UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------------------
FORM 10-K
(Mark One) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
X OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 0-25280
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
(Exact name of registrant as specified in its charter)
New York 13-5570651
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1290 Avenue of the Americas, New York, New York 10104
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 554-1234
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
- -------------------------------- ----------------------------------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock (Par Value $1.25 Per Share)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
No voting or non-voting common equity of the registrant is held by
non-affiliates of the registrant as of March 15, 2000.
As of March 15, 2000, 2,000,000 shares of the registrant's Common Stock were
outstanding.
REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION (I)(1)(a) AND
(b) OF FORM 10-K AND IS THEREFORE FILING THIS FORM WITH THE REDUCED DISCLOSURE
FORMAT.
<PAGE>
TABLE OF CONTENTS
Part I
Item 1. Business........................................................ 1-1
General......................................................... 1-1
Insurance....................................................... 1-2
Investment Services............................................. 1-6
Discontinued Operations......................................... 1-10
General Account Investment Portfolio............................ 1-10
Competition..................................................... 1-13
Regulation...................................................... 1-14
Principal Shareholder........................................... 1-19
Item 2. Properties...................................................... 2-1
Item 3. Legal Proceedings............................................... 3-1
Item 4. Submission of Matters to a Vote of Security Holders............. 4-1
Part II
Item 5 Market for Registrant's Common Equity and Related Stockholders
Matters......................................................... 5-1
Item 6. Selected Consolidated Financial Information..................... 6-1
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations......................................... 7-1
Item 7A. Quantitative and Qualitative Disclosures about Market Risk...... 7A-1
Item 8. Financial Statements and Supplementary Data..................... FS-1
Item 9. Changes In and Disagreements With Accountants On Accounting and
Financial Disclosure.......................................... 9-1
Part III
Item 10. Directors and Executive Officers of the Registrant.............. 10-1
Item 11. Executive Compensation.......................................... 11-1
Item 12. Security Ownership of Certain Beneficial Owners and Management.. 12-1
Item 13. Certain Relationships and Related Transactions.................. 13-1
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K...................................................... 14-1
Signatures ............................................................. S-1
Index to
Exhibits ............................................................. E-1
<PAGE>
Part I, Item 1.
BUSINESS (1)
General. Equitable Life, which was established in the State of New York in 1859,
is among the largest life insurance companies in the United States, with more
than three million policy and contractholders as of December 31, 1999. Equitable
Life, through its ownership of an approximate 57% economic interest in Alliance
and an approximate 30% interest in DLJ, is part of a diversified financial
services organization offering a broad spectrum of financial advisory,
insurance, investment management and investment banking and brokerage services.
The Company is one of the world's largest asset managers, with total assets
under management of approximately $462.7 billion at December 31, 1999. Equitable
Life's insurance business, conducted principally by Equitable Life and its
subsidiaries EOC and EDI, is reported in the Insurance segment. Alliance's
investment management business, and the investment banking and brokerage
business conducted by DLJ, are reported in the Investment Services segment. For
additional information on Equitable Life's business segments, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations
("MD&A") - Combined Operating Results by Segment" and Notes 1 and 19 of Notes to
Consolidated Financial Statements. Operating results and segment information are
presented on a basis which adjusts amounts as reported in the GAAP financial
statements to exclude investment gains/losses, net of related DAC and other
charges, and the effect of unusual or non-recurring events and transactions. For
additional information relating to these adjustments, see "MD&A - Combined
Operating Results - Adjustments to GAAP Reported Earnings". Since Equitable
Life's demutualization in 1992, it has been a wholly owned subsidiary of the
Holding Company, shares of which are listed on the New York Stock Exchange
("NYSE"). AXA, a French holding company for an international group of insurance
and related financial services companies, is the Holding Company's majority
shareholder. See "Principal Shareholder".
- ----------
(1) As used in this Form 10-K, the term "Equitable Life" refers to The Equitable
Life Assurance Society of the United States, a New York stock life insurance
corporation, "Holding Company" refers to AXA Financial, Inc., a Delaware
corporation formerly known as The Equitable Companies Incorporated, "AXA
Financial" refers to the Holding Company and its subsidiaries, and the "Company"
refers to Equitable Life and its consolidated subsidiaries. The term "Insurance
Group" refers collectively to Equitable Life and certain of its subsidiaries
engaged in insurance-related businesses, including The Equitable of Colorado,
Inc. ("EOC") and Equitable Distributors, Inc. ("EDI"). The term "Investment
Subsidiaries" refers collectively to Equitable Life's affiliates Alliance
Capital Management L.P. ("Alliance"), a Delaware limited partnership, and
Donaldson, Lufkin & Jenrette, Inc. ("DLJ"), a Delaware corporation, and, prior
to June 10, 1997, to Equitable Life's wholly-owned subsidiary Equitable Real
Estate Investment Management, Inc. ("EREIM") together with its affiliates
Equitable Agri-Business, Inc. and EQ Services, Inc. (collectively referred to
herein as "Equitable Real Estate"), and in each case their respective
subsidiaries. The term "AXA Network" refers to AXA Network, LLC, a Delaware
limited liability company and its subsidiaries. The term "General Account"
refers to the assets held in the respective general accounts of Equitable Life
and EOC and all of the investment assets held in certain of Equitable Life's
separate accounts on which the Insurance Group bears the investment risk. The
term "Separate Accounts" refers to the Separate Account investment assets of
Equitable Life excluding the assets held in those separate accounts on which the
Insurance Group bears the investment risk. The term "General Account Investment
Assets" refers to assets held in the General Account associated with the
Insurance Group's continuing operations (which includes the Closed Block) and
does not include assets held in the General Account associated primarily with
the Insurance Group's discontinued Wind-Up Annuity and guaranteed interest
contract ("GIC") lines of business which are referred to herein as "Discontinued
Operations Investment Assets".
1-1
<PAGE>
AXA Financial conducted a comprehensive review of its organization and strategy
and identified strategic initiatives with the goal of furthering its evolution
as a premier provider of financial advice and planning, investment banking and
brokerage and insurance and asset management products and services. Equitable
Life and its affiliates have taken a number of steps to refine and implement the
strategic initiatives.
In 1999, the Holding Company changed its name to "AXA Financial, Inc." to better
communicate the broad range of products and services offered by its subsidiaries
and to embody the positive attributes of a global company with significant
resources. AXA Client Solutions, LLC ("AXA Client Solutions") was formed as a
wholly owned direct subsidiary of the Holding Company and the Holding Company
contributed to it all of Equitable Life's stock, making AXA Client Solutions the
direct parent of Equitable Life. AXA Advisors, LLC ("AXA Advisors"), a Delaware
limited liability company and the successor by merger to EQ Financial
Consultants, Inc., was transferred by Equitable Life to AXA Distribution Holding
Corporation, a Delaware corporation ("AXA Distribution") and a wholly-owned
direct subsidiary of AXA Client Solutions. AXA Advisors, a significant new brand
for the Holding Company, will focus on the development and management of retail
customer relationships with a greater emphasis on advice and financial planning.
AXA Network, successor to EquiSource of New York, Inc. and its subsidiaries, was
established as an insurance general agency for the sale, on a retail basis, of
insurance products of Equitable Life and unaffiliated insurance companies. In
first quarter 2000, AXA Network was transferred from Equitable Life to AXA
Distribution. These steps are designed to separate the manufacture of insurance
and annuity products, which will continue under the "Equitable" name, from the
provision of financial advice and the distribution of relationship-management
products and services, which will be undertaken by "AXA" named companies. In
1999, AXA Advisors launched fee-based financial planning services in a pilot
program in Texas; these services will be introduced throughout the United States
in 2000 on a regional basis. Also in 1999, we identified "advanced practice
models" in the areas of tax-qualified retirement planning, executive benefits,
and estate planning and AXA Advisors and AXA Network began efforts to increase
the number and productivity of financial professionals specializing in these
areas through dedicated resources and support.
