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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended March 31, 2003 Commission File No. 0-25280
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THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
---------------------------------------------------------
(Exact name of registrant as specified in its charter)
New York 13-5570651
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1290 Avenue of the Americas, New York, New York 10104
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 554-1234
------------------------
None
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(Former name, former address, and former fiscal year if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Shares Outstanding
Class at May 14, 2003
- -------------------------------------- ----------------------------------------
Common Stock, $1.25 par value 2,000,000
REDUCED DISCLOSURE FORMAT:
Registrant meets the conditions set forth in General Instruction H (1) (a) and
(b) of Form 10-Q and is therefore filing this form with the Reduced Disclosure
Format.
Page 1 of 28
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2003
TABLE OF CONTENTS
Page #
PART I FINANCIAL INFORMATION
Item 1: Unaudited Consolidated Financial Statements
o Consolidated Balance Sheets as of March 31, 2003 and December 31, 2002......... 3
o Consolidated Statements of Earnings for the Three Months Ended
March 31, 2003 and 2002........................................................ 4
o Consolidated Statements of Shareholder's Equity and Comprehensive
Income (Loss) for the Three Months Ended March 31, 2003 and 2002............... 5
o Consolidated Statements of Cash Flows for the Three Months Ended
March 31, 2003 and 2002........................................................ 6
o Notes to Consolidated Financial Statements..................................... 7
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations ("Management Narrative")................................... 17
Item 3: Quantitative and Qualitative Disclosures About Market Risk*...................... 23
Item 4: Controls and Procedures.......................................................... 23
PART II OTHER INFORMATION
Item 1: Legal Proceedings................................................................ 24
Item 2: Changes in Securities............................................................ 25
Item 3: Defaults Upon Senior Securities.................................................. 25
Item 4: Submission of Matters to a Vote of Security Holders.............................. 25
Item 5: Other Information................................................................ 25
Item 6: Exhibits and Reports on Form 8-K................................................. 25
SIGNATURES................................................................................. 26
CERTIFICATIONS............................................................................. 27
*Omitted pursuant to General Instruction H to Form 10-Q.
2
PART I FINANCIAL INFORMATION
ITEM 1: UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
MARCH 31, December 31,
2003 2002
----------------- -----------------
(IN MILLIONS)
ASSETS
Investments:
Fixed maturities available for sale, at estimated fair value.............. $ 26,535.0 $ 26,278.9
Mortgage loans on real estate............................................. 3,654.1 3,746.2
Equity real estate........................................................ 711.8 717.3
Policy loans.............................................................. 3,986.8 4,035.6
Other equity investments.................................................. 726.4 720.3
Other invested assets..................................................... 1,666.4 1,327.6
----------------- -----------------
Total investments..................................................... 37,280.5 36,825.9
Cash and cash equivalents................................................... 1,173.5 269.6
Cash and securities segregated, at estimated fair value..................... 1,054.5 1,174.3
Broker-dealer related receivables........................................... 1,495.1 1,446.2
Deferred policy acquisition costs........................................... 5,904.3 5,801.0
Goodwill and other intangible assets, net................................... 3,525.4 3,503.8
Amounts due from reinsurers................................................. 2,392.0 2,351.7
Loans to affiliates at estimated fair value................................. 402.9 413.0
Other assets................................................................ 3,975.0 4,028.7
Separate Accounts assets.................................................... 39,632.6 39,012.1
----------------- -----------------
TOTAL ASSETS................................................................ $ 96,835.8 $ 94,826.3
================= =================
LIABILITIES
Policyholders' account balances............................................. $ 23,796.9 $ 23,037.5
Future policy benefits and other policyholders liabilities.................. 14,060.4 13,975.7
Broker-dealer related payables.............................................. 933.9 731.0
Customers related payables.................................................. 1,419.2 1,566.8
Amounts due to reinsurers................................................... 884.9 867.5
Short-term and long-term debt............................................... 1,520.5 1,274.7
Federal income taxes payable................................................ 2,352.4 2,231.0
Other liabilities........................................................... 1,657.0 1,748.3
Separate Accounts liabilities............................................... 39,522.4 38,883.8
Minority interest in equity of consolidated subsidiaries.................... 1,784.9 1,816.6
Minority interest subject to redemption rights.............................. 504.7 515.4
----------------- -----------------
Total liabilities..................................................... 88,437.2 86,648.3
----------------- -----------------
Commitments and contingencies (Note 9)
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.............................................. 4,768.3 4,753.8
Retained earnings........................................................... 2,776.3 2,740.6
Accumulated other comprehensive income...................................... 851.5 681.1
----------------- -----------------
Total shareholder's equity............................................ 8,398.6 8,178.0
----------------- -----------------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY.................................. $ 96,835.8 $ 94,826.3
================= =================
See Notes to Consolidated Financial Statements.
3
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
CONSOLIDATED STATEMENTS OF EARNINGS
THREE MONTHS ENDED MARCH 31, 2003 AND 2002
(UNAUDITED)
2003 2002
----------------- -----------------
(IN MILLIONS)
REVENUES
Universal life and investment-type product policy fee income................ $ 316.0 $ 340.9
Premiums.................................................................... 243.7 235.3
Net investment income....................................................... 586.1 590.7
Investment losses, net...................................................... (125.0) (37.7)
Commissions, fees and other income.......................................... 653.9 754.7
----------------- -----------------
Total revenues........................................................ 1,674.7 1,883.9
----------------- -----------------
BENEFITS AND OTHER DEDUCTIONS
Policyholders' benefits..................................................... 484.1 458.7
Interest credited to policyholders' account balances........................ 235.8 247.8
Compensation and benefits................................................... 286.5 274.9
Commissions................................................................. 234.1 195.3
Distribution plan payments.................................................. 89.1 105.3
Amortization of deferred sales commissions.................................. 53.0 57.0
Interest expense............................................................ 20.5 20.1
Amortization of deferred policy acquisition costs........................... 87.2 82.7
Capitalization of deferred policy acquisition costs......................... (222.2) (176.7)
Rent expense................................................................ 40.7 41.3
Amortization of other intangible assets, net................................ 5.5 5.3
Other operating costs and expenses.......................................... 234.5 231.9
----------------- -----------------
Total benefits and other deductions................................... 1,548.8 1,543.6
----------------- -----------------
Earnings from continuing operations before Federal income taxes
and minority interest..................................................... 125.9 340.3
Federal income tax expense.................................................. (27.8) (76.0)
Minority interest in net income of consolidated subsidiaries................ (62.4) (101.8)
----------------- -----------------
Earnings from continuing operations......................................... 35.7 162.5
Earnings from discontinued operations, net of Federal income taxes.......... - 1.0
Cumulative effect of accounting changes, net of Federal income taxes........ - (33.1)
----------------- -----------------
Net Earnings................................................................ $ 35.7 $ 130.4
================= =================
See Notes to Consolidated Financial Statements.
