7.86 billion to $32.36
billion at December 31, 2002 (although, these assets declined from $39.66
billion at December 2001), including approximately $29.42 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, 2002, EQAT had 34 investment
portfolios. Alliance, including its Bernstein Investment Research and Management
unit, provides the day-to-day advisory services to 11 investment portfolios and
three allocated portions of multi-advised portfolios of EQAT, representing 70.6%
of the assets in EQAT. The other 23 investment portfolios and allocated portions
of multi-advised investment portfolios are advised by unaffiliated investment
advisors.
Equitable Life also issues certain variable annuity products that contain a
guaranteed minimum income benefit ("GMIB") feature and/or a guaranteed minimum
death benefit ("GMDB") feature. The GMIB feature, if elected by the policyholder
after a stipulated waiting period from contract issuance, guarantees a minimum
lifetime annuity based on predetermined annuity purchase rates that may be in
excess of what the contract account value can purchase at then-current annuity
purchase rates. The GMDB feature, if elected by the policyholder, guarantees a
minimum death benefit which may be in excess of the contract account value. For
additional information, see Notes 2, 9 and 12 of Notes to Consolidated Financial
Statements.
During periods of sustained market downturns, such as the one we are currently
experiencing, demand for variable products like the ones emphasized by Equitable
Life typically declines relative to fixed products. In response to this market
environment, Equitable Life is placing greater emphasis on the development and
sale of fixed products.
In January 2002, Equitable Life launched the AXA Premier Funds Trust, a family
of multi-manager, sub-advised retail mutual funds which provide investors with
diversified investment strategies based on their individual needs and risk
tolerance. The AXA Premier Funds Trust features ten mutual funds, including
eight equity funds, one bond fund and one money market fund. The equity and bond
funds are also offered within the Equitable Life variable life and annuity
product array through AXA Premier VIP Trust, a new trust established for this
purpose. Eighteen money management firms serve as sub-advisers to the AXA
Premier Funds Trust, including Alliance, its Bernstein Investment Research and
Management unit, and AXA Rosenberg Investment Management LLC. At December 31,
2002, the AXA Premier Funds Trust had assets of $119 million and AXA Premier VIP
Trust had assets of $875 million. Equitable Life's affiliates provide the
day-to-day advisory services to 15 allocated portions, which represent
approximately 19% of the combined assets, of the AXA Premier Funds Trust and AXA
Premier VIP Trust. Equitable Life serves as the Investment Manager of EQAT, AXA
Premier Funds Trust and AXA Premier VIP Trust.
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,
including life, health and long-term care insurance products, annuity products
and mutual funds and other investment products and services. 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 and universal life insurance are targeted at the middle-to-upper income
life markets. Life insurance products are also used in the estate planning,
business continuation and executive benefit 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
not-for-profit organizations), corporate pension plans (particularly 401(k)
defined contribution plans for small to mid-size groups) and the IRA retirement
planning market. 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.
1-3
DISTRIBUTION. Retail distribution of products and services is accomplished by
approximately 7,100 financial professionals of AXA Advisors and/or AXA Network,
approximately 3,000 of whom are fully credentialed to offer a broad array of
insurance and investment products and who account for the substantial majority
of our production. Field operations are organized into six divisions across the
United States. The retail organization's business process and informational
website, www.AXAonline.com, provides operational efficiencies for retail
distribution, serving as the single point of entry for all web-based company
resources.
Wholesale distribution of products is undertaken through AXA Distributors, which
at year end 2002 had 615 selling agreements, including arrangements with four
major wirehouse firms, 90 banks or similar financial institutions, and 521
broker-dealers and financial planners. Three major securities firms were
responsible for approximately 25.4%, 14.4% and 9.1%, respectively, of AXA
Distributors' 2002 premiums and deposits. In 2002, AXA Distributors was
responsible for approximately 34.32% 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. During the first quarter of 2003, the Insurance Group began to
transition to excess of retention reinsurance on most new variable life,
universal life and term life policies whereby mortality risk will be retained up
to a maximum of $15 million on single-life policies and $20 million on
second-to-die policies with the excess 100% reinsured. Previously the Insurance
Group ceded 90% of mortality risk on substantially all new variable life,
universal life and term life policies, with risk retained to a maximum of $5
million on single-life policies, and $15 million on second-to-die policies. For
amounts applied for in excess of those limits, reinsurance is sought. 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 3.8% of the total policy life reserves of the Insurance Group (including
Separate Accounts).
The Insurance Group also cedes a percentage of its exposure on variable annuity
products which contain a GMIB and/or GMDB feature. Equitable Life reinsures,
subject to certain maximum amounts or caps in any one period, approximately 72%
of its net amount of risk resulting from the GMIB feature and approximately 16%
of its net amount of risk to the GMDB obligation on annuity contracts in force
as of December 31, 2002. For additional information, see Notes 2, 9 and 12 of
Notes to Consolidated Financial Statements.
The Insurance Group acts as a retrocessionaire by assuming life reinsurance from
reinsurers. Mortality risk through reinsurance assumed is managed under the same
corporate retention amounts noted above, although lower internal retention
limits currently apply to life reinsurance assumed.
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
("Centre Life"). 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. For
additional information about this indemnity reinsurance contract and the
Insurance Group's reinsurance agreements in general, see Note 12 of Notes to
Consolidated Financial Statements.
INVESTMENT SERVICES
GENERAL. The Investment Services segment is comprised of the operations of
Alliance, which provides diversified investment management and related services
to the Insurance Group and globally 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, and AXA and its insurance company
subsidiaries, by means of separate accounts, sub-advisory relationships
resulting from the efforts of the institutional marketing department, structured
products, group trusts, mutual funds and investment vehicles 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
1-4
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 "managed account" products, and (d) institutional investors
desiring institutional research services 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.
Alliance provides a broad offering of investment products, global in scope, with
expertise in both growth and value oriented strategies, the two predominant
equity investment styles, coupled with a fixed income capability in both taxable
and tax exempt securities.
The Investment Services segment in 2002 accounted for approximately $2.74
billion (or 37.4%) of total revenues, after intersegment eliminations. As of
December 31, 2002, Alliance had approximately $386.58 billion in assets under
management including approximately $210.99 billion from institutional investors,
$39.69 billion for private clients and approximately $135.90 billion from retail
mutual fund accounts. As of December 31, 2002, assets of AXA, the Holding
Company and the Insurance Group, including investments in EQAT, represented
approximately 14.6% of Alliance's total assets under management, and
approximately 4.6% of Alliance's total revenues.
INTEREST IN ALLIANCE. At December 31, 2002, the Holding Company, Equitable Life
and certain subsidiaries had combined holdings equaling an approximate 55.7%
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 Capital Management Holding L.P. ("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 4.0%.
For additional information about Alliance, including its results of operations,
see "Regulation" and "Management Narrative - Results Of Continuing Operations By
Segment - Investment Services" and Alliance's Annual Report on Form 10-K for the
year ended December 31, 2002.
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 $415.31 billion of assets under management at December
31, 2002, $337.99 billion (or 81.4%) were managed for third parties, including
$298.98 billion from unaffiliated third parties and $39.01 billion for the
Separate Accounts, and $38.31 billion were managed principally for the General
Account and invested assets of subsidiaries. Of the $1.85 billion of fees for
assets under management for the year ended December 31, 2002, $1.81 billion were
received from third parties, including $1.74 billion from unaffiliated third
parties and $70.16 million in respect of Separate Accounts, and $36.17 million
in respect of the General Account. For additional information on assets under
management, see "Management Narrative - Results Of Continuing Operations By
Segment - Assets Under Management".
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. At December 31, 2002, $909.5
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 General Account consists 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.
1-5
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 following table summarizes General Account Investment Assets by asset
category at December 31, 2002.
GENERAL ACCOUNT INVESTMENT ASSETS
NET AMORTIZED COST (1)
(DOLLARS IN MILLIONS)
AMOUNT % OF TOTAL
------------------ ---------------
Fixed maturities (2)................... $ 25,501.1 71.5%
Mortgages.............................. 3,770.5 10.6
Equity real estate..................... 708.1 2.0
Other equity investments............... 906.5 2.5
Policy loans........................... 4,034.7 11.3
Cash and short-term investments (3).... 745.4 2.1
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Total.................................. $ 35,666.3 100.0%
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(1) Net Amortized Cost is the cost of the General Account Investment Assets
(adjusted for impairments in value deemed to be other than temporary, if
any) less depreciation and amortization, where applicable, and less
valuation allowances on mortgage and real estate portfolios.
(2) Excludes net unrealized gains of $1.54 billion on fixed maturities
classified as available for sale. Fixed maturities includes approximately
$1.82 billion net amortized cost of below investment grade securities.
(3) Comprised of "Cash and cash equivalents" and short-term investments
included within the "Other invested assets" caption on the consolidated
balance sheet.
Certain investments contained in the General Account's investment portfolio
include securities issued by companies in the above mentioned industries that
could be adversely affected by future terrorist acts and any responsive actions.
These industries could include commercial airlines, hotels and property and
casualty insurers and reinsurers. As of December 31, 2002, directly held
investments in fixed income or equities involving companies in the
above-mentioned industries represented approximately 2.0% of the General Account
investment portfolio.
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.
EMPLOYEES AND FINANCIAL PROFESSIONALS
As of December 31, 2002, the Insurance Group had approximately 4,687 full-time
employees and Alliance had approximately 4,118 full-time employees. In addition,
the Financial Advisory/Insurance Group had a sales force of approximately 7,100
financial professionals, including approximately 446 field force managers.
COMPETITION
INSURANCE GROUP. There is strong competition among companies seeking clients for
the types of products and services provided 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, brokerage firms and other financial
institutions for sales of insurance, annuity and other investment products and
services and with mutual funds, investment advisers and other financial entities
1-6
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 customer service,
visibility and brand recognition in the marketplace, quality of service and,
with respect to variable insurance and annuity products, mutual funds and other
investment products, investment management performance.
FINANCIAL RATINGS. Ratings are an important factor in establishing the
competitive position of insurance companies. As of March 27, 2003, the financial
strength or claims-paying rating of Equitable Life was AA- from Standard &
Poor's Corporation (4th highest of 20 ratings; with stable outlook), Aa3 from
Moody's Investors Service (4th highest of 21 ratings), A+ from A.M. Best
Company, Inc. (2nd highest of 15 ratings), and AA from Fitch Investors Service,
L.P. (3rd highest of 24 ratings). As of March 27, 2003, AXA Financial's
long-term debt rating was A from Standard & Poor's Corporation (6th highest of
20 ratings; with outlook), A3 from Moody's Investors Services (7th highest of 21
ratings; with stable outlook) and A+ from Fitch Investors Service, L.P. (5th
highest of 24 ratings).
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 and services
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.
Management from time to time continues to explore selective acquisition
opportunities in AXA Financial's financial advisory/insurance and investment
management businesses.
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 states of the United States, the District of
Columbia, Puerto Rico, the U.S. Virgin Islands 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
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
1-7
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 various
factors including the availability of relevant information after the passage of
more than 50 years and 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 intercompany service agreements, asset transfers, loans and shareholder
dividend payments by insurers. Depending on their size, such transactions and
payments may be subject to prior notice to 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) the
Holding Company (and certain affiliates, including AXA). In 2002, Equitable Life
paid an aggregate of $500.0 million in shareholder dividends, and expects to pay
dividends in 2003.
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.
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.
In June 2001, tax legislation was enacted which, among other things, provides
several years of lower rates for estate, gift and generation skipping taxes
("GST") as well as one year of estate and GST repeal (in 2010) before a return
to 2001 law for the year 2011 and thereafter. Other provisions of the
legislation increased amounts which may be contributed to tax qualified
retirement plans and could have a positive impact on funding levels of tax
qualified retirement products. Recently, legislation has been proposed regarding
accelerating and making permanent the repeal of the estate and generation
skipping taxes. If enacted, this legislation would have an adverse impact on
sales of life insurance in connection with estate planning. Other provisions of
the proposed legislation relate to the business use of life insurance, creation
of new tax favored savings accounts, modifications to qualified plan rules, the
tax-free treatment of certain corporate dividends whether paid or retained and
adjustments to certain life insurance company tax rules. If enacted, these
provisions could adversely affect the sale of life insurance to businesses, as
well as the attractiveness of qualified plan arrangements, cash value life
insurance and deferred annuities and could increase life insurance company
taxes. 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"). EQAT, AXA Premier Funds Trust, and AXA Premier VIP Trust are
registered as investment companies under the Investment Company Act and shares
offered by these investment companies are also registered under the Securities
Act. AXA Advisors, AXA Distributors, 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
Exchange Act. The Broker-Dealers are subject to extensive regulation by the SEC,
and are members of, and subject to regulation by, the National Association of
Securities Dealers, Inc. ("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.
1-8
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.
PRIVACY OF CUSTOMER INFORMATION. Federal and state law and regulation require
financial institutions to protect the security and confidentiality of customer
information and to notify customers about their policies and practices relating
to their collection, disclosure and protection of customer information. Federal
and state laws also regulate disclosures of customer information. Congress and
state legislatures are expected to consider additional regulation relating to
privacy and other aspects of customer information.
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
engaged in the financial protection and wealth management business. AXA is the
largest French insurance group and one of the largest insurance groups in the
world. AXA operates primarily in Western Europe, North America, Asia/Pacific
region and, to a lesser extent, in other regions including the Middle East,
Africa and South America. AXA has five operating business segments: life and
savings, property and casualty, international insurance (including reinsurance),
asset management, and other financial services.
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 entered into a Voting Trust Agreement dated
as of May 12, 1992 (as amended by the First Amendment, dated January 22, 1997
and as amended and restated by the Amended and Restated Voting Agreement dated
May 12, 2002, 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 who 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 initial term of the Voting Trust ended in 2002 and the
term of the Voting Trust has been extended, with the prior approval of the
Superintendent, until May 12, 2012. Future extensions of the term of the Voting
Trust remain subject to the prior approval of the Superintendent.
1-9
PART I, ITEM 2
PROPERTIES
INSURANCE
Equitable Life leases on a long-term basis approximately 810,000 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 50,000 square feet of office
space at two other locations in New York, NY. Equitable Life also has the
following significant office space leases: 244,000 square feet in Secaucus, NJ,
under a lease that expires in 2011 for its Annuity Operations; 185,000 square
feet in Charlotte, NC, under a lease that expires in 2013 for use by its
National Operations Center; 113,000 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 Note
19 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 568,500 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 75,630 square feet of space at 767 Fifth
Avenue, New York, NY, under leases expiring in 2016 and 2005, respectively.
Alliance also occupies approximately 47,621 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 141,002 square feet of space at One North
Lexington, White Plains, NY, under leases expiring in 2008. Alliance and its
subsidiaries, Alliance Fund Distributors Inc. and Alliance Global Investor
Services, Inc., occupy approximately 134,261 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 11 cities in the United States and its
subsidiaries and affiliates lease space in London, England, Tokyo, Japan and 27
other cities outside the United States.
2-1
PART I, ITEM 3.
LEGAL PROCEEDINGS
The matters set forth in Note 16 of Notes to the Company's Consolidated
Financial Statements for the year ended December 31, 2002 (Item 8 of this
report) are incorporated herein by reference, with the following additional
information.
3-1 In Malhotra, in March 2003, the United States District Court for the Eastern
District of New York: (i) granted plaintiffs' motion, filed October 2001,
seeking leave to reopen their original case for the purpose of filing an amended
complaint and accepted plaintiffs' proposed amended complaint, (ii) appointed
the named plaintiffs as lead plaintiffs and their counsel as lead counsel for
the putative class, (iii) consolidated plaintiffs' original action with their
second action, which was filed in October 2001, and (iv) ruled that the court
would apply Equitable Life's motion to dismiss the amended complaint in the
second action to the plaintiffs' amended complaint from the original action. The
court subsequently dismissed plaintiffs' operative amended complaint without
prejudice to their filing a second amended complaint within 30 days.
In the Mississippi Actions, plaintiffs' motions to remand two lawsuits, one
involving 79 plaintiffs and the other involving four plaintiffs, which lawsuits
had been removed from state court to the United States District Court for the
Northern District of Mississippi, have been denied. In March 2003, the Supreme
Court of Mississippi has affirmed the dismissal with prejudice of the Circuit
Court of Sunflower County lawsuit.
In January and February 2003, the United States District Court for the Southern
District of Mississippi granted Equitable Life's petitions to compel arbitration
of the cross-claims asserted by two former agents in three of the Mississippi
Actions and also granted Equitable Life's motion to enjoin prosecution of those
cross-claims in state court.
In Miller, in March 2003, the Federal District Court in the Southern District of
Illinois denied in part, and granted in part, defendants' motion to dismiss. The
court declined to dismiss plaintiffs' claims that certain advisory and
distribution fees paid to Alliance and AFD, respectively, were excessive in
violation of Section 36(b) of the ICA. The court dismissed plaintiffs' claims
that certain distribution plans were adopted in violation of the ICA.
In Benak, in February 2003, Alliance moved to dismiss the Consolidated Amended
Complaint. That motion is pending.
In Enron, in March 2003, Alliance's motion to dismiss was denied.
In Jaffe, in March 2003, the court granted Alliance's motion to transfer the
Jaffe Complaint to the United States District Court for the District of
New Jersey.
3-1
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 Financial Services, LLC, a
wholly owned direct subsidiary of AXA Financial, Inc. which is a wholly owned
subsidiary of AXA. Consequently, there is no established public market for
Equitable Life's common equity. In 2002, Equitable Life paid shareholder
dividends of $500.0 million. For information on Equitable Life's present and
future ability to pay dividends, see Note 18 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 II, 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 notes to consolidated financial statements and information discussed
under forward-looking statements included elsewhere in this Form 10-K.
GENERAL
Certain non-recurring events have impacted the Company's results of operations.
In fourth quarter 2000 and January 2001, AXA and AXA Merger acquired the
approximately 40% minority interest share of the Holding Company's Common Stock.
As a result of this purchase, AXA Financial's management amended the terms of
substantially all of the outstanding Holding Company stock options.
Approximately $493.9 million of expenses, principally related to modifications
to and accelerated vesting of Holding Company stock options that resulted from
the AXA minority interest buyout, are included in pre-tax earnings from
continuing operations for 2000. In January 2001, the Company became a wholly
owned direct subsidiary of the Holding Company. On June 1, 2002, the Holding
Company transferred ownership of the Company to AXA Financial Services, LLC, a
wholly owned direct subsidiary of the Holding Company. See Note 1 of Notes to
Consolidated Financial Statements for further information.
In 2000, the Company recognized a $1.96 billion gain when it sold its interest
in DLJ receiving cash and CSG stock. See Notes 1 and 5 of Notes to Consolidated
Financial Statements for further information. In 2001 and 2000, respectively,
$27.1 million of realized income and $43.2 million of realized and unrealized
losses on the CSG shares were included in net investment income. The remaining
CSG shares were sold in first quarter 2001.
In 2000, Alliance purchased Bernstein. For further information on the Bernstein
acquisition, see Note 1 of Notes to Consolidated Financial Statements.
CONSOLIDATED RESULTS OF OPERATIONS
Earnings from continuing operations before Federal income taxes and minority
interest were $1.03 billion for 2002, a decrease of $264.3 million from the
$1.29 billion reported in 2001. The decrease resulted from a $269.6 million
decrease in the Insurance segment partially offset by a $5.3 million increase
for the Investment Services segment.
Total revenues decreased $320.7 million to $7.35 billion in 2002 from $7.67
billion in 2001 due to decreases in both the Insurance and Investment Services
segments. The 2002 decrease principally resulted from lower policy fee and
premium income and higher investment losses in the Insurance segment and lower
investment advisory and services fees and lower distribution revenues in the
Investment Services segment, partially offset by higher other income in the
Insurance segment related to the fair value of derivative reinsurance contracts.
Total benefits and other deductions were $6.32 billion in 2002, a $56.4 million
decrease as compared to $6.37 billion 2001. The reduction in amortization
expense due to the cessation of goodwill amortization upon the adoption of SFAS
No. 142 on January 1, 2002, as well as lower compensation and benefits in both
segments and lower distribution plan payments and other operating costs and
expenses in the Investment Services segment in 2002, was partially offset by
higher policyholders' benefits related to the GMDB/GMIB features and by higher
commission expense in the Insurance segment.
Federal income tax expense totaled $50.9 million in 2002 as compared to the
$316.2 million reported in 2001. The decrease resulted principally from a $144.3
million tax benefit in 2002 related to the favorable treatment of certain tax
matters related to Separate Account investment activity during the 1997-2001 tax
years and a settlement with the IRS with respect to such tax matters for the
1992-1996 tax years. Federal income tax expense also reflected the release of
tax audit reserves of $34.2 million and $28.2 million in 2002 and 2001,
respectively.
In 2002 and 2001, the Company reported cumulative effects of accounting changes
of $(33.1) million and $(3.5) million (net of Federal income tax benefits of
$17.9 million and $1.9 million), respectively. The 2002 amount resulted from the
Company's change in the method of accounting for liabilities associated with
variable annuity contracts with GMDB/GMIB features while the 2001 change
resulted from the adoption of SFAS No. 133. For further information, see "New
Accounting Pronouncements" in Note 2 of Notes to Consolidated Financial
Statements.
7-1
Net earnings were $587.4 million for 2002 compared to $647.0 million for 2001 as
the $18.7 million higher net earnings in the Investment Services segment were
more than offset by the $78.3 million decrease in the Insurance segment in 2002.
RESULTS OF CONTINUING OPERATIONS BY SEGMENT
INSURANCE.
INSURANCE - RESULTS OF OPERATIONS
(IN MILLIONS)
2002 2001
----------------- ------------------
Universal life and investment-type product policy fee income...................... $ 1,315.5 $ 1,342.3
Premiums.......................................................................... 945.2 1,019.9
Net investment income............................................................. 2,331.2 2,337.9
Investment losses, net............................................................ (279.0) (205.0)
Commissions, fees and other income................................................ 360.5 268.2
---------------- ------------------
Total revenues............................................................... 4,673.4 4,763.3
---------------- ------------------
Policyholders' benefits........................................................... 2,034.0 1,886.9
Interest credited to policyholders' account balances.............................. 972.5 981.7
Compensation and benefits......................................................... 238.5 300.8
Commissions....................................................................... 788.8 742.1
Deferred policy acquisition costs, net............................................ (458.1) (458.5)
Rent expense ..................................................................... 64.9 61.5
All other operating costs and expenses............................................ 594.9 541.3
----------------- ----------------
Total benefits and other deductions.......................................... 4,235.5 4,055.8
---------------- ------------------
Earnings from Continuing Operations before Federal Income Taxes................... $ 437.9 $ 707.5
================ ==================
2002 COMPARED TO 2001 - In 2002, pre-tax earnings from continuing operations in
the Insurance segment declined $269.6 million to $437.9 million as compared to
$707.5 million in 2001, principally due to lower premium and policy fee income,
higher investment losses, higher commission and all other operating costs and
expenses and the reserve increase in policyholders' benefits related to variable
annuity products with GMDB/GMIB features, partially offset by the increase in
the fair value of derivative reinsurance contracts in other income and lower
compensation.
Segment revenues decreased $89.9 million over the prior year period as $101.5
million lower premiums and policy fee income and $74.0 million in higher
investment losses, net were partially offset by a $92.3 million increase in
commissions, fees and other income.
Policy fee income was $26.8 million lower largely due to the effect of market
depreciation on average Separate Account balances partially offset by higher
product level mortality and surrender charges.
Premiums decreased $74.7 million in 2002 reflecting lower premiums on
traditional life products due to the Insurance segment's focus on sales of
variable and interest-sensitive life and annuity products whose revenues are not
reported as premiums and lower reinsurance assumed premiums related to Equitable
Life's withdrawal from certain accident and health and aviation and space
reinsurance pools.
Net investment income decreased $6.7 million as higher earnings on fixed
maturities, primarily attributed to a higher General Account asset base, were
more than offset by lower yields and the absence of investment income on the
remaining CSG shares sold in first quarter 2001.
Investment losses, net were $74.0 million higher in 2002 as compared to 2001
principally as a result of net losses of $61.5 million as compared to net gains
of $72.4 million on sales of fixed maturities and writedowns of $312.8 million
on fixed maturities, up $25.3 million from 2001. These losses were partially
offset by a $96.8 million gain on the sale of a single real estate property in
second quarter 2002. The 2002 fixed maturity writedowns occurred primarily on
7-2
securities in the telecommunications, airline, utilities and energy sectors
while the losses on fixed maturity sales included $97.2 million and $32.5
million of losses on telecommunications and utilities securities, respectively.
In fourth quarter 2002, writedowns of $170.3 million were taken, principally on
securities in the utilities, airline, energy and telecommunications industries,
while losses on fixed maturities sales totaling $20.2 million were primarily due
to losses on utilities and telecommunications securities.
Commissions, fees and other income increased $92.3 million in 2002 as compared
to 2001 principally due to the $120.0 million increase in the fair value of the
GMIB reinsurance contracts accounted for as derivatives.
Total benefits and other deductions in 2002 increased $208.6 million from 2001
as higher policyholders' benefits, commissions and other operating costs and
expenses were partially offset by lower compensation and benefits and interest
credited.
The $147.1 million increase in policyholders' benefits was principally due to
the change in reserves related to the GMDB/GMIB features contained in certain
variable annuity contracts, discussed in "Accounting Changes" in Note 2 and as
well as in Note 9 of Notes to Consolidated Financial Statements, higher GMDB
claims, higher claims experience in reinsurance assumed product lines and
increased accruals for litigation. These increases were partially offset by the
absence of claims associated with the September 11, 2001 terrorist attacks.