The results of operations of AXA Advisors and AXA Network, effective upon their
transfers to AXA Distribution, will no longer be included in Equitable Life's
consolidated financial statements. Equitable Life has entered into agreements
pursuant to which it will compensate AXA Advisors and AXA Network for
distributing Equitable Life products. See "Business - Distribution". For
information about the Holding Company's ability to use and sublicense the use of
the name "AXA", see "Business - Principal Shareholder - AXA Sublicense". AXA
Financial is making significant investments in technology to support these
initiatives and to better leverage and integrate the technology capabilities and
business practices of its separate subsidiaries.
Segment Information
Insurance
General. The Insurance Group offers a variety of traditional, variable and
interest-sensitive life insurance products and variable and fixed-interest
annuity products to individuals, small groups, small and medium-size businesses,
state and local governments and not-for-profit organizations. It also
administers traditional participating group annuity contracts with conversion
features, generally for corporate qualified pension plans, and association plans
which provide full service retirement programs for individuals affiliated with
professional and trade associations. This segment includes Separate Accounts for
individual and group insurance and annuity products. The Insurance segment
accounted for approximately $4.08 billion or 65.6% of consolidated revenue for
the year ended December 31, 1999. AXA Advisors, a broker-dealer, and AXA
Network, an insurance general agency, market Insurance segment products on a
retail basis in all 50 states, the District of Columbia, Puerto Rico and the
U.S. Virgin Islands through their more than 7,500 financial professionals. In
addition, EDI, a broker-dealer subsidiary of Equitable Life, distributes
Equitable Life products on a wholesale basis through major securities firms,
other broker-dealers and banks. Association plans are marketed directly to
clients by the Insurance Group. For additional information on this segment, see
"MD&A - Combined Operating Results by Segment - Insurance", Note 19 of Notes to
Consolidated Financial Statements, as well as "Employees and Agents",
"Competition" and "Regulation".
1-2
<PAGE>
Products and Services. The Insurance Group offers a portfolio of insurance and
annuity products designed to meet a broad range of its customers' needs
throughout their financial life-cycles. These products include individual
variable and interest-sensitive life insurance policies and variable annuity
contracts, which in 1999 accounted for 17.8% and 70.0%, respectively of total
life insurance and annuity sales. Both products provide a return that is linked
to the performance of underlying investment portfolios, as well various
guaranteed interest options. A wide range of portfolios is provided, so that
customers can determine their desired asset mix for funds underlying their
policy or contract. As the return on the underlying fund portfolios increases or
decreases, the product's cash surrender value may increase or decrease, and for
variable life insurance either the death benefit or the duration or the policy
may vary. The Insurance Group is among the country's leading issuers of variable
life insurance and variable annuity products.
Variable life insurance products include Incentive Life sm, Equitable Life's
flagship life insurance product, as well as a second to die policy, and a
product for the corporate owned life insurance ("COLI") market. Equitable Life
is currently developing a new generation of its modified single premium variable
life insurance policy. Equitable Life also offers traditional whole life
insurance, universal life insurance and term life insurance policies. Variable
life insurance and universal life insurance provide policy owners with
flexibility in the timing and amount of premiums, provided there are sufficient
policy funds to cover all policy charges. Second to die policies provide a
benefit upon the death of the second of two covered lives and are frequently
used for estate and tax planning purposes. Traditional whole life insurance
requires a fixed periodic premium and has no variable investment options. Term
insurance provides a pure death benefit, and may be purchased on either a
traditional increasing premium plan or a level premium plan for a specified
number of years. Life insurance policies can be purchased for a range of
customer uses, including protection of heirs, cash value accumulation, funding
of business buy-sell agreements, corporate nonqualified deferred compensation
arrangements, and estate and tax planning.
Variable annuity products include Equi-Vest(R) and Accumulator sm, which are
individual variable deferred annuities, and the Momentum sm series of group
annuities for the employer retirement plan market. Individual deferred annuities
may be purchased on either a single or flexible premium basis; group annuities
generally have recurring premium from the retirement plans they fund. Individual
variable annuities are designed for the non-qualified market, and are also
offered in forms that qualify for tax advantages under various sections of the
Code, such as individual retirement annuities (IRA) and tax sheltered annuities
(TSA). Most individual variable annuity products include some or all of
Equitable Life's special features, such as an extra-credit enhancement to the
account value created by the initial contract consideration, a dollar cost
averaging account that pays an increased rate of interest while new money is
being transferred into investment portfolios, an enhanced death benefit,
Equitable Life's baseBuilder(R) minimum guaranteed income benefit, and market
value adjusted (MVA) fixed interest investment options. Equitable Life also
offers individual single premium deferred annuities, which credit an initial and
subsequent annually declared interest rates, and offers payout annuities. The
family of payout annuity products includes traditional life annuities, variable
life annuities, which provide lifetime periodic payments that fluctuate with the
performance of underlying investment portfolios, and the Income Manager sm,
which provides guaranteed lifetime payments with cash values during an initial
period.
1-3
<PAGE>
Prior to 1997, the Separate Account options under all of the variable life
insurance products and most of the variable annuity products issued by the
Insurance Group invested in portfolios of the Hudson River Trust ("HRT"), a
mutual fund which was managed by Alliance. To provide customers with additional
investment flexibility and choice, in 1997 the Insurance Group introduced EQ
Advisors Trust ("EQAT"), a mutual fund which offered variable life and annuity
contractholders investment portfolios advised by unaffiliated investment
advisors. In 1999, the Insurance Group combined HRT and EQAT through a
transaction known as substitution. At December 31, 1999, EQAT had 40 investment
portfolios, 25 of which were managed by Alliance, representing 85.1% of the
assets in EQAT, and 15 of which were managed by unaffiliated investment
advisors.
The continued growth of Separate Account assets remains a strategic objective of
the Insurance Group. Generally, with investment funds placed in the Separate
Accounts associated with variable products, the investment risk (and reward) is
transferred to policyholders while the Insurance Group earns fee income on
Separate Account assets. In addition, products funded by Separate Account
generally require less capital because they involve less risk to the Insurance
Group than traditional products. Over the past five years, Separate Account
assets for individual variable life and variable annuities have increased by
$34.74 billion to $44.36 billion at December 31, 1999, including approximately
$42.14 billion invested through EQAT.
In addition to products issued by the Insurance Group, AXA Advisors and AXA
Network provide their financial professionals with access to life, health and
long-term care insurance products, annuity products and investment products and
services from unaffiliated insurers and from other financial services firms. In
1999, AXA Advisors and its predecessor sold approximately $2.72 billion in
mutual funds and other investment products. AXA Advisors also offers an asset
management account and money management products. The AXA Asset Account,
launched nationally in 1999, is an asset management account with a variety of
related services including brokerage capabilities, a debit card, check writing
and a consolidated statement showing a client's investments. The money
management products include a mutual fund asset allocation program that offers
personal investment advice and related services for an annual fee, and a
wrap-fee program for high net worth clients that offers individualized
professional investment management services together with transaction execution
and clearance for a single annual fee.
From July 1, 1993 through January 1998, new disability income ("DI") policies
issued by Equitable Life were 80% reinsured through an arrangement with Paul
Revere Life Insurance Company ("Paul Revere"). Paul Revere manages claims
incurred under Equitable Life's DI policies. Equitable Life no longer
underwrites new DI policies.
For information relating to the unfavorable results of the DI business, and a
related DAC write-off and reserve strengthening in 1996, see Note 4 of Selected
Consolidated Financial Information. Based on experience that emerged on this
book of business since taking those actions, management continues to believe the
DI reserves have been calculated on a reasonable basis and are adequate.
Equitable Life is exploring its ability to dispose of the DI business through
reinsurance.