4
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
AND COMPREHENSIVE INCOME (LOSS)
THREE MONTHS ENDED MARCH 31, 2003 AND 2002
(UNAUDITED)
2003 2002
----------------- -----------------
(IN MILLIONS)
SHAREHOLDER'S EQUITY
Common stock, at par value, beginning of year and end of period............. $ 2.5 $ 2.5
----------------- -----------------
Capital in excess of par value, beginning of year........................... 4,753.8 4,694.6
Increase (decrease) in additional paid in capital in excess of par value.... 14.5 9.2
----------------- -----------------
Capital in excess of par value, end of period............................... 4,768.3 4,703.8
----------------- -----------------
Retained earnings, beginning of year........................................ 2,740.6 2,653.2
Net earnings................................................................ 35.7 130.4
----------------- -----------------
Retained earnings, end of period............................................ 2,776.3 2,783.6
----------------- -----------------
Accumulated other comprehensive income, beginning of year................... 681.1 215.4
Other comprehensive income (loss)........................................... 170.4 (143.1)
----------------- -----------------
Accumulated other comprehensive income, end of period....................... 851.5 72.3
----------------- -----------------
TOTAL SHAREHOLDER'S EQUITY, END OF PERIOD................................... $ 8,398.6 $ 7,562.2
================= =================
COMPREHENSIVE INCOME (LOSS)
Net earnings................................................................ $ 35.7 $ 130.4
Change in unrealized gains (losses) net of reclassification adjustments..... 170.4 (143.1)
----------------- -----------------
Other comprehensive income (loss)........................................... 170.4 (143.1)
----------------- -----------------
COMPREHENSIVE INCOME (LOSS)................................................. $ 206.1 $ (12.7)
================= =================
See Notes to Consolidated Financial Statements.
5
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2003 AND 2002
(UNAUDITED)
2003 2002
----------------- -----------------
(IN MILLIONS)
Net earnings................................................................ $ 35.7 $ 130.4
Adjustments to reconcile net earnings to net cash provided (used)
by operating activities:
Interest credited to policyholders' account balances.................... 235.8 247.8
Universal life and investment-type product policy fee income............ (316.0) (340.9)
Net change in broker-dealer and customer related receivables/payables... (84.3) (429.0)
Investment losses, net.................................................. 125.0 37.7
Change in Federal income tax payable.................................... 29.1 62.6
Change in future policy benefits........................................ (2.4) 24.8
Change in property and equipment........................................ (11.6) (25.0)
Change in deferred policy acquisition costs............................. (135.0) (94.0)
Purchase of segregated cash and securities, net......................... 119.8 317.0
Minority interest in net income of consolidated subsidiaries............ 62.4 101.8
Amortization of other intangible assets, net............................ 5.5 5.3
Other, net.............................................................. 33.1 (129.2)
----------------- -----------------
Net cash provided (used) by operating activities............................ 97.1 (90.7)
----------------- -----------------
Cash flows from investing activities:
Maturities and repayments................................................. 983.7 817.6
Sales.................................................................... 1,167.8 1,041.5
Purchases................................................................. (2,040.5) (2,112.1)
Increase in short-term investments........................................ (313.7) (102.4)
Other, net................................................................ 40.9 31.6
----------------- -----------------
Net cash used by investing activities....................................... (161.8) (323.8)
----------------- -----------------
Cash flows from financing activities:
Policyholders' account balances:
Deposits................................................................ 1,355.2 1,020.5
Withdrawals and transfers to Separate Accounts.......................... (562.4) (609.2)
Net increase in short-term financings..................................... 256.3 148.1
Other, net................................................................ (80.5) (80.9)
----------------- -----------------
Net cash provided by financing activities................................... 968.6 478.5
----------------- -----------------
Change in cash and cash equivalents......................................... 903.9 64.0
Cash and cash equivalents, beginning of year................................ 269.6 627.8
----------------- -----------------
Cash and Cash Equivalents, End of Period.................................... $ 1,173.5 $ 691.8
================= =================
Supplemental cash flow information
Interest Paid............................................................. $ 18.0 $ 24.0
================= =================
Income Taxes (Refunded) Paid.............................................. $ (10.0) $ .1
================= =================
See Notes to Consolidated Financial Statements.
6
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1) BASIS OF PRESENTATION
The preparation of the accompanying unaudited consolidated financial
statements in conformity with U.S. GAAP requires management to make
estimates and assumptions (including normal, recurring accruals) that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates. The accompanying
unaudited interim consolidated financial statements reflect all
adjustments necessary in the opinion of management to present fairly the
consolidated financial position of the Company and its consolidated
results of operations and cash flows for the periods presented. All
significant intercompany transactions and balances except those with
discontinued operations (see Note 5) have been eliminated in
consolidation. These statements should be read in conjunction with the
consolidated financial statements of the Company for the year ended
December 31, 2002. The results of operations for the three months ended
March 31, 2003 are not necessarily indicative of the results to be
expected for the full year.
The terms "first quarter 2003" and "first quarter 2002" refer to the three
months ended March 31, 2003 and 2002, respectively.
Certain reclassifications have been made in the amounts presented for
prior periods to conform these periods with the current presentation.
2) ACCOUNTING CHANGES
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
increase Earnings from continuing operations in first quarter 2002 by $2.0
million, net of Federal income taxes of $.9 million.
3) INVESTMENTS
Investment valuation allowances for mortgage loans and equity real estate
and changes thereto follow:
THREE MONTHS ENDED
MARCH 31,
--------------------------
2003 2002
----------- ----------
(IN MILLIONS)
Balances, beginning of year....................... $ 55.0 $ 87.6
Additions charged to income....................... 3.0 7.7
Deductions for writedowns and asset dispositions.. (1.7) (3.1)
---------- -----------
Balances, End of Period........................... $ 56.3 $ 92.2
========== ===========
Balances, end of period comprise:
Mortgage loans on real estate................... $ 22.3 $ 19.1
Equity real estate.............................. 34.0 73.1
---------- -----------
Total............................................. $ 56.3 $ 92.2
========== ===========
For the first quarters of 2003 and 2002, investment income is shown net of
investment expenses of $51.6 million and $49.5 million, respectively.