Interest credited to policyholders' account balances declined $9.2 million in
2002 as the impact of lower crediting rates was substantially offset by higher
General Account balances.
Compensation and benefits for the Insurance segment declined $62.3 million to
$238.5 million in 2002 as compared to $300.8 million in 2001. The 2002 total
included $10.2 million of credits resulting from changes in the SARs liability
as compared to $63.2 million in 2001. The negative impact of lower SARs credits
was more than offset by lower employee salary expenses due to reduced headcounts
partially offset by higher pension plan costs, which included the impact of
reducing the expected long-range return on assets for the qualified pension plan
from 10.25% as of January 1, 2001 to 9.0% as of January 1, 2002. Compensation
and benefits in 2001 included severance benefits for certain former senior
officers and employees associated with cost reduction programs, as well as
payments to certain former senior officers under continuity agreements related
to AXA's minority interest buyout.
Commissions increased $46.7 million in 2002 from $742.1 million in 2001 due to
higher sales of annuity contracts.
DAC amortization increased to $296.7 million in 2002, up $8.8 million from
$287.9 million in 2001. DAC for universal life, investment-type and
participating traditional life policies is amortized over the expected total
life of the contract group as a constant percentage of estimated gross profits
(for universal life and investment-type contracts) or margins (for participating
traditional life policies). Estimates and assumptions underlying these DAC
amortization rates are reassessed and updated at the end of each reporting
period ("DAC unlocking"). The effect of DAC unlocking is reflected in earnings
in the period such estimated gross profits are revised. A decrease in expected
gross profits would accelerate DAC amortization. Conversely, an increase in
expected gross profits would slow DAC amortization.
Expected gross profits for variable and interest-sensitive life insurance and
variable annuities arise principally from investment results, Separate Account
fees, mortality and expense margins and surrender charges. A significant
assumption in the development of expected gross profits and, therefore, the
amortization of DAC on these products relates to projected future Separate
Account performance. Expected future gross profit assumptions related to
Separate Account performance are set by management using a long-term view of
expected average market returns by applying a reversion to the mean approach. In
applying this approach to develop estimates of future returns, it is assumed
that the market will return to an average gross long-term return estimate,
developed with reference to historical long-term equity market performance and
subject to assessment of the reasonableness of resulting estimates of future
return assumptions. For purposes of making this reasonableness assessment,
management has set limitations as to maximum and minimum future rate of return
assumptions, as well as a limitation on the duration of use of these maximum or
minimum rates of return. Currently, the average gross long-term annual return
estimate is 9.0% (7.2% net of product weighted average Separate Account fees),
and the gross maximum and minimum annual rate of return limitations are 15.0%
(13.2% net of product weighted average Separate Account fees) and 0% (-1.9% net
of product weighted average Separate Account fees), respectively. The maximum
duration over which these rate limitations may be applied is 5 years. This
approach will continue to be applied in future periods. If actual market returns
continue at levels that would result in assuming future market returns of 15.0%
for more than 5 years in order to reach the average gross long-term return
estimate, the application of the 5 year maximum duration limitation would result
in an acceleration of DAC amortization. Conversely, actual market returns
resulting in assumed future market returns of 0% for more than 5 years would
result in a required deceleration of DAC amortization. As of
7-3
December 31, 2002, current projections of future average gross market returns
are within the maximum and minimum limitations and assume a reversion to the
mean of 9.0% after 2.5 years.
In addition, projections of future mortality assumptions related to variable and
interest-sensitive life products are based on a long-term average of actual
experience. This assumption is updated quarterly to reflect recent experience as
it emerges. Improvement of life mortality in future periods from that currently
projected would result in future deceleration of DAC amortization. Conversely,
deterioration of life mortality in future periods from that currently projected
would result in future acceleration of DAC amortization. Generally, life
mortality experience has improved in recent periods.
DAC capitalization increased $8.4 million from $746.4 million in 2001 to $754.8
million in 2002 as higher commissions were partially offset by lower deferrable
operating expenses.
Other operating costs increased $53.6 million to $594.9 million from $541.3
million in 2001 primarily due to an increased accrual for litigation.
Premiums and Deposits. First year premiums and deposits for life and annuity
products in 2002 increased from prior year levels by $1.76 billion to $6.58
billion primarily due to $1.49 billion higher sales of individual annuities. The
increase in variable annuity sales that began in the second quarter of 2002 was
primarily due to higher deposits from annuities in the wholesale channel, and
included $754.2 million in sales of a new single premium deferred annuity
product in 2002 compared to $418.5 million in 2001, when first introduced, and
$3.58 billion in sales of a new line of variable annuity products introduced in
April 2002. Renewal premiums and deposits decreased by $205.0 million to $4.19
billion in 2002 from $4.39 billion in 2001.
Surrenders and Withdrawals. Policy and contract surrenders and withdrawals
increased $284.8 million to $5.15 billion during 2002 compared to 2001. The
annuity surrender rates increased from 9.0% in 2001 to 10.1% in 2002. When a
single large pension plan contract that surrendered in second quarter 2002,
which totaled $123.8 million, is excluded, the 2002 surrender rate would
decrease to 9.8%. The individual life surrender rate increased slightly to 4.0%
from 3.8% in the prior year. The trends in surrenders and withdrawals continue
to fall within the range of expected experience.
7-4
INVESTMENT SERVICES.
The table that follows presents the operating results of the Investment Services
segment, consisting principally of Alliance's operations.
INVESTMENT SERVICES - RESULTS OF OPERATIONS
(IN MILLIONS)
2002 2001
--------------- ----------------
Revenues:
Investment advisory and services fees (1)............................. $ 1,847.9 $ 2,023.8
Distribution revenues................................................. 467.5 544.6
Institutional research services....................................... 294.9 265.8
Shareholder servicing fees............................................ 101.6 96.3
Other revenues, net (1)............................................... 33.0 63.9
--------------- ----------------
Total revenues.................................................... 2,744.9 2,994.4
--------------- ----------------
Expenses:
Alliance employee compensation and benefits........................... 907.1 930.7
Distribution plan payments............................................ 392.8 429.1
Amortization of deferred sales commissions............................ 229.0 230.8
All other promotion and servicing expenses............................ 193.3 233.6
Amortization of goodwill and intangibles.............................. 21.2 178.2
All other operating expenses.......................................... 410.8 406.6
--------------- ----------------
Total expenses.................................................... 2,154.2 2,409.0
--------------- ----------------
Earnings from Continuing Operations before
Federal Income Taxes and Minority Interest........................... $ 590.7 $ 585.4
=============== ================
(1) Includes fees earned by Alliance totaling $36.2 million and $35.9 million
in 2002 and 2001, respectively, for services provided to the Insurance
Group.
2002 COMPARED TO 2001 - Investment Services' pre-tax results of operations for
2002 were $590.7 million, an increase of $5.3 million from the prior year.
Revenues totaled $2.74 billion in 2002, a decrease of $249.5 million from 2001,
principally due to $175.9 million lower investment advisory and services fees
and $77.1 million lower distribution revenues, partially offset by a $29.1
million increase in institutional research services. Investment advisory and
services fees include brokerage transaction charges for SCB LLC. The decrease in
investment advisory and services fees primarily resulted from lower average
assets under management ("AUM") primarily as a result of significant market
depreciation related to on-going global equity market declines and net asset
outflows of $4.3 million and a decrease in performance fees from $79.4 million
in 2001 to $54.1 million in 2002. Lower performance fees in 2002 were
principally related to lower investment returns, caused by adverse equity and
fixed income markets, earned by certain hedge funds investing in value stocks
and certain growth investment advisory contracts, partially offset by higher
performance fees in certain value investment advisory contracts, while the 2001
performance fees were principally the result of certain hedge funds investing in
value stocks during 2001. The decrease in distribution revenues was principally
due to lower average mutual fund AUM attributed to market depreciation and net
redemptions of back-end load mutual fund shares. Institutional research services
revenues increased $29.1 million to $294.9 million in 2002 from $265.8 million
for 2001 due to higher market share of NYSE volumes, expanded research and
broader trading capabilities.
The segment's total expenses were $2.15 billion in 2002, compared to $2.41
billion in 2001. Investment Services's total expenses decreased $254.8 million
in 2002 primarily due to $157.0 million lower amortization of goodwill and
intangibles, a $40.3 million decrease in all other promotion and servicing
expenses and a decrease of $36.3 million in distribution plan payments. The
$157.0 decrease in amortization of goodwill and intangibles was the result of
the cessation of goodwill amortization upon adopting SFAS No. 142. The 2002
decrease in all other promotion and servicing expenses was due to decreases in
travel, entertainment and printing costs. Lower distribution plan payments in
2002 were due to lower average mutual fund AUM. The $23.6 million decrease in
Alliance employee compensation and benefits was due to lower base compensation,
fringe benefits and other compensation due to reduced headcounts and expense
control initiatives.
Incentive and commission compensation was flat in 2002 due to lower operating
earnings and higher deferred compensation primarily attributable to deferred
compensation agreements entered into in connection with the
7-5
Bernstein acquisition and the realignment of certain sales management
professionals to incentive-based from commission-based compensation.
ASSETS UNDER MANAGEMENT
A breakdown of AUM follows:
ASSETS UNDER MANAGEMENT
(IN MILLIONS)
DECEMBER 31,
--------------------------------------
2002 2001
------------------ ------------------
Third party (1) (2)...................................................... $ 337,984 $ 394,648
Equitable Life General Account, the Holding Company
and its other affiliates (3).......................................... 38,315 36,153
Separate Accounts........................................................ 39,012 46,947
------------------ ------------------
Total Assets Under Management........................................ $ 415,311 $ 477,748
================== ==================
(1) AUM previously reported has been restated to conform to 2002 presentation,
which excludes assets managed by unconsolidated affiliates of Alliance.
(2) Includes $7.83 billion and $5.31 billion of assets managed on behalf of AXA
affiliates at December 31, 2002 and 2001, respectively. Also included in
2002 and 2001 are $8.7 billion and $7.5 billion, respectively, in assets
related to an Australian joint venture between Alliance and an AXA
affiliate. Third party AUM includes 100% of the estimated fair value of
real estate owned by joint ventures in which third party clients own an
interest.
(3) Includes invested assets of the Company, the Holding Company and its other
affiliates not managed by Alliance, principally cash and short-term
investments and policy loans, totaling approximately $8.66 billion and
$6.62 billion at December 31, 2002 and 2001, respectively, as well as
mortgages and equity real estate totaling $4.83 billion and $5.62 billion
at December 31, 2002 and 2001, respectively.
Third party AUM declined $56.66 billion to $337.98 billion in 2002 primarily due
to decreases at Alliance. Equitable Life General Account, Holding Company and
its other affiliates AUM increased $2.16 billion from the total reported in 2001
due to higher sales of General Account based products and products with General
Account and dollar cost averaging options. The $7.94 billion decrease in
Separate Accounts AUM in 2002 resulted from continued equity market depreciation
that more than offset net new deposits.
Alliance's AUM decreased $65.58 billion to $386.58 billion in 2002 from $452.16
billion in 2001; $61.3 billion of the decrease resulted from significant market
depreciation due to global equity market declines and $4.3 billion to net asset
outflows.
OTHER DISCONTINUED OPERATIONS
Earnings from Discontinued Operations of $5.6 million in 2002 as compared to
$43.9 million in 2001 reflect releases of the allowance for future losses due to
favorable investment results projected for future years partially offset by
unfavorable investment results actually realized during 2002.
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 sales of fixed maturities, sales of other 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 the Holding Company; 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
7-6
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, 2002, this asset pool
included an aggregate of $767.4 million in highly liquid short-term investments,
as compared to $485.2 million at December 31, 2001. 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. These proceeds funded the $1.5
billion shareholder dividend paid in April 2001.
Other liquidity sources include dividends and distributions from Alliance. In
2002, Equitable Life received cash distributions from Alliance and Alliance
Holding of $259.3 million as compared to $313.2 million in 2001.
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.
Liquidity Requirements. Equitable Life's liquidity needs are affected by
fluctuations in mortality and other benefit payments and in the level of
surrenders and withdrawals previously discussed in "Results of Continuing
Operations by Segment - Insurance," as well as by dividends to its shareholder.
In 2002 and 2001, respectively, Equitable Life paid shareholder dividends
totaling $500.0 million and $1.70 billion. 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 Alliance 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 2002 and 2001,
respectively, subsidiaries of Alliance purchased Alliance Holding units totaling
$73.1 million and $36.2 million for deferred and other 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, 2002.
SUPPLEMENTARY INFORMATION
The Company is involved in a number of ventures and transactions with AXA and
certain of its affiliates. At December 31, 2002, Equitable Life had a $400.0
million, 5.89% loan outstanding with AXA Insurance Holding Co., Ltd., a Japanese
subsidiary of AXA. All payments, including interest, are guaranteed by AXA.
Alliance provides investment management and related services to AXA, the Holding
Company and Equitable Life and certain of their subsidiaries and affiliates. In
2001, Alliance entered into joint ventures with an Australian affiliate of AXA
and recognized management fees of $14.1 million and $12.3 million in 2002 and
2001, respectively. The Holding Company, Equitable Life and Alliance, along with
other AXA affiliates, participate in certain cost sharing and servicing
agreements which include technology and professional development arrangements.
Payments by Equitable Life to AXA totaled approximately $16.3 million and $13.7
million in 2002 and 2001, respectively, while Alliance's share of such costs
were approximately $1.6 million and $0.9 million, respectively. See Notes 19 and
22 of Notes to the Consolidated Financial Statements and Alliance's Report on
Form 10-K for the year ended December 31, 2002 for information on related party
transactions.
7-7
A schedule of future payments under certain of the Company's consolidated
contractual obligations follows:
CONTRACTUAL OBLIGATIONS - DECEMBER 31, 2002
(IN MILLIONS)
PAYMENTS DUE BY PERIOD
----------------------------------------------------------
LESS THAN OVER
TOTAL 1 YEAR 1 - 3 YEARS 4 - 5 YEARS 5 YEARS
----------- ----------- ----------- ----------- -------------
CONTRACTUAL OBLIGATIONS:
LONG-TERM DEBT.................. $ 1,254.8 $ 248.3 $ 400.0 $ 406.5 $ 200.0
OPERATING LEASES................ 1,417.2 128.0 249.1 191.7 848.4
----------- ----------- ---------- ----------- -------------
TOTAL CONTRACTUAL
OBLIGATIONS................. $ 2,672.0 $ 376.3 $ 649.1 $ 598.2 $ 1,048.4
=========== =========== ========== ============ =============
The Company also has contractual obligations to the policy and contractholders
of its various life insurance and annuity products and/or their designated
beneficiaries. These obligations include paying death claims and making annuity
payments. The timing of such payments depends upon such factors as the mortality
and persistency of its customer base.
In addition, the Company has obligations under contingent commitments at
December 31, 2002, including: Equitable Life and Alliance's respective revolving
credit facilities and commercial paper programs; Alliance's $100.0 million ECN
program; the Insurance Group's $57.3 million letters of credit; Alliance's
$125.0 million guarantee on behalf of SCB LLC; and the Company's guarantees or
commitments to provide equity financing to certain limited partnerships of
$298.6 million. Information on these contingent commitments can be found in
Notes 10, 15 and 22 of Notes to Consolidated Financial Statements.
Further, the Company is exposed to potential risk related to its own ceded
reinsurance agreements with other insurers and to insurance guaranty fund laws
in all 50 states, the District of Columbia and Puerto Rico. Under these laws,
insurers doing business in these states can be assessed amounts up to prescribed
limits to protect policyholders of companies that become impaired or insolvent.
In the aftermath of the September 11, 2001 terrorist attacks, while traditional
indicators continue to be used to monitor insurers' financial position, the
ability of otherwise fiscally healthy insurers, or even the insurance industry,
to absorb further catastrophic losses of such a nature cannot be predicted.
CRITICAL ACCOUNTING POLICIES
The Company's management narrative is based upon the Company's consolidated
financial statements that have been prepared in accordance with GAAP. The
preparation of these financial statements requires management to make estimates
and assumptions (including normal, recurring accruals) that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the period. On an on-going basis, the Company
evaluates its estimates, including those related to investments, recognition of
insurance income and related expenses, DAC, future policy benefits, recognition
of Investment Services revenues and related expenses and pension cost. The
Company bases its estimates on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances. The
results of such factors form the basis for making judgments about the carrying
values of assets and liabilities that are not readily apparent from other
sources. Actual results could differ from those estimates under different
assumptions or conditions.
The Company believes the following critical accounting policies affect its more
significant judgments and estimates used in the preparation of its consolidated
financial statements.
Investments - The Company records an investment impairment charge when it
believes an investment has experienced a decline in fair value that is other
than temporary. Identifying those situations requires management's careful
consideration of the facts and circumstances, including but not limited to the
duration and extent to which the fair value has been depressed, the financial
position, cash flows, and near-term earnings potential of the issuer, as well as
the Company's ability and intent to retain the investment to allow sufficient
time for any anticipated recovery in fair value. The basis for measuring fair
value may require utilization of investment valuation methodologies, such as
discounted cash flow analysis, if quoted market prices are not readily
available.
7-8
Recognition of Insurance Income and Related Expenses - Profits on
non-participating traditional life policies and annuity contracts with life
contingencies emerge from the matching of benefits and other expenses against
the related premiums. Profits on participating traditional life, universal life
and investment-type contracts emerge from the matching of benefits and other
expenses against the related contract margins. This matching is accomplished by
means of the provision for liabilities for future policy benefits and the
deferral, and subsequent amortization, of policy acquisition costs. Secular
trends and the Company's own mortality, morbidity, persistency and claims
experience have a direct impact on the benefits and expenses reported in any
given period.
DAC - The level of operating expenses of the Insurance Group that can be
deferred is another significant factor in that business' reported profitability
in any given period. Additionally, for universal life and investment-type
contracts and participating traditional life policies, DAC amortization may be
affected by changes in estimated gross profits and margins principally related
to investment results, Separate Account fees, mortality and expense margins,
lapse rates and anticipated surrender charges. Should revisions to estimated
gross profits or margins be required, the effect is reflected in earnings in the
period such estimated gross profits are revised.
Future Policy Benefits - Future policy benefit liabilities for traditional
policies are based on actuarial assumptions as to such factors as mortality,
persistency, interest and expenses and, in the case of participating policies,
expected annual and terminal dividends. Determination of the GMDB/GMIB
liabilities is based on models that involve numerous estimates and subjective
judgments, including those regarding expected market rates of return and
volatility, contract surrender rates, mortality experience and, for GMIB, GMIB
election rates. Premium deficiency reserves are based upon estimates of future
gross premiums, expected policy benefits and other expenses. The allowance for
future losses for the discontinued Wind-Up Annuities is based upon numerous
estimates and subjective judgments regarding the expected performance of the
related invested assets, future asset reinvestment rates and future benefit
payments.
Recognition of Investment Services Revenues and Related Expenses - The
Investment Services segment's revenues are largely dependent on the total value
and composition of assets under management. The most significant factors that
could affect segment results include, but are not limited to, the performance of
the financial markets and the investment performance and composition of
sponsored investment products and separately managed accounts.
Performance fees are recorded as revenue at the end of the specified period and
will generally be higher in favorable markets and lower in unfavorable markets,
which may increase the volatility of the segment's revenues and earnings.
Capitalized sales commissions paid to financial intermediaries in connection
with the sale of shares of open-end mutual funds sold without a front-end sales
charge are expected to be recovered from distribution plan payments received
from those funds and from contingent deferred sales charges received from
shareholders of those funds upon redemption of their shares. The recoverability
of these commissions is estimated based on management's assessment of these
future revenue flows.
Pension Cost - Net periodic pension cost is the aggregation of the compensation
cost of benefits promised, interest cost resulting from deferred payment of
those benefits, and investment results of assets dedicated to fund those
benefits. Each cost component is based on the Company's best estimate of
long-term actuarial and investment return assumptions. Actual experience
different from that assumed generally is recognized prospectively over future
periods; however, significant variances could result in immediate recognition if
they exceed certain prescribed thresholds or in conjunction with a
reconsideration of the related assumptions.
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 position. Forward-looking statements include,
among other things, discussions concerning the Company's potential exposure to
market risks, as well as statements expressing management's expectations,
beliefs, estimates, forecasts, projections and assumptions, as indicated by
words such as "believes," "estimates," "intends," "anticipates," "expects,"
"projects," "should," "probably," "risk," "target," "goals," "objectives," or
similar expressions. The Company claims the protection afforded by the safe
harbor for forward-looking statements contained in the Private Securities
Litigation Reform Act of 1995, and assumes no duty 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
7-9
factors including those discussed elsewhere in this report and in the Company's
other public filings, press releases, oral presentations and discussions. The
following discussion highlights some of the more important risk and other
factors that could cause such differences and/or, if realized, could have a
material adverse effect on the Company's consolidated financial position and/or
results of operations.
Market Risk. The Company's businesses are subject to market risks arising from
its insurance asset/liability management, investment management and trading
activities. The primary market risk exposures result from interest rate
fluctuations, equity price movements and changes in credit quality. The nature
of each of these risks is discussed under the caption "Quantitative and
Qualitative Disclosures About Market Risk" contained herein and in Note 14 of
Notes to Consolidated Financial Statements.
Increased volatility of equity markets can impact profitability of the Insurance
and Investment Services segments. For the Insurance Group, in addition to
impacts on equity securities held in the General Account, significant changes in
equity markets impact asset-based policy fees charged on variable life and
annuity products. Moreover, for variable life and annuity products with
GMDB/GMIB features, sustained periods with declines in the value of underlying
Separate Account investments would increase the Insurance Group's net exposure
to guaranteed benefits under those contracts (increasing claims and reserves,
net of any reinsurance) at a time when fee income for these benefits is also
reduced from prior period levels. Increased volatility of equity markets also
will result in increased volatility of the fair value of the GMIB reinsurance
contracts.
Equity market volatility also may impact DAC amortization on variable and
universal life insurance contracts, variable annuities and participating
traditional life contracts. To the extent that actual market trends, and
reasonable expectations as to future performance drawn from those trends, lead
to reductions in the investment return and/or other related estimates underlying
the DAC amortization rates, DAC amortization could be accelerated. Volatile
equity markets can also impact the level of contractholder surrender activity,
which, in turn, can impact future profitability.
Interest rate fluctuations, equity price movements and changes in credit quality
may also affect invested assets held in the qualified pension plan which could
impact future pension plan costs.
The effects of significant equity market fluctuations on the Insurance Group's
operating results can be complex and subject to a variety of estimates and
assumptions, such as assumed rates of long-term equity market performance,
making it difficult to reliably predict effects on operating earnings over a
broad range of equity markets performance alternatives. Further, these effects
may not always be proportional for market increases and market decreases.
Margins on interest-sensitive annuities and universal life insurance can be
affected by interest rate fluctuations. In a declining interest rate
environment, credited rates can generally be adjusted more quickly than the
related invested asset portfolio is affected by declining reinvestment rates,
tending to result in higher net interest margins on interest-sensitive products
in the short term. However, under scenarios in which interest rates fall and
remain at significantly lower levels, minimum guarantees on interest-sensitive
annuities and universal life insurance (generally 2.5% to 4.5%) could cause the
spread between the yield on the portfolio and the interest rate credited to
policyholders to deteriorate.
For both interest-sensitive annuities and universal life insurance, a rapid and
sustained rise in interest rates poses risks of deteriorating spreads and high
surrenders. In this environment, there is pressure to increase credited rates on
interest-sensitive products to match competitors' new money rates. However, such
changes in credited rates generally occur more quickly than the earned rates on
the related invested asset portfolios reflect changes in market yields. The
greater and faster the rise in interest rates, the more the earned rates will
tend to lag behind market rates.
For the Investment Services segment, significant changes in equity markets can
impact revenues and the recoverability of deferred costs. See "Other Risks of
the Investment Services Segment" below.
Other Risks of the Insurance Segment. The Insurance Group's future sales of life
insurance and annuity products and financial planning services are dependent on
numerous factors including: successful implementation of the Company's strategy;
the intensity of competition from other insurance companies, banks and other
financial institutions; conditions in the securities markets; the strength and
professionalism of distribution channels; the continued development of
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; its ability to obtain reinsurance for certain products,
the offering of which products depends upon the ability to reinsure all or a
substantial portion of the risks; its investment management performance; and
unanticipated changes in industry trends. In addition, the nature and extent of
competition and the markets for products sold by the Insurance Group may be
materially affected by changes in laws and regulations,
7-10
including changes relating to savings, retirement funding and taxation. See
"Business - Regulation" contained herein. The profitability of the Insurance
Group depends on a number of factors including: levels of gross operating
expenses and the amount which can be deferred as DAC and software
capitalization; successful implementation of expense-reduction initiatives;
secular trends; the Company's mortality, morbidity, persistency and claims
experience; margins between investment results from General Account Investment
Assets and interest credited on individual insurance and annuity products, which
are subject to contractual minimum guarantees; the level of claims and reserves
on contracts with GMDB/GMIB features and the impact of related reinsurance; the
account balances against which policy fees are assessed on universal and
variable life insurance and variable annuity products; the pattern of DAC
amortization which is based on models involving numerous estimates and
subjective judgments including those regarding investment, mortality and expense
margins, expected market rates of return, lapse rates and anticipated surrender
charges; the adequacy of reserves and the extent to which subsequent experience
differs from management's estimates and assumptions, including future
reinvestment rates, used in determining those reserves; and the effects of the
September 11, 2001 and any future terrorist attacks and the results of war on
terrorism. Recoverability of DAC is dependent on future contract cash flows
(including premiums and deposits, contract charges, benefits, surrenders,
withdrawals, and expenses), which can be affected by equity market and interest
rate trends as well as changes in contract persistency levels. The performance
of General Account Investment Assets depends, among other things, on levels of
interest rates and the markets for equity securities and real estate, the need
for asset valuation allowances and writedowns, and the performance of equity
investments which have created, and in the future may create, significant
volatility in investment income.