Markets. Targeted customers for the Company's products include affluent and
emerging affluent individuals such as professionals and owners of small
businesses, as well as employees of tax-exempt organizations and existing
customers. For variable life, the Insurance Group has targeted certain markets,
particularly executive benefit plans, the estate planning market and the market
for business continuation needs (e.g., the use of variable life insurance to
fund buy/sell agreements and similar arrangements), as well as the
middle-to-upper income life protection markets. The Insurance Group's target
markets for variable annuities include, in addition to the personal retirement
savings market, the tax-exempt markets (particularly retirement plans for
educational and non-profit organizations), corporate pension plans (particularly
401(k) defined contribution plans covering 25 to 3,000 employees) and the IRA
retirement planning market. Equitable Life's Income Manager series of annuity
products includes products designed to address the growing market of those at or
near retirement who need to convert retirement savings into retirement income.
Demographic studies suggest that, as the post-World War II "baby boom"
generation ages over the next decade, there will be a corresponding growth in
the number of individuals in the target market for the Insurance Group's
savings-oriented products. Studies also indicate that intergenerational wealth
transfers will be enormous, and that there will be a significant increase in the
number of households seeking advice related to financial, tax and estate
planning. In addition, the trend continues among U.S. employers away from
defined benefit plans (under which the employer makes the investment decisions)
toward employee-directed, defined contribution retirement and savings plans
(which allow employees to choose from a variety of investment options).
Management continuously reviews its range of products and services to satisfy
the needs of customers in these target markets.
1-4
<PAGE>
In 1999, the Insurance Group collected premiums and deposits from policy or
contractholders in all 50 states, the District of Columbia and Puerto Rico. For
the Insurance Group, the states of New York (13.09%), New Jersey (7.52%),
California (7.19%), Illinois (5.97%), Florida (5.64%), Michigan (5.48%) and
Pennsylvania (5.44%) contributed the greatest amounts of premiums (accounted for
on a statutory basis), and no other state represented more than 5% of the
Insurance Group's statutory premiums. Premiums from all non-U.S. citizens
represented less than 1% of the Insurance Group's 1999 aggregate statutory
premiums.
Distribution. Retail distribution of products and services is accomplished by
more than 7,500 financial professionals of AXA Advisors and/or AXA Network
(including approximately 375 individuals who are engaged in related professions,
in addition to offering Insurance Group products) organized into 18 geographic
regions across the United States. Wholesale distribution of products is
undertaken through EDI, which at year end 1999 had 404 selling agreements,
including arrangements with four major securities firms, 50 banks or similar
financial institutions, and 350 broker-dealers. EDI recently expanded its
wholesale distribution activities to include life insurance products, in
addition to the annuity products it continues to offer.
The following table summarizes product sales by distribution channel for the
years ended December 31, 1999, 1998 and 1997.
<TABLE>
<CAPTION>
Sales by Distribution Channel
(Dollars in Millions)
1999 1998 1997
----------------- ---------------- ----------------
<S> <C> <C> <C>
Retail:
Total Insurance/Annuity...................... $ 8,307.2 $ 7,717.7 $ 7,180.6
Total Mutual Funds/Investment Products....... 2,717.5 2,373.2 1,706.7
Wholesale - Total Channel....................... 2,273.1 1,697.3 648.4
----------------- ---------------- ----------------
Total Sales.................................. $ 13,297.8 $ 11,788.2 $ 9,535.7
================= ================ ================
</TABLE>
AXA Advisors and AXA Network provide their financial professionals with
training, marketing and sales support. In 1999, in connection with the launch of
the AXA Asset Account, new and enhanced investment products and financial
planning services, approximately 2,500 financial professionals received
significant additional training. Financial professionals were selected to
receive the additional training based on their attainment of (or commitment to
attain) required licenses (including NASD Series 7 and Series 65/66 securities
licenses) and their stated interest to offer the new products and services.
Nearly all of the financial professionals are licensed to sell variable
insurance and annuity products as well as certain investment products, including
mutual funds. As of December 31, 1999, approximately 2,500 of these financial
professionals were licensed to sell general securities. The Financial
Advisory/Insurance Group leads the insurance industry in the number of financial
professionals and employees who hold both the Chartered Life Underwriter (CLU)
and Chartered Financial Consultant (ChFC) designations, which are awarded by The
American College, a professional organization for insurance and financial
planning professionals.
To support the training of financial professionals and their sales of financial
planning services, the Advisor Support Group ("ASG") was developed. Based in
Alpharetta, Georgia, ASG consists of the Practice Development Center, the
national training center for financial professionals, the Financial Planning
Center, which assists financial professionals with the development and delivery
of financial plans and the Case Design Group, which provides technical resources
and sales support to financial professionals in connection with advanced
practice models and complex sales. AXA Network is organized into 18 geographic
regions with common staff and systems infrastructures designed to improve sales
and service support at the local level. In addition, Equitable Life has
centralized its life insurance processing and servicing functions in a new
National Operations Center in Charlotte, North Carolina.
In its ongoing effort to enhance the quality of the retail distribution force,
during 1999 AXA Advisors and AXA Network continued to recruit professionals from
fields such as accounting, banking and law. Management believes the knowledge
and experience of these individuals will add significant value to client
service; that recruiting more experienced individuals has had a positive impact
on the retention and productivity rates of first year agents; and that their
professionalism constitutes a competitive advantage in the marketing of the
Insurance Group's sophisticated insurance products.
1-5
<PAGE>
Equitable Life is party to a Distribution and Servicing Agreement with AXA
Advisors pursuant to which AXA Advisors acts as Equitable Life's broker-dealer
in connection with the distribution of variable insurance and annuity products,
and AXA Advisors assumes responsibility for carrying out compliance, supervisory
and training functions in connection with these distribution activities as
required by the NASD and securities laws. Equitable Life and EOC have
substantially identical General Agent Sales Agreements retaining AXA Network as
a non-exclusive general agent to solicit applications for their insurance and
annuity products and to service the policies and contracts sold under the
agreements as well as existing policies and contracts. The agreements provide
that compensation will not exceed any limitations imposed by applicable law.
Equitable Life agreements provide to each of AXA Advisors and AXA Network
personnel, property, and services reasonably necessary for their operations. AXA
Advisors and AXA Network pay Equitable Life their actual costs (direct and
indirect) and expenses under the respective agreements.
Equitable Life's Law Department maintains a Compliance Group staffed with
compliance professionals who, working together with attorneys and other
professionals in the Law Department, review and approve advertising and sales
literature prior to use by the Financial Advisory/Insurance Group and monitor
customer complaints. In 1998, Equitable Life became a member of a voluntary
market conduct compliance association. See "Regulation - Market Conduct".
Insurance Underwriting and Reinsurance. Underwriting rules and procedures
established by the Insurance Group's underwriting area are designed to produce
mortality results consistent with assumptions used in product pricing while
providing for competitive risk selection. The risk selection process is carried
out by underwriters who evaluate policy applications based on information
provided by the applicant and other sources. Specific tests, such as blood
analysis, are used to evaluate policy applications based on the size of the
policy, the age of the applicant and other factors.
In 1997, the Insurance Group put in place a program under which it cedes 90% of
mortality risk on substantially all new variable life, universal life and term
life policies. In addition, the Insurance Group generally limits risk retention
on new policies to a maximum of $5.0 million on single-life policies, and $15.0
million on second-to-die policies. Automatic reinsurance arrangements permit
policies to be written in a range from $25.0 to $50.0 million, depending upon
the product. A contingent liability exists with respect to reinsurance ceded
should the reinsurers be unable to meet their obligations. Therefore, the
Insurance Group carefully evaluates the financial condition of its reinsurers to
minimize its exposure to significant losses from reinsurer insolvencies. The
Insurance Group is not party to any risk reinsurance arrangement with any
reinsurer pursuant to which the amount of reserves on reinsurance ceded to such
reinsurer equals more than 2% of the total policy life reserves of the Insurance
Group (including Separate Accounts).