7
As of March 31, 2003 and December 31, 2002, fixed maturities classified as
available for sale had amortized costs of $24,676.4 million and $24,751.8
million. Other equity investments included trading securities having
carrying values of $1.2 million and $1.1 million and costs of $3.3 million
and $3.3 million at March 31, 2003 and December 31, 2002, respectively,
and other equity securities with carrying values of $24.2 million and
$36.2 million and costs of $26.1 million and $37.6 million as of March 31,
2002 and December 31, 2002, respectively.
In the first quarters of 2003 and 2002, respectively, net unrealized and
realized holding gains on trading account equity securities of $.1 million
and $.8 million were included in net investment income in the consolidated
statements of earnings.
For the first quarters of 2003 and 2002, proceeds received on sales of
fixed maturities classified as available for sale amounted to $1,165.5 and
$1,009.0 million, respectively. Gross gains of $35.1 million and $29.9
million and gross losses of $21.5 million and $23.4 million were realized
on these sales for the first quarters of 2003 and 2002, respectively.
Unrealized net investment gains related to fixed maturities classified as
available for sale increased by $341.6 million during the first three
months of 2003, resulting in a balance of $1,868.6 million at March 31,
2003.
Impaired mortgage loans along with the related investment valuation
allowances for losses follow:
MARCH 31, December 31,
2003 2002
--------------- -----------------
(IN MILLIONS)
Impaired mortgage loans with investment valuation allowances...... $ 95.7 $ 111.8
Impaired mortgage loans without investment valuation allowances... 58.9 20.4
--------------- -----------------
Recorded investment in impaired mortgage loans.................... 154.6 132.2
Investment valuation allowances................................... (22.3) (23.4)
--------------- -----------------
Net Impaired Mortgage Loans....................................... $ 132.3 $ 108.8
=============== =================
During the first quarters of 2003 and 2002, respectively, the Company's
average recorded investment in impaired mortgage loans was $145.6 million
and $132.3 million. Interest income recognized on these impaired mortgage
loans totaled $2.4 million and $2.6 million for the first quarters of 2003
and 2002, 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
March 31, 2003 and December 31, 2002, respectively, the carrying value of
mortgage loans on real estate that had been classified as nonaccrual loans
was $114.9 million and $91.1 million.
4) 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
8
income from continuing operations. If the Closed Block has insufficient
funds to make guaranteed policy benefit payments, such payments will be
made from assets outside the Closed Block.
Many expenses related to Closed Block operations, including amortization
of DAC, are charged to operations outside of the Closed Block;
accordingly, net revenues of the Closed Block do not represent the actual
profitability of the Closed Block operations. Operating costs and expenses
outside of the Closed Block are, therefore, disproportionate to the
business outside of the Closed Block.
Summarized financial information for the Closed Block is as follows:
MARCH 31, December 31,
2003 2002
----------------- -----------------
(IN MILLIONS)
CLOSED BLOCK LIABILITIES:
Future policy benefits, policyholders' account balances and other.... $ 8,976.6 $ 8,997.3
Policyholder dividend obligation..................................... 247.4 213.3
Other liabilities.................................................... 88.4 97.6
----------------- -----------------
Total Closed Block liabilities....................................... 9,312.4 9,308.2
----------------- -----------------
ASSETS DESIGNATED TO THE CLOSED BLOCK:
Fixed maturities, available for sale, at estimated fair value
(amortized cost of $4,823.4 and $4,794.0).......................... 5,176.0 5,098.4
Mortgage loans on real estate........................................ 1,418.9 1,456.0
Policy loans......................................................... 1,435.1 1,449.9
Cash and other invested assets....................................... 150.5 141.9
Other assets......................................................... 211.5 219.9
----------------- -----------------
Total assets designated to the Closed Block......................... 8,392.0 8,366.1
----------------- -----------------
Excess of Closed Block liabilities over assets designated to
the Closed Block.................................................. 920.4 942.1
Amounts included in accumulated other comprehensive income:
Net unrealized investment gains, net of
deferred Federal income tax of $36.8 and $31.8
and policyholder dividend obligation of $247.4 and $213.3..... 68.3 59.1
----------------- -----------------
Maximum Future Earnings To Be Recognized From Closed Block
Assets and Liabilities............................................ $ 988.7 $ 1,001.2
================= =================
9
Closed Block revenues and expenses were as follows:
THREE MONTHS ENDED
MARCH 31,
-----------------------------------
2003 2002
--------------- ---------------
(IN MILLIONS)
REVENUES:
Premiums and other income................................................ $ 131.6 $ 139.2
Investment income (net of investment expenses of $1.7 and $1.3).......... 141.5 143.7
Investment (losses) gains, net........................................... (18.8) 3.2
--------------- ---------------
Total revenues........................................................... 254.3 286.1
--------------- ---------------
BENEFITS AND OTHER DEDUCTIONS:
Policyholders' benefits and dividends.................................... 233.3 255.6
Other operating costs and expenses....................................... 1.2 4.8
--------------- ----------------
Total benefits and other deductions...................................... 234.5 260.4
--------------- ----------------
Net revenues before Federal income taxes................................. 19.8 25.7
Federal income taxes..................................................... (7.3) (10.1)
--------------- ----------------
Net Revenues............................................................. $ 12.5 $ 15.6
=============== ================
Reconciliation of the policyholder dividend obligation is as follows:
THREE MONTHS ENDED
MARCH 31,
-------------------------------------
2003 2002
---------------- ----------------
(IN MILLIONS)
Balances, beginning of year............................................. $ 213.3 $ -
Unrealized investment gains............................................. 34.1 -
---------------- ----------------
Balances, End of Period................................................. $ 247.4 $ -
================ ================
5) DISCONTINUED OPERATIONS
Summarized financial information for discontinued operations follows:
MARCH 31, December 31,
2003 2002
----------------- -------------------
(IN MILLIONS)
BALANCE SHEETS
Fixed maturities, available for sale, at estimated fair value
(amortized cost $665.1 and $677.8).................................. $ 721.8 $ 722.7
Equity real estate..................................................... 201.4 203.7
Mortgage loans on real estate.......................................... 73.9 87.5
Other equity investments............................................... 8.2 9.4
Other invested assets.................................................. .2 .2
----------------- -------------------
Total investments................................................... 1,005.5 1,023.5
Cash and cash equivalents.............................................. 45.5 31.0
Other assets........................................................... 134.0 126.5
----------------- -------------------
Total Assets........................................................... $ 1,185.0 $ 1,181.0
================= ===================
Policyholders liabilities.............................................. $ 902.6 $ 909.5
Allowance for future losses............................................ 173.1 164.6
Other liabilities...................................................... 109.3 106.9
----------------- -------------------
Total Liabilities...................................................... $ 1,185.0 $ 1,181.0
================= ===================
10
THREE MONTHS ENDED
MARCH 31,
-------------------------------------
2003 2002
----------------- -----------------
(IN MILLIONS)
STATEMENTS OF EARNINGS
Investment income (net of investment expenses of $6.4 and $4.7)........... $ 18.9 $ 21.3
Investment gains, net..................................................... .6 1.6
----------------- -----------------
Total revenues............................................................ 19.5 22.9
Benefits and other deductions............................................. 23.0 24.6
Losses charged to allowance for future losses............................. (3.5) (1.7)
----------------- -----------------
Pre-tax results from operations........................................... - -
Pre-tax earnings from releasing the allowance for future losses........... - 1.5
Federal income tax expense................................................ - (.5)
----------------- -----------------
Income from Discontinued Operations....................................... $ - $ 1.0
================= =================
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. These updated assumptions and estimates
resulted in a release of allowance in first quarter 2002; no release or
strengthening of the allowance was required in first quarter 2003.