Other Risks of the Investment Services Segment. Alliance's revenues are largely
dependent on the total value and composition of assets under its management and
are, therefore, affected by the performance of financial markets, the investment
performance of sponsored investment products and separately managed accounts,
additions and withdrawals of assets, purchases and redemptions of mutual funds
and shifts of assets between accounts or products with different fee structures,
as well as general economic conditions, future acquisitions, competitive
conditions and government regulations, including tax rates. See "Results of
Continuing Operations by Segment - Investment Services" contained herein.
Payments by Alliance made to financial intermediaries in connection with the
sale of back-end load shares under Alliance's mutual fund distribution system
are capitalized as deferred sales commissions and amortized over periods not
exceeding five and one-half years, the periods of time during which deferred
sales commissions are expected to be recovered from distribution fees received
from those funds and from contingent deferred sales charges ("CDSC") received
from shareholders of those funds upon redemption of their shares. CDSC reduces
unamortized deferred sales commissions when received. The recorded amount of the
deferred sales commission asset was $500.9 million at December 31, 2002.
Alliance's management tests the deferred sales commission asset for
recoverability quarterly, or more often when events or changes in circumstances
occur that could significantly increase the risk of impairment of the asset.
Alliance's management determines recoverability by estimating undiscounted
future cash flows to be realized from this asset, as compared to its recorded
amount, as well as the estimated remaining life of the deferred sales commission
asset over which undiscounted future cash flows are expected to be received.
Undiscounted future cash flows consist of ongoing distribution fees and CDSC.
Distribution fees are calculated as a percentage of average assets under
management related to back-end load shares. CDSC is based on lower of cost or
current value, at the time of redemption, of back-end load shares redeemed and
the point at which redeemed during the applicable minimum holding period under
the mutual fund distribution system.
Significant assumptions utilized to estimate average assets under management of
back-end load shares include expected future market levels and redemption rates.
Market assumptions are selected using a long-term view of expected average
market returns based on historical returns of broad market indices. At December
31, 2002, Alliance's management used estimates of 10% and 7% for equity and
fixed income annual market returns, respectively. An increase in the expected
average market returns would increase the undiscounted future cash flows, while
a reduction in the expected average market returns would decrease the
undiscounted future cash flows. Future redemption rate assumptions were
determined by reference to actual redemption experience over the last five
years. Alliance's management determined that a range of assumed average annual
redemption rates of 14% to 16%, calculated as a percentage of average assets
under management, should be used at December 31, 2002. An increase in the
assumed rate of redemptions would decrease the undiscounted future cash flows,
while a decrease in the assumed rate of redemptions would increase the
undiscounted future cash flows. These assumptions are updated periodically.
7-11
Estimates of undiscounted future cash flows and the remaining life of the
deferred sales commission asset are made from these assumptions. Alliance's
management considers the results of these analyses performed at various dates.
Alliance's management determined that the deferred sales commission asset was
not impaired as December 31, 2002. If Alliance's management determines in the
future that the deferred sales commission asset is not recoverable, an
impairment condition would exist and a loss would be measured as the amount by
which the recorded amount of the asset exceeds its estimated fair value.
Estimated fair value is determined using Alliance management's best estimate of
discounted cash flows discounted to a present value amount.
During 2002, equity markets declined by approximately 22% as measured by the
change in the Standard & Poor's 500 Stock Index while fixed income markets
increased by approximately 10% as measured by the change in the Lehman Brothers'
Aggregate Bond Index. The redemption rate for domestic back-end load shares
exceeded 20% in 2002. Continued declines in financial markets or continued
higher redemption levels, or both, as compared to the assumptions used to
estimate undiscounted future cash flows, could result in the impairment of the
deferred sales commission asset. Due to the volatility of the capital markets
and changes in redemption rates, Alliance's management is unable to predict
whether or when a future impairment of the deferred sales commission asset will
occur. Should an impairment occur, any loss would reduce materially the recorded
amount of the asset with a corresponding charge to expense.
Discontinued Operations. The determination of the allowance for future losses
for the discontinued Wind-Up Annuities continues to involve numerous estimates
and subjective judgments including those regarding expected performance of
investment assets, asset reinvestment rates, ultimate mortality experience and
other factors 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 in a secure and timely manner. These systems are maintained
to provide customer privacy and are tested to ensure the viability of business
resumption plans. Any significant difficulty associated with the operation of
such systems, or any material delay or inability to develop needed system
capabilities, could have a material adverse effect on the Company's results of
operations and, ultimately, its ability to achieve its strategic goals.
Legal Environment. A number of lawsuits have been filed against life and health
insurers involving insurers' sales practices, alleged agent misconduct, failure
to properly supervise agents and other matters. Some of the lawsuits have
resulted in the award of substantial judgments against other insurers, including
material amounts of punitive damages, or in substantial settlements. In some
states, juries have substantial discretion in awarding punitive damages. The
Holding Company's insurance subsidiaries, including Equitable Life, like other
life and health insurers, are involved in such litigation. 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 position could be
affected by defense and settlement costs and any unexpected material adverse
outcomes in such litigations as well as in other material litigations pending
against the Holding Company and its subsidiaries. The frequency of large damage
awards, including large punitive damage awards that bear little or no relation
to actual economic damages incurred by plaintiffs in some jurisdictions,
continues to create the potential for an unpredictable judgment in any given
matter.
In addition, examinations by Federal and state regulators could result in
adverse publicity, sanctions and fines. For further information, see "Business -
Regulation" and "Legal Proceedings" contained herein.
Future Accounting Pronouncements. In the future, new accounting pronouncements,
as well as new interpretations of accounting pronouncements, may have material
effects on the Company's consolidated statements of earnings and shareholders'
equity. See Note 2 of Notes to Consolidated Financial Statements for
pronouncements issued but not effective at December 31, 2002.
7-12
Regulation. The businesses conducted by the Holding Company's subsidiaries,
including Equitable Life, are subject to extensive regulation and supervision by
state insurance departments and Federal and state agencies regulating, among
other things, insurance and annuities, securities transactions, investment
companies, investment advisors and anti-money laundering compliance programs.
Changes in the regulatory environment could have a material impact on operations
and results. The activities of the Insurance Group are subject to the
supervision of the insurance regulators of each of the 50 states, the District
of Columbia and Puerto Rico. See "Business - Regulation" contained herein.
7-13
PART II, ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
The Company's businesses are subject to financial, market, political and
economic risks, as well as to risks inherent in its business operations. The
discussion that follows provides additional information on market risks arising
from its insurance asset/liability management and asset management activities.
Such risks are evaluated and managed by each business on a decentralized basis.
Primary market risk exposure results from interest rate fluctuations, equity
price movements and changes in credit quality.
INVESTMENT SERVICES
Alliance's investments are divided into two portfolios: trading and available
for sale investments and other investments. Alliance's trading and available for
sale portfolio primarily includes U.S. Treasury bills, equity and fixed income
mutual funds and money market investments. The carrying value of money market
investments approximates fair value. Although the available for sale 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, 2002, Alliance's estimates of its interest rate,
equity price, derivative and credit quality risks related to its investment
portfolios were not material to the Company.
At December 31, 2002, Alliance's fixed rate debt had an aggregate fair value of
$422.3 million. The potential fair value would increase to $451.3 million in
response to an immediate 100 basis point decrease in interest rates from those
prevailing at the end of 2002. For further information on Alliance's market
risk, see Alliance Holding's and Alliance's Annual Reports on Form 10-K for the
year ended December 31, 2002.
INSURANCE GROUP
Insurance Group results significantly depend on profit margins between
investment results from assets held in the General Account associated with the
continuing operations ("General Account Investment Assets") and discontinued
operations of the Insurance Group 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
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. See the "Investments" section of Note 2 of Notes to Consolidated
Financial Statements for the accounting policies for the investment portfolios.
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 that make up 84.2% of the carrying value of General Account
Investment Assets at December 31, 2002. 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, 2002 and 2001 would have on the fair value of fixed maturities and
mortgage loans:
7A-1
INTEREST RATE RISK EXPOSURE
(IN MILLIONS)
DECEMBER 31, 2002 December 31, 2001
----------------------------------------- ------------------------------------
BALANCE AFTER Balance After
FAIR +100 BASE Fair +100 Basis
VALUE POINT CHANGE Value Point Change
------------------- ------------------- ---------------- -------------------
Continuing Operations:
Fixed maturities:
Fixed rate........................ $ 25,485.2 $ 24,234.9 $ 22,932.6 $ 21,813.0
Floating rate..................... 1,206.6 1,206.6 738.4 738.4
Mortgage loans...................... 4,070.0 4,054.6 4,438.5 4,265.8
Discontinued Operations:
Fixed maturities:
Fixed rate........................ $ 722.7 $ 687.8 $ 559.6 $ 527.3
Mortgage loans...................... 94.7 92.8 171.6 167.8
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, 2002 and 2001:
EQUITY PRICE RISK EXPOSURE
(IN MILLIONS)
DECEMBER 31, 2002 December 31, 2001
----------------------------------------- ------------------------------------
BALANCE AFTER Balance After
FAIR -10% EQUITY Fair -10% Equity
VALUE PRICE CHANGE Value Price Change
------------------ --------------------- -------------- ---------------------
Insurance Group:
Continuing operations.............. $ 37.3 $ 33.5 $ 61.4 $ 55.3
Discontinued Operations............ .9 .8 1.2 1.1
Excess of Separate Accounts assets
over Separate Accounts
liabilities...................... 128.3 115.5 71.7 64.5
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 years end 2002 and 2001, the aggregate carrying value of policyholders
liabilities were $37,922.7 million and $35,414.7 million, respectively,
including $14,542.6 million and $12,245.9 million of liabilities, respectively,
related to the General Account's investment contracts. The aggregate fair value
of those investment contracts at years end 2002 and 2001 were $15,092.0 million
and $12,498.8 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 $15,751.6 million and $12,636.5 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 2002 levels
or with respect to a 10% drop in equity prices from year end 2002 levels.
As more fully described in Notes 2 and 14 of Notes to Consolidated Financial
Statements, various traditional 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 derivative 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 years end 2002 and 2001, the net market value exposures of the Insurance
Group's derivatives were $11.9 million and $6.9 million, respectively. There
were no swaps outstanding at either year-end. 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 BALANCE AFTER BALANCE AFTER
NOTIONAL TERM -100 BASIS FAIR +100 BASIS
AMOUNT (YEARS) POINT CHANGE VALUE POINT CHANGE
--------------- -------------- ----------------- ---------------- -------------------
DECEMBER 31, 2002
Options:
Caps................... $ 5,050.0 .89 $ 0.0 $ 0.0 $ 0.5
Floors................. 4,000.0 3.81 10.0 8.7 0.7
Futures ................. 49.8 .22 3.2 3.2 3.2
-------------- --------------- ---------------- ------------------
Total.................... $ 9,099.8 2.17 $ 13.2 $ 11.9 $ 4.4
============== ============== =============== ================ ==================
December 31, 2001
Options:
Caps................... $ 6,675.0 1.65 $ 2.7 $ 7.0 $ 17.8
Floors................. 20.4 .24 (.1) (.1) (.1)
-------------- -------------- ---------------- ------------------
Total.................... $ 6,695.4 1.65 $ 2.6 $ 6.9 $ 17.7
============== ============== ============== ================ ==================
In addition to the traditional derivatives discussed above, the Insurance Group
has purchased reinsurance contracts to mitigate the risk associated with the
impact of potential market fluctuations on future policyholder elections of GMIB
features contained in certain annuity contracts. These reinsurance contracts are
considered derivatives under SFAS No. 133 and were reported at their fair values
of $120.0 million at December 31, 2002. The potential fair value exposure to an
immediate 10% drop in equity prices from those prevailing at December 31, 2002
would increase the balance of these reinsurance contracts to $177.0 million.
At the end of 2002 and of 2001, the aggregate fair values of long-term debt
issued by Equitable Life were $1.01 billion and $979.6 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 2002
and of 2001.
INTEREST RATE RISK EXPOSURE
(IN MILLIONS)
DECEMBER 31, 2002 December 31, 2001
-------------------------------------- --------------------------------------
BALANCE AFTER Balance After
FAIR -100 BASIS Fair -100 Basis
VALUE POINT CHANGE Value Point Change
----------------- -------------------- ------------------ -------------------
Continuing Operations:
Fixed rate........................ $ 657.6 $ 690.0 $ 629.6 $ 663.4
Floating rate..................... 248.3 248.3 248.3 248.3
Discontinued Operations:
Floating rate..................... $ 101.7 $ 101.7 $ 101.7 $ 101.7
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, 2002 and 2001................................................. F-2
Consolidated Statements of Earnings, Years Ended December 31, 2002, 2001 and 2000....................... F-3
Consolidated Statements of Shareholder's Equity, Years Ended
December 31, 2002, 2001 and 2000...................................................................... F-4
Consolidated Statements of Cash Flows, Years Ended December 31, 2002, 2001 and 2000..................... F-5
Notes to Consolidated Financial Statements.............................................................. F-7
Report of Independent Accountants on Financial Statement Schedules........................................ F-51
Consolidated Financial Statement Schedules:
Schedule I - Summary of Investments - Other than Investments in Related Parties,
December 31, 2002..................................................................................... F-52
Schedule II - Balance Sheets (Parent Company), December 31, 2002 and 2001............................... F-53
Schedule II - Statements of Earnings (Parent Company), Years Ended
December 31, 2002, 2001 and 2000...................................................................... F-54
Schedule II - Statements of Cash Flows (Parent Company), Years Ended
December 31, 2002, 2001 and 2000...................................................................... F-55
Schedule III - Supplementary Insurance Information, Years Ended
December 31, 2002, 2001 and 2000...................................................................... F-56
Schedule IV - Reinsurance, Years Ended December 31, 2002, 2001 and 2000................................. F-59
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
condition of The Equitable Life Assurance Society of the United States and its
subsidiaries ("Equitable Life") at December 31, 2002 and December 31, 2001 and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 2002 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.
As discussed in Note 2 to the consolidated financial statements, Equitable Life
changed its method of accounting for variable annuity products that contain
guaranteed minimum death benefit and guaranteed minimum income benefit features,
and its method of accounting for intangible and long-lived assets in 2002.
/s/ PricewaterhouseCoopers LLP
New York, New York
February 4, 2003
F-1
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2002 AND 2001
DECEMBER 31 December 31,
2002 2001
----------------- -----------------
(IN MILLIONS)
ASSETS
Investments:
Fixed maturities available for sale, at estimated fair value.............. $ 26,278.9 $ 23,265.9
Mortgage loans on real estate............................................. 3,746.2 4,333.3
Equity real estate........................................................ 717.3 875.7
Policy loans.............................................................. 4,035.6 4,100.7
Other equity investments.................................................. 720.3 756.6
Other invested assets..................................................... 1,327.6 686.0
----------------- -----------------
Total investments..................................................... 36,825.9 34,018.2
Cash and cash equivalents................................................... 269.6 680.0
Cash and securities segregated, at estimated fair value..................... 1,174.3 1,415.2
Broker-dealer related receivables........................................... 1,446.2 1,950.9
Deferred policy acquisition costs........................................... 5,801.0 5,513.7
Goodwill and other intangible assets, net................................... 3,503.8 3,370.2
Amounts due from reinsurers................................................. 2,351.7 2,237.0
Loans to affiliates, at estimated fair value................................ 413.0 400.0
Other assets................................................................ 4,028.7 3,754.1
Separate Accounts assets.................................................... 39,012.1 46,947.3
----------------- -----------------
TOTAL ASSETS................................................................ $ 94,826.3 $ 100,286.6
================= =================
LIABILITIES
Policyholders' account balances............................................. $ 23,037.5 $ 20,939.1
Future policy benefits and other policyholders liabilities.................. 13,975.7 13,542.7
Broker-dealer related payables.............................................. 731.0 1,260.7
Customers related payables.................................................. 1,566.8 1,814.5
Amounts due to reinsurers................................................... 867.5 798.5
Short-term and long-term debt............................................... 1,274.7 1,475.5
Federal income taxes payable................................................ 2,231.0 1,885.0
Other liabilities........................................................... 1,787.1 1,702.0
Separate Accounts liabilities............................................... 38,883.8 46,875.5
Minority interest in equity of consolidated subsidiaries.................... 1,777.8 1,776.0
Minority interest subject to redemption rights.............................. 515.4 651.4
----------------- -----------------
Total liabilities..................................................... 86,648.3 92,720.9
----------------- -----------------
Commitments and contingencies (Notes 12, 14, 15, 16 and 17)
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.............................................. 4,753.8 4,694.6
Retained earnings........................................................... 2,740.6 2,653.2
Accumulated other comprehensive income...................................... 681.1 215.4
----------------- -----------------
Total shareholder's equity............................................ 8,178.0 7,565.7
----------------- -----------------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY.................................. $ 94,826.3 $ 100,286.6
================= =================
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, 2002, 2001 AND 2000
2002 2001 2000
----------------- ----------------- -----------------
(IN MILLIONS)
REVENUES
Universal life and investment-type product
policy fee income........................................... $ 1,315.5 $ 1,342.3 $ 1,413.3
Premiums...................................................... 945.2 1,019.9 1,175.0
Net investment income......................................... 2,377.2 2,404.3 2,751.9
Gain on sale of equity investee............................... - - 1,962.0
Investment losses, net........................................ (278.5) (207.3) (791.8)
Commissions, fees and other income............................ 2,987.6 3,108.5 2,730.8
----------------- ----------------- -----------------
Total revenues.......................................... 7,347.0 7,667.7 9,241.2
----------------- ----------------- -----------------
BENEFITS AND OTHER DEDUCTIONS
Policyholders' benefits....................................... 2,034.0 1,886.9 2,060.3
Interest credited to policyholders' account balances.......... 972.5 981.7 1,048.5
Compensation and benefits..................................... 1,155.3 1,220.8 809.0
Commissions................................................... 788.8 742.1 779.3
Distribution plan payments.................................... 392.8 429.1 421.3
Amortization of deferred sales commissions.................... 229.0 230.8 219.7
Interest expense.............................................. 95.7 102.6 116.3
Amortization of deferred policy acquisition costs............. 296.7 287.9 309.0
Capitalization of deferred policy acquisition costs........... (754.8) (746.4) (778.1)
Rent expense.................................................. 167.0 156.2 120.1
Amortization of goodwill and other intangible assets, net..... 21.2 178.2 65.0
Expenses related to AXA's minority interest acquisition....... - - 493.9
Other operating costs and expenses............................ 920.2 904.9 991.4
----------------- ----------------- -----------------
Total benefits and other deductions..................... 6,318.4 6,374.8 6,655.7
----------------- ----------------- -----------------
Earnings from continuing operations before Federal
income taxes and minority interest.......................... 1,028.6 1,292.9 2,585.5
Federal income tax expense.................................... (50.9) (316.2) (958.3)
Minority interest in net income of consolidated subsidiaries.. (362.8) (370.1) (330.3)
----------------- ----------------- -----------------
Earnings from continuing operations........................... 614.9 606.6 1,296.9
Earnings from discontinued operations, net of Federal
income taxes.............................................. 5.6 43.9 58.6
Cumulative effect of accounting changes, net of Federal
income taxes.............................................. (33.1) (3.5) -
----------------- ----------------- -----------------
Net Earnings.................................................. $ 587.4 $ 647.0 $ 1,355.5
================= ================= =================
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, 2002, 2001 AND 2000
2002 2001 2000
----------------- ----------------- -----------------
(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............. 4,694.6 4,723.8 3,557.2
Increase (decrease) in additional paid in capital in
excess of par value......................................... 59.2 (29.2) 1,166.6
----------------- ----------------- -----------------
Capital in excess of par value, end of year................... 4,753.8 4,694.6 4,723.8
----------------- ----------------- -----------------
Retained earnings, beginning of year.......................... 2,653.2 3,706.2 2,600.7
Net earnings.................................................. 587.4 647.0 1,355.5
Shareholder dividends paid.................................... (500.0) (1,700.0) (250.0)
----------------- ----------------- -----------------
Retained earnings, end of year................................ 2,740.6 2,653.2 3,706.2
----------------- ----------------- -----------------
Accumulated other comprehensive income (loss),
beginning of year........................................... 215.4 12.8 (392.9)
Other comprehensive income.................................... 465.7 202.6 405.7
----------------- ----------------- -----------------
Accumulated other comprehensive income, end of year........... 681.1 215.4 12.8
----------------- ----------------- -----------------
TOTAL SHAREHOLDER'S EQUITY, END OF YEAR....................... $ 8,178.0 $ 7,565.7 $ 8,445.3
================= ================= =================
COMPREHENSIVE INCOME
Net earnings.................................................. $ 587.4 $ 647.0 $ 1,355.5
----------------- ----------------- -----------------
Change in unrealized gains (losses), net of reclassification
adjustments................................................ 465.6 202.6 405.7
Minimum pension liability adjustment.......................... .1 - -
----------------- ----------------- -----------------
Other comprehensive income.................................... 465.7 202.6 405.7
----------------- ----------------- -----------------
COMPREHENSIVE INCOME.......................................... $ 1,053.1 $ 849.6 $ 1,761.2
================= ================= =================
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, 2002, 2001 AND 2000
2002 2001 2000
----------------- ----------------- -----------------
(IN MILLIONS)
Net earnings..................................................... $ 587.4 $ 647.0 $ 1,355.5
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Interest credited to policyholders' account balances........... 972.5 981.7 1,048.5
Universal life and investment-type product
policy fee income............................................ (1,315.5) (1,342.3) (1,413.3)
Net change in broker-dealer and customer related
receivables/payables......................................... (237.3) 181.0 (422.9)
Gain on sale of equity investee................................ - - (1,962.0)
Investment losses, net......................................... 278.5 207.3 791.8
Expenses related to AXA's minority interest acquisition........ - - 493.9
Change in deferred policy acquisition costs.................... (458.1) (458.5) (469.1)
Change in future policy benefits............................... 218.0 (15.1) (825.6)
Change in property and equipment............................... (74.5) (228.5) (321.0)
Change in Federal income tax payable........................... 93.3 (231.5) 2,100.2
Purchase of segregated cash and securities, net................ 240.8 (108.8) (610.4)
Minority interest in net income of consolidated subsidiaries... 362.8 370.1 330.3
Change in fair value of guaranteed minimum income
benefit reinsurance contract................................. (120.0) - -
Amortization of goodwill and other intangible assets, net...... 21.2 178.2 65.0
Other, net..................................................... 103.0 315.2 197.6
--------------- ----------------- -----------------
Net cash provided by operating activities........................ 672.1 495.8 358.5
----------------- ----------------- -----------------
Cash flows from investing activities:
Maturities and repayments...................................... 2,996.0 2,454.6 2,525.3
Sales.......................................................... 8,037.5 9,285.2 8,069.2
Purchases...................................................... (12,720.8) (11,833.9) (9,660.0)
(Increase) decrease in short-term investments.................. (568.9) 211.8 141.5
Sale of equity investee........................................ - - 1,580.6
Acquisition of subsidiary ..................................... (249.7) - (1,480.0)
Loans to affiliates............................................ - (400.0) -
Other, net..................................................... 137.6 (79.4) (162.1)
----------------- ----------------- -----------------
Net cash (used) provided by investing activities................. (2,368.3) (361.7) 1,014.5
----------------- ----------------- -----------------
Cash flows from financing activities:
Policyholders' account balances:
Deposits..................................................... 4,328.5 3,198.8 2,695.6
Withdrawals and transfers to Separate Accounts............... (2,022.9) (2,458.1) (3,941.8)
Net (decrease) increase in short-term financings............... (201.2) (552.8) 225.2
Additions to long-term debt.................................... - 398.1 .3
Shareholder dividends paid..................................... (500.0) (1,700.0) (250.0)
Proceeds from newly issued Alliance units...................... - - 1,600.0
Other, net..................................................... (318.6) (456.9) (281.3)
----------------- ----------------- -----------------
Net cash provided (used) by financing activities................. 1,285.8 (1,570.9) 48.0
----------------- ----------------- -----------------
Change in cash and cash equivalents.............................. (410.4) (1,436.8) 1,421.0
Cash and cash equivalents, beginning of year..................... 680.0 2,116.8 695.8
----------------- ----------------- -----------------
Cash and Cash Equivalents, End of Year........................... $ 269.6 $ 680.0 $ 2,116.8
================= ================= =================
F-5
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
CONTINUED
2002 2001 2000
----------------- ----------------- -----------------
(IN MILLIONS)
Supplemental cash flow information
Interest Paid............................................... $ 80.5 $ 82.1 $ 97.0
================= ================= =================
Income Taxes (Refunded) Paid................................ $ (139.6) $ 524.2 $ 337.6
================= ================= =================
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. In February 2000,
Equitable Life transferred AXA Network, LLC ("AXA Network") to AXA
Distribution 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. Equitable Life continues to develop
and market the "Equitable" brand of life and annuity products, while AXA
Distribution's subsidiaries provide financial planning services,
distribute products and manage customer relationships.