The Insurance Group acts as a retrocessionaire by assuming life reinsurance from
reinsurers. Mortality risk through reinsurance assumed is limited to $5.0
million on single-life policies and on second-to-die policies. For additional
information on the Insurance Group's reinsurance agreements, see Note 13 of
Notes to Consolidated Financial Statements. The Insurance Group also assumes
annuity reinsurance and, by participating in various reinsurance pools,
accident, health, group long-term disability, aviation and space risks, but has
determined to stop assuming new risks in these categories as existing agreements
terminate.
Investment Services
General. The Investment Services segment, which in 1999 accounted for
approximately $2.16 billion or 34.9% of consolidated revenues, provides asset
management, investment banking, securities transaction and brokerage services to
both corporate and institutional clients, including the Insurance Group, and to
high net worth individuals. In recent years, rapid growth in sales of mutual
funds to individuals and retail clients has augmented the traditional focus on
institutional markets. The results of DLJ are accounted for on the equity basis
in Equitable Life's consolidated statements of earnings. See Note 20 of Notes to
Consolidated Financial Statements. For additional information on the Investment
Subsidiaries, including their respective results of operations, see "MD&A -
Combined Operating Results by Segment - Investment Services" and "Regulation".
1-6
<PAGE>
Donaldson, Lufkin & Jenrette, Inc. - DLJ is a leading integrated investment and
merchant bank, serving institutional, corporate, governmental and individual
clients both domestically and internationally. DLJ's businesses include
securities underwriting, sales and trading; merchant banking; financial advisory
services; investment research; venture capital; correspondent brokerage
services; securities lending; online interactive brokerage services; and asset
management and other advisory services. DLJ revenues consist primarily of
commissions, underwriting spreads, fees on merger and acquisition, private
placement, asset management and other advisory services, principal transactions
(both trading and investment revenues) and other (primarily dividends and
miscellaneous transaction revenues). At December 31, 1999, Equitable Life owned
approximately 38.6% and the Holding Company owned approximately 38.6%% of DLJ's
common stock. Assuming full vesting of restricted stock units and full exercise
of all outstanding options, Equitable Life would own approximately 25.3% and the
Holding Company would own approximately 30.8% of DLJ's common stock. See "MD&A -
Combined Operating Results by Segment - Investment Services". In 1999, DLJ
issued a new class of DLJ common stock to track the performance of DLJdirect,
its online brokerage business, selling shares representing an approximately 18%
interest in DLJdirect's financial performance.
DLJ conducts its business through four principal operating groups: the Banking
Group, the Equities Group, the Fixed Income Group, and the Financial Services
Group. DLJ's Banking Group (which includes Investment Banking, Merchant Banking
and the Sprout Group) is a major participant in the raising of capital for and
the providing of financial advice to companies throughout the United States and
in Europe, Asia and Latin America. Through Investment Banking, DLJ manages and
underwrites public offerings of securities, arranges private placements,
originates both investment and non-investment-grade debt, underwrites and
syndicates senior bank debt and provides advisory and other services in
connection with mergers, acquisitions, restructurings and other financial
transactions. Merchant Banking pursues direct investments in a variety of areas
through a number of investment vehicles funded with capital provided primarily
by institutional investors, DLJ and its employees. The Sprout Group is Wall
Street's oldest venture capital organization. In 1999, the Banking Group
expanded its capabilities in the utilities and technology industries.
The Equities Group provides domestic and foreign institutional clients with
global research, trading and sales services in United States listed and
over-the-counter equities, and foreign equities trading in the United States,
Europe and Asia. A joint venture has also been established in Johannesburg,
South Africa. Autranet is one of the largest distributors of third-party
research and investment material. DLJ's Equity Derivatives Division provides a
broad range of equity and index option products.
The Fixed Income Group provides institutional clients with research, trading and
sales services for a broad range of fixed-income products, and distributes
fixed-income securities in connection with offerings underwritten by DLJ.
The Financial Services Group provides a broad array of services to individual
investors and the financial intermediaries that represent them. Pershing is a
leading provider of correspondent brokerage services, clearing transactions for
financial institutions which collectively maintain over 3.2 million active
customer accounts. Through its Asset Management Group, DLJ provides cash
management, investment advisory and trust services primarily to high-net-worth
individuals and families. DLJ's Investment Services Group provides access to
DLJ's equity and fixed-income research, trading services and underwriting to a
broad mix of private clients. DLJdirect is a leading provider of online discount
brokerage and related investment services, offering customers automated
securities order placement through the Internet and online service providers.
DLJdirect's broad range of investment services is targeted at self-directed,
sophisticated online investors.
DLJ's principal business activities, investment and merchant banking, securities
and trading and correspondent and online discount brokerage services, are, by
their nature, highly competitive and subject to general market conditions,
volatile trading markets and fluctuations in the volume of market activity.
Consequently, DLJ's net income and revenues have been, and are likely to
continue to be, subject to wide fluctuations reflecting the impact of many
factors beyond DLJ's control, including securities market conditions, the level
and volatility of interest rates, competitive conditions and the size and timing
of transactions.
1-7
<PAGE>
In 1999, DLJ continued to make strides toward establishing a strong
international presence. DLJ opened investment banking offices in Frankfurt and
Taipei and an equity sales office was established in Singapore. Merchant Banking
expanded its international efforts, with investments in the United Kingdom,
Italy, France, Argentina and Brazil. For the years ended December 31, 1999 and
1998, total net revenues related to DLJ's foreign operations were approximately
$782.2 million and $389.7 million, respectively. At December 31, 1999 and 1998,
total foreign assets were approximately $10.9 billion and $8.6 billion,
respectively.
For additional information about DLJ, see "MD&A - Combined Operating Results by
Segment - Investment Services" and DLJ's Annual Report on Form 10-K for the year
ended December 31, 1999.
Alliance - Alliance, one of the nation's largest investment advisors, provides
diversified investment management services to the Insurance Group and to a
variety of institutional clients, including corporate and public employee
pension funds, endowments, foundations and other domestic and foreign
institutions, as well as to high net worth individuals and, through various
investment vehicles, to individual investors. Alliance advises institutional
Separate Accounts ($10.09 billion at December 31, 1999) which provide various
investment options for large group pension clients, primarily defined benefit
contribution plans, through pooled or single group accounts. In recent years,
rapid growth in sales of mutual funds by Alliance to individuals and retail
clients has augmented the traditional focus on institutional markets. For
additional information on Alliance, including its results of operations, see
"Regulation" and "MD&A - Combined Operating Results by Segment - Investment
Services".
As of December 31, 1999, Alliance had approximately $368.32 billion in assets
under management (including $301.37 billion for third party clients). Alliance's
assets under management at December 31, 1999 included approximately $198.88
billion from separately managed accounts for institutional investors and high
net worth individuals and approximately $169.44 billion from mutual fund
accounts. Alliance's greatest growth in recent years has been in products for
individual investors, primarily mutual funds, which generate relatively high
management and servicing fees as compared to fees charged to separately managed
accounts.
Alliance's asset management business can be divided into separately managed
accounts and mutual funds management. Alliance's separately managed accounts
consist primarily of the active management of equity accounts, balanced (equity
and fixed income) accounts and fixed income accounts for institutional investors
and high net worth individuals. Alliance's mutual funds management services,
which developed as a diversification of its institutional investment management
business, consist of the management, distribution and servicing of mutual funds
and cash management products, including money market funds and deposit accounts.
Separately Managed Accounts - At December 31, 1999, separately managed accounts
represented approximately 54.0% of Alliance's total assets under management
while the fees earned from the management of those accounts represented
approximately 23.8% of Alliance's revenues for the year ended December 31, 1999.
In addition to the separately managed account business Alliance also provides
active management for international (non-United States) and global (including
United States) equity, balanced and fixed income portfolios, asset allocation
portfolios, venture capital portfolios, investment partnership portfolios known
as hedge funds and portfolios that invest in real estate investment trusts. In
addition, Alliance provides "passive" management services for equity, fixed
income and international accounts.