Management believes the allowance for future losses at March 31, 2003 is
adequate to provide for all future losses; however, the determination of
the allowance involves numerous estimates and subjective judgments
regarding the expected performance of Discontinued Operations Investment
Assets. There can be no assurance the losses provided for will not differ
from the losses ultimately realized. To the extent actual results or
future projections of discontinued operations differ from management's
current estimates and assumptions underlying the allowance for future
losses, the difference would be reflected in the consolidated statements
of earnings in discontinued operations. In particular, to the extent
income, sales proceeds and holding periods for equity real estate differ
from management's previous assumptions, periodic adjustments to the loss
allowance are likely to result.
Valuation allowances of $4.3 million and $4.9 million on mortgage loans on
real estate were held at March 31, 2003 and December 31, 2002,
respectively.
6) 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, or
d) Combo: the benefit is the greater of the ratchet benefit or the roll-up
benefit.
11
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 2003:
GMDB GMIB TOTAL
----------------- ---------------- -----------------
(IN MILLIONS)
Balance at December 31, 2002....................... $ 128.4 $ 117.5 $ 245.9
Paid guarantee benefits.......................... (22.4) - (22.4)
Other changes in reserve......................... 14.6 2.1 16.7
----------------- ---------------- -----------------
Balance at March 31, 2003.......................... $ 120.6 $ 119.6 $ 240.2
================= ================ =================
Related GMDB reinsurance ceded amounts were:
GMDB
---------------------
(IN MILLIONS)
Balance at December 31, 2002....................... $ 21.5
Paid guarantee benefits ceded.................... (5.7)
Other changes in reserve......................... 1.7
---------------------
Balance at March 31, 2003.......................... $ 17.5
=====================
The GMIB reinsurance contracts are considered derivatives and are reported
at fair value. At March 31, 2003 AXA Financial had the following variable
contracts with guarantees. Note that AXA Financial'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)................... $ 21,287 $ 4,017 $ 6,063 $ 2,323 $ 33,690
Net amount at risk, gross........... $ 5,603 $ 1,770 $ 3,229 $ 96 $ 10,698
Net amount at risk, net of amounts
reinsured......................... $ 5,596 $ 1,224 $ 2,030 $ 96 $ 8,946
Average attained age of
contractholders................... 49.9 59.1 61.1 59.4 51.7
Percentage of contractholders
over age 70....................... 6.9% 20.0% 24.6% 19.4% 9.6%
Range of guaranteed minimum return
rates............................ N/A N/A 3-6% 3-6% N/A
GMIB:
Account value (2)................... N/A N/A $ 4,689 $ 3,306 $ 7,995
Net amount at risk, gross........... N/A N/A $ 1,210 $ - $ 1,210
Net amount at risk, net of amounts
reinsured......................... N/A N/A $ 327 $ - $ 327
Weighted average years remaining
until annuitization.............. N/A N/A 4.7 10.0 4.7
Range of guaranteed minimum return
rates............................ N/A N/A 3-6% 3-6% 3-6%
(1) Included General Account balances of $10,534 million, $130 million,
$174 million and $360 million, respectively, for a total of $11,198
million.
(2) Included General Account balances of $7 million and $536 million,
respectively, for a total of $543 million.
12
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.
7) FEDERAL INCOME TAXES
Federal income taxes for interim periods have been computed using an
estimated annual effective tax rate. This rate is revised, if necessary,
at the end of each successive interim period to reflect the current
estimate of the annual effective tax rate.
8) STOCK APPRECIATION RIGHTS
Following completion of the merger of AXA Merger Corp. with and into the
Holding Company, certain employees exchanged AXA ADR options for tandem
Stock Appreciation Rights and at-the-money AXA ADR options of equivalent
intrinsic value. The maximum obligation for the Stock Appreciation Rights
is $73.3 million, based upon the underlying price of AXA ADRs at January
2, 2001, the closing date of the aforementioned merger. For first quarter
2002, the Company recorded an increase in the Stock Appreciation Rights
liability of $6.0 million reflecting the variable accounting for Stock
Appreciation Rights, based on the change in the market value of AXA ADRs
for the period ended March 31, 2002. At March 31, 2003 and December 31,
2002, Stock Appreciation Rights were not in-the-money and consequently,
the Stock Appreciation Rights liability was zero.
9) LITIGATION
There have been no new material legal proceedings and no material
developments in specific litigations previously reported in the Company's
Notes to Consolidated Financial Statements for the year ended December 31,
2002, except as described below:
In MCEACHERN, in March 2003, the parties settled the individual claims of
the plaintiffs and the action was dismissed with prejudice.
In MALHOTRA, in April 2003, plaintiffs filed a second amended complaint
alleging violations of Sections 10(b) and 20(a) of the Securities Exchange
Act of 1934. The action purports to be on behalf of a class consisting of
all persons who on or after October 3, 1997 purchased an individual
variable deferred annuity contract, received a certificate to a group
variable deferred annuity contract or made an additional investment
through such a contract, which contract was used to fund a contributory
retirement plan or arrangement qualified for favorable income tax
treatment.
In the Mississippi Actions, plaintiffs in the Circuit Court of Sunflower
County action have moved for rehearing by the Supreme Court of
Mississippi. The motion has been fully briefed. In March 2003, an action
was filed on behalf of one plaintiff in the Circuit Court of Kemper
County. That lawsuit has been removed to the United States District Court
for the Southern District of Mississippi. In April 2003, the Company
entered into agreements to settle three of the Mississippi Actions
involving 10 plaintiffs. One of those actions, involving two plaintiffs,
has been dismissed with prejudice. In addition, the Company entered into
two agreements to settle an additional 21 lawsuits involving approximately
285 plaintiffs. Those agreements are subject to certain conditions
contained therein.