In October 2000, Alliance acquired substantially all of the assets and
liabilities of SCB Inc., formerly known as 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 units in
Alliance ("Alliance Units"). The Holding Company provided Alliance with
the cash portion of the consideration by purchasing approximately 32.6
million Alliance Units for $1.60 billion in June 2000. 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. In connection with the issuance of Alliance
Units to former Bernstein shareholders, Equitable Life and its
consolidated subsidiaries (collectively, 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. In the fourth quarter of 2002, the Company acquired 8.16
million Alliance Units at the aggregate market price of $249.7 million
from SCB Inc. and SCB Partners, Inc. under a preexisting agreement (see
Note 2). Upon completion of this transaction the Company's beneficial
ownership in Alliance increased by approximately 3.2%. The Company's
consolidated economic interest in Alliance was 42.8% at December 31, 2002,
and together with the Holding Company's economic interest in Alliance
exceeds 50%.
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 received
$35.75 in cash and 0.295 of an AXA American Depositary Receipt ("AXA ADR")
(before giving effect to AXA's May 2001 four-for-one stock split and
related change in ADRs' parity) for each Holding Company share. On January
2, 2001, AXA Merger Corp. ("AXA Merger"), a wholly owned subsidiary of
AXA, was merged with and into the Holding Company, resulting in AXA
Financial becoming a wholly owned subsidiary of AXA.
F-7
2) SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Principles of Consolidation
-----------------------------------------------------
The preparation of the accompanying consolidated financial statements in
conformity with U.S. generally accepted accounting principles ("GAAP")
requires management to make estimates and assumptions (including normal,
recurring accruals) that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates. The accompanying consolidated financial statements
reflect all adjustments necessary in the opinion of management to present
fairly the consolidated financial position of the Company and its
consolidated results of operations and cash flows for the periods
presented.
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 investment companies, partnerships and joint ventures
in which Equitable Life or its subsidiaries has control and a majority
economic interest. The Company's investment in DLJ, which was sold in
November 2000, was reported on the equity basis of accounting.
All significant intercompany transactions and balances except those with
discontinued operations (see Note 8) have been eliminated in
consolidation. The years "2002," "2001" and "2000" refer to the years
ended December 31, 2002, 2001 and 2000, respectively. Certain
reclassifications have been made in the amounts presented for prior
periods to conform those periods with the current 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, 2002 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, 2002 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 the 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 (see Note
8).
F-8
Accounting Changes
------------------
On January 1, 2002, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 141, "Business Combinations," SFAS No. 142,
"Goodwill and Other Intangible Assets," and SFAS No. 144, "Accounting for
the Impairment or Disposal of Long-lived Assets". SFAS No. 142 embraced an
entirely new approach to accounting for goodwill by eliminating the
long-standing requirement for systematic amortization and instead imposing
periodic impairment testing to determine whether the fair value of the
reporting unit to which the goodwill is ascribed supports its continued
recognition. Concurrent with its adoption of SFAS No. 142, the Company
ceased to amortize goodwill. Amortization of goodwill and other intangible
assets for the years ended December 31, 2001 and 2000, respectively, was
approximately $73.4 million and $27.1 million, net of minority interest of
$104.7 million and $38.0 million, of which $7.6 million and $1.0 million,
net of minority interest of $13.6 million and $1.4 million, related to
other intangible assets. Net income, excluding goodwill amortization
expense, for the years ended December 31, 2001 and 2000, respectively,
would have been $712.8 million and $1,381.6 million. The carrying amount
of goodwill was $3,112.2 million and $2,974.5 million, respectively, at
December 31, 2002 and at December 31, 2001 and relates solely to the
Investment Services segment. No losses resulted from completion in 2002 of
transitional and annual impairment testing of goodwill and
indefinite-lived intangible assets. Amounts presently estimated to be
recorded in each of the succeeding five years ending December 31, 2007 for
amortization of other intangible assets are not expected to vary
significantly from the amount for the full year December 31, 2002 of $8.6
million, net of minority interest of $12.6 million. The gross carrying
amount and accumulated amortization of other intangible assets were $531.7
million and $140.1 million, respectively, at December 31, 2002 and $514.6
million and $118.9 million, respectively, at December 31, 2001. SFAS No.
144, retains many of the fundamental recognition and measurement
provisions previously required by SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets to be Disposed of," except for the removal
of goodwill from its scope, inclusion of specific guidance on cash flow
recoverability testing and the criteria that must be met to classify a
long-lived asset as held-for-sale. SFAS No. 141 and No. 144 had no
material impact on the results of operations or financial position of the
Company upon their adoption on January 1, 2002.
Effective January 1, 2002, the Company changed its method of accounting
for liabilities associated with variable annuity contracts that contain
guaranteed minimum death benefit ("GMDB") and guaranteed minimum income
benefit ("GMIB") features, to establish reserves for the Company's
estimated obligations associated with these features. The method was
changed to achieve a better matching of revenues and expenses. The initial
impact of adoption as of January 1, 2002 resulted in a charge of $33.1
million for the cumulative effect of this accounting change, net of
Federal income taxes of $17.9 million, in the consolidated statements of
earnings. Prior to the adoption of this accounting change, benefits under
these features were expensed as incurred. The impact of this change was to
reduce Earnings from continuing operations in 2002 by $113.0 million, net
of Federal income taxes of $61.0 million. The pro-forma effects of
retroactive application of this change on 2001 and 2000 results were not
material.
On January 1, 2001, the Company adopted SFAS No. 133, as amended, that
established new accounting and reporting standards for all derivative
instruments, including certain derivatives embedded in other contracts,
and for hedging activities. Free-standing derivative instruments
maintained by the Company at January 1, 2001 included interest rate caps,
floors and collars intended to hedge crediting rates on interest-sensitive
individual annuity contracts and certain reinsurance contracts. Based upon
guidance from the Financial Accounting Standards Board ("FASB") and the
Derivatives Implementation Group ("DIG"), the caps, floors and collars
could not be designated in a qualifying hedging relationship under SFAS
No. 133 and, consequently, require mark-to-market accounting through
earnings for changes in their fair values beginning January 1, 2001. In
accordance with the transition provision of SFAS No. 133, the Company
recorded a cumulative-effect-type charge to earnings of $3.5 million to
recognize the difference between the carrying values and fair values of
free-standing derivative instruments at January 1, 2001. With respect to
adoption of the requirements on embedded derivatives, 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 before that date. As a
consequence of this election, coupled with recent interpretive guidance
from the FASB and the DIG with respect to issues specifically related to
insurance contracts and features, adoption of the new requirements for
embedded derivatives had no material impact on the Company's results of
operations or its financial position. Upon its adoption of SFAS No. 133,
the Company reclassified $256.7 million of held-to-maturity securities as
available-for-sale. This reclassification resulted in an after-tax
cumulative-effect-type adjustment of $8.9 million in other comprehensive
income, representing the after-tax unrealized gain on these securities at
January 1, 2001.
F-9
The accounting for the GMIB reinsurance assets that are considered an SFAS
No. 133 derivative is discussed in the Policyholders' Account Balances and
Future Policy Benefits section of this Note.
The Company adopted the AICPA's Statement of Position ("SOP") 00-3, which
established new accounting and reporting standards for demutualizations,
prospectively as of January 1, 2001 with no financial impact upon initial
implementation.
SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities," provides the accounting and reporting
rules for sales, securitizations, servicing of receivables and other
financial assets, for secured borrowings and collateral transactions and
extinguishments of liabilities. SFAS No. 140 emphasizes the legal form of
the transfer rather than the previous accounting that was based upon the
risks and rewards of ownership. SFAS No. 140 was effective for transfers
after March 31, 2001 and is principally applied prospectively. Since that
March 2001 effective date, no significant transactions were impacted by
SFAS No. 140.
New Accounting Pronouncements
-----------------------------
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities". SFAS No. 146 established
financial accounting and reporting standards for costs associated with
exit or disposal activities and nullifies Emerging Issues Task Force Issue
No. 94-3, "Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)". SFAS No. 146 requires that a liability for a cost
associated with an exit or disposal activity be recognized only when the
liability is incurred and measured initially at fair value. However, the
cost of termination benefits provided under the terms of an ongoing
benefit arrangement, such as a standard severance offering based on years
of service, continues to be covered by other accounting pronouncements and
is unchanged by SFAS No. 146. SFAS No. 146 is effective for exit and
disposal activities initiated after December 31, 2002.
In November 2002, the FASB issued Interpretation ("FIN") No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others". FIN No. 45
addresses the disclosures made by a guarantor in its interim and annual
financial statements about obligations under guarantees. FIN No. 45 also
clarifies the requirements related to the recognition of a liability by a
guarantor at the inception of a guarantee for the obligations that the
guarantor has undertaken in issuing that guarantee. The fair value
reporting provisions of FIN No. 45 are to be applied on a prospective
basis to guarantees issued or modified after December 31, 2002. The
disclosure requirements are effective for financial statements of interim
or annual periods ending after December 15, 2002 (see Note 15). The
initial recognition and initial measurement provisions are to be applied
only on a prospective basis to guarantees issued or modified after
December 31, 2002.
In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable
Interest Entities," to address when it is appropriate to consolidate
financial interests in any variable interest entity ("VIE"), a new term to
define a business structure that either does not have equity investors
with voting or other similar rights or has equity investors that do not
provide sufficient financial resources to support its activities. For
entities with these characteristics, including many formerly known as
special purpose entities, FIN 46 imposes a consolidation model that
focuses on the relative exposures of the participants to the economic
risks and rewards from the assets of the VIE rather than on ownership of
its voting interests, if any, to determine whether a parent-subsidiary
relationship exists. Under the VIE consolidation model, the party with a
majority of the economic risks or rewards associated with a VIE's
activities, including those conveyed by derivatives, credit enhancements,
and other arrangements, is the "primary beneficiary" and, therefore, is
required to consolidate the VIE.
The consolidation requirements of FIN 46 phase-in beginning in the first
quarter of 2003, with immediate application to all new VIEs created after
January 31, 2003 and further application to existing VIEs starting in the
first interim period beginning after June 15, 2003. However, specific
disclosures are required in 2002 year-end financial statements issued
subsequent to January 31, 2003 if it is "reasonably possible" that a
company will have a significant, but not necessarily consolidated,
variable interest in a VIE when the consolidation requirements become
effective. At December 31, 2002, the Company identified significant
variable interests totaling $123.7 million, representing its participation
in seven collateralized debt obligation structures and four investment
limited partnerships determined to be VIEs. These variable interests are
reflected in the consolidated balance sheets as fixed maturities or other
equity investments and, accordingly,
F-10
are subject to ongoing review for impairments in value deemed to be other
than temporary. These variable interests and approximately $24.5 million
related funding commitments to the investment limited partnerships, as
more fully described in Note 15, represent the Company's maximum exposure
to loss from its involvement with these VIEs. The Company has no further
economic interests in these VIEs in the form of related guarantees,
derivatives or similar instruments and obligations.
By no later than third quarter 2003, the Company is required by FIN 46 to
consolidate those VIEs where it is determined to be the primary
beneficiary, which includes consideration of the aggregate variable
interests in these VIEs held by related parties. Management's preliminary
assessment indicates consolidation is likely to be required for one
collateralized debt obligation security and two investment limited
partnerships, which comprise $93.5 million of the significant variable
interests identified at December 31, 2002. Management believes no material
impact on consolidated financial position or reported amounts of
consolidated total liabilities would result from consolidation of these
VIEs. Similarly, management believes there would be no material impact on
consolidated results of operations as the Company's economic interests in
these VIEs are accounted for primarily under the equity method.
The FASB is in the process of considering the application of SFAS No. 133
in situations in which a financial instrument incorporates credit risk
exposures that are unrelated or only partially related to the
creditworthiness of the issuer of the instrument. The issue is whether an
embedded derivative exists in such instruments, related to the transfer of
credit risk that is unrelated to the creditworthiness of the issuer, which
must be bifurcated and reported at fair value. This issue may have
application to certain insurance and reinsurance contracts, such as
modified coinsurance arrangements in which a total return on a specified
group of assets is paid to the reinsurer, and group pension participating
contracts which credit the contractholder a total return on a specified
portfolio of assets. Based on management's understanding of the issues
under discussion, this potential accounting change is not expected to have
a material impact on the Company's results of operations or financial
position upon adoption.
Investments
-----------
The carrying values of fixed maturities identified as available for sale
are reported at estimated fair value. Changes in estimated fair value are
reported in comprehensive income. The amortized cost of fixed maturities
is adjusted for impairments in value deemed to be other than temporary.
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.
F-11
Partnerships, investment companies and joint venture interests in which
the Company has control and 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 and 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 include common stock and non-redeemable preferred stock
classified as either trading or available for sale securities, 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), net
(together "investment results") related to certain participating group
annuity contracts which are passed through to the contractholders are
offset in amounts 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, Closed Block policyholders dividend obligation, participating
group annuity contracts and deferred policy acquisition costs ("DAC")
related to universal life and investment-type products and participating
traditional life contracts.
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.
F-12
Deferred Policy Acquisition Costs
---------------------------------
Acquisition costs that vary with and are primarily related to the
acquisition of new and renewal insurance business, including commissions,
underwriting, agency and policy issue expenses, 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, Separate Account fees, 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. A
decrease in expected gross profits would accelerate DAC amortization.
Conversely, an increase in expected gross profits would slow DAC
amortization. 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 shareholders' equity as
of the balance sheet date.
A significant assumption in the amortization of DAC on variable and
interest-sensitive life insurance and variable annuities relates to
projected future Separate Account performance. Expected future gross
profit assumptions related to Separate Account performance are set by
management using a long-term view of expected average market returns by
applying a reversion to the mean approach. In applying this approach to
develop estimates of future returns, it is assumed that the market will
return to an average gross long-term return estimate, developed with
reference to historical long-term equity market performance and subject to
assessment of the reasonableness of resulting estimates of future return
assumptions. For purposes of making this reasonableness assessment,
management has set limitations as to maximum and minimum future rate of
return assumptions, as well as a limitation on the duration of use of
these maximum or minimum rates of return. Currently, the average gross
long-term annual return estimate is 9.0% (7.2% net of product weighted
average Separate Account fees), and the gross maximum and minimum annual
rate of return limitations are 15.0% (13.2% net of product weighted
average Separate Account fees) and 0% (-1.9% net of product weighted
average Separate Account fees), respectively. The maximum duration over
which these rate limitations may be applied is 5 years. This approach will
continue to be applied in future periods. If actual market returns
continue at levels that would result in assuming future market returns of
15% for more than 5 years in order to reach the average gross long-term
return estimate, the application of the 5 year maximum duration limitation
would result in an acceleration of DAC amortization. Conversely, actual
market returns resulting in assumed future market returns of 0% for more
than 5 years would result in a required deceleration of DAC amortization.
As of December 31, 2002, current projections of future average gross
market returns are within the maximum and minimum limitations and assume a
reversion to the mean of 9.0% after 2.5 years.
In addition, projections of future mortality assumptions related to
variable and interest-sensitive life products are based on a long-term
average of actual experience. This assumption is updated quarterly to
reflect recent experience as it emerges. Improvement of life mortality in
future periods from that currently projected would result in future
deceleration of DAC amortization. Conversely, deterioration of life
mortality in future periods from that currently projected would result in
future acceleration of DAC amortization. Generally, life mortality
experience has improved in recent periods.
Other significant assumptions underlying gross profit estimates relate to
contract persistency and general account investment spread.
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,
2002, the average rate of assumed investment yields, excluding policy
loans, was 7.9% grading to 7.3% over 8 years. 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 shareholders' equity as of the balance sheet date.
F-13
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.
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.
Equitable Life issues certain variable annuity products with a GMDB
feature. Equitable Life also issues certain variable annuity products that
contain a GMIB feature which, if elected by the policyholder after a
stipulated waiting period from contract issuance, guarantees a minimum
lifetime annuity based on predetermined annuity purchase rates that may be
in excess of what the contract account value can purchase at then-current
annuity purchase rates. This minimum lifetime annuity is based on
predetermined annuity purchase rates applied to a guarantee minimum income
benefit base. The risk associated with the GMDB and GMIB features is that
a protracted under-performance of the financial markets could result in
GMDB and GMIB benefits being higher than what accumulated policyholder
account balances would support. Reserves for GMDB and GMIB obligations are
calculated on the basis of actuarial assumptions related to projected
benefits and related contract charges over the lives of the contracts
using assumptions consistent with those used in estimating gross profits
for purposes of amortizing DAC. The determination of this estimated
liability is based on models which involve numerous estimates and
subjective judgments, including those regarding expected market rates of
return and volatility, contract surrender rates, mortality experience,
and, for GMIB, GMIB election rates. Assumptions regarding Separate Account
performance used for purposes of this calculation are set using a
long-term view of expected average market returns by applying a reversion
to the mean approach, consistent with that used for DAC amortization.
There can be no assurance that ultimate actual experience will not differ
from management's estimates.
The GMIB reinsurance contracts are considered derivatives under SFAS No.
133 and, therefore, are required to be reported in the balance sheet at
their fair value. GMIB fair values are reported in the consolidated
balance sheets in Other assets. Changes in GMIB fair values are reflected
in Commissions, fees and other income in the consolidated statements of
earnings. Since there is no readily available market for GMIB reinsurance
contracts, the determination of their fair values is based on models which
involve numerous estimates and subjective judgments including those
regarding expected market rates of return and volatility, GMIB election
rates, contract surrender rates and mortality experience. There can be no
assurance that ultimate actual experience will not differ from
management's estimates.
For reinsurance contracts other than those covering GMIB exposure,
reinsurance recoverable balances are calculated using methodologies and
assumptions that are consistent with those used to calculate the direct
liabilities.
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
that, 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 8.43% for annuity
liabilities.
F-14
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.
Claim reserves and associated liabilities net of reinsurance ceded for
individual DI and major medical policies were $86.0 million and $104.2
million at December 31, 2002 and 2001, respectively. At December 31, 2002
and 2001, respectively, $1,088.9 million and $1,101.8 million of DI
reserves and associated liabilities were ceded through an indemnity
reinsurance agreement principally with a single reinsurer (see Note 12).
Incurred benefits (benefits paid plus changes in claim reserves) and
benefits paid for individual DI and major medical policies are summarized
as follows:
2002 2001 2000
----------------- ---------------- -----------------
(IN MILLIONS)
Incurred benefits related to current year.......... $ 36.6 $ 44.0 $ 56.1
Incurred benefits related to prior years........... (6.3) (10.6) 15.0
----------------- ---------------- -----------------
Total Incurred Benefits............................ $ 30.3 $ 33.4 $ 71.1
================= ================ =================
Benefits paid related to current year.............. $ 11.5 $ 10.7 $ 14.8
Benefits paid related to prior years............... 37.2 38.8 106.0
----------------- ---------------- -----------------
Total Benefits Paid................................ $ 48.7 $ 49.5 $ 120.8
================= ================ =================
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, 2002, participating policies, including those in the
Closed Block, represent approximately 19.4% ($36.5 billion) of directly
written life insurance in-force, net of amounts ceded.
Separate Accounts
-----------------
Generally, 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. Separate Accounts' assets and liabilities are shown on
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 and are not reported in revenues in the consolidated
statements of earnings. For 2002, 2001 and 2000, investment results of
such Separate Accounts were (losses) gains of $(4,740.7) million,
$(2,214.4) million and $8,051.7 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.
F-15
Recognition of Investment Management Revenues and Related Expenses
------------------------------------------------------------------
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; they include brokerage transactions charges of Sanford C.
Bernstein & Co., LLC ("SCB LLC"), a wholly owned subsidiary of Alliance,
for substantially all private client transactions and certain
institutional investment management client transactions. 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 in excess of a stated benchmark over a
specified period of time. Performance fees are recorded as revenue at the
end of the measurement period. Transaction charges earned and related
expenses are recorded on a trade date basis. Distribution revenues and
shareholder servicing fees are accrued as earned.
Institutional research services revenue consists of brokerage transaction
charges and underwriting syndicate revenues related to services provided
to institutional investors. Brokerage transaction charges earned and
related expenses are recorded on a trade date basis. Syndicate
participation and underwriting revenues include gains, losses and fees,
net of syndicate expenses, arising from securities offerings in which SCB
LLC acts as an underwriter or agent. Syndicate participation and
underwriting revenues are recorded on the offering date.
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 and from contingent deferred sales charges
("CDSC") received from shareholders of those funds upon the redemption of
their shares. CDSC reduces unamortized deferred sales commissions when
received. At December 31, 2002 and 2001, respectively, deferred sales
commissions totaled $500.9 million and $648.2 million and are included
within Other assets.
Impairment of the deferred sales commission asset is evaluated quarterly,
or when a significant decrease in the estimated fair value of the asset
occurs, by comparing the undiscounted cash flows estimated by Alliance's
management to be realized from this asset to its recorded amount. If the
estimated undiscounted cash flows are less that the recorded amount and if
Alliance's management estimates that the recorded amount is not fully
recoverable, an impairment loss is recognized for the difference between
the recorded amount and the estimated fair value of the asset. Cash flows
consist of ongoing distribution fees and CDSC. Distribution fees are
calculated as a percentage of average assets under management related to
back-end load shares. CDSC is based on the values of back-end load shares
redeemed and, generally, the length of time the shares have been held.
Other Accounting Policies
-------------------------
In accordance with regulations of the Securities and Exchange Commission
("SEC"), securities with a fair value of $1.17 billion have been
segregated in a special reserve bank custody account at December 31, 2002
for the exclusive benefit of securities broker-dealer or brokerage
customers under Rule 15c3-3 under the Securities Exchange Act of 1934, as
amended.
Intangible assets include costs assigned to contracts of businesses
acquired. These costs continue to be amortized on a straight-line basis
over estimated useful lives of twenty years.
Capitalized internal-use software is amortized on a straight-line basis
over the estimated useful life of the software.
The Holding Company and its consolidated subsidiaries, including the
Company, file a consolidated Federal income tax return. 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.
F-16
Minority interest subject to redemption rights represents the remaining
32.6 million private Alliance Units issued to former Bernstein
shareholders in connection with Alliance's acquisition of Bernstein. The
Holding Company agreed to provide liquidity to these former Bernstein
shareholders after a two-year lock-out period which ended October 2002.
The Company acquired 8.16 million of the former Bernstein shareholders'
Units in 2002. The outstanding 32.6 million Alliance Units may be sold to
the Holding Company at the prevailing market price over the remaining
seven years ending in 2009. Generally not more than 20% of the original
Units issued to the former Bernstein shareholders may be put to the
Holding Company in any one annual period.
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, stock option awards result in compensation
expense only if the current market price of the underlying stock exceeds
the option strike price at the grant date. See Note 21 for the pro forma
disclosures required by SFAS No. 123, "Accounting for Stock-Based
Compensation," and SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure".
F-17
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, 2002
-----------------
Fixed Maturities:
Available for Sale:
Corporate.......................... $ 20,084.0 $ 1,491.0 $ 269.0 $ 21,306.0
Mortgage-backed.................... 2,419.2 99.2 - 2,518.4
U.S. Treasury, government and
agency securities................ 895.5 84.1 - 979.6
States and political subdivisions.. 197.6 17.9 - 215.5
Foreign governments................ 231.8 37.4 .8 268.4
Redeemable preferred stock......... 923.7 71.4 4.1 991.0
----------------- ----------------- ---------------- -----------------
Total Available for Sale............... $ 24,751.8 $ 1,801.0 $ 273.9 $ 26,278.9
================= ================= ================ =================
Equity Securities:
Available for sale................... $ 37.6 $ 2.0 $ 3.4 $ 36.2
Trading securities................... 3.3 .8 3.0 1.1
----------------- ----------------- ---------------- -----------------
Total Equity Securities................ $ 40.9 $ 2.8 $ 6.4 $ 37.3
================= ================= ================ =================
December 31, 2001
-----------------
Fixed Maturities:
Available for Sale:
Corporate.......................... $ 18,582.9 $ 663.5 $ 291.7 $ 18,954.7
Mortgage-backed.................... 2,428.7 39.1 5.5 2,462.3
U.S. Treasury, government and
agency securities................ 1,113.5 62.3 1.5 1,174.3
States and political subdivisions.. 138.9 6.8 1.3 144.4
Foreign governments................ 143.1 15.6 1.0 157.7
Redeemable preferred stock......... 379.6 16.5 23.6 372.5
----------------- ----------------- ---------------- -----------------
Total Available for Sale............... $ 22,786.7 $ 803.8 $ 324.6 $ 23,265.9
================= ================= ================ =================
Equity Securities:
Available for sale................... $ 54.9 $ 5.8 $ 1.6 $ 59.1
Trading securities................... 4.9 .9 3.4 2.4
----------------- ----------------- ---------------- -----------------
Total Equity Securities................ $ 59.8 $ 6.7 $ 5.0 $ 61.5
================= ================= ================ =================
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,
2002 and 2001, securities without a readily ascertainable market value
having an amortized cost of $4,899.8 million and $5,368.3 million,
respectively, had estimated fair values of $5,137.2 million and $5,453.8
million, respectively.
F-18
The contractual maturity of bonds at December 31, 2002 is shown below:
AVAILABLE FOR SALE
------------------------------------
AMORTIZED ESTIMATED
COST FAIR VALUE
---------------- -----------------
(IN MILLIONS)
Due in one year or less................................................ $ 612.4 $ 612.1
Due in years two through five.......................................... 5,239.9 5,527.7
Due in years six through ten........................................... 8,630.1 9,268.1
Due after ten years.................................................... 6,926.5 7,361.6
Mortgage-backed securities............................................. 2,419.2 2,518.4
---------------- -----------------
Total.................................................................. $ 23,828.1 $ 25,287.9
================ =================
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, 2002, approximately 6.9% of the
$23,828.1 million aggregate amortized cost of bonds held by the Company
was considered to be other than investment grade.
At December 31, 2002, the carrying value of fixed maturities which are
non-income producing for the twelve months preceding the consolidated
balance sheet date was $132.4 million.
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, 2002 and 2001 were $674.8
million and $695.2 million, respectively.