As of December 31, 1999, Alliance acted as investment manager for approximately
2,373 separately managed accounts (other than investment companies) which
include corporate employee benefit plans, public employee retirement systems,
endowments, foundations, foreign governments, multi-employer pension plans and
financial and other institutions and the General and certain of the Separate
Accounts of Equitable Life and its insurance company subsidiary. The General and
Separate Accounts of the Insurance Group are Alliance's largest institutional
clients. Alliance's separately managed accounts are managed pursuant to written
investment management agreements between the clients and Alliance, which are
usually terminable at any time or upon relatively short notice by either party.
1-8
<PAGE>
Mutual Funds Management - Alliance also (i) manages assets in EQAT aggregating
approximately $36.3 billion at December 31, 1999, which includes assets formerly
held in HRT, a former funding vehicle for the individual variable life insurance
and annuity products offered by the Insurance Group and manages other funds
which serve as funding vehicles for variable annuity and variable life insurance
products offered by unaffiliated insurance companies; (ii) manages and sponsors
a broad range of open-end and closed-end mutual funds other than those available
through EQAT; (iii) provides cash management services (money market funds and
Federally insured deposit accounts) that are marketed to individual investors
through broker-dealers, banks, insurance companies, and other financial
intermediaries; (iv) manages and sponsors certain structured products and (v)
manages and sponsors certain hedge funds. The Alliance-managed assets described
in this paragraph amounted at December 31, 1999 to approximately $169.4 billion.
Revenues - Alliance revenues consist primarily of investment advisory and
service fees generally based on the value of assets under management. Certain
investment advisory agreements also provide for the payment of performance fees
when investment performance exceeds a contractual benchmark. Fees charged vary
with the type of account managed (mutual fund, institutional separate account,
individual managed account) and the nature of the assets being managed (money
market funds, equities, fixed income investments). Alliance also generates
distribution plan fees consisting of reimbursement of mutual fund distribution
expenses, and administrative and transfer agency service fees provided to
Alliance mutual funds and money market funds. Other Alliance revenues consist
primarily of, commissions on shares of mutual funds sold with conventional
front-end sales charges, and interest and dividends. In connection with the
Reorganization described below, Equitable Life agreed, subject to certain
adjustments, to pay to Alliance asset management fees of not less than $38
million annually through 2003 with respect to specified General Account asset
classes.
Reorganization - At a special meeting of unitholders held in September 1999, the
unitholders of Alliance Capital Management Holding L.P., formerly Alliance
Capital Management L.P. ("Alliance Holding"), approved both the transfer of
Alliance Holding's business to Alliance, a newly-formed private limited
partnership, in exchange for all units of Alliance (the "Reorganization") and
the amendment and restatement of Alliance Holding's partnership agreement. In
connection with the Reorganization, Alliance Holding offered to its unitholders
the opportunity to exchange Alliance Holding units for Alliance Capital units on
a one-for-one basis. In October 1999, Alliance Holding transferred its business,
assets and liabilities to Alliance pursuant to the Reorganization. At December
31, 1999, an Equitable Life subsidiary held 100,000 general partnership units of
Alliance Holding and a 1% general partnership interest in Alliance. Equitable
Life and its subsidiaries also held approximately 2% of the Alliance Holding
units, and 55% of the Alliance units. These combined holdings equal an
approximate 57% economic interest in Alliance's operations.
As a result of the Reorganization, Alliance Holding's principal asset is its
economic interest in Alliance. Alliance Holding records its investment in
Alliance under the equity method of accounting based on its proportionate share
of net income of Alliance. At December 31, 1999, Alliance Holding owned
approximately 72.1 million units, or approximately 42% of the economic interests
in Alliance. As part of the Reorganization, Alliance Holding elected to retain
its partnership tax status and, therefore, is subject to an annual 3.5% Federal
tax on its proportionate share of the gross business income of Alliance.
Alliance, as a private partnership, is not subject to this 3.5% tax, which, in
1999 and 1998 reduced the Investment Services segment after-tax operating
earnings by approximately $19 million and $18 million, respectively. Alliance
Holding and Alliance are generally not subject to state and local income taxes,
with the exception of the New York City unincorporated business tax of 4%. On
December 30, 1997, Alliance Holding elected under Section 754 of the Code to
adjust the tax basis of its assets in connection with sales and exchanges of
Alliance Holding units in the secondary market after January 1, 1998. Purchasers
of Alliance Holding units on or after that date will be entitled to claim
deductions for their proportionate share of Alliance Holding's amortizable and
depreciable assets. The election had no direct effect on the Company's holdings
of economic interests in Alliance nor on the Company's ownership of Alliance
Holding units.
For additional information about Alliance, see "MD&A - Combined Results of
Operations by Segment - Investment Services" and Alliance's Annual Report on
Form 10-K for the year ended December 31, 1999.
Equitable Real Estate
On June 10, 1997, Equitable Life sold EREIM to Lend Lease Corporation Limited
("Lend Lease") and entered into long-term advisory agreements whereby
subsidiaries of Lend Lease continue to provide to Equitable Life's General
Account and Separate Accounts substantially the same services, for substantially
the same fees, as provided prior to the sale. The Investment Services segment
includes the results of ERE which provided real estate investment management
services, property management services, mortgage servicing and loan asset
management and agricultural investment management services, but only through
June 10, 1997, the date of ERE's sale.
1-9
<PAGE>
Assets Under Management and Fees
The Company continues to pursue its strategy of increasing third party assets
under management. The Investment Subsidiaries continue to add third party assets
under management, and provide investment management services to the Insurance
Group. Of the $462.67 billion of assets under management at December 31, 1999,
$395.0 billion (or 78.9%) were managed for third parties, including $340.55
billion for domestic and overseas investors, mutual funds, pension funds and
endowment funds and $54.4 billion for the Insurance Group's Separate Accounts,
and $67.66 billion principally for the Insurance Group General Account and
invested assets of subsidiaries. Of the $1.56 billion of fees for assets under
management received for the year ended December 31, 1999, $1.51 billion were
received from third parties, including $1.41 billion from unaffiliated third
parties and $107.6 million in respect of Separate Accounts, and $43.7 million
from the Insurance Group. For additional information on fees and assets under
management, see "MD&A - Combined Operating Results by Segment - Fees and Assets
Under Management."
Discontinued Operations
In September 1991, Equitable Life discontinued the operations of the Wind-Up
Annuity and GIC lines of business, reflecting management's strategic decision to
focus its attention and capital on its core businesses. Discontinued operations
includes Wind-Up Annuity products, the terms of which were fixed at issue, which
were sold to corporate sponsors of terminating qualified defined benefit plans,
and GIC products pursuant to which Equitable Life is contractually obligated to
credit an interest rate which was set at the date of issue. These contracts have
fixed maturity dates on which funds are to be returned to the contractholder. At
December 31, 1999, $993.3 million of contractholder liabilities were
outstanding, substantially all of which were related to Wind-Up Annuities. For
additional information, see Note 8 of Notes to Consolidated Financial Statements
and "MD&A - Discontinued Operations".
General Account Investment Portfolio
General. The Insurance Group's General Accounts consist of diversified portfolio
of investments. The General Account liabilities can be divided into two primary
types, participating and non-participating. For participating products, the
investment results of the underlying assets determine, to a large extent, the
return to the policyholder, and the Insurance Group's profits are earned from
investment management, mortality and other charges. For non-participating or
interest-sensitive products, the Insurance Group's profits are earned from a
positive spread between the investment return and the crediting or reserve
interest rate.