In FISCHEL, in May 2003, plaintiffs' motion for an award of additional
legal fees from the settled claim settlement fund was denied by the
District Court.
In HIRT, in March 2003, plaintiffs filed an amended complaint
elaborating on the remaining claims in the original complaint and adding
additional class and individual claims alleging that the adoption and
announcement of the cash balance formula and the subsequent announcement
of changes in the application of the cash balance formula failed to
comply with ERISA. The parties have agreed that the new individual
claims of the five named plaintiffs regarding the delivery of
announcements to them will be excluded from the class certification. In
April 2003, defendants filed an answer to the amended complaint.
13
In January 2003, a putative class action entitled BERGER ET AL. V. AXA
NETWORK, LLC AND THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED
STATES was commenced in the United States District Court for the Northern
District of Illinois by two former agents on behalf of themselves and
other similarly situated present, former and retired agents who, according
to the complaint, "(a) were discharged by Equitable Life from `statutory
employee status' after January 1, 1999, because of Equitable Life's
adoption of a new policy stating that in any given year, those who failed
to meet specified sales goals during the preceding year would not be
treated as `statutory employees,' or (b) remain subject to discharge from
`statutory employee' status based on the policy applied by Equitable
Life." The complaint alleges that the company improperly "terminated" the
agents' full-time life insurance salesman statutory employee status in or
after 1999 by requiring attainment of minimum production credit levels for
1998, thereby making the agents ineligible for benefits and "requiring"
them to pay Self-Employment Contribution Act taxes. The former agents, who
assert claims for violations of ERISA and 26 U.S.C. 3121, and breach of
contract, seek declaratory and injunctive relief, plus restoration of
benefits and an adjustment of their benefit plan contributions and payroll
tax withholdings.
In May 2003, a putative class action complaint entitled ECKERT V. THE
EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES was filed against
The Equitable Life Assurance Society of the United States in the United
States District Court for the Eastern District of New York, as a case
related to the MALHOTRA action described above. The complaint asserts a
single claim for relief under Section 47(b) of the Investment Company Act
of 1940 based on Equitable Life's alleged failure to register as an
investment company. According to the complaint, Equitable Life was
required to register as an investment company because it was allegedly
issuing securities in the form of variable insurance products and
allegedly investing its assets primarily in other securities. The
plaintiff purports to act on behalf of all persons who purchased or made
an investment in variable insurance products from Equitable Life on or
after May 7, 1998. The complaint seeks declaratory judgment permitting
putative class members to elect to void their variable insurance
contracts, restitution of all fees and penalties paid by the putative
class members on the variable insurance products, disgorgement of all
revenues received by Equitable Life on those products, and an injunction
against the payment of any dividends by Equitable Life to the Holding
Company.
Although the outcome of litigation cannot be predicted with certainty, the
Company's management believes that the ultimate resolution of the matters
described above should not have a material adverse effect on the
consolidated financial position of the Company. The Company's management
cannot make an estimate of loss, if any, or predict whether or not such
litigations will have a material adverse effect on the Company's
consolidated results of operations in any particular period.
In addition to the matters previously reported and those described above,
the Holding Company and its subsidiaries are involved in various legal
actions and proceedings in connection with their businesses. Some of the
actions and proceedings have been brought on behalf of various alleged
classes of claimants and certain of these claimants seek damages of
unspecified amounts. While the ultimate outcome of such matters cannot be
predicted with certainty, in the opinion of management no such matter is
likely to have a material adverse effect on the Company's consolidated
financial position or results of operations. However, it should be noted
that the frequency of large damage awards, including large punitive damage
awards that bear little or no relation to actual economic damages incurred
by plaintiffs in some jurisdictions, continues to create the potential for
an unpredictable judgment in any given matter.
10) BUSINESS SEGMENT INFORMATION
The following tables reconcile segment revenues and earnings from
continuing operations before Federal income taxes and minority interest to
total revenues and earnings as reported on the consolidated statements of
earnings and segment assets to total assets on the consolidated balance
sheets, respectively.
14
THREE MONTHS ENDED
MARCH 31,
---------------------------------------
2003 2002
------------------ ------------------
(IN MILLIONS)
SEGMENT REVENUES:
Insurance......................................................... $ 1,089.4 $ 1,180.9
Investment Services............................................... 602.6 722.8
Consolidation/elimination......................................... (17.3) (19.8)
------------------ ------------------
Total Revenues.................................................... $ 1,674.7 $ 1,883.9
================== ==================
SEGMENT EARNINGS FROM CONTINUING OPERATIONS BEFORE FEDERAL INCOME
TAXES AND MINORITY INTEREST:
Insurance......................................................... $ 22.3 $ 176.0
Investment Services............................................... 103.6 164.3
------------------ ------------------
Total Earnings from Continuing Operations before Federal
Income Taxes and Minority Interest............................ $ 125.9 $ 340.3
================== ==================
MARCH 31, DECEMBER 31,
2003 2002
--------------- -----------------
(IN MILLIONS)
ASSETS:
Insurance......................................................... $ 82,729.0 $ 80,638.7
Investment Services............................................... 14,078.6 14,160.3
Consolidation/elimination......................................... 28.2 27.3
------------------ ------------------
Total Assets...................................................... $ 96,835.8 $ 94,826.3
================== ==================
11) 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 $16.9 million and $7.9 million,
respectively, for first quarter 2003 and 2002.
The Company paid $159.4 million and $158.7 million, respectively, of
commissions and fees to AXA Distribution and its subsidiaries for sales of
insurance products for first quarter 2003 and 2002. The Company charged
AXA Distribution's subsidiaries $73.9 million and $120.0 million,
respectively, for their applicable share of operating expenses for first
quarter 2003 and 2002, pursuant to the Agreements for Services.
12) STOCK-BASED COMPENSATION
The Company continues 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 Holding Company's Stock
Incentive Plans been determined based on SFAS No.123's fair value based
method:
15
THREE MONTHS ENDED
MARCH 31,
-----------------------------------------
2003 2002
----------------- ------------------
(IN MILLIONS)
Net earnings as reported...................................... $ 35.7 $ 130.4
Less: Total stock-based employee compensation expense
determined under fair value method for all awards, net of
Federal income tax benefit................................ (9.5) (7.8)
----------------- ------------------
Pro Forma Net Earnings........................................ $ 26.2 $ 122.6
================= ==================
16
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Management's discussion and analysis is omitted pursuant to General Instruction
H of Form 10-Q. The management narrative for the Company that follows should be
read in conjunction with the Consolidated Financial Statements and the related
Notes to Consolidated Financial Statements included elsewhere herein, and with
the management narrative found in the Management's Discussion and Analysis
("MD&A") section included in the Company's Annual Report on Form 10-K for the
year ended December 31, 2002 ("2002 Form 10-K").