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 $75.3 million and
$31.5 million at December 31, 2002 and 2001, respectively. Gross interest
income on these loans included in net investment income aggregated $5.3
million, $3.2 million and $9.7 million in 2002, 2001 and 2000,
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 $6.8 million, $4.2 million and $11.0 million in
2002, 2001 and 2000, respectively.
Impaired mortgage loans along with the related investment valuation
allowances for losses follow:
DECEMBER 31,
----------------------------------------
2002 2001
------------------- -------------------
(IN MILLIONS)
Impaired mortgage loans with investment valuation allowances....... $ 111.8 $ 114.2
Impaired mortgage loans without investment valuation allowances.... 20.4 30.7
------------------- -------------------
Recorded investment in impaired mortgage loans..................... 132.2 144.9
Investment valuation allowances.................................... (23.4) (19.3)
------------------- -------------------
Net Impaired Mortgage Loans........................................ $ 108.8 $ 125.6
=================== ===================
F-19
During 2002, 2001 and 2000, respectively, the Company's average recorded
investment in impaired mortgage loans was $138.1 million, $141.7 million
and $169.8 million. Interest income recognized on these impaired mortgage
loans totaled $10.0 million, $7.2 million and $12.4 million for 2002, 2001
and 2000, respectively.
Mortgage loans on real estate are placed on nonaccrual status once
management believes the collection of accrued interest is doubtful. Once
mortgage loans on real estate are classified as nonaccrual loans, interest
income is recognized under the cash basis of accounting and the resumption
of the interest accrual would commence only after all past due interest
has been collected or the mortgage loan on real estate has been
restructured to where the collection of interest is considered likely. At
December 31, 2002 and 2001, respectively, the carrying value of mortgage
loans on real estate that had been classified as nonaccrual loans was
$91.1 million and $95.8 million.
The Insurance Group's investment in equity real estate is through direct
ownership and through investments in real estate joint ventures. At
December 31, 2002 and 2001, the carrying value of equity real estate held
for sale amounted to $107.7 million and $216.6 million, respectively. For
2002, 2001 and 2000, respectively, real estate of $5.6 million, $64.8
million and $21.6 million was acquired in satisfaction of debt. At
December 31, 2002 and 2001, the Company owned $268.8 million and $376.5
million, respectively, of real estate acquired in satisfaction of debt of
which $2.7 million and $11.1 million, respectively, are held as real
estate joint ventures.
Accumulated depreciation on real estate was $163.6 million and $160.3
million at December 31, 2002 and 2001, respectively. Depreciation expense
on real estate totaled $18.0 million, $16.1 million and $21.7 million for
2002, 2001 and 2000, respectively.
Investment valuation allowances for mortgage loans and equity real estate
and changes thereto follow:
2002 2001 2000
----------------- ---------------- -----------------
(IN MILLIONS)
Balances, beginning of year........................ $ 87.6 $ 126.2 $ 177.9
Additions charged to income........................ 32.5 40.0 68.2
Deductions for writedowns and
asset dispositions............................... (65.1) (78.6) (119.9)
----------------- ---------------- -----------------
Balances, End of Year.............................. $ 55.0 $ 87.6 $ 126.2
================= ================ =================
Balances, end of year comprise:
Mortgage loans on real estate.................... $ 23.4 $ 19.3 $ 50.5
Equity real estate............................... 31.6 68.3 75.7
----------------- ---------------- -----------------
Total.............................................. $ 55.0 $ 87.6 $ 126.2
================= ================ =================
F-20
4) EQUITY METHOD INVESTMENTS
Included in equity real estate or other equity investments, as
appropriate, is the Company's interest in real estate joint ventures,
limited partnership interests and investment companies accounted for under
the equity method with a total carrying value of $801.6 million and $883.9
million, respectively, at December 31, 2002 and 2001. The Company's total
equity in net (losses) earnings for these real estate joint ventures and
limited partnership interests was $(14.9) million, $(111.1) million and
$180.3 million, respectively, for 2002, 2001 and 2002.
Summarized below is the combined financial information only for those real
estate joint ventures and for those 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 (7 and 10 individual ventures at December 31, 2002 and 2001,
respectively) and the Company's carrying value and equity in net earnings
for those real estate joint ventures and limited partnership interests:
DECEMBER 31,
------------------------------------
2002 2001
---------------- -----------------
(IN MILLIONS)
BALANCE SHEETS
Investments in real estate, at depreciated cost........................ $ 550.0 $ 570.5
Investments in securities, generally at estimated fair value........... 237.5 255.7
Cash and cash equivalents.............................................. 27.9 23.7
Other assets........................................................... 32.2 39.4
---------------- -----------------
Total Assets........................................................... $ 847.6 $ 889.3
================ =================
Borrowed funds - third party........................................... $ 264.7 $ 269.6
Other liabilities...................................................... 19.2 20.3
---------------- -----------------
Total liabilities...................................................... 283.9 289.9
---------------- -----------------
Partners' capital...................................................... 563.7 599.4
---------------- -----------------
Total Liabilities and Partners' Capital................................ $ 847.6 $ 889.3
================ =================
The Company's Carrying Value in These Entities Included Above.......... $ 172.3 $ 188.2
================ =================
2002 2001 2000
----------------- ---------------- -----------------
(IN MILLIONS)
STATEMENTS OF EARNINGS
Revenues of real estate joint ventures............. $ 98.4 $ 95.6 $ 147.6
Net (losses) revenues of
other limited partnership interests.............. (23.2) 29.8 16.5
Interest expense - third party..................... (19.8) (11.5) (17.0)
Interest expense - the Company..................... - (.7) (2.0)
Other expenses..................................... (59.3) (58.2) (88.0)
----------------- ---------------- -----------------
Net (Losses) Earnings.............................. $ (3.9) $ 55.0 $ 57.1
================= ================ =================
The Company's Equity in Net Earnings of These
Entities Included Above.......................... $ 12.8 $ 13.2 $ 17.8
================= ================ =================
F-21
5) NET INVESTMENT INCOME AND INVESTMENT GAINS (LOSSES)
The sources of net investment income follows:
2002 2001 2000
----------------- ---------------- -----------------
(IN MILLIONS)
Fixed maturities................................... $ 1,755.4 $ 1,662.4 $ 1,764.8
Mortgage loans on real estate...................... 314.8 361.6 387.1
Equity real estate................................. 153.7 166.2 207.2
Other equity investments........................... (45.4) (53.6) 135.3
Policy loans....................................... 269.4 268.2 258.3
Other investment income............................ 114.1 216.6 208.1
----------------- ---------------- -----------------
Gross investment income.......................... 2,562.0 2,621.4 2,960.8
Investment expenses.............................. (184.8) (217.1) (208.9)
----------------- ---------------- -----------------
Net Investment Income.............................. $ 2,377.2 $ 2,404.3 $ 2,751.9
================= ================ =================
Investment (losses) gains including changes in the valuation allowances
follow:
2002 2001 2000
----------------- ---------------- -----------------
(IN MILLIONS)
Fixed maturities................................... $ (374.3) $ (225.2) $ (795.0)
Mortgage loans on real estate...................... 3.7 (11.4) (18.0)
Equity real estate................................. 101.5 34.5 1.6
Other equity investments........................... 3.3 (13.0) (23.4)
Issuance and sales of Alliance Units............... .5 (2.3) 3.9
Issuance and sales of DLJ common stock............. - - 38.8
Other.............................................. (13.2) 10.1 .3
----------------- ---------------- -----------------
Investment Losses, Net........................... $ (278.5) $ (207.3) $ (791.8)
================= ================ =================
Writedowns of fixed maturities amounted to $312.8 million, $287.5 million
and $635.5 million for 2002, 2001 and 2000, respectively, including $499.2
million in fourth quarter 2000. Writedowns of mortgage loans on real
estate and equity real estate amounted to $5.5 million and $5.8 million,
respectively, for 2002.
For 2002, 2001 and 2000, respectively, proceeds received on sales of fixed
maturities classified as available for sale amounted to $7,176.3 million,
$7,372.3 million and $7,685.5 million. Gross gains of $108.4 million,
$156.2 million and $79.7 million and gross losses of $172.9 million,
$115.9 million and $220.9 million, respectively, were realized on these
sales. The change in unrealized investment gains (losses) related to fixed
maturities classified as available for sale for 2002, 2001 and 2000
amounted to $1,047.8 million, $429.5 million and $954.5 million,
respectively.
In conjunction with the sale of DLJ in 2000, the Company received 11.4
million shares in Credit Suisse Group ("CSG") common stock, 2.8 million
shares of which were immediately repurchased by CSG at closing. The CSG
shares were designated as trading account securities. The $1.56 billion
carrying value of CSG shares that were held by the Company at December 31,
2000 were sold in January 2001. Net investment income included realized
gains of $27.1 million in 2001 and included unrealized holding losses of
$43.3 million in 2000 on the CSG shares.
In 2002, 2001 and 2000, respectively, net unrealized holding gains
(losses) on trading account equity securities of $.5 million, $25.0
million, and $(42.2) million were included in net investment income in the
consolidated statements of earnings. These trading securities had a
carrying value of $1.1 million and $2.4 million and costs of $3.3 million
and $4.9 million at December 31, 2002 and 2001, respectively.
F-22
For 2002, 2001 and 2000, investment results passed through to certain
participating group annuity contracts as interest credited to
policyholders' account balances amounted to $92.1 million, $96.7 million
and $110.6 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 Discontinued Operations on
a line-by-line basis, follow:
2002 2001 2000
----------------- ---------------- -----------------
(IN MILLIONS)
Balance, beginning of year......................... $ 215.5 $ 12.9 $ (392.8)
Changes in unrealized investment (losses) gains.... 1,049.9 436.0 979.7
Changes in unrealized investment losses(gains)
attributable to:
Participating group annuity contracts,
Closed Block policyholder dividend
obligation and other......................... (157.3) (48.6) (18.3)
DAC............................................ (174.1) (71.6) (262.1)
Deferred Federal income taxes.................. (252.9) (113.2) (293.6)
----------------- ---------------- -----------------
Balance, End of Year............................... $ 681.1 $ 215.5 $ 12.9
================= ================ =================
Balance, end of year comprises:
Unrealized investment gains (losses) on:
Fixed maturities............................... $ 1,572.0 $ 496.0 $ 65.9
Other equity investments....................... (1.5) 4.3 (2.3)
Other.......................................... (22.2) (1.9) (1.2)
----------------- ---------------- -----------------
Total........................................ 1,548.3 498.4 62.4
Amounts of unrealized investment (losses) gains
attributable to:
Participating group annuity contracts,
Closed Block policyholder dividend
obligation and other....................... (221.2) (63.9) (15.3)
DAC.......................................... (274.0) (99.9) (28.3)
Deferred Federal income taxes................ (372.0) (119.1) (5.9)
----------------- ---------------- -----------------
Total.............................................. $ 681.1 $ 215.5 $ 12.9
================= ================ =================
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-23
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:
2002 2001 2000
----------------- ---------------- -----------------
(IN MILLIONS)
Unrealized gains on investments.................... $ 681.1 $ 215.5 $ 12.9
Minimum pension liability.......................... - (.1) (.1)
----------------- ---------------- -----------------
Total Accumulated Other
Comprehensive Income............................. $ 681.1 $ 215.4 $ 12.8
================= ================ =================
The components of other comprehensive income (loss) for the past three
years follow:
2002 2001 2000
----------------- ---------------- -----------------
(IN MILLIONS)
Net unrealized gains (losses) on investments:
Net unrealized gains arising during
the period..................................... $ 1,008.9 $ 525.2 $ 191.0
Losses (gains) reclassified into net earnings
during the period.............................. 41.0 (89.2) 788.7
----------------- ---------------- -----------------
Net unrealized gains on investments................ 1,049.9 436.0 979.7
Adjustments for policyholders liabilities,
DAC and deferred Federal income taxes.......... (584.3) (233.4) (574.0)
---------------- ----------------- -----------------
Change in unrealized gains, net of
adjustments.................................... 465.6 202.6 405.7
Change in minimum pension liability................ .1 - -
----------------- ---------------- -----------------
Total Other Comprehensive Income................... $ 465.7 $ 202.6 $ 405.7
================= ================ =================
7) CLOSED BLOCK
The excess of Closed Block liabilities over Closed Block assets (adjusted
to exclude the impact of related amounts in accumulated other
comprehensive income) represents the expected maximum future post-tax
earnings from the Closed Block which would be recognized in income from
continuing operations over the period the policies and contracts in the
Closed Block remain in force. As of January 1, 2001, the Company has
developed an actuarial calculation of the expected timing of the Closed
Block earnings.
If the actual cumulative earnings from the Closed Block are greater than
the expected cumulative earnings, only the expected earnings will be
recognized in net income. Actual cumulative earnings in excess of expected
cumulative earnings at any point in time are recorded as a policyholder
dividend obligation because they will ultimately be paid to Closed Block
policyholders as an additional policyholder dividend unless offset by
future performance that is less favorable than originally expected. If a
policyholder dividend obligation has been previously established and the
actual Closed Block earnings in a subsequent period are less than the
expected earnings for that period, the policyholder dividend obligation
would be reduced (but not below zero). If, over the period the policies
and contracts in the Closed Block remain in force, the actual cumulative
earnings of the Closed Block are less than the expected cumulative
earnings, only actual earnings would be recognized in income from
continuing operations. If the Closed Block has insufficient funds to make
guaranteed policy benefit payments, such payments will be made from assets
outside the Closed Block.
Many expenses related to Closed Block operations, including amortization
of DAC, are charged to operations outside of the Closed Block;
accordingly, net revenues of the Closed Block do not represent the actual
profitability of the Closed Block operations. Operating costs and expenses
outside of the Closed Block are, therefore, disproportionate to the
business outside of the Closed Block.
F-24
Summarized financial information for the Closed Block is as follows:
DECEMBER 31, December 31,
2002 2001
----------------- -----------------
(IN MILLIONS)
CLOSED BLOCK LIABILITIES:
Future policy benefits, policyholders' account balances
and other.......................................................... $ 8,997.3 $ 9,002.8
Policyholder dividend obligation..................................... 213.3 47.1
Other liabilities.................................................... 97.6 53.6
----------------- -----------------
Total Closed Block liabilities....................................... 9,308.2 9,103.5
----------------- -----------------
ASSETS DESIGNATED TO THE CLOSED BLOCK:
Fixed maturities, available for sale, at estimated fair value
(amortized cost of $4,794.0 and $4,600.4).......................... 5,098.4 4,705.7
Mortgage loans on real estate........................................ 1,456.0 1,514.4
Policy loans......................................................... 1,449.9 1,504.4
Cash and other invested assets....................................... 141.9 141.0
Other assets......................................................... 219.9 214.7
----------------- -----------------
Total assets designated to the Closed Block.......................... 8,366.1 8,080.2
----------------- -----------------
Excess of Closed Block liabilities over assets designated to
the Closed Block................................................... 942.1 1,023.3
Amounts included in accumulated other comprehensive income:
Net unrealized investment gains, net of deferred Federal income
tax of $31.8 and $20.4 and policyholder dividend obligation...... 59.1 37.8
----------------- -----------------
Maximum Future Earnings To Be Recognized From Closed Block
Assets and Liabilities............................................. $ 1,001.2 $ 1,061.1
================= =================
Closed Block revenues and expenses were as follows:
2002 2001 2000
---------------- ---------------- --------------------
(IN MILLIONS)
REVENUES:
Premiums and other income............................ $ 543.8 $ 571.5 $ 594.7
Investment income (net of investment
expenses of $5.4, $3.0, and $8.1).................. 582.4 583.5 578.7
Investment losses, net............................... (47.0) (42.3) (35.8)
---------------- ---------------- --------------------
Total revenues....................................... 1,079.2 1,112.7 1,137.6
---------------- ---------------- --------------------
BENEFITS AND OTHER DEDUCTIONS:
Policyholders' benefits and dividends................ 980.2 1,009.3 1,025.2
Other operating costs and expenses................... 4.4 4.7 5.2
---------------- ---------------- --------------------
Total benefits and other deductions.................. 984.6 1,014.0 1,030.4
---------------- ---------------- --------------------
Net revenues before Federal income taxes............. 94.6 98.7 107.2
Federal income taxes................................. (34.7) (36.2) (38.2)
---------------- ---------------- --------------------
Net Revenues......................................... $ 59.9 $ 62.5 $ 69.0
================ ================ ====================
F-25
Reconciliation of the policyholder dividend obligation is as follows:
DECEMBER 31,
------------------------------------
2002 2001
---------------- -----------------
(IN MILLIONS)
Balance at beginning of year........................................... $ 47.1 $ -
Unrealized investment gains (losses)................................... 166.2 47.1
---------------- -----------------
Balance at end of year ................................................ $ 213.3 $ 47.1
================ =================
Impaired mortgage loans along with the related investment valuation
allowances follows:
DECEMBER 31,
------------------------------------
2002 2001
---------------- -----------------
(IN MILLIONS)
Impaired mortgage loans with investment valuation allowances........... $ 18.6 $ 26.7
Impaired mortgage loans without investment valuation allowances........ .9 6.5
---------------- -----------------
Recorded investment in impaired mortgages.............................. 19.5 33.2
Investment valuation allowances........................................ (4.0) (5.8)
---------------- -----------------
Net Impaired Mortgage Loans............................................ $ 15.5 $ 27.4
================ =================
During 2002, 2001 and 2000, the Closed Block's average recorded investment
in impaired mortgage loans was $26.0 million, $30.8 million and $31.0
million, respectively. Interest income recognized on these impaired
mortgage loans totaled $2.1 million, $1.2 million and $2.0 million for
2002, 2001 and 2000, respectively.
Valuation allowances amounted to $3.9 million and $5.7 million on mortgage
loans on real estate and $.1 million and $9.8 million on equity real
estate at December 31, 2002 and 2001, respectively. Writedowns of fixed
maturities amounted to $40.0 million, $30.8 million and $27.7 million for
2002, 2001 and 2000, respectively, including $23.3 million in fourth
quarter 2001.
F-26
8) DISCONTINUED OPERATIONS
Summarized financial information for Discontinued Operations follows:
DECEMBER 31,
--------------------------------------
2002 2001
----------------- -----------------
(IN MILLIONS)
BALANCE SHEETS
Fixed maturities, available for sale, at estimated fair value
(amortized cost of $677.8 and $542.9)............................. $ 722.7 $ 559.6
Equity real estate.................................................. 203.7 252.0
Mortgage loans on real estate....................................... 87.5 160.3
Other equity investments............................................ 9.4 22.3
Other invested assets............................................... .2 .4
----------------- -----------------
Total investments................................................. 1,023.5 994.6
Cash and cash equivalents........................................... 31.0 41.1
Other assets........................................................ 126.5 152.6
----------------- -----------------
Total Assets........................................................ $ 1,181.0 $ 1,188.3
================= =================
Policyholders liabilities........................................... $ 909.5 $ 932.9
Allowance for future losses......................................... 164.6 139.9
Other liabilities................................................... 106.9 115.5
----------------- -----------------
Total Liabilities................................................... $ 1,181.0 $ 1,188.3
================= =================
2002 2001 2000
----------------- ---------------- -----------------
(IN MILLIONS)
STATEMENTS OF EARNINGS
Investment income (net of investment
expenses of $18.1, $25.3 and $37.0)............. $ 69.7 $ 91.6 $ 102.2
Investment gains (losses), net.................... 34.2 33.6 (6.6)
Policy fees, premiums and other income............ .2 .2 .7
----------------- ---------------- -----------------
Total revenues.................................... 104.1 125.4 96.3
Benefits and other deductions..................... 98.7 100.7 106.9
Earnings credited (losses charged) to allowance
for future losses............................... 5.4 24.7 (10.6)
----------------- ---------------- -----------------
Pre-tax loss from operations...................... - - -
Pre-tax earnings from releasing the allowance
for future losses............................... 8.7 46.1 90.2
Federal income tax expense........................ (3.1) (2.2) (31.6)
----------------- ---------------- -----------------
Earnings from Discontinued Operations............. $ 5.6 $ 43.9 $ 58.6
================= ================ =================
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, 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.
Valuation allowances of $4.9 million and $4.8 million on mortgage loans on
real estate and $0 million and $5.0 million on equity real estate were
held at December 31, 2002 and 2001, respectively. During 2002, 2001 and
2000, discontinued operations' average recorded investment in impaired
mortgage loans was $25.3 million, $32.2 million and $11.3 million,
respectively. Interest income recognized on these impaired mortgage loans
totaled $2.5 million, $2.5 million and $.9 million for 2002, 2001 and
2000, respectively.
In 2001, Federal Income tax expense for discontinued operations reflected
a $13.8 million reduction in taxes due to settlement of open tax years.
F-27
9) VARIABLE ANNUITY CONTRACTS - GMDB AND GMIB
Equitable Life issues certain variable annuity contracts with GMDB and
GMIB features that guarantee either:
a) Return of Premium: the benefit is the greater of current account
value and premiums paid (adjusted for withdrawals),
b) Ratchet: the benefit is the greatest of current account value,
premiums paid (adjusted for withdrawals), and the highest account
value on any anniversary up to contractually specified ages
(adjusted for withdrawals), or
c) Roll-Up: the benefit is the greater of current account value and
premiums paid (adjusted for withdrawals) accumulated at
contractually specified interest rates up to specified ages,
d) Combo: the benefit is the greater of the ratchet benefit or the
roll-up benefit.
The following table summarizes the GMDB and GMIB liabilities, before
reinsurance ceded, reflected in the General Account in future policy
benefits and other policyholders liabilities in 2002:
GMDB GMIB TOTAL
----------------- ---------------- -----------------
(IN MILLIONS)
Balance at January 1, 2002......................... $ 43.0 $ 15.0 $ 58.0
Paid guarantee benefits.......................... (65.0) - (65.0)
Other changes in reserve......................... 150.4 102.5 252.9
----------------- ---------------- -----------------
Balance at December 31, 2002....................... $ 128.4 $ 117.5 $ 245.9
================= ================ =================
Related GMDB reinsurance ceded amounts were:
GMDB
--------------------
(IN MILLIONS)
Balance at January 1, 2002......................... $ 7.0
Paid guarantee benefits ceded.................... (14.5)
Other changes in reserve......................... 29.0
--------------------
Balance at December 31, 2002....................... $ 21.5
====================
The GMIB reinsurance contracts are considered derivatives and are reported
at fair value (see Note 12).
F-28
At December 31, 2002 the Company had the following variable contracts with
guarantees. Note that the Company's variable contracts with GMDB
guarantees may also offer GMIB guarantees in each contract, therefore, the
GMDB and GMIB amounts listed are not mutually exclusive:
RETURN
OF
PREMIUM RATCHET ROLL-UP COMBO TOTAL
------------- -------------- -------------- ------------- --------------
(DOLLARS IN MILLIONS)
GMDB:
Account value (1)................ $ 21,052 $ 3,991 $ 6,030 $ 1,488 $ 32,561
Net amount at risk, gross........ $ 5,609 $ 1,724 $ 3,036 $ 44 $ 10,413
Net amount at risk, net of
amounts reinsured.............. $ 5,602 $ 1,187 $ 1,897 $ 44 $ 8,730
Average attained age of
contractholders................ 50.0 58.9 61.0 59.6 51.7
Percentage of contractholders
over age 70.................... 7.0% 19.8% 24.3% 20.4% 9.5%
Range of guaranteed minimum
return rates.................. N/A N/A 3-6% 3-6% N/A
GMIB:
Account value (2)................ N/A N/A $ 4,782 $ 2,042 $ 6,824
Net amount at risk, gross........ N/A N/A $ 1,112 $ 10 $ 1,122
Net amount at risk, net of
amounts reinsured.............. N/A N/A $ 308 $ 5 $ 313
Weighted average years remaining
until annuitization ........... N/A N/A 5.0 10.2 5.0
Range of guaranteed minimum
return rates.................. N/A N/A 3-6% 3-6% 3-6%
(1) Included General Account balances of $10,141 million, $96 million,
$129 million and $257 million, respectively, for a total of
$10,623 million.
(2) Included General Account balances of $20 million and $356 million,
respectively, for a total of $376 million.
For contracts in the event of death, the net amount at risk is defined as
the amount by which the GMDB benefits exceed related account values.
For contracts at annuitization, the net amount at risk is defined as the
amount by which the GMIB benefit bases exceed related account values,
taking into account the relationship between current annuity purchase
rates and the GMIB guaranteed annuity purchase rates.
F-29
10) SHORT-TERM AND LONG-TERM DEBT
Short-term and long-term debt consists of the following:
DECEMBER 31,
--------------------------------------
2002 2001
----------------- -----------------
(IN MILLIONS)
Short-term debt...................................................... $ 22.0 $ 223.1
----------------- -----------------
Long-term debt:
Equitable Life:
Surplus notes, 6.95%, due 2005..................................... 399.8 399.7
Surplus notes, 7.70%, due 2015..................................... 199.7 199.7
Other.............................................................. - .2
----------------- -----------------
Total Equitable Life........................................... 599.5 599.6
----------------- -----------------
Alliance:
Senior Notes, 5.625%, due 2006..................................... 398.4 398.0
Other.............................................................. 6.5 6.5
----------------- -----------------
Total Alliance................................................. 404.9 404.5
----------------- -----------------
Wholly Owned and Joint Venture Real Estate:
Mortgage notes, 3.09% due through 2017............................. 248.3 248.3
----------------- -----------------
Total long-term debt................................................. 1,252.7 1,252.4
----------------- -----------------
Total Short-term and Long-term Debt.................................. $ 1,274.7 $ 1,475.5
================= =================
Short-term Debt
---------------
Equitable Life has a $350.0 million five year bank credit facility. The
interest rates are based on external indices dependent on the type of
borrowing ranging from 1.60% to 4.25%. There were no amounts outstanding
under this credit facility at December 31, 2002.