Although all the assets of the General Account of each insurer in the Insurance
Group support all of that insurer's liabilities, the Insurance Group has
developed an asset/liability management approach with separate investment
objectives for specific classes of product liabilities, such as insurance,
annuity and group pension. As part of this approach, the Insurance Group
develops investment guidelines for each product line which form the basis for
investment strategies to manage such product line's investment return and
liquidity requirements, consistent with management's overall investment
objectives for the General Account Investment Portfolio. Investments frequently
meet the investment objectives of more than one class of product liabilities;
each such class may be allocated a pro rata interest in such investments and the
returns therefrom.
The Closed Block assets and results are a part of continuing operations and have
been combined in the MD&A on a line-by-line basis with assets and results
outside of the Closed Block. Therefore, the Closed Block assets are included in
General Account Investment Assets discussed below. For further information on
these portfolios and on Discontinued Operations Investment Assets, see "MD&A -
Continuing Operations Investment Portfolio" and "- Discontinued Operations".
Most individual investments in the portfolios of discontinued operations are
also included in General Account Investment Assets. For more information on the
Closed Block, see Notes 2 and 7 of Notes to Consolidated Financial Statements.
1-10
<PAGE>
The following table summarizes General Account Investment Assets by asset
category at December 31, 1999.
<TABLE>
<CAPTION>
General Account Investment Assets
Net Amortized Cost
(Dollars in Millions)
Amount % of Total
------------------ ------------------
<S> <C> <C>
Fixed maturities(1).............................. $ 23,719.1 $ 66.2%
Mortgages........................................ 4,974.2 13.9
Equity real estate............................... 1,251.2 3.5
Other equity investments......................... 826.2 2.3
Policy loans..................................... 3,851.2 10.7
Cash and short-term investments(2)............... 1,220.6 3.4
------------------ ------------------
Total............................................ $ 35,842.5 $ 100.0%
================== ==================
<FN>
(1) Excludes unrealized losses of $896.4 million on fixed maturities classified
as available for sale.
(2) Comprised of "Cash and cash equivalents" and short-term investments
included within the "Other invested assets" caption on the consolidated
balance sheet.
</FN>
</TABLE>
Investment Surveillance. As part of the Insurance Group's investment management
process, management, with the assistance of its investment advisors, constantly
monitors General Account investment performance. This internal review process
culminates with a quarterly review of certain assets by the Insurance Group's
Surveillance Committee which evaluates whether any investments are other than
temporarily impaired, whether specific investments should be classified as
problems, potential problems or restructures, and whether specific investments
should be put on an interest non-accrual basis.
Description of General Account Investment Assets. For portfolio management
purposes, General Account Investment Assets are divided into four major asset
categories: fixed maturities, mortgages, equity real estate and other equity
investments.
Fixed Maturities. As of December 31, 1999, the fixed maturities category was the
largest asset class of General Account Investment Assets with $23.72 billion in
net amortized cost or 66.2% of total General Account Investment Assets. The
fixed maturities category consists of both investment grade and below investment
grade public and private debt securities, as well as small amounts of redeemable
preferred stock. At December 31, 1999, 76.9% ($18.25 billion) of the amortized
cost of the asset category were publicly traded debt securities and 86.7%
($20.56 billion) were rated investment grade (National Association of Insurance
Commissioners ("NAIC") bond rating 1 or 2).
The following table summarizes fixed maturities by remaining average life as of
December 31, 1999.
<TABLE>
<CAPTION>
Fixed Maturity Investments By
Remaining Average Life
(In Millions)
Amortized Cost
(In Millions)
-----------------------
<S> <C>
Due in one year or less.......................... $ 783.3
Due in years two through five.................... 4,831.1
Due in years six through ten..................... 8,948.6
Due after ten years(1)........................... 4,009.7
Mortgage-backed securities....................... 5,146.4
-----------------------
Total.......................................... $ 23,719.1
=======================
<FN>
(1) Includes redeemable preferred stock.
</FN>
</TABLE>
1-11
<PAGE>
Investment grade fixed maturities (which include redeemable preferred stocks)
include the securities of 1,012 different issuers, with no individual issuer
representing more than 0.7% of investment grade fixed maturities as a whole. The
investment grade fixed maturities are also diversified by industry, with
investments in manufacturing (23.6%), banking (14.5%), finance (13.9%),
utilities (13.7%), and communications (8.6%) representing the five largest
allocations of investment grade fixed maturities at December 31, 1999. No other
industry represented more than 7.9% of the investment grade fixed maturities
portfolio at that date.
Below investment grade fixed maturities (NAIC bond rating 3 through 6 and
redeemable preferred stocks) include the securities of over 403 different
issuers with no individual issuer representing more than 2.3% of below
investment grade fixed maturities as a whole. At December 31, 1999, the five
largest industries represented in these below investment grade fixed maturities
were manufacturing (46.1%), communications (8.7%), finance (7.8%),
agriculture/mining/construction (6.7%) and banking (6.6%). No other industry
represented more than 5.5% of this portfolio. The General Account portfolio also
has interests in below investment grade fixed maturities through equity
interests in a number of high yield funds. See "Other Equity Investments".
Investment losses on fixed maturities in 1999 were due to $226.5 million in
writedowns primarily on domestic and emerging market high-yield securities and
net losses of $68.4 million on sales.
For further information regarding fixed maturities, see "MD&A - Continuing
Operations Investment Portfolio Investment Results of General Account Investment
Assets - Fixed Maturities".
Mortgages. At December 31, 1999, measured by amortized cost, commercial
mortgages totaled $3.05 billion (60.9% of the amortized cost of the category),
agricultural loans were $1.96 billion (39.1%) and residential loans were $0.7
million (less than 0.1%).
Commercial mortgages, substantially all of which are made on a non-recourse
basis, consist of fixed interest rate first mortgages on completed properties.
There were no construction or land loans in the category. Valuation allowances
of $32.1 million were held against the portfolio. As of December 31, 1999, there
were 219 individual commercial mortgage loans collateralized by office buildings
(amortized cost of $1,534.2 million), retail properties ($784.1 million),
apartment buildings ($317.9 million), hotels ($278.4 million) and industrial
properties ($116.8 million).
The agricultural mortgage loans add diversity to the mortgage loan portfolio. As
of December 31, 1999, there were approximately 4,072 outstanding agricultural
mortgages with an aggregate amortized cost of $1.96 billion. As of December 31,
1999, 30.0%, 22.7%, 20.0% and 13.1% of these assets were collateralized by land
used for grain crops, fruit/vine/timber, general farm purposes and ranch and
livestock, respectively, and no other land use category collateralized more than
14.2% of these loans. Of the properties collateralizing these loans, 27.4% were
located in California and no more than 8.5% are located in any other single
state. For information regarding the mortgage portfolio, see "MD&A - Continuing
Operations Investment Portfolio - General Account Investment Portfolio -
Investment Results of General Account Investment Assets - Mortgages".
Equity Real Estate. The $1.40 billion amortized cost of equity real estate
consists of office ($806.6 million), retail ($202.4 million), land and other
($193.9 million) and no other category comprised more than 5.5% of the
portfolio. Valuation allowances of $145.8 million were held against the
portfolio at December 31, 1999. Office properties are primarily significant
downtown buildings in major cities. Measured by amortized cost, 47.5%, 19.8%,
and 8.2% of these properties are located in New York, Ohio and Illinois,
respectively, and no more than 7.1% were located in any other state.
In January 1998, management announced a program to sell a significant portion of
its equity real estate portfolio. For 1999 and 1998, proceeds from the sale of
equity real estate for continuing operations totaled $576.6 million and $1.05
billion, respectively. At December 31, 1999, the remaining held for sale equity
real estate portfolio's depreciated cost for continuing and discontinued
operations totaled $769.7 million, excluding related valuation allowances of
$200.6 million. For additional information regarding the equity real estate
portfolio and the impact of the equity real estate sales program on Equitable
Life's results of operations , see "MD&A - Combined Operating Results" and
"Continuing Operations Investment Portfolio - Investment Results of General
Account Investment Assets - Equity Real Estate" and "- Discontinued Operations".