CONSOLIDATED RESULTS OF OPERATIONS
First Quarter 2003 Compared to First Quarter 2002
Earnings from continuing operations before Federal income taxes and minority
interest was $125.9 million for first quarter 2003, a decrease of $214.4 million
or 63.0% from the year earlier quarter, with $153.7 million lower earnings
reported by the Insurance segment and $60.7 million lower earnings for the
Investment Services segment. Net earnings for the Company totaled $35.7 million
for first quarter 2003, down $94.7 million from $130.4 million for the 2002
quarter. First quarter 2002 included a $33.1 million charge for the cumulative
effect of the Company's change in the method of accounting for liabilities
associated with variable annuity contracts with GMDB/GMIB features.
Revenues. In first quarter 2003, total revenues decreased $209.2 million as
revenues for both the Insurance and Investment Services segments declined
compared to first quarter 2002.
Premiums increased $8.4 million to $243.7 million for first quarter 2003,
reflecting higher reinsurance assumed premiums. Policy fee income was $316.0
million, $24.9 million lower than first quarter 2002 largely due to the effect
of market depreciation on Separate Account balances.
Net investment income decreased $4.6 million to $586.1 million as lower income
on mortgages and equity real estate of $10.9 million and $1.3 million,
respectively, and losses on equity investments of $0.3 million compared to
income of $3.9 million in first quarter 2002 were partially offset by $11.5
million and $2.9 million higher income on fixed maturities and cash and
short-term investments in the Insurance segment. The mortgage income decrease
was principally due to a smaller asset base. The increase in fixed maturities
income resulted from higher balances due to increased sales of General Account
products partially offset by lower yields due to lower reinvestment rates. The
higher income from cash and short-term investments was due to higher short-term
investment positions related to the timing of investment into longer-term
securities supporting underlying life and annuity products.
Investment losses totaled $125.0 million in first quarter 2003, an increase of
$87.3 million from first quarter 2002. The higher losses were principally
related to writedowns of $137.1 million on fixed maturities compared to $45.9
million in first quarter 2002. The higher writedowns in the 2003 period were due
to continued deterioration in credit quality of securities primarily in the
airline industry as well as other specific securities.
Commissions, fees and other income declined $100.8 million as the $120.2 million
lower income in the Investment Services segment was partially offset by an $15.2
million net increase in the Insurance segment due to the $21.0 million increase
in the fair value of the GMIB reinsurance contracts accounted for as
derivatives. Both the $74.0 million investment advisory and services fees
decline and the $29.2 million distribution revenues decrease at Alliance were
primarily due to market depreciation of assets under management ("AUM") and net
asset outflows. Institutional research revenues totaled $57.9 million in first
quarter 2003, down $13.9 million from the prior year's comparable quarter, due
to lower market share of NYSE volume.
Benefits and Other Deductions. Total benefits and other deductions decreased
$5.2 million as $59.5 million of lower expenses in the Investment Services
segment were more than offset by $62.2 million higher benefits and other
deductions in the Insurance segment.
Policyholders' benefits were $484.1 million in first quarter 2003. The $25.4
million increase resulted from higher reinsurance assumed claims and reserves,
GMDB/GMIB benefits and reserves, and variable and interest-sensitive life
mortality partially offset by lower traditional life mortality.
17
The $12.0 million decrease in interest credited to policyholders' account
balances to $235.8 million in first quarter 2003 resulted from the impact of
lower crediting rates being substantially offset by higher General Account
balances.
Total compensation and benefits increased $11.6 million in first quarter 2003 as
the $28.5 million increase for the Insurance segment was offset by a $17.1
million decrease for the Investment Services segment. The $28.5 million increase
in the Insurance segment was primarily due to higher qualified and nonqualified
pension expense, including the impact of reducing the expected long-range return
on assets for the qualified pension plan from 9.0% as of January 2002 to 8.5% as
of January 2003, and higher other benefits and taxes. First quarter 2002
compensation included a $6.0 million expense resulting from an increase in the
Stock Appreciation Rights liability. The compensation and benefits decrease of
$17.1 million in the Investment Services segment was due to lower commissions,
lower base and incentive compensation, and lower fringe benefits due to lower
operating earnings and to lower headcounts, offset by higher deferred
compensation related to a plan entered into concurrent with the Bernstein
acquisition.
For first quarter 2003, commissions grew to $234.1 million, an increase of $38.8
million from first quarter 2002, principally due to higher sales of variable
annuity contracts in both the wholesale and retail channels.
There was a $16.2 decline in distribution plan payments by Alliance, from $105.3
million in first quarter 2002 to $89.1 million in first quarter 2003, due to
lower average mutual fund AUM. Amortization of deferred sales commissions was
$53.0 million, $4.0 million lower than in the year earlier period.
Interest expense was virtually unchanged, totaling $20.5 million and $20.1
million in the first quarters of 2003 and 2002, respectively.
DAC amortization increased to $87.2 million in first quarter 2003 up $4.5
million from first quarter 2002. The increase in amortization was principally
due to favorable mortality in the Closed Block which is highly DAC reactive,
partially offset by reactivity to higher investment losses.
DAC capitalization totaled $222.2 million; the increase of $45.5 million from
the amount reported in first quarter 2002 primarily resulted from higher
commissions and deferrable operating expenses.
Both rent expense and amortization of intangible assets remained level from
first quarter 2002 to first quarter 2003.
There was a $2.6 million increase in other operating costs and expenses, from
$231.9 million in first quarter 2002 to $234.5 million in the current year
period, as the $24.2 million increase for the Insurance segment was offset by
the $23.9 million decline in the Investment Services segment. The increase in
the Insurance segment, to $156.8 million in first quarter 2003, was principally
due to higher advertising, software and printing costs. The Investment Services
segment decrease resulted from lower print, mailing and travel and entertainment
costs, and lower office and technology related services partially offset by
higher legal fees related to litigation.
Premiums and Deposits. Total premiums and deposits for insurance and annuity
products for first quarter 2003 increased from prior year levels by $945.3
million to $3.40 billion primarily due to higher premiums from variable
annuities partially offset by lower premiums from individual variable life
policies.
Surrenders and Withdrawals. Surrenders and withdrawals were down, from $1.25
billion in first quarter 2002 to $1.15 billion for first quarter 2003 as a
$122.2 million decline in annuities surrenders and withdrawals was partially
offset by $26.1 million higher surrenders for the life insurance lines. The
annualized annuities surrender rate remained unchanged at 8.9% while the
individual life surrender rates showed an increase to 4.7% from 3.7%. The trends
in surrender and withdrawal rates described above continue to fall within the
range of expected experience.