Equitable Life has a commercial paper program with an issue limit of
$500.0 million. This program is available for general corporate purposes
used to support Equitable Life's liquidity needs and is supported by
Equitable Life's $350.0 million bank credit facility. At December 31,
2002, there were no amounts outstanding under this program.
Since 1998, Alliance has had a $425.0 million commercial paper program. In
September 2002, Alliance entered into an $800.0 million five-year
revolving credit facility with a group of commercial banks and other
lenders that replaced three previously existing credit facilities
aggregating $875.0 million. Of the $800.0 million total, $425.0 million is
intended to provided back-up liquidity for Alliance's commercial paper
program, with the balance available for general purposes, including
capital expenditures and funding the payments of sales commissions to
financial intermediaries. 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.
The credit facility also provides for a facility fee payable on the total
facility. In addition, a utilization rate fee is payable in the event the
average aggregate daily outstanding balance exceeds $400.0 million for
each calendar quarter. The revolving credit facility contains covenants
that, among other things, require Alliance to meet certain financial
ratios. Alliance was in compliance with the covenants at December 31,
2002. At December 31, 2002, Alliance had commercial paper outstanding
totaling $22.0 million at an effective interest rate of 1.3%; there were
no borrowings outstanding under Alliance's revolving credit facilities.
Since December 1999, Alliance has maintained a $100.0 million extendible
commercial notes ("ECN") program as a supplement to its $425.0 million
commercial paper program. ECNs are short-term uncommitted debt instruments
that do not require back-up liquidity support. At December 31, 2002, there
were no borrowings outstanding under the ECN program.
F-30
Long-term Debt
--------------
Certain of the long-term debt agreements, principally mortgage notes, have
restrictive covenants related to the total amount of debt, net tangible
assets and other matters. At December 31, 2002, the Company was in
compliance with all debt covenants.
At December 31, 2002 and 2001, respectively, the Company has pledged real
estate of $322.9 million and $314.5 million as collateral for certain
long-term debt.
At December 31, 2002, aggregate maturities of the long-term debt based on
required principal payments at maturity was $248.3 million for 2003, $0.0
for 2004, $400.0 million for 2005, $406.5 million for 2006, $0.0 million
for 2007 and $200.0 million thereafter.
In August 2001, Alliance issued $400.0 million 5.625% notes in a public
offering. Alliance may issue up to $600.0 million in senior debt
securities. The Alliance notes mature in 2006 and are redeemable at any
time. The proceeds from the Alliance notes were used to reduce commercial
paper and credit facility borrowings and for other general partnership
purposes.
11) FEDERAL INCOME TAXES
A summary of the Federal income tax expense in the consolidated statements
of earnings follows:
2002 2001 2000
----------------- ---------------- -----------------
(IN MILLIONS)
Federal income tax expense (benefit):
Current.......................................... $ (400.0) $ (38.2) $ 820.6
Deferred......................................... 450.9 354.4 137.7
----------------- ---------------- -----------------
Total.............................................. $ 50.9 $ 316.2 $ 958.3
================= ================ =================
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:
2002 2001 2000
----------------- ---------------- -----------------
(IN MILLIONS)
Expected Federal income tax expense................ $ 360.0 $ 452.5 $ 904.9
Minority interest.................................. (128.3) (126.9) (117.9)
Separate Account investment activity............... (159.3) - -
Non deductible stock option
compensation expense............................ - - 34.4
Subsidiary gains................................... - - 161.4
Adjustment of tax audit reserves................... (34.2) (28.2) 17.9
Equity in unconsolidated subsidiaries.............. - - (48.7)
Other.............................................. 12.7 18.8 6.3
----------------- ---------------- -----------------
Federal Income Tax Expense......................... $ 50.9 $ 316.2 $ 958.3
================= ================ =================
F-31
The components of the net deferred Federal income taxes are as follows:
DECEMBER 31, 2002 December 31, 2001
--------------------------------- ---------------------------------
ASSETS LIABILITIES Assets Liabilities
--------------- ---------------- --------------- ---------------
(IN MILLIONS)
Compensation and related benefits...... $ - $ 221.2 $ - $ 92.0
Other.................................. - 7.7 - .1
DAC, reserves and reinsurance.......... - 1,273.1 - 1,020.1
Investments............................ - 579.9 - 333.3
--------------- ---------------- --------------- ---------------
Total.................................. $ - $ 2,081.9 $ - $ 1,445.5
=============== ================ =============== ===============
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:
2002 2001 2000
----------------- ---------------- -----------------
(IN MILLIONS)
DAC, reserves and reinsurance...................... $ 270.9 $ 291.7 $ 403.3
Investments........................................ (6.2) 42.1 (140.7)
Compensation and related benefits.................. 178.7 15.7 (96.4)
Other.............................................. 7.5 4.9 (28.5)
----------------- ---------------- -----------------
Deferred Federal Income Tax Expense................ $ 450.9 $ 354.4 $ 137.7
================= ================ =================
In 2002, the Company recorded a $144.3 million benefit resulting from the
favorable treatment of certain tax matters related to Separate Account
investment activity arising during the 1997-2001 tax years and a
settlement with the Internal Revenue Service (the "IRS") with respect to
such tax matters for the 1992-1996 tax years.
The IRS commenced in January 2003 an examination of AXA Financial's
consolidated Federal income tax returns for the years 1997 through 2001.
Management believes this audit will have no material adverse effect on the
Company's consolidated results of operations.
12) REINSURANCE AGREEMENTS
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.
The effect of reinsurance (excluding group life and health) is summarized
as follows:
2002 2001 2000
----------------- ---------------- -----------------
(IN MILLIONS)
Direct premiums.................................... $ 954.6 $ 990.0 $ 1,103.8
Reinsurance assumed................................ 181.4 203.0 194.2
Reinsurance ceded.................................. (190.8) (173.1) (123.0)
----------------- ---------------- -----------------
Premiums........................................... $ 945.2 $ 1,019.9 $ 1,175.0
================= ================ =================
Universal Life and Investment-type Product
Policy Fee Income Ceded.......................... $ 96.6 $ 86.9 $ 92.1
================= ================ =================
Policyholders' Benefits Ceded...................... $ 346.3 $ 370.3 $ 239.2
================= ================ =================
Interest Credited to Policyholders' Account
Balances Ceded................................... $ 54.6 $ 50.4 $ 46.5
================= ================ =================
F-32
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 and $5.0 million on single life polices.
Substantially 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.
At December 31, 2002, Equitable Life had reinsured in the aggregate
approximately 16.0% of its current exposure to the GMDB obligation on
annuity contracts in-force and, subject to certain maximum amounts or caps
in any one period, approximately 72.0% of its current liability exposure
resulting from the GMIB feature.
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, 2002 and 2001, respectively, reinsurance recoverables
related to insurance contracts amounted to $2,351.7 million and $2,237.0
million, of which $1,049.2 million and $1,060.4 million relates to one
specific reinsurer. Reinsurance payables related to insurance contracts
amounting to $867.5 million and $798.5 million are included in Other
liabilities in the consolidated balance sheets.
Based on management's estimates of future contract cash flows and
experience, the estimated fair values of the GMIB reinsurance contracts,
which are considered derivatives under SFAS No. 133, at December 31, 2002
and 2001 were $120.0 million and zero, respectively. The increase in
estimated fair value of $120.0 million for the year ended December 31,
2002 was due primarily to significant equity market declines during 2002.
The Insurance Group cedes 100% of its group life and health business to a
third party insurer. Insurance liabilities ceded totaled $410.9 million
and $444.2 million at December 31, 2002 and 2001, respectively.
In addition to the sale of insurance products, the Insurance Group acts as
a professional retrocessionaire by assuming life and annuity reinsurance
from professional reinsurers. The Insurance Group also assumes accident,
health, aviation and space risks by participating in various reinsurance
pools. Reinsurance assumed reserves at December 31, 2002 and 2001 were
$570.7 million and $540.2 million, respectively.
13) 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 made cash contributions in 2002 to the
qualified plans totaling $348.1 million.
Generally, the Company's funding policy is to make the minimum
contribution required by the Employee Retirement Income Security Act of
1974 ("ERISA").
Components of net periodic pension credit follow:
2002 2001 2000
----------------- ---------------- ------------------
(IN MILLIONS)
Service cost....................................... $ 32.1 $ 32.1 $ 29.5
Interest cost on projected benefit obligations..... 125.3 128.8 124.2
Expected return on assets.......................... (181.8) (218.7) (223.2)
Net amortization and deferrals..................... 6.4 .1 (.6)
----------------- ---------------- ------------------
Net Periodic Pension Credit........................ $ (18.0) $ (57.7) $ (70.1)
================= ================ ==================
F-33
The projected benefit obligations under the pension plans were comprised
of:
DECEMBER 31,
------------------------------------
2002 2001
---------------- -----------------
(IN MILLIONS)
Benefit obligations, beginning of year................................. $ 1,812.3 $ 1,712.6
Service cost........................................................... 27.1 27.1
Interest cost.......................................................... 125.3 128.8
Actuarial losses (gains)............................................... 42.5 64.4
Benefits paid.......................................................... (123.3) (120.6)
---------------- -----------------
Benefit Obligation, End of Year........................................ $ 1,883.9 $ 1,812.3
================ =================
The funded status of the pension plans was as follows:
DECEMBER 31,
------------------------------------
2002 2001
---------------- -----------------
(IN MILLIONS)
Plan assets at fair value, beginning of year........................... $ 1,845.3 $ 2,119.4
Actual return on plan assets........................................... (278.2) (148.0)
Contributions.......................................................... 348.1 -
Benefits paid and fees................................................. (129.8) (126.1)
---------------- -----------------
Plan assets at fair value, end of year................................. 1,785.4 1,845.3
Projected benefit obligations.......................................... 1,883.9 1,812.3
---------------- -----------------
Excess of plan assets over projected benefit obligations............... (98.5) 33.0
Unrecognized prior service cost........................................ (40.0) (46.3)
Unrecognized net loss (gain) from past experience different
from that assumed.................................................... 1,033.9 550.1
Unrecognized net asset at transition................................... (1.5) (1.6)
---------------- -----------------
Prepaid Pension Cost, Net.............................................. $ 893.9 $ 535.2
================ =================
The accrued liability for pension plans with projected benefit obligations
in excess of plan assets was $19.1 million and $16.7 million at December
31, 2002 and 2001, respectively. The aggregate accumulated benefit
obligation and fair value of plan assets for pension plans with
accumulated benefit obligations in excess of plan assets were $60.9
million and $24.2 million, respectively, at December 31, 2002 and $49.7
million and $28.7 million, respectively, at December 31, 2001.
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 6.75% and 7.26%, respectively, at December 31,
2002 and 7.25% and 7.19%, respectively, at December 31, 2001. As of
January 1, 2002 and 2001, the expected long-term rate of return on assets
for the retirement plan was 9.0% and 10.25%, respectively.
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 $26.0 million,
$27.3 million and $28.7 million for 2002, 2001 and 2000, respectively.
Alliance maintains several unfunded deferred compensation plans for the
benefit of certain eligible employees and executives. The Capital
Accumulation Plan was frozen on December 31, 1987 and no additional awards
have been made. For the active plans, benefits vest over a period ranging
from 3 to 8 years and are amortized as compensation and benefit expense.
ACMC, Inc. ("ACMC"), a subsidiary of the Company, is obligated to make
capital contributions to Alliance in amounts equal to benefits paid under
the Capital Accumulation Plan and the contractual unfunded deferred
compensation arrangements. In connection with the acquisition of
Bernstein, Alliance agreed to invest $96.0 million per annum for three
years to fund purchases of Alliance Holding units or an Alliance sponsored
money market fund in each case for the benefit of certain individuals who
were stockholders or principals of Bernstein or were hired to replace
them. The Company has recorded compensation and benefit expenses in
connection with the plans totaling $101.4 million, $58.1 million and $29.8
F-34
million for 2002, 2001 and 2000, respectively (including $63.7 million and
$34.6 million for 2002 and 2001, respectively, relating to the Bernstein
deferred compensation plan).
14) 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. Various derivative
financial instruments are used to achieve this objective, including
interest rate caps and floors to hedge crediting rates on
interest-sensitive individual annuity contracts, interest rate futures to
protect against declines in interest rates between receipt of funds and
purchase of appropriate assets, and interest rate swaps to modify the
duration and cash flows of fixed maturity investments. In addition, the
Company periodically enters into forward and futures contracts to hedge
certain equity exposures. Also, the Company has purchased reinsurance
contracts to mitigate the risks associated with the impact of potential
market fluctuations on future policyholder elections of guaranteed minimum
income benefit features contained in certain annuity contracts issued by
the Company.
As earlier described in Note 2 of Notes to Consolidated Financial
Statements, the Company adopted SFAS No. 133, as amended, on January 1,
2001. Consequently, all derivatives outstanding at December 31, 2002 are
recognized on the balance sheet at their fair values. The outstanding
notional amounts of derivative financial instruments purchased and sold
were $9,050.0 million and zero, respectively, at December 31, 2002. These
amounts principally consist of interest rate cap contracts of Equitable
Life that have a total fair value at December 31, 2002 of $8.7 million. At
December 31, 2002 and during the year then ended, there were no hybrid
instruments that required bifurcation of an embedded derivative component
under the provisions of SFAS No. 133.
All gains and losses on derivative financial instruments utilized by the
Company in 2002 and 2001 are reported in earnings for the current year as
none of the derivatives were designated to qualifying hedging
relationships under SFAS No. 133 either at initial adoption of the
Statement or at inception of the contracts. For 2002 and 2001,
respectively, investment results, principally in net investment income,
included gross gains of $7.7 million and $27.5 million and gross losses of
$7.7 million and $4.6 million that were recognized on derivative
positions.
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, 2002 and 2001.
F-35
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 fair values for variable deferred annuities and single premium
deferred annuities, which are included in policyholders' account balances,
are estimated as the discounted value of projected account values. Current
account values are projected to the time of the next crediting rate review
at the current crediting rates and are projected beyond that date at the
greater of current estimated market rates offered on new policies or the
guaranteed minimum crediting rate. Expected cash flows and projected
account values are discounted back to the present at the current estimated
market rates.
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, 8 and 10 are presented below:
DECEMBER 31,
--------------------------------------------------------------------
2002 2001
--------------------------------- ---------------------------------
CARRYING ESTIMATED Carrying Estimated
VALUE FAIR VALUE Value Fair Value
--------------- ---------------- --------------- ---------------
(IN MILLIONS)
Consolidated:
-------------
Mortgage loans on real estate.......... $ 3,746.2 $ 4,070.1 $ 4,333.3 $ 4,438.7
Other limited partnership interests.... 674.8 674.8 695.2 695.2
Policy loans........................... 4,035.6 4,728.2 4,100.7 4,476.4
Policyholders liabilities:
Investment contracts................. 14,555.0 15,114.9 12,256.4 12,514.0
Long-term debt......................... 1,252.7 1,334.7 1,252.4 1,287.1
Closed Block:
-------------
Mortgage loans on real estate.......... $ 1,456.0 $ 1,572.6 $ 1,514.4 $ 1,532.6
Other equity investments............... 16.4 16.4 24.4 24.4
Policy loans........................... 1,449.4 1,740.9 1,504.4 1,664.8
SCNILC liability....................... 16.5 16.6 18.2 18.1
Discontinued Operations:
------------------------
Mortgage loans on real estate.......... $ 87.5 $ 94.7 $ 160.3 $ 171.6
Other equity investments............... 9.4 9.4 22.3 22.3
Guaranteed interest contracts.......... 18.3 17.0 18.8 16.1
Long-term debt......................... 101.7 101.7 101.7 101.7
F-36
15) COMMITMENTS AND CONTINGENT LIABILITIES
In addition to its debt and lease commitments discussed in Notes 10 and
17, from time to time, the Company has provided certain guarantees or
commitments to affiliates, investors and others. At December 31, 2002,
these arrangements included commitments by the Company to provide equity
financing of $298.6 million to certain limited partnerships under certain
conditions. 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 Company had $57.3 million of letters of credit related to reinsurance
of which no amounts were outstanding at December 31, 2002.
In February 2002, Alliance signed a $125.0 million agreement with a group
of commercial banks and other lenders. Under the agreement, Alliance
guaranteed various obligations of SCB LLC incurred in the ordinary course
of its business in the event SCB LLC is unable to meet these obligations.
At December 31, 2002, Alliance was not required to perform under the
agreement and had no liability outstanding in connection with the
agreement.
16) LITIGATION
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 EOC, like other
life and health insurers, from time to time are involved in such
litigations. Among litigations against Equitable Life, EVLICO and EOC of
the type referred to in this paragraph are the litigations described in
the following four paragraphs.
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
plaintiff filed a motion to remand the case to state court. The court has
permitted limited discovery on the issue of whether the Securities
Litigation Uniform Standards Act applies. In November 2001, plaintiff
filed a motion for leave to join additional plaintiffs. In February 2002,
the court denied the plaintiff's motion to remand and granted defendants'
motion to dismiss, but permitted plaintiff until April 1, 2002 to file an
amended complaint in Federal Court. In March 2002, plaintiff filed a
motion to alter or amend the court's judgment. In September 2002,
plaintiff filed an amended complaint in the United States District Court
for the Southern District of Alabama. In the amended complaint, the
original plaintiff added two new plaintiffs who are alleged to have
purchased individual retirement annuities in 1998 and 1999. The amended
complaint does not assert any claims against Equitable Life's agent,
previously named as a defendant. Plaintiffs seek to represent a class of
F-37
(i) all persons who purchased deferred variable annuities from Equitable
Life in tax deferred qualified retirement plans, and (ii) all persons who
were charged allegedly unnecessary mortality fees for tax deferral for
variable annuities held in qualified retirement accounts. Plaintiffs
assert causes of action for unjust enrichment, money had and received (a
common-law cause of action similar to unjust enrichment), conversion,
breach of contract, negligence, negligent and/or wanton training,
negligent and/or wanton supervision, and breach of fiduciary duty.
Plaintiffs seek damages, including punitive damages, in an unspecified
amount and attorneys' fees and expenses. In December 2002, the court
granted Equitable Life's motion to dismiss the complaint, ruling that the
Securities Litigation Uniform Standards Act applied. The complaint has
been dismissed without prejudice.
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 September 2001, the District Court issued a decision
granting defendants' motion to dismiss and denying plaintiffs' motion to
remand, and judgment was entered in favor of the defendants. In October
2001, plaintiffs filed a motion seeking leave to reopen the case for the
purpose of filing an amended complaint. In addition, plaintiffs filed a
new complaint in the District Court, alleging a similar class and similar
facts. The new complaint asserts causes of action for violations of
Federal securities laws in addition to the state law causes of action
asserted in the previous complaint. In January 2002, plaintiffs amended
their new complaint in response to defendants' motion to dismiss and,
subsequently, in March 2002, defendants filed a motion to dismiss the
amended complaint.
Between June 2000 and January 2003, 29 lawsuits were filed in the state
courts of Mississippi (the "Mississippi Actions") by more than 300
plaintiffs naming as defendants Equitable Life, EVLICO, EOC and AXA
Advisors and various present and former individual sales agents. The
actions arise from the purchase by each of the plaintiffs of various types
of life insurance policies from Equitable Life, EVLICO and/or EOC. The
policies at issue include term, variable and whole life policies purchased
as early as 1954. The actions allege misrepresentations in connection with
the sale of life insurance policies including that the defendants
misrepresented the stated number of years that premiums would need to be
paid. Plaintiffs assert claims for breach of contract, fraud, fraudulent
inducement, misrepresentation, conspiracy, negligent supervision and other
tort claims. Plaintiffs seek unspecified compensatory and punitive
damages. The parties are engaged in various stages of discovery in many of
the pending actions. In March 2002, the Circuit Court of Sunflower County,
in one of the lawsuits, granted Equitable Life's motion, joined by the
agent defendant, to dismiss that action with prejudice; plaintiffs' appeal
to the Supreme Court of Mississippi has been fully briefed. The lawsuit
involving 79 plaintiffs has been removed from state court to the United
States District Court for the Northern District of Mississippi. Motions to
remand are pending in several other cases.
In six of the Mississippi Actions, between May 2002 and January 2003 three
former sales agents and one retired sales agent of Equitable Life named as
defendants have asserted cross-claims against Equitable Life seeking
indemnification, as well as compensatory and punitive damages for, among
other things, alleged injury to their reputations. Equitable Life filed
motions to dismiss those cross-claims and in the Federal district courts
in Mississippi, is seeking to compel arbitration of the cross-claims. In
January 2003, the United States District Court for the Southern District
of Mississippi granted Equitable Life's petition to compel arbitration of
the cross-claims asserted by a former agent in two of the Mississippi
Actions and also granted Equitable Life's motion to enjoin prosecution of
those cases in state court.
F-38
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 substantial 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
March 2001, plaintiffs filed an amended complaint. The District Court
granted defendants' motion to dismiss AXA Client Solutions and the Holding
Company from the amended complaint, and dismissed the conversion claims in
June 2001. The District Court denied defendants' motion to dismiss the
remaining claims. Equitable Life has answered the amended complaint. While
the monetary damages sought by plaintiffs, if awarded, could have a
material adverse effect on the consolidated financial position and results
of operations of the Company, management believes that the ultimate
resolution of this litigation should not have a material adverse on the
Company's consolidated financial position.
After the District Court denied defendants' motion to assert certain
defenses and counterclaims in American National Bank, Equitable Life
commenced an action, in December 2001, entitled The Equitable Life
Assurance Society of the United States v. American National Bank and Trust
Company of Chicago, as trustee f/b/o Emerald Investments LP and Emerald
Investments LP, in the United States District Court for the Northern
District of Illinois. The complaint arises out of the same facts and
circumstances as described in American National Bank. Equitable Life's
complaint alleges common law fraud and equitable rescission in connection
with certain annuities issued by Equitable Life. Equitable Life seeks
unspecified money damages, rescission, punitive damages and attorneys'
fees. In March 2002, defendants filed an answer to Equitable Life's
complaint and asserted counterclaims. Defendants' counterclaims allege
common law fraud, violations of the Federal and Illinois Securities Acts
and violations of the Illinois and New York Consumer Fraud Acts.
Defendants seek unspecified money damages, punitive damages and attorneys'
fees. In May 2002, the District Court granted in part and denied in part
Equitable Life's motion to dismiss defendants' counterclaims, dismissing
defendants' Illinois Securities Act and New York Consumer Fraud Act
claims. Equitable Life has answered defendants' remaining counterclaims.
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. 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
challenged the District Court's subject matter jurisdiction over the
health benefit claims. In May 2001, plaintiffs filed a second amended
complaint which, among other things, alleges that Equitable Life failed to
comply with plan amendment procedures and deletes the promissory estoppel
claim. In September 2001, Equitable Life filed a motion for summary
judgment on all of plaintiffs' claims, and plaintiffs filed a motion for
partial summary judgment on all claims except their claim for breach of
fiduciary duty. In May 2002, the District Court issued an order granting
plaintiffs' motion for partial summary judgment, granting Equitable Life's
motion for summary judgment on plaintiffs' claim for breach of fiduciary
duty and otherwise denying Equitable Life's motion for summary judgment.
The court ruled that Equitable Life is liable to plaintiffs on their
contract claims for subsidized benefits under ERISA. The court has
deferred addressing the relief to which plaintiffs are entitled in light
of the May 2002 order. A decision was rendered in October 2002 on the
appeal by plaintiffs concerning the award of legal fees to plaintiffs'
counsel for the previously settled claim not involving health benefits.
The Court of Appeals denied plaintiffs' challenge to the District Court's
subject matter jurisdiction over the settled claim, affirmed the method
that the District Court used to calculate the award of legal fees to
plaintiffs' counsel and remanded for further consideration of the fee
award.
F-39
A putative class action entitled Stefanie Hirt, et al. v. The Equitable
Retirement Plan for Employees, Managers and Agents, et al. was filed in
the District Court for the Southern District of New York in August 2001
against The Equitable Retirement Plan for Employees, Managers and Agents
(the "Retirement Plan") and The Officers Committee on Benefit Plans of
Equitable Life, as Plan Administrator. The action was brought by five
participants in the Retirement Plan and purports to be on behalf of "all
Plan participants, whether active or retired, their beneficiaries and
Estates, whose accrued benefits or pension benefits are based on the
Plan's Cash Balance Formula." The complaint challenges the change,
effective January 1, 1989, in the pension benefit formula from a final
average pay formula to a cash balance formula. Plaintiffs allege that the
change to the cash balance formula violates ERISA by reducing the rate of
accruals based on age, failing to comply with ERISA's notice requirements
and improperly applying the formula to retroactively reduce accrued
benefits. The relief sought includes a declaration that the cash balance
plan violates ERISA, an order enjoining the enforcement of the cash
balance formula, reformation and damages. Defendants answered the
complaint in October 2001. In April 2002, plaintiffs filed a motion
seeking to certify a class of "all Plan participants, whether active or
retired, their beneficiaries and Estates, whose accrued benefits or
pension benefits are based on the Plan's Cash Balance Formula." Also in
April 2002, plaintiffs agreed to dismiss with prejudice their claim that
the change to the cash balance formula violates ERISA by improperly
applying the formula to retroactively reduce accrued benefits. That claim
has been dismissed. The parties have agreed on class certification and in
October 2002, the court accepted the recommendation of a special master to
certify a plaintiff class.