Other Equity Investments. Other equity investments consist of LBO, mezzanine,
venture capital and other limited partnership interests, alternative limited
partnerships and common stock and other equity securities. Alternative funds
utilize trading strategies that may be leveraged, and attempt to protect against
market risk through a variety of methods, including short sales, financial
futures, options and other derivative instruments. Returns on equity investments
are very volatile and investment results for any period are not representative
of any other period. The excess of Separate Accounts assets over Separate
Accounts liabilities at December 31, 1999 of $118.7 million represented an
investment by the General Account principally in equity securities. See "MD&A -
Continuing Operations Investment Portfolio - Investment Results of General
Account Investment Assets - Other Equity Investments".
1-12
<PAGE>
Commencing in third quarter 1998, in response to a perceived increase in the
price volatility of publicly-traded equity markets, Equitable Life began to
reduce its holdings of common stock investments. Effective January 1, 1999,
Equitable Life designated all investments in publicly-traded common equity
securities in the General Account portfolio as "trading securities" for the
purpose of classification under SFAS No. 115 and all subsequent changes in the
investments' fair value have been reported through earnings. These investments
are actively managed to control risk and generate investment returns.
Employees and Agents
As of December 31, 1999, the Insurance Group had approximately 5,000 employees
and the Investment Subsidiaries had approximately 12,600 employees. In addition,
the Financial Advisory/Insurance Group had more than 7,500 financial
professionals. Management believes relations with employees and financial
professionals are good.
Competition
Insurance Group. There is strong competition among companies seeking clients for
the types of insurance, annuity and group pension products sold by the Insurance
Group. Many other insurance companies offer one or more products similar to
those offered by the Insurance Group and in some cases through similar marketing
techniques. Several of the Insurance Group's principal competitors have
announced their intention to demutualize by year-end 2000, giving them increased
access to capital and other advantages of being publicly traded companies. In
addition, the Insurance Group competes with banks and other financial
institutions for sales of annuity products and, to a lesser extent, life
insurance products and with mutual funds, investment advisers and other
financial entities for the investment of savings dollars. The recent enactment
of the Gramm-Leach-Bliley Act may increase competition by permitting new
entrants into the insurance business.
The principal competitive factors affecting the Insurance Group's business are
price, financial and claims-paying ratings, size, strength and professionalism
of the sales force, range of product lines, product quality, reputation and
visibility in the marketplace, quality of service and, with respect to variable
insurance and annuity products, investment management performance. Management
believes the registration of nearly all of its retail financial professionals
with the National Association of Securities Dealers, Inc. ("NASD") and the
training provided to these sales associates by the AXA Advisors and AXA Network
provide a competitive advantage in effectively penetrating and communicating
with its target markets. In the wholesale distribution channels, the Insurance
Group's competitive advantage comes from strong brands, innovative products and
services and sales support to retail customers.
Ratings are an important factor in establishing the competitive position of
insurance companies. As of December 31, 1999, the financial strength or
claims-paying rating of Equitable Life was AA from Standard & Poor's Corporation
(3rd highest of 22 ratings), Aa3 from Moody's Investors Service (4th highest of
21 ratings), A+ from A.M. Best Company, Inc. (2nd highest of 16 ratings), AA
from Fitch Investors Service, L.P. (3rd highest of 18 ratings) and AA- from Duff
& Phelps Credit Rating Co. (4th highest of 18 ratings).
During 2000, management may from time to time explore selective acquisition
opportunities in Equitable Life's core insurance and investment management
businesses.
Investment Services - DLJ. DLJ encounters significant competition in all aspects
of the securities business and competes directly worldwide with other domestic
and foreign securities firms, a number of which have greater capital, financial
and other resources than DLJ. In addition to competition from firms currently in
the securities business, there has been increasing competition from other
sources, such as commercial banks and investment boutiques. As a result of
pending legislative and regulatory initiatives in the United States removing
certain restrictions on commercial banks, it is anticipated that competition in
some markets currently dominated by investment banks may increase in the future.
Such competition could also affect DLJ's ability to attract and retain highly
skilled individuals to conduct its various businesses. The principal competitive
factors influencing DLJ's business are its professional staff, the firm's
reputation in the marketplace, its existing client relationships, the ability to
commit capital to client transactions and its mix of market capabilities. DLJ's
ability to compete effectively in securities brokerage and investment banking
activities will also be influenced by the adequacy of its capital levels.
1-13
<PAGE>
DLJdirect is part of the online discount brokerage industry, a new, rapidly
evolving and intensely competitive market, which is experiencing substantial
competition from established financial services firms as well as new entrants
who are trying to quickly establish their presence in the market. DLJdirect
expects competition to continue and intensify in the future. DLJdirect faces
direct competition from discount brokerage firms providing either touch-tone
telephone or online investing services, or both. DLJdirect also encounters
competition from the broker-dealer affiliates of established full commission
brokerage firms. In addition, it competes with financial institutions, mutual
fund sponsors and other organizations, some of which provide electronic
brokerage services. DLJdirect's future success depends in part on its ability to
develop and enhance its services and products.
As a result of intense competitive pressures, the industry has experienced a
significant increase in brand development costs, a lowering of commission
pricing and an increase in content development costs. DLJdirect expects to spend
significant amounts in the future to develop much greater brand recognition
within its targeted market, to stay competitively priced and to develop new
state-of-the-art products and services. In particular, DLJdirect expects to
spend significant amounts for advertising. Additionally, DLJdirect expects to
spend significant amounts in the future in order to expand its international
presence.
Investment Services - Alliance. The financial services industry is highly
competitive and new entrants continually are attracted to it. No single
competitor, or any small group of competitors, is dominant in the industry.
Alliance is subject to substantial competition in all aspects of its business.
Pension fund, institutional and corporate assets are managed by investment
management firms, broker-dealers, banks and insurance companies. Many of these
financial institutions have substantially greater resources than Alliance.
Alliance competes with other providers of institutional investment products
primarily on the basis of the range of investment products offered, the
investment performance of such products and the services provided to clients.
Consultants also play a major role in the selection of managers for pension
funds.
Many of the firms competing with Alliance for institutional clients also offer
mutual fund shares and cash management services to individual investors.
Competitiveness in this area is chiefly a function of the range of mutual funds
and cash management services offered, investment performance, quality in
servicing customer accounts and the capacity to provide financial incentives to
financial intermediaries through distribution assistance and administrative
services payments funded by "Rule 12b-1" distribution plans and the investment
adviser's own resources.
The Insurance Group and the Investment Subsidiaries compete with and are
expected to continue to compete with each other by providing investment
management services, including sponsoring mutual funds and other investment
funds and accounts. For example, Alliance's partnership agreement specifically
allows Equitable Life and its subsidiaries (other than Alliance Capital
Management Corporation, a wholly owned Equitable Life subsidiary) to compete
with Alliance and to seek to develop opportunities that also may be available to
Alliance.
Regulation
State Supervision. The Insurance Group is licensed to transact its insurance
business in, and is subject to extensive regulation and supervision by,
insurance regulators in all 50 of the United States, the District of Columbia,
Puerto Rico, the U.S. Virgin Islands and Canada and nine of Canada's twelve
provinces and territories. Equitable Life is domiciled in New York and is
primarily regulated by the Superintendent of the New York Insurance Department
(the "Superintendent"). The extent of state regulation varies, but most
jurisdictions have laws and regulations governing standards of solvency, levels
of reserves, permitted types and concentrations of investments, and business
conduct to be maintained by insurance companies as well as agent licensing,
approval of policy forms and, for certain lines of insurance, approval or filing
of rates. The New York Insurance Law limits sales commissions and certain other
marketing expenses that may be incurred by Equitable Life. The Insurance Group
is required to file detailed annual financial statements, prepared on a
statutory accounting basis, with supervisory agencies in each of the
jurisdictions in which it does business. Such agencies may conduct regular
examinations of the Insurance Group's operations and accounts, and make
1-14
<PAGE>
occasional requests for particular information from the Insurance Group. In
January 1998 the Florida Attorney General and the Florida Department of
Insurance issued subpoenas, and in December 1999 the Florida Attorney General
issued an additional subpoena, in each case requesting, among other things,
documents relating to various sales practices. Equitable Life has completed its
response to the 1998 subpoenas and is in the process of responding to the 1999
subpoena. A number of states have enacted legislation requiring insurers who
sold policies in Europe prior to and during the Second World War to file
information concerning those policies with state authorities. Although Equitable
Life intends to comply with these laws with respect to its own activities, the
ability of AXA and its European affiliates to comply may be impacted by privacy
laws in effect in various European countries, which could result in state
regulatory authorities seeking to take enforcement actions against AXA and its
U.S. affiliates, including Equitable Life, even though Equitable Life does not
control AXA.