18
Assets Under Management. Breakdowns of assets under management follow.
ASSETS UNDER MANAGEMENT
(IN MILLIONS)
MARCH 31,
-----------------------------------
2003 2002
--------------- ---------------
Third party..................................................................... $ 335,370 $ 394,929
Equitable Life General Account, the Holding Company
and its other affiliates..................................................... 39,008 36,533
Separate Accounts............................................................... 39,632 46,104
--------------- ---------------
Total Assets Under Management................................................... $ 414,010 $ 477,566
=============== ===============
Third party assets under management at March 31, 2003 decreased $59.56 billion
primarily due to decreases at Alliance. Equitable Life General Account, the
Holding Company and its other affiliates' assets under management increased
$2.48 billion from first quarter 2002 totals. The decline in Separate Account
assets under management resulted from continued market depreciation which more
than offset net new deposits.
Alliance assets under management at the end of first quarter 2003 totaled $386.3
billion as compared to $452.19 billion at March 31, 2002 as a result of
significant market depreciation due to global equity market declines and to net
asset outflows. Non-US clients accounted for 17.1% of the March 31, 2003 total.
LIQUIDITY AND CAPITAL RESOURCES
Equitable Life. In first quarter 2003, Equitable Life amended the terms of its
$350.0 million credit facility. Included in the amendments was a change of the
maturity date to March 31, 2004 from June 30, 2005. At March 31, 2003, no
amounts were outstanding under Equitable Life's commercial paper program or its
revolving credit facility.
Alliance. At March 31, 2003, Alliance had $24.5 million of short-term debt
outstanding, principally under its commercial paper program.
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
factors including those discussed elsewhere in this report and in the Company's
other public filings, press releases, oral presentations and discussions. The
following discussion highlights some of the more important risk and other
factors that could cause such differences and/or, if realized, could have a
material adverse effect on the Company's consolidated financial position and/or
results of operations.
Market Risk. The Company's businesses are subject to market risks arising from
its insurance asset/liability management, investment management and trading
activities. The primary market risk exposures result from interest rate
fluctuations, equity price movements and changes in credit quality. The nature
of each of these risks is discussed under the caption "Quantitative and
Qualitative Disclosures About Market Risk" and in Note 14 of Notes to
Consolidated Financial Statements, both contained in the 2002 Form 10-K.
Increased volatility of equity markets can impact profitability of the Insurance
and Investment Services segments. For the Insurance Group, in addition to
impacts on equity securities held in the General Account, significant changes in
equity markets impact asset-based policy fees charged on variable life and
19
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, including changes
relating to savings, retirement funding and taxation. Recent legislative tax
proposals have included, among other items, changes to the estate tax rules and
to the taxation of corporate dividends and capital gains, which depending on
their final form and if enacted could adversely impact sales of life insurance
and non-qualified annuities in certain markets. Management cannot predict what
other proposals may be made, what legislation, if any, may be introduced or
enacted or what the effect of any other such legislation might be. See "Business
- - Regulation" contained in the 2002 Form 10-K. The profitability of the
Insurance Group depends on a number of factors including: levels of gross
operating expenses and the amount which can be deferred as DAC and software
capitalization; successful implementation of expense-reduction initiatives;
secular trends; The 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
20
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 in the 2002
Form 10-K.
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 $469.3 million at March 31, 2003.
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 March 31,
2003, Alliance's management used assumptions of 7% for fixed income and ranging
from 9% to 10% for equity, respectively, to estimate annual market return.
Higher actual average market returns would increase the undiscounted future cash
flows, while lower actual average market returns would decrease the undiscounted
future cash flows. Future redemption rate assumptions were determined by
reference to actual redemption experience over the three year and five year
periods ended March 31, 2003. Alliance's management determined that a range of
assumed average annual redemption rates of 15% to 18%, calculated as a
percentage of average assets under management, should be used at March 31, 2003.
An increase in the actual rate of redemptions would decrease the undiscounted
future cash flows, while a decrease in the actual rate of redemptions would
increase the undiscounted future cash flows. These assumptions are updated
periodically. 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. As of March 31, 2003, Alliance's management believed that the
deferred sales commission asset was not impaired. If Alliance's management
determines in the future that the deferred sales commission asset is not
recoverable, an impairment condition would exist and a loss would be measured as
the amount by which the recorded amount of the asset exceeds its estimated fair
value. Estimated fair value is determined using Alliance management's best
estimate of discounted cash flows discounted to a present value amount.
During first quarter 2003, equity markets declined by approximately 3% as
measured by the change in the Standard & Poor's 500 Stock Index while fixed
income markets increased by approximately 1% as measured by the change in the
Lehman Brothers' Aggregate Bond Index. The redemption rate for domestic back-end
load shares exceeded 22% in first quarter 2003. 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
21
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
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 in the 2002 Form 10-K
and herein.
Future Accounting Pronouncements. In the future, new accounting pronouncements,
as well as new interpretations of accounting pronouncements, may have material
effects on the Company's consolidated statements of earnings and shareholder's
equity. See Note 2 of Notes to Consolidated Financial Statements contained in
the 2002 Form 10-K for pronouncements issued but not effective at December 31,
2002.
Regulation. The businesses conducted by the Holding Company's subsidiaries,
including Equitable Life, are subject to extensive regulation and supervision by
state insurance departments and Federal and state agencies regulating, among
other things, insurance and annuities, securities transactions, investment
companies, investment advisors and anti-money laundering compliance programs.
Changes in the regulatory environment could have a material impact on operations
and results. The activities of the Insurance Group are subject to the
supervision of the insurance regulators of each of the 50 states, the District
of Columbia and Puerto Rico. See "Business - Regulation" contained in the 2002
Form 10-K.
22
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Omitted pursuant to General Instruction H to Form 10-Q.
Item 4. CONTROLS AND PROCEDURES
An evaluation was performed under the supervision and with the participation of
management, including the Chief Executive Officer and the Chief Financial
Officer, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures as of March 31, 2003. 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 March 31, 2003.
23
PART II OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
There have been no new material legal proceedings and no material developments
in matters which were previously reported in the Registrant's Form 10-K for the
year ended December 31, 2002, except as described below:
In MCEACHERN, in March 2003, the parties settled the individual claims of the
plaintiffs and the action was dismissed with prejudice.
In MALHOTRA, in April 2003, plaintiffs filed a second amended complaint alleging
violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934.