F-40
Three previously disclosed lawsuits, 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, Raymond Patenaude v. The Equitable Life
Assurance Society of the United States, AXA Advisors, LLC and Equitable
Distributors, Inc. and Siamac Sedighim v. Donaldson Lufkin & Jenrette,
Inc., et al. have been dismissed with prejudice. In addition, in three
previously disclosed actions, R.S.M. Inc., et al. v. Alliance Capital
Management L.P., et al., In re AXA Financial, Inc. Shareholders Litigation
and David Uhrik v. Credit Suisse First Boston (USA), Inc., et al., the
parties have agreed to settle and the actions have been dismissed.
Although the outcome of litigation generally cannot be predicted with
certainty, the Company's management believes that, subject to the
foregoing, (i) the settlement of the R.S.M., In re AXA Financial, Inc.
Shareholders Litigation and the Uhrik litigations 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 April 2001, an amended class action complaint entitled Miller, et al.
v. Mitchell Hutchins Asset Management, Inc., et al. (Miller Complaint"),
was filed in Federal District Court in the Southern District of Illinois
against Alliance, Alliance Fund Distributors, Inc. ("AFD"), a wholly owned
subsidiary of Alliance, and other defendants alleging violations of the
Investment Company Act of 1940, as amended ("ICA"), and breaches of common
law fiduciary duty. The allegations in the Miller Complaint concern six
mutual funds with which Alliance has investment advisory agreements,
including Alliance Premier Growth Fund ("Premier Growth Fund"), Alliance
Health Care Fund, Alliance Growth Fund, Alliance Quasar Fund, Alliance
Fund and Alliance Disciplined Value Fund. The Miller Complaint alleges
principally that (i) certain advisory agreements concerning these funds
were negotiated, approved, and executed in violation of the ICA, in
particular because certain directors of these funds should be deemed
interested under the ICA; (ii) the distribution plans for these funds were
negotiated, approved, and executed in violation of the ICA; and (iii) the
advisory fees and distribution fees paid to Alliance and AFD,
respectively, are excessive and, therefore, constitute a breach of
fiduciary duty. Plaintiffs seek a recovery of certain fees paid by these
funds to Alliance. In March 2002, the court issued an order granting
defendants' joint motion to dismiss the Miller Complaint. The court
allowed plaintiffs up to and including April 1, 2002 to file an amended
complaint comporting with its order. In April 2002, plaintiffs filed a
second amended complaint. The allegations and relief sought in the second
amended complaint are virtually identical to the Miller Complaint. In May
2002, defendants filed a motion to dismiss the amended complaint. Alliance
and AFD believe that plaintiffs' allegations are without merit and intend
to vigorously defend against these allegations. At the present time,
management of Alliance and AFD are unable to estimate the impact, if any,
that the outcome of this action may have on Alliance's results of
operations or financial condition and the Company's management is unable
to estimate the impact, if any, that the outcome of this action may have
on its consolidated results of operations or financial position.
In December 2001 a complaint entitled Benak v. Alliance Capital Management
L.P. and Alliance Premier Growth Fund ("Benak Complaint") was filed in
Federal District Court in the District of New Jersey against Alliance and
Alliance Premier Growth Fund alleging violation of the ICA. The principal
allegations of the Benak Complaint are that Alliance breached its duty of
loyalty to Premier Growth Fund because one of the directors of the General
Partner of Alliance served as a director of Enron Corp. ("Enron") when
Premier Growth Fund purchased shares of Enron and as a consequence
thereof, the investment advisory fees paid to Alliance by Premier Growth
Fund should be returned as a means of recovering for Premier Growth Fund
the losses plaintiff alleges were caused by the alleged breach of the duty
of loyalty. Plaintiff seeks recovery of fees paid by Premier Growth Fund
to Alliance. Subsequently, between December 2001 and July 2002, five
complaints making substantially the same allegations and seeking
substantially the same relief as the Benak Complaint were filed against
Alliance Capital Management L.P. and Alliance Premier Growth Fund. All of
those actions were consolidated in Federal District Court in the District
of New Jersey. In January 2003, a consolidated amended complaint entitled
Benak v. Alliance Capital Management L.P. was filed containing allegations
similar to those in the individual complaints and alleging violation of
the ICA. While the Consolidated Amended Complaint seeks relief similar to
that requested in the individual actions, it does not name the Premier
Growth Fund as a defendant. Alliance believes the plaintiffs' allegations
in the Benak Consolidated Amended Complaint are without merit and intends
to vigorously defend against these allegations. At the present time
Alliance's management is unable to estimate the impact, if any, that the
outcome of these actions may have on Alliance's results of operations or
financial condition and the Company's management is unable to estimate the
impact, if any, that the outcome of these actions may have on its
consolidated results of operations or financial position.
In April 2002, a consolidated complaint entitled In re Enron Corporation
Securities Litigation ("Enron Complaint") was filed in Federal District
Court in the Southern District of Texas, Houston Division, against
numerous defendants, including Alliance. The principal allegations of the
Enron Complaint, as they pertain to Alliance, are that Alliance violated
Sections 11 and 15 of the Securities Act of 1933, as amended ("Securities
Act") with respect to a registration statement filed by Enron and
effective with the SEC on July 18, 2001, which was used to sell $1.9
billion Enron Corp. Zero Coupon Convertible Senior Notes due 2021.
Plaintiffs allege that Frank Savage, who was at that time an employee of
Alliance and who was and remains a director of the General Partner of
Alliance, signed the registration statement at issue. Plaintiffs allege
that the registration statement was materially misleading. Plaintiffs
further allege that Alliance was a controlling person of Frank Savage.
Plaintiffs therefore assert that Alliance is itself liable for the
allegedly misleading registration statement. Plaintiffs seek recission or
a recissionary measure of damages. The Enron Complaint specifically states
that "[n]o allegations of fraud are made against or directed at" Alliance.
In June 2002, Alliance moved to dismiss the complaint as the allegations
therein pertain to it. That motion is pending. Alliance believes the
allegations of the Enron Complaint as to it are without merit and intends
to vigorously defend against these allegations. At the present time,
management of Alliance is unable to estimate the impact, if any, that the
outcome of this action may have on Alliance's results of operations or
financial condition and the Company's management is unable to estimate the
impact, if any, that the outcome of this action may have on its
consolidated results of operations or financial position.
In May, 2002, a complaint entitled The Florida State Board of
Administration v. Alliance Capital Management L.P. (the "SBA Complaint")
was filed in the Circuit Court of the Second Judicial Circuit, in and for
Leon County, Florida against Alliance. The SBA Complaint alleges breach of
contract relating to the Investment Management Agreement between The
Florida State Board of Administration ("SBA") and Alliance, breach of the
covenant of good faith and fair dealing contained in the Investment
Management Agreement, breach of fiduciary duty, negligence, gross
negligence and violation of the Florida Securities and Investor Protection
Act, in connection with purchases and sales of Enron common stock for the
SBA investment account. The SBA seeks more than $300 million in
compensatory damages and an unspecified amount of punitive damages. In
June 2002, Alliance moved to dismiss the SBA Complaint; in September 2002,
the court denied Alliance's motion to dismiss the SBA Complaint in its
entirety, and the case is currently in discovery. Alliance believes the
SBA's allegations in the SBA Complaint are without merit and intends to
vigorously defend against these allegations. At the present time,
Alliance's management is unable to estimate the impact, if any, that the
outcome of this action may have on Alliance's results of operations or
financial condition and the Company's management is unable to estimate the
impact, if any, that the outcome of this action may have on its
consolidated results of operations or financial position.
In September 2002, a complaint entitled Lawrence E. Jaffe Pension Plan,
Lawrence E. Jaffe Trustee U/A 1198 v. Alliance Capital Management L.P.,
Alfred Harrison and Alliance Premier Growth Fund, Inc. ("Jaffe Complaint")
was filed in Federal District Court in the Southern District of New York
against Alliance, Alfred Harrison and Premier Growth Fund alleging
violation of the ICA. The Jaffe Complaint alleges that the defendants
breached their fiduciary duties of loyalty, care and good faith to Premier
Growth Fund by causing Premier Growth Fund to invest in the securities of
F-41
Enron and that the agreements between Premier Growth Fund and Alliance
violated the ICA because all of the directors of Premier Growth Fund
should be deemed interested under the ICA. Plaintiff seeks damages equal
to Premier Growth Fund's losses as a result of Premier Growth Fund's
investment in shares of Enron and a recovery of all fees paid to Alliance
beginning November 1, 2000. In November 2002, Alliance filed a motion to
transfer the Jaffe Complaint to the United States District Court for the
District of New Jersey to be consolidated with the Benak v. Alliance
Capital Management L.P. action already pending there. Alliance's time to
move, answer or otherwise respond to the Jaffe Complaint is stayed pending
a decision on the motion to transfer. Alliance and Alfred Harrison believe
that plaintiff's allegations in the Jaffe Complaint are without merit and
intend to vigorously defend against these allegations. At the present
time, management of Alliance is unable to estimate the impact, if any,
that the outcome of this action may have on its results of operations or
financial condition and the Company's management is unable to estimate the
impact, if any, that the outcome of this action may have on its
consolidated results of operations or financial position.
In December 2002, a complaint entitled Patrick J. Goggins et al. v.
Alliance Capital Management L.P. et al. ("Goggins Complaint") was filed in
Federal District Court in the Southern District of New York against
Alliance, Premier Growth Fund and individual directors and certain
officers of the Fund. The Goggins Complaint alleges that defendants
violated the Securities Act of 1933 because Premier Growth Fund's
registration statements and prospectuses allegedly were materially
misleading, contained untrue statements of material fact and omitted
material facts in describing the strategic objectives and investment
strategies of Premier Growth Fund in relation to Premier Growth Fund's
investments, including Premier Growth Fund's investments in Enron Corp.
securities. Plaintiffs seek rescissory relief or an unspecified amount of
compensatory damages. Alliance's time to move, answer or otherwise respond
to the Goggins Complaint is currently stayed. Alliance, Premier Growth
Fund and the other defendants believe the plaintiffs' allegations in the
Goggins Complaint are without merit and intend to vigorously defend
against these allegations. At the present time, management of Alliance is
unable to estimate the impact, if any, that the outcome of this action may
have on Alliance's results of operations or financial condition and the
Company's management is unable to estimate the impact, if any, that the
outcome of this action may have on its consolidated results of operations
or financial position.
In addition to the matters previously reported and those described above,
the Holding Company and its subsidiaries are involved in various legal
actions and proceedings in connection with their businesses. Some of the
actions and proceedings have been brought on behalf of various alleged
classes of claimants and certain of these claimants seek damages of
unspecified amounts. While the ultimate outcome of such matters cannot be
predicted with certainty, in the opinion of management no such matter is
likely to have a material adverse effect on the Company's consolidated
financial position. However, it should be noted that the frequency of
large damage awards, including large punitive damage awards that bear
little or no relation to actual economic damages incurred by plaintiffs in
some jurisdictions, continues to create the potential for an unpredictable
judgment in any given matter. Accordingly, the Company's management cannot
make an estimate of loss, if any, or predict whether or not any given
matter will have a material adverse effect the Company's consolidated
results of operations in any particular period.
17) 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
operating leases for 2003 and the four successive years are $123.6
million, $127.9 million, $117.5 million, $99.9 million, $91.8 million and
$848.4 million thereafter. Minimum future sublease rental income on these
noncancelable operating leases for 2003 and the four successive years is
$5.6 million, $5.6 million, $5.4 million, $2.2 million, $2.2 million and
$18.1 million thereafter.
At December 31, 2002, the minimum future rental income on noncancelable
operating leases for wholly owned investments in real estate for 2003 and
the four successive years is $81.7 million, $78.8 million, $75.9 million,
$75.2 million, $67.6 million and $535.8 million thereafter.
The Company has entered into capital leases for certain information
technology equipment. Future minimum payments under noncancelable capital
leases for 2003 and the two successive years are $4.4 million, $2.8
million, and $.9 million.
F-42
18) 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, a domestic life
insurer may, without prior approval of the Superintendent, pay a dividend
to its shareholders not exceeding an amount calculated based on a
statutory formula. This formula would permit Equitable Life to pay
shareholder dividends not greater than $408.9 million during 2003. Payment
of dividends exceeding this amount requires the insurer to file notice of
its intent to declare such dividends with the Superintendent who then has
30 days to disapprove the distribution. For 2002, 2001 and 2000, the
Insurance Group statutory net income totaled $451.6 million, $547.7
million and $1,068.6 million, respectively. Statutory surplus, capital
stock and Asset Valuation Reserve ("AVR") totaled $4,281.0 million and
$6,100.4 million at December 31, 2002 and 2001, respectively. In 2002,
2001 and 2000, respectively, $500.0 million, $1.7 billion and $250.0
million in shareholder dividends were paid by Equitable Life.
At December 31, 2002, the Insurance Group, in accordance with various
government and state regulations, had $23.3 million of securities
deposited with such government or state agencies.
In 1998, the NAIC approved a codification of statutory accounting
practices ("Codification"), which provides regulators and insurers with
uniform statutory guidance, addresses areas where statutory accounting
previously was silent and changes certain existing statutory positions.
Equitable Life and Equitable of Colorado became subject to Codification
rules for all state filings upon adoption of Codification by the
respective states.
On December 27, 2000, an emergency rule was issued by the New York
Insurance Department (NYID), which adopted Codification in New York
effective on January 1, 2001 except where the guidance conflicted with New
York Law. Differences in the New York regulation adopted in 2000 from
Codification were in accounting for deferred taxes and goodwill, which are
required to be disclosed in the notes to the Annual Statement, as well as
the Annual Audited Report. On September 24, 2002 the bill authorizing the
admissibility of deferred taxes by New York insurers was signed into law
and was effective as of January 1, 2002. The impact of adopting the
accounting for deferred taxes at January 1,2002 was a $363.6 million
decrease to surplus.
The implementation of Codification in 2001 resulted in a $1,630.9 million
increase to surplus and capital stock, principally due to the $1,660.8
million valuation adjustment related to Alliance.
The application of the Codification rules as adopted by the State of
Colorado had no significant effect on Equitable Life or EOC.
At December 31, 2002 and for the year then ended, there were no
differences in net income and capital and surplus resulting from practices
prescribed and permitted by the State of New York and those prescribed in
the January 1, 2001 NAIC Accounting Practices and Procedures manual.
Accounting practices used to prepare statutory financial statements for
regulatory filings of stock life insurance companies differ in certain
instances from GAAP. 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) under SAP, Federal income taxes are provided on the
basis of amounts currently payable with provisions made for deferred
amounts that reverse within one year while under GAAP, deferred taxes are
recorded for temporary differences between the financial statements and
tax basis of assets and liabilities where the probability of realization
is reasonably assured (e) 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; (f) the valuation of
the investment in Alliance and Alliance Holding under SAP reflects a
portion of the market value appreciation rather than the equity in the
underlying net assets as required under GAAP; (g) the provision for future
losses of the discontinued Wind-Up Annuities business is only required
under GAAP; (h) reporting the surplus notes as a component of surplus in
SAP but as a liability in GAAP; (i) computer software development costs
are capitalized under GAAP but expensed under SAP; and (j) certain assets,
primarily pre-paid assets, are not admissible under SAP but are admissible
under GAAP.
F-43
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
NYID with net earnings and equity on a GAAP basis.
2002 2001 2000
----------------- ---------------- -----------------
(IN MILLIONS)
Net change in statutory surplus and
capital stock.................................... $ (1,354.7) $ 104.1 $ 1,321.4
Change in AVR...................................... (464.7) (230.2) (665.5)
----------------- ---------------- -----------------
Net change in statutory surplus, capital stock
and AVR.......................................... (1,819.4) (126.1) 655.9
Adjustments:
Future policy benefits and policyholders'
account balances............................... 255.2 270.8 254.5
DAC.............................................. 458.1 458.5 469.1
Deferred Federal income taxes.................... (634.6) (354.8) (127.3)
Valuation of investments......................... (74.8) 67.9 (134.8)
Valuation of investment subsidiary............... 1,399.4 (1,507.9) (29.2)
Change in fair value of guaranteed minimum
income benefit reinsurance contracts........... 120.0 - -
Shareholder dividends paid...................... 500.0 1,700.0 250.0
Changes in non-admitted assets................... 384.2 138.3 73.8
Stock option expense related to AXA's minority
interest acquisition........................... - - (493.9)
Other, net....................................... (23.7) 5.4 383.1
GAAP adjustments for Discontinued
Operations..................................... 23.0 (5.1) 54.3
----------------- ---------------- -----------------
Net Earnings of the Insurance Group................ $ 587.4 $ 647.0 $ 1,355.5
================= ================ =================
DECEMBER 31,
---------------------------------------------------------
2002 2001 2000
----------------- ---------------- ------------------
(IN MILLIONS)
Statutory surplus and capital stock................ $ 4,091.3 $ 5,446.0 $ 5,341.9
AVR................................................ 189.7 654.4 884.6
----------------- ---------------- ------------------
Statutory surplus, capital stock and AVR........... 4,281.0 6,100.4 6,226.5
Adjustments:
Future policy benefits and policyholders'
account balances............................... (1,237.6) (1,492.8) (1,763.6)
DAC.............................................. 5,801.0 5,513.7 5,128.8
Deferred Federal income taxes.................... (1,835.8) (1,252.2) (640.7)
Valuation of investments......................... 1,629.6 635.9 140.2
Valuation of investment subsidiary............... (1,191.4) (2,590.8) (1,082.9)
Change in fair value of guaranteed minimum
income benefit reinsurance contracts........... 120.0 - -
Non-admitted assets.............................. 1,162.3 778.1 639.8
Issuance of surplus notes........................ (599.6) (539.4) (539.1)
Other, net....................................... 157.2 536.6 500.6
GAAP adjustments for Discontinued
Operations..................................... (108.7) (123.8) (164.3)
----------------- ---------------- ------------------
Equity of the Insurance Group...................... $ 8,178.0 $ 7,565.7 $ 8,445.3
================= ================ ==================
F-44
19) 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.
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 principally includes Alliance. Alliance
provides diversified investment management and related services globally
to a broad range of clients including: (a) institutional clients,
including pension funds, endowments and domestic and foreign financial
institutions, (b) private clients, including high net worth individuals,
trusts and estates and charitable foundations, (c) individual investors,
principally through a broad line of mutual funds, and (d) institutional
investors by means of in-depth research, portfolio strategy and other
services. This segment also includes institutional Separate Accounts that
provide various investment options for large group pension clients,
primarily defined benefit and contribution plans, through pooled or single
group accounts.
Intersegment investment advisory and other fees of approximately $102.2
million, $116.6 million and $153.2 million for 2002, 2001 and 2000,
respectively, are included in total revenues of the Investment Services
segment.
The following tables reconcile segment revenues and earnings from
continuing operations before Federal income taxes to total revenues and
earnings as reported on the consolidated statements of earnings and
segment assets to total assets on the consolidated balance sheets,
respectively.
2002 2001 2000
----------------- ---------------- ------------------
(IN MILLIONS)
SEGMENT REVENUES:
Insurance............................................ $ 4,673.4 $ 4,763.3 $ 4,681.9
Investment Services.................................. 2,744.9 2,994.4 4,672.5
Consolidation/elimination............................ (71.3) (90.0) (113.2)
----------------- ---------------- ------------------
Total Revenues....................................... $ 7,347.0 $ 7,667.7 $ 9,241.2
================= ================ ==================
SEGMENT EARNINGS (LOSS) FROM CONTINUING OPERATIONS
BEFORE FEDERAL INCOME TAXES AND MINORITY INTEREST:
Insurance............................................ $ 437.9 $ 707.5 $ (192.5)
Investment Services.................................. 590.7 585.4 2,778.0
----------------- ---------------- ------------------
Total Earnings from Continuing Operations
before Federal Income Taxes
and Minority Interest............................. $ 1,028.6 $ 1,292.9 $ 2,585.5
================= ================ ==================
2002 2001 2000
----------------- ---------------- ------------------
(IN MILLIONS)
ASSETS:
Insurance............................................ $ 80,638.7 $ 84,572.2 $ 88,641.1
Investment Services.................................. 14,160.3 15,808.8 16,807.2
Consolidation/elimination............................ 27.3 (94.4) (57.1)
----------------- ---------------- ------------------
Total Assets......................................... $ 94,826.3 $ 100,286.6 $ 105,391.2
================= ================ ==================
F-45
20) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The quarterly results of operations for 2002 and 2001 are summarized
below:
THREE MONTHS ENDED
------------------------------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
----------------- ----------------- ------------------ ------------------
(IN MILLIONS)
2002
----
Total Revenues................ $ 1,883.9 $ 2,072.1 $ 1,860.9 $ 1,530.1
================= ================= ================== ==================
Earnings (Loss) from
Continuing Operations....... $ 162.6 $ 206.7 $ 266.9 $ (21.3)
================= ================= ================== ==================
Net Earnings (Loss)........... $ 130.4 $ 205.3 $ 286.3 $ (34.6)
================= ================= ================== ==================
2001
----
Total Revenues................ $ 2,023.1 $ 1,898.6 $ 1,804.8 $ 1,941.2
================= ================= ================== ==================
Earnings from Continuing
Operations.................. $ 227.1 $ 120.3 $ 119.2 $ 140.0
================= ================= ================== ==================
Net Earnings.................. $ 233.6 $ 118.5 $ 118.7 $ 176.2
================= ================= ================== ==================
The quarterly results of operations for the first three quarters of 2002
have been restated to reflect the accounting change adopted in the fourth
quarter of 2002 as of January 1, 2002 for liabilities associated with
variable annuity contracts that contain GMDB and GMIB features, as
follows:
THREE MONTHS ENDED
------------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30
----------------- ---------------- ----------------------
(IN MILLIONS)
Earnings from continuing operations,
as previously reported.......................... $ 160.5 $ 286.6 $ 345.7
Adjustment to reflect adoption of accounting
change as of January 1, 2002.................... 2.1 (79.9) (78.8)
----------------- ---------------- ----------------------
Earnings from Continuing
Operations, as Restated......................... $ 162.6 $ 206.7 $ 266.9
================= ================ ======================
Net earnings, as previously reported............... $ 161.5 $ 285.2 $ 365.1
Adjustment to reflect adoption of accounting
change as of January 1, 2002.................... (31.1) (79.9) (78.8)
----------------- ---------------- ----------------------
Net Earnings, as Restated.......................... $ 130.4 $ 205.3 $ 286.3
================= ================ ======================
F-46
21) 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.
Stock-based employee compensation expense is not reflected in the
statement of earnings as all options granted under those plans had an
exercise price equal to the market value of the underlying common stock on
the date of the grant. The following table illustrates the effect on net
income had compensation expense as related to options awarded under the
Company's Stock Incentive Plans been determined based on SFAS No. 123's
fair value based method, including the cost of the amendments and
modifications made in connection with AXA's acquisition of the minority
interest in the Holding Company:
2002 2001 2000
----------------- ---------------- -------------------
(IN MILLIONS)
Net income, as reported............................ $ 587.4 $ 647.0 $ 1,355.5
Add: Compensation charge resulting from
AXA's acquisition of minority interest
included in net earnings........................ - - 306.4
Less: Total stock-based employee compensation
expense determined under fair value method for
all awards, net of Federal income tax benefit (36.0) (22.2) (34.6)
----------------- ---------------- -------------------
Pro Forma Net Earnings............................. $ 551.4 $ 624.8 $ 1,627.3
================= ================ ===================
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 ADRs. 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.
Beginning in 2001, under the 1997 Stock Incentive Plan, the Holding
Company can issue options to purchase AXA ADRs. The options, which include
Incentive Stock Options and Nonstatutory Stock Options, are issued at the
fair market value of the AXA ADRs on the date of grant. Generally,
one-third of stock options granted vest and become exercisable on each of
the first three anniversaries of the date such options were granted.
Options are currently exercisable up to 10 years from the date of grant.
Following completion of the merger of AXA Merger Corp. with and into the
Holding Company, certain employees exchanged AXA ADR options for tandem
Stock Appreciation Rights ("SARs") and at-the-money AXA ADR options of
equivalent intrinsic value. The maximum obligation for the SARs is $73.3
million, based upon the underlying price of AXA ADRs at January 2, 2001,
the closing date of the aforementioned merger. The Company recorded a
(reduction) increase in the SARs liability of $(10.2) million and $(63.2)
million for 2002 and 2001, respectively, reflecting the variable
accounting for the SARs, based on the change in the market value of AXA
ADRs for the respective periods ended December 31, 2002 and 2001.
F-47
The Black-Scholes option pricing model was used in determining the fair
values of option awards used in the pro-forma disclosures above. The
option pricing assumptions for 2002, 2001 and 2000 follow:
HOLDING COMPANY ALLIANCE
----------------------------------------- -------------------------------
2002 (1) 2001 (1) 2000 2002 2001 2000
------------- ------------- ------------ -------------------- ----------
Dividend yield.... 2.54% 1.52% 0.32% 5.80% 5.80% 7.20%
Expected
volatility...... 46% 29% 28% 32% 33% 30%
Risk-free interest
rate............ 4.04% 4.98% 6.24% 4.2% 4.5% 5.90%
Expected life
in years........ 5 5 5 7.0 7.2 7.4
Weighted average
fair value per
option at
grant-date...... $6.30 $9.42 $11.08 $5.89 $9.23 $8.32
(1) Beginning in 2001, the option pricing assumptions reflect options
granted by the Holding Company representing rights to acquire AXA ADRs.