Holding Company Regulation. Several states, including New York, regulate
transactions between an insurer and its affiliates under insurance holding
company acts. These acts contain certain reporting requirements and restrictions
on provision of services and on transactions such as the transfer of assets,
loans or the payment of dividends between an insurer and its affiliates. Under
such laws, services performed, transfers of assets, loans or dividends by
Equitable Life to its parent and the Holding Company (and certain affiliates,
including AXA) may be subject to prior notice or approval depending on the size
of such transactions or payments. Equitable Life has agreed with the NYID that
similar approval requirements also apply to transactions between (i) material
subsidiaries of Equitable Life and (ii) its parent and the Holding Company (and
certain affiliates, including AXA). Changes in control of an insurance company
(generally presumed at a threshold of 10% or more of outstanding voting
securities) are also regulated by these laws.
Guaranty Funds. Under insurance guaranty fund laws existing in all states,
insurers doing business in those states can be assessed up to prescribed limits
to protect policyholders of companies which become impaired or insolvent.
Assessments levied against the Insurance Group during each of the past five
years have not been material. While the amount of any future assessments cannot
be predicted with certainty, management believes that assessments with respect
to pending insurance company impairments and insolvencies will not be material
to the financial position of Equitable Life.
Statutory Investment Valuation Reserves. Statutory accounting practices require
a life insurer to maintain an asset valuation reserve ("AVR") and an interest
maintenance reserve ("IMR") to absorb both realized and unrealized gains and
losses on most of an insurer's invested assets.
AVR requires life insurers to establish statutory reserves for substantially all
invested assets other than policy loans and life insurance subsidiaries. AVR
generally captures all realized and unrealized gains or losses on invested
assets, other than those resulting from changes in interest rates. Each year the
amount of an insurer's AVR will fluctuate as additional gains or losses are
absorbed by the reserve. To adjust for such changes over time, an annual
contribution must be made to AVR equal to a basic contribution plus 20% of the
difference between the reserve objective and the actual AVR. In addition,
voluntary contributions to the AVR are permitted, to the extent that AVR does
not exceed its maximum level. (The basic contribution, reserve objective and
maximum reserve are each determined annually according to the type and quality
of an insurer's invested assets.) As of December 31, 1999, the AVR objective for
the Insurance Group was $1.5 billion and the actual AVR was $1.6 billion.
IMR captures the net gains or losses which are realized upon the sale of fixed
income investments and which result from changes in the overall level of
interest rates. These net realized gains or losses are then amortized into
income over the remaining life of each investment sold. IMR applies to all types
of fixed income securities (bonds, preferred stocks, mortgage-backed securities
and mortgage loans).
In 1999, the AVR increased statutory surplus by $6.2 million and the IMR
increased statutory surplus by $100.4 million, as compared to decreases of
$111.8 million and $10.8 million, respectively, in 1998. The increase in
statutory surplus caused by the AVR in 1999 primarily was a result of unrealized
losses on bonds. The increase caused by the IMR resulted from realized losses
due to changes in interest rates.
Changes in statutory surplus resulting from increases or decreases in AVR and
IMR impact the funds available for shareholder dividends. See "Shareholder
Dividend Restrictions". AVR and IMR are not included in financial statements
prepared in conformity with GAAP. Asset valuation allowances reflected in
consolidated financial statements included herein are established under GAAP.
While the future effect of both AVR and IMR on the Insurance Group's statutory
surplus will depend on the actual composition (both as to type and quality) of
the Insurance Group's assets and gains/losses, management does not expect these
reserves will reduce its statutory surplus to levels that would constrain the
growth of the Insurance Group's operations. See "Regulation - Statutory Surplus
and Capital".
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Surplus Relief Reinsurance. The Insurance Group uses surplus relief reinsurance,
which has no GAAP financial reporting effect other than from the associated
expense and risk charge and administrative costs. However, surplus relief
reinsurance does have the effect of increasing current statutory surplus while
reducing future statutory earnings. As of December 31, 1999, $29.1 million
(0.5%) of the Insurance Group's total statutory capital (capital, surplus and
AVR) resulted from surplus relief reinsurance. Management reduced surplus relief
reinsurance by approximately $81.9 million in 1999 and by $634.9 million since
December 31, 1992. Management currently intends to eliminate all surplus relief
reinsurance by December 31, 2000.
Management believes the Insurance Group's surplus relief reinsurance agreements
are in substantial compliance with all applicable regulations.
NAIC Ratios. On the basis of statutory financial statements filed with state
insurance regulators, the NAIC annually calculates a number of financial ratios
to assist state regulators in monitoring the financial condition of insurance
companies. Twelve ratios were calculated based on the 1999 statutory financial
statements. A "usual range" of results for each ratio is used as a benchmark.
Departure from the "usual range" on four or more of the ratios can lead to
inquiries from individual state insurance departments. Based on Equitable Life's
1999 statutory financial statements, no ratios fell outside of the "usual
range".
Statutory Surplus and Capital. As licensed insurers in each of the 50 states of
the United States, members of the Insurance Group are subject to the supervision
of the regulators of each such state. Such regulators have the discretionary
authority, in connection with the continual licensing of any member of the
Insurance Group, to limit or prohibit new issuances of business to policyholders
within their jurisdiction when, in their judgment, such regulators determine
that such member is not maintaining adequate statutory surplus or capital.
Management does not believe the current or anticipated levels of statutory
surplus of the Insurance Group present a material risk that any such regulator
would limit the amount of new insurance business the Insurance Group may issue.
On March 16, 1998, members of the NAIC approved its Codification of Statutory
Accounting Principles ("Codification") project. Codification provides regulators
and insurers with uniform statutory guidance, addressing areas where statutory
accounting previously was silent and changing certain existing statutory
positions. Equitable Life will be subject to Codification to the extent and in
the form adopted in New York State, which would require action by both the New
York legislature and the New York Insurance Department. In February 2000, the
Superintendent announced the New York Insurance Department's intention to
proceed with implementation of Codification rules, subject to any provisions in
New York statutes which conflict with particular points in the Codification
rules. It is not possible to predict in what form or when Codification will be
adopted in New York, and accordingly it is not possible to predict the effect of
Codification on Equitable Life.
Risk-Based Capital. Life insurers are subject to risk-based capital ("RBC")
guidelines which provide a method to measure the adjusted capital (statutory
capital and surplus plus AVR and other adjustments) that a life insurance
company should have for regulatory purposes taking into account the risk
characteristics of the company's investments and products. The RBC requirements
establish capital requirements for four categories of risk: asset risk,
insurance risk, interest rate risk and business risk. For each category, the
capital requirement is determined by applying factors to various asset, premium
and reserve items, with the factor being higher for those items with greater
underlying risk and lower for less risky items. The New York Insurance Law gives
the Superintendent explicit regulatory authority to require various actions by,
or take various actions against, insurance companies whose adjusted capital does
not meet the minimum acceptable level. Management believes that Equitable Life's
statutory capital, as measured by its year end 1999 RBC, is adequate to support
its current business needs and financial ratings