The action purports to be on behalf of a class consisting of all persons who on
or after October 3, 1997 purchased an individual variable deferred annuity
contract, received a certificate to a group variable deferred annuity contract
or made an additional investment through such a contract, which contract was
used to fund a contributory retirement plan or arrangement qualified for
favorable income tax treatment.
In the Mississippi Actions, plaintiffs in the Circuit Court of Sunflower County
action have moved for rehearing by the Supreme Court of Mississippi. The motion
has been fully briefed. In March 2003, an action was filed on behalf of one
plaintiff in the Circuit Court of Kemper County. That lawsuit has been removed
to the United States District Court for the Southern District of Mississippi. In
April 2003, the Company entered into agreements to settle three of the
Mississippi Actions involving 10 plaintiffs. One of those actions, involving two
plaintiffs, has been dismissed with prejudice. In addition, the Company entered
into two agreements to settle an additional 21 lawsuits involving approximately
285 plaintiffs. Those agreements are subject to certain conditions contained
therein.
In FISCHEL, in May 2003, plaintiffs' motion for an award of additional legal
fees from the settled claim settlement fund was denied by the District Court.
In HIRT, in March 2003, plaintiffs filed an amended complaint elaborating on the
remaining claims in the original complaint and adding additional class and
individual claims alleging that the adoption and announcement of the cash
balance formula and the subsequent announcement of changes in the application of
the cash balance formula failed to comply with ERISA. The parties have agreed
that the new individual claims of the five named plaintiffs regarding the
delivery of announcements to them will be excluded from the class certification.
In April 2003, defendants filed an answer to the amended complaint.
In January 2003, a putative class action entitled BERGER ET AL. V. AXA NETWORK,
LLC AND THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES was commenced
in the United States District Court for the Northern District of Illinois by two
former agents on behalf of themselves and other similarly situated present,
former and retired agents who, according to the complaint, "(a) were discharged
by Equitable Life from `statutory employee status' after January 1, 1999,
because of Equitable Life's adoption of a new policy stating that in any given
year, those who failed to meet specified sales goals during the preceding year
would not be treated as `statutory employees,' or (b) remain subject to
discharge from `statutory employee' status based on the policy applied by
Equitable Life." The complaint alleges that the company improperly "terminated"
the agents' full-time life insurance salesman statutory employee status in or
after 1999 by requiring attainment of minimum production credit levels for 1998,
thereby making the agents ineligible for benefits and "requiring" them to pay
Self-Employment Contribution Act taxes. The former agents, who assert claims for
violations of ERISA and 26 U.S.C. 3121, and breach of contract, seek declaratory
and injunctive relief, plus restoration of benefits and an adjustment of their
benefit plan contributions and payroll tax withholdings.
In May 2003, a putative class action complaint entitled ECKERT V. THE EQUITABLE
LIFE ASSURANCE SOCIETY OF THE UNITED STATES was filed against The Equitable Life
Assurance Society of the United States in the United States District Court for
the Eastern District of New York, as a case related to the MALHOTRA action
described above. The complaint asserts a single claim for relief under Section
47(b) of the Investment Company Act of 1940 based on Equitable Life's alleged
failure to register as an investment company. According to the complaint,
Equitable Life was required to register as an investment company because it was
allegedly issuing securities in the form of variable insurance products and
allegedly investing its assets primarily in other securities. The plaintiff
purports to act on behalf of all persons who purchased or made an investment in
variable insurance products from Equitable Life on or after May 7, 1998. The
complaint seeks declaratory judgment permitting putative class members to elect
to void their variable insurance contracts restitution of all fees and
penalties paid by the putative class members on the variable insurance products,
24
disgorgement of all revenues received by Equitable Life on those products, and
an injunction against the payment of any dividends by Equitable Life to the
Holding Company.
Although the outcome of litigation cannot be predicted with certainty, the
Company's management believes that the ultimate resolution of the matters
described above should not have a material adverse effect on the consolidated
financial position of the Company. The Company's management cannot make an
estimate of loss, if any, or predict whether or not such litigations will have a
material adverse effect on the Company's consolidated results of operations in
any particular period.
In addition to the matters previously reported and those described above, the
Holding Company and its subsidiaries are involved in various legal actions and
proceedings in connection with their businesses. Some of the actions and
proceedings have been brought on behalf of various alleged classes of claimants
and certain of these claimants seek damages of unspecified amounts. While the
ultimate outcome of such matters cannot be predicted with certainty, in the
opinion of management no such matter is likely to have a material adverse effect
on the Company's consolidated financial position or results of operations.
However, it should be noted that the frequency of large damage awards, including
large punitive damage awards that bear little or no relation to actual economic
damages incurred by plaintiffs in some jurisdictions, continues to create the
potential for an unpredictable judgment in any given matter.
ITEM 2. CHANGES IN SECURITIES
NONE
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
NONE
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE
ITEM 5. OTHER INFORMATION
NONE
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
Number Description and Method of Filing
----------- ---------------------------------------------------
99.1 Section 906 Certification made by the Registrant's
Chief Executive Officer, filed herewith
99.2 Section 906 Certification made by the Registrant's
Chief Financial Officer, filed herewith
(b) Reports on Form 8-K
None
25
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, The
Equitable Life Insurance Society of the United States has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: May 14, 2003 THE EQUITABLE LIFE INSURANCE SOCIETY
OF THE UNITED STATES
By: /s/ Stanley B. Tulin
------------------------------------------------
Name: Stanley B. Tulin
Title: Vice Chairman of the Board and
Chief Financial Officer
Date: May 14, 2003 /s/ Alvin H. Fenichel
------------------------------------------------
Name: Alvin H. Fenichel
Title: Senior Vice President and Controller
26
CERTIFICATIONS
--------------
I, Christopher M. Condron, President and Chief Executive Officer of The
Equitable Life Assurance Society of the United States, certify that:
1. I have reviewed this quarterly report on Form 10-Q of The Equitable Life
Assurance Society of the United States (the "Registrant");
2. Based on my knowledge, this quarterly 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 quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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
quarterly 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 quarterly 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
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly 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
quarterly 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: May 14, 2003
/s/ Christopher M. Condron
----------------------------------------
Christopher M. Condron
President and Chief Executive Officer
27
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 quarterly report on Form 10-Q The Equitable Life
Assurance Society of the United States (the "Registrant");
2) Based on my knowledge, this quarterly 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 quarterly report;
3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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
quarterly 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 quarterly
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 quarterly report (the "Evaluation Date"); and
c) presented in this quarterly 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
quarterly 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: May 14, 2003
/s/ Stanley B. Tulin
------------------------------
Stanley B. Tulin
Vice Chairman of the Board and
Chief Financial Officer
28