A summary of the activity in the option shares of the Holding Company and
Alliance's option plans follows, including information about options
outstanding and exercisable at December 31, 2002. Outstanding options at
January 2, 2001 to acquire AXA ADRs reflect the conversion of 11.5 million
share options of the Holding Company that remained outstanding following
the above-described cash settlement made pursuant to the agreement for
AXA's acquisition of the minority interest in the Holding Company's Common
Stock. All information presented below as related to options to acquire
AXA ADRs gives appropriate effect to AXA's May 2001 four-for-one stock
split and the related changes in ADR parity for each Holding Company share
option:
HOLDING COMPANY ALLIANCE
------------------------------------ ---------------------------------
COMMON
STOCK WEIGHTED WEIGHTED
AND AVERAGE AVERAGE
AXA ADRS EXERCISE UNITS EXERCISE
(IN MILLIONS) PRICE (IN MILLIONS) PRICE
------------------------------------ --------------- -----------------
Holding Company Option Shares:
Balance at 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 at December 31, 2000..... 23.5 $27.20 15.4 $28.73
========== ============
AXA ADR Option Shares:
Balance at January 2, 2001 18.3 $21.65
Granted........................ 17.0 $31.55 2.5 $50.34
Exercised...................... (2.2) $11.57 (1.7) $13.45
Forfeited...................... (3.1) $32.02 (.3) $34.33
---------- ------------ ---------- ---------
Balance at December 31, 2001..... 30.0 $31.55 15.9 $33.58
Granted........................ 6.7 $17.24 2.4 $39.32
Exercised...................... (.2) $10.70 (1.4) $14.83
Forfeited...................... (1.2) $27.12 (.5) $42.99
---------- ------------ ---------- ---------
Balance at December 31, 2002 35.3 $25.14 16.4 $34.91
========== ============ ========== =========
F-48
Information about options outstanding and exercisable at December 31, 2002
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
--------------------------------------- ---------------- --------------- ------------------ ----------------
AXA ADRs
----------------------
$ 6.325 - $ 9.01 1.8 1.26 $6.76 1.8 $6.76
$10.195 - $14.73 3.3 6.41 $13.13 2.4 $13.28
$15.995 - $22.84 10.3 7.82 $18.47 4.7 $18.80
$26.095 - $33.025 14.9 5.60 $30.93 8.5 $31.76
$36.031 5.0 6.48 $36.03 5.0 $36.03
----------------- ------------------
$ 6.325 - $36.031 35.3 6.22 $25.14 22.4 $26.00
================= ==================
Alliance
----------------------
$ 8.81 - $18.47 3.5 3.43 $13.21 3.5 $13.21
$ 22.50 - $30.25 3.8 6.34 $27.87 2.6 $27.60
$ 30.94 - $48.50 4.9 8.68 $41.01 1.0 $48.46
$ 50.15 - $50.56 2.3 8.92 $50.25 .5 $50.25
$ 51.10 - $58.50 1.9 7.95 $53.78 .7 $53.77
----------------- ------------------
$ 8.81 - $58.50 16.4 6.98 $34.91 8.3 $27.72
================= ==================
The Company's ownership interest in Alliance will continue to be reduced
upon the exercise of unit options granted to certain Alliance employees.
Options are exercisable over a period of up to ten years.
In 1997, Alliance Holding established a long-term incentive compensation
plan under which grants are made to key employees for terms established by
Alliance Holding at the time of grant. These awards include options,
restricted Alliance Holding units and phantom restricted Alliance Holding
units, performance awards, other Alliance Holding unit based awards, or
any combination thereof. At December 31, 2002, approximately 14.4 million
Alliance Holding units of a maximum 40.0 million units were subject to
options granted and 80,433 Alliance Holding units were subject to awards
made under this plan.
22) RELATED PARTY TRANSACTIONS
Beginning January 1, 2000, the Company reimburses the Holding Company for
expenses relating to the Excess Retirement Plan, Supplemental Executive
Retirement Plan and certain other employee benefit plans that provide
participants with medical, life insurance, and deferred compensation
benefits. Such reimbursement was based on the cost to the Holding Company
of the benefits provided which totaled $39.7 million and $19.1 million,
respectively, for 2002 and 2001.
The Company paid $596.6 million and $590.5 million, respectively, of
commissions and fees to AXA Distribution and its subsidiaries for sales of
insurance products for 2002 and 2001. The Company charged AXA
Distribution's subsidiaries $411.9 million and $522.6 million,
respectively, for their applicable share of operating expenses for 2002
and 2001, pursuant to the Agreements for Services.
In September 2001, Equitable Life loaned $400.0 million to AXA Insurance
Holding Co. Ltd., a subsidiary of AXA. This investment has an interest
rate of 5.89% and matures on June 15, 2007. All payments, including
interest payable semi-annually, are guaranteed by AXA.
Both Equitable Life and Alliance, along with other AXA affiliates,
participate in certain intercompany cost sharing and service agreements
which include technology and professional development arrangements.
Payments by Equitable Life and Alliance to AXA under such agreements
totaled approximately $17.9 million and $13.7 million in 2002 and 2001,
respectively. Payments by AXA and AXA affiliates to Equitable Life under
such agreements totaled $17.6 million and $9.9 million in 2002 and 2001,
respectively.
F-49
Commissions, fees and other income includes certain revenues for services
provided to mutual funds managed by Alliance described below:
2002 2001 2000
----------------- ---------------- ------------------
(IN MILLIONS)
Investment advisory and services fees.............. $ 950.1 $ 1,089.7 $ 1,021.8
Distribution revenues.............................. 467.5 544.6 621.6
Shareholder servicing fees......................... 89.7 87.2 85.6
Other revenues..................................... 10.2 11.0 11.6
Brokerage.......................................... 7.0 5.7 1.0
23) PRO FORMA FINANCIAL INFORMATION (UNAUDITED)
Assuming the Bernstein acquisition had occurred on January 1, 2000,
revenues for the Company would have been $8.79 billion for 2000 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, 2000, nor is the pro forma
financial information necessarily indicative of the results of operations
that may be achieved for any future period.
F-50
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 4, 2003 appearing on page F-1 of this Annual Report on Form 10-K
also included an audit of the financial statement schedules listed in Item
15(A)2 of this Form 10-K. In our opinion, these 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 4, 2003
F-51
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
SCHEDULE I
SUMMARY OF INVESTMENTS - OTHER THAN INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 2002
ESTIMATED CARRYING
TYPE OF INVESTMENT COST (A) FAIR VALUE VALUE
- ------------------ ----------------- ---------------- ---------------
(IN MILLIONS)
Fixed maturities:
U.S. government, agencies and authorities............... $ 895.5 $ 979.6 $ 979.6
State, municipalities and political subdivisions........ 197.6 215.5 215.5
Foreign governments..................................... 231.8 268.4 268.4
Public utilities........................................ 2,579.8 2,704.6 2,704.6
All other corporate bonds............................... 19,923.4 21,119.8 21,119.8
Redeemable preferred stocks............................. 923.7 991.0 991.0
----------------- ---------------- ---------------
Total fixed maturities.................................... 24,751.8 26,278.9 26,278.9
----------------- ---------------- ---------------
Equity securities:
Common stocks:
Industrial, miscellaneous and all other............... 52.9 45.5 45.5
Mortgage loans on real estate............................. 3,746.2 4,070.1 3,746.2
Real estate............................................... 334.0 XXX 334.0
Real estate acquired in satisfaction of debt.............. 268.8 XXX 268.8
Real estate joint ventures................................ 114.5 XXX 114.5
Policy loans.............................................. 4,035.6 4,728.2 4,035.6
Other limited partnership interests....................... 674.8 674.8 674.8
Other invested assets..................................... 1,327.6 1,327.6 1,327.6
----------------- ---------------- ---------------
Total Investments......................................... $ 35,306.2 $ 37,125.1 $ 36,825.9
================= ================ ===============
(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-52
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
SCHEDULE II
BALANCE SHEETS (PARENT COMPANY)
DECEMBER 31, 2002 AND 2001
2002 2001
----------------- -----------------
(IN MILLIONS)
ASSETS
Investment:
Fixed maturities:
Available for sale, at estimated fair value (amortized
cost of $24,480.4 and $22,512.6, respectively)........................ $ 25,981.9 $ 22,984.8
Mortgage loans on real estate............................................. 3,746.2 4,332.3
Equity real estate........................................................ 717.3 875.5
Policy loans.............................................................. 3,805.8 3,877.1
Investments in and loans to affiliates.................................... 1,359.3 1,117.0
Other equity investments.................................................. 720.2 756.5
Other invested assets..................................................... 892.4 356.6
----------------- -----------------
Total investments..................................................... 37,223.1 34,299.8
Cash and cash equivalents................................................... 15.3 309.0
Deferred policy acquisition costs........................................... 5,749.8 5,458.7
Amounts due from reinsurers................................................. 1,482.4 1,437.1
Other assets................................................................ 2,289.2 2,290.5
Loans to affiliates......................................................... 413.0 400.0
Prepaid pension asset....................................................... 865.1 502.1
Separate Accounts assets.................................................... 39,012.1 46,947.3
----------------- -----------------
TOTAL ASSETS................................................................ $ 87,050.0 $ 91,644.5
================= =================
LIABILITIES
Policyholders' account balances............................................. $ 22,630.6 $ 20,541.1
Future policy benefits and other policyholders liabilities.................. 13,892.5 13,469.4
Short-term and long-term debt............................................... 847.8 847.9
Federal income taxes payable................................................ 1,698.8 1,355.2
Other liabilities........................................................... 918.5 989.7
Separate Accounts liabilities............................................... 38,883.8 46,875.5
----------------- -----------------
Total liabilities..................................................... 78,872.0 84,078.8
----------------- -----------------
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.............................................. 4,753.8 4,694.6
Retained earnings........................................................... 2,740.6 2,653.2
Accumulated other comprehensive income...................................... 681.1 215.4
----------------- -----------------
Total shareholder's equity............................................ 8,178.0 7,565.7
----------------- -----------------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY.................................. $ 87,050.0 $ 91,644.5
================= =================
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-53
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
SCHEDULE II
STATEMENTS OF EARNINGS (PARENT COMPANY)
YEARS ENDED DECEMBER 31, 2002, 2001, 2000
2002 2001 2000
----------------- ----------------- ---------------
(IN MILLIONS)
REVENUES
Universal life and investment-type product policy fee
income....................................................... $ 1,312.3 $ 1,337.4 $ 1,409.7
Premiums....................................................... 936.7 1,010.0 1,164.0
Net investment income.......................................... 2,321.7 2,301.9 2,681.8
Investment losses, net......................................... (264.1) (201.4) (834.3)
Equity in earnings of subsidiaries ............................ 113.1 134.2 1,409.8
Commissions, fees and other income............................. 337.7 244.2 127.4
----------------- ----------------- ----------------
Total revenues........................................... 4,757.4 4,826.3 5,958.4
----------------- ----------------- ----------------
BENEFITS AND OTHER DEDUCTIONS
Policyholders' benefits........................................ 2,025.7 1,878.9 2,054.5
Interest credited to policyholders' account balances........... 945.5 957.1 1,025.0
Compensation and benefits...................................... 235.8 287.5 413.7
Commissions.................................................... 835.5 824.9 782.8
Interest expense............................................... 72.5 71.6 89.6
Amortization of deferred policy acquisition costs.............. 292.6 284.0 305.0
Capitalization of deferred policy acquisition costs............ (753.2) (743.4) (772.4)
Rent expense................................................... 64.9 61.5 85.7
Expenses related to AXA's minority interest acquisition
of the Holding Company....................................... - - 493.9
Amortization and depreciation.................................. 85.8 93.2 65.7
Premium taxes.................................................. 36.3 36.9 60.6
Taxes, licenses and fees....................................... 33.0 40.9 24.9
Other operating costs and expenses............................. 293.5 202.2 44.7
----------------- ----------------- ----------------
Total benefits and other deductions...................... 4,167.9 3,995.3 4,673.7
----------------- ----------------- ----------------
Earnings from continuing operations before
Federal income taxes......................................... 589.5 831.0 1,284.7
Federal income tax benefit (expense)........................... 25.4 (224.4) 12.2
----------------- ----------------- ----------------
Earnings from continuing operations............................ 614.9 606.6 1,296.9
Earnings from discontinued operations, net of
Federal income taxes......................................... 5.6 43.9 58.6
Cumulative effect of accounting changes, net of
Federal income taxes......................................... (33.1) (3.5) -
----------------- ----------------- ----------------
Net Earnings................................................... $ 587.4 $ 647.0 $ 1,355.5
================= ================= ================
F-54
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
SCHEDULE II
STATEMENTS OF CASH FLOWS (PARENT COMPANY)
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
2002 2001 2000
----------------- ----------------- ----------------
(IN MILLIONS)
Net earnings.................................................... $ 587.4 $ 647.0 $ 1,355.5
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Interest credited to policyholders' account balances.......... 945.5 957.1 1,025.0
Universal life and investment-type policy fee income.......... (1,312.3) (1,337.4) (1,409.7)
Investment losses net......................................... 264.1 201.4 834.3
Equity in net earnings of subsidiaries........................ (113.1) (134.2) (1,409.8)
Dividends from subsidiaries................................... 213.6 1,289.4 1,717.3
Change in deferred policy acquisition costs................... (460.6) (459.4) (467.4)
Change in future policy benefits and other policyholder
funds....................................................... 216.1 (15.6) (846.6)
Change in prepaid pension asset............................... (363.0) (56.7) (66.5)
Change in fair value of guaranteed minimum income
benefit reinsurance contract.............................. (120.0) - -
Change in property and equipment.............................. (21.1) (120.9) (265.7)
Change in Federal income tax payable.......................... 93.2 573.9 (70.4)
Other, net.................................................... 279.7 328.9 (301.9)
----------------- ----------------- -----------------
Net cash provided by operating activities....................... 209.5 1,873.5 94.1
----------------- ----------------- -----------------
Cash flows from investing activities:
Maturities and repayments..................................... 2,973.1 2,429.1 2,492.6
Sales......................................................... 7,626.0 7,338.1 8,010.9
Purchases..................................................... (12,621.0) (11,776.0) (7,981.5)
Increase in loans to discontinued operations.................. 38.0 14.8 -
Change in short-term investments.............................. (570.9) 123.1 370.5
Change in policy loans........................................ 71.5 (52.2) (176.0)
Loans to affiliates........................................... - (400.0) -
Other, net.................................................... 32.2 (107.0) (26.4)
----------------- ----------------- -----------------
Net cash (used) provided by investing activities................ (2,451.1) (2,430.1) 2,690.1
----------------- ----------------- -----------------
Cash flows from financing activities:
Policyholders' account balances:
Deposits.................................................... 4,384.9 3,252.1 2,729.2
Withdrawals and transfers to Separate Accounts.............. (1,995.9) (2,445.4) (3,906.3)
Net decrease in short-term financings......................... (.2) (.2) (167.6)
Shareholder dividends paid.................................... (500.0) (1,700.0) (250.0)
Other, net.................................................... 59.1 (29.3) 1.6
----------------- ----------------- -----------------
Net cash provided (used) by financing activities................ 1,947.9 (922.8) (1,593.1)
----------------- ----------------- -----------------
Change in cash and cash equivalents............................. (293.7) (1,479.4) 1,191.1
Cash and cash equivalents, beginning of year.................... 309.0 1,788.4 597.3
----------------- ----------------- -----------------
Cash and Cash Equivalents, End of Year.......................... $ 15.3 $ 309.0 $ 1,788.4
================= ================= =================
Supplemental cash flow information
Interest Paid................................................. $ 43.6 $ 43.4 $ 97.0
================= ================= =================
Income Taxes (Refunded) Paid.................................. $ (153.6) $ 517.0 $ 358.2
================= ================= =================
F-55
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
SCHEDULE III
SUPPLEMENTARY INSURANCE INFORMATION
AT AND FOR THE YEAR ENDED DECEMBER 31, 2002
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........... $ 5,801.0 $ 23,037.5 $ 13,975.7 $ 2,260.7 $ 2,331.2 $ 3,006.5 $ 296.7 $ 932.3
Investment
Services.......... - - - - 18.0 - - 2,154.2
Consolidation/
elimination....... - - - - 28.0 - - (71.3)
---------- ------------- ------------ ---------- ------------ --------- ------- -----------
Total............... $ 5,801.0 $ 23,037.5 $ 13,975.7 $ 2,260.7 $ 2,377.2 $ 3,006.5 $ 296.7 $ 3,015.2
========== ============= ============ ========== ============ ========= ======= ===========
(1) Net investment income is based upon specific identification of portfolios
within segments.
(2) Operating expenses are principally incurred directly by a segment.
F-56
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
SCHEDULE III
SUPPLEMENTARY INSURANCE INFORMATION
AT AND FOR THE YEAR ENDED DECEMBER 31, 2001
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........ $ 5,513.7 $ 20,939.1 $ 13,539.4 $ 2,362.2 $ 2,337.9 $ 2,868.6 $ 287.9 $ 899.3
Investment
Services....... - - - - 39.9 - - 2,409.0
Consolidation/
elimination.... - - - - 26.5 - - (90.0)
---------- ------------- ------------ ---------- ------------ --------- ------- -----------
Total............ $ 5,513.7 $ 20,939.1 $ 13,539.4 $ 2,362.2 $ 2,404.3 $ 2,868.6 $ 287.9 $ 3,218.3
========== ============= ============ ========== ============ ========= ======= ===========
(1) Net investment income is based upon specific identification of portfolios
within segments.
(2) Operating expenses are principally incurred directly by a segment.
F-57
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
SCHEDULE III
SUPPLEMENTARY INSURANCE INFORMATION
FOR THE YEAR ENDED DECEMBER 31, 2000
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.................... $ 2,588.3 $ 2,653.1 $ 3,108.8 $ 309.0 $ 1,456.6
Investment
Services................... - 67.5 - - 1,894.4
Consolidation/
elimination................ - 31.3 - - (113.1)
------------- -------------- ------------- ---------- -----------
Total........................ $ 2,588.3 $ 2,751.91 $ 3,108.8 $ 309.0 $ 3,237.9
============= ============== ============= ========== ===========
(1) Net investment income is based upon specific identification of portfolios
within segments.
(2) Operating expenses are principally incurred directly by a segment.
F-58
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
SCHEDULE IV
REINSURANCE (A)
AT AND FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
ASSUMED PERCENTAGE
CEDED TO FROM OF AMOUNT
GROSS OTHER OTHER NET ASSUMED
AMOUNT COMPANIES COMPANIES AMOUNT TO NET
----------------- ---------------- ----------------- --------------- ---------------
(DOLLARS IN MILLIONS)
2002
- ----
Life Insurance In-Force...... $ 264,456.6 $ 89,413.1 $ 42,228.6 $ 217,281.1 19.44%
================= ================ ================= ===============
Premiums:
Life insurance and
annuities.................. $ 803.3 $ 86.8 $ 145.7 $ 862.2 16.90%
Accident and health.......... 151.3 104.0 35.7 83.0 43.01%
----------------- ---------------- ----------------- ---------------
Total Premiums............... $ 954.6 $ 190.8 $ 181.4 $ 945.2 19.19%
================= ================ ================= ===============
2001
- ----
Life Insurance In-Force...... $ 263,375.6 $ 75,190.5 $ 42,640.4 $ 230,825.5 18.47%
================= ================ ================= ===============
Premiums:
Life insurance and
annuities.................. $ 830.2 $ 63.6 $ 138.5 $ 905.1 15.30%
Accident and health.......... 159.8 109.5 64.5 114.8 56.18%
----------------- ---------------- ----------------- ---------------
Total Premiums............... $ 990.0 $ 173.1 $ 203.0 $ 1,019.9 19.90%
================= ================ ================= ===============
2000
- ----
Life Insurance In-Force...... $ 260,762.0 $ 54,418.0 $ 42,588.0 $ 248,932.0 17.11%
================= ================ ================= ===============
Premiums:
Life insurance and
annuities.................. $ 939.2 $ 52.6 $ 130.8 $ 1,017.4 12.86%
Accident and health.......... 164.6 70.4 63.4 157.6 40.23%
----------------- ---------------- ----------------- ---------------
Total Premiums............... $ 1,103.8 $ 123.0 $ 194.2 $ 1,175.0 16.53%
================= ================ ================= ===============
(A) Includes amounts related to the discontinued group life and health business.
F-59
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 III, ITEM 14.
CONTROLS AND PROCEDURES
An evaluation was performed under the supervision and with the participation of
management, including the Chief Executive Office and the Chief Financial
Officer, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures as of December 31, 2002. Based on that
evaluation, management, including the Chief Executive Officer and Chief
Financial Officer, concluded that the Company's disclosure controls and
procedures are effective. There have been no significant changes in the
Company's internal controls or in other factors that could significantly affect
internal controls subsequent to December 31, 2002.
14-1
PART IV, ITEM 15.
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
1. On August 14, 2002, Equitable Life furnished a current report on Form
8-K relating to the certifications made by its Chief Executive Officer
and Chief Financial Officer as required by Section 906 of the
Sarbanes-Oxley Act of 2002.
2. On September 4, 2002, Equitable Life furnished a current report on Form
8-K relating to a discussion of DAC amortization by Vice Chairman of
the Board and Chief Financial Officer, Stanley B. Tulin, to security
analysts on September 3, 2002.
3. On November 13, 2002, Equitable Life furnished a current report on Form
8-K relating to the certifications made by its Chief Executive Officer
and Chief Financial Officer as required by Section 906 and Section 302
of the Sarbanes-Oxley Act of 2002.
15-1
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 20, 2003 THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE
UNITED STATES
By: /s/Christopher M. Condron
-----------------------------------------
Name: Christopher M. Condron
Chairman of the Board, President 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.
/s/Christopher M. Condron Chairman of the Board, President and Chief March 20, 2003
- -----------------------------
Christopher M. Condron Executive Officer, Director
/s/Stanley B. Tulin Vice Chairman of the Board and March 20, 2003
- -----------------------------
Stanley B. Tulin Chief Financial Officer, Director
/s/Alvin H. Fenichel Senior Vice President and Controller March 20, 2003
- -----------------------------
Alvin H. Fenichel
Director March , 2003
- -----------------------------
Henri de Castries
Director March , 2003
- -----------------------------
Bruce W. Calvert
/s/Francoise Colloc'h Director March 20, 2003
- -----------------------------
Francoise Colloc'h
/s/ Claus-Michael Dill
- ----------------------------- Director March 20, 2003
Claus-Michael Dill
/s/Joseph L. Dionne Director March 20, 2003
- -----------------------------
Joseph L. Dionne
/s/Denis Duverne Director March 20, 2003
- -----------------------------
Denis Duverne
- ----------------------------- Director March , 2003
Jean-Rene Fourtou
/s/John C. Graves Director March 20, 2003
- -----------------------------
John C. Graves
/s/Donald J. Greene Director March 20, 2003
- -----------------------------
Donald J. Greene
S-1
/s/Nina Henderson Director March 20, 2003
- -----------------------------
Nina Henderson
/s/James F. Higgins Director March 20, 2003
- -----------------------------
James F. Higgins
/s/W. Edwin Jarmain Director March 20, 2003
- -----------------------------
W. Edwin Jarmain
/s/Christina Johnson Director March 20, 2003
- -----------------------------
Christina Johnson
/s/Scott D. Miller Director March 20, 2003
- -----------------------------
Scott D. Miller
/s/Joseph H. Moglia Director March 20, 2003
- -----------------------------
Joseph H. Moglia
/s/ Peter J. Tobin Director March 20, 2003
- -----------------------------
Peter J. Tobin
S-2
CERTIFICATIONS
I, Christopher M. Condron, Chairman of the Board, President and Chief Executive
Officer of The Equitable Life Assurance Society of the United States, certify
that:
1. I have reviewed this annual report on Form 10-K of The Equitable Life
Assurance Society of the United States (the "Registrant");
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the Registrant as of, and for, the periods presented in this annual
report;
4. The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the Registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
b) evaluated the effectiveness of the Registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;
5. The Registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the Registrant's auditors and the audit
committee of Registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Registrant's ability to
record, process, summarize and report financial data and have
identified for the Registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrant's internal
controls; and
6. The Registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: March 27, 2003
/s/ Christopher M. Condron
--------------------------------
Christopher M. Condron
Chairman of the Board, President
and Chief Executive Officer
C-1
I, Stanley B. Tulin, Vice Chairman of the Board and Chief Financial Officer of
The Equitable Life Assurance Society of the United States, certify that:
1) I have reviewed this annual report on Form 10-K of The Equitable Life
Assurance Society of the United States (the "Registrant");
2) Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3) Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the Registrant as of, and for, the periods presented in this annual
report;
4) The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the Registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
b) evaluated the effectiveness of the Registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;
5) The Registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the Registrant's auditors and the audit
committee of Registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Registrant's ability to
record, process, summarize and report financial data and have
identified for the Registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrant's internal
controls; and
6) The Registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: March 27, 2003
/s/ Stanley B. Tulin
---------------------------------
Stanley B. Tulin
Vice Chairman of the Board and
Chief Financial Officer
C-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 May 12, 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, L.L.C. and Company's annual report on Form 10-K for
Equitable 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
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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
between the IDA, Equitable Life and 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 Filed as Exhibit 10.8 to the registrant's
Use of Personnel, Property and Services annual report on Form 10-K for the year
between Equitable Life and AXA ended December 31, 1999 and incorporated
Advisors 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 dated annual report on Form 10-K for the year
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 annual report on Form 10-K for the year
January 1, 2000 ended December 31, 1999 and incorporated
herein by reference
18 Preferability letter from Filed herewith
PricewaterhouseCoopers LLP
21 Subsidiaries of the registrant Omitted pursuant to General Instruction I
of Form 10-K
99.1 Section 906 Certification made by the Filed herewith
registrant's Chief Executive Officer
99.2 Section 906 Certification made by the Filed herewith
registrant's Chief Financial Officer
E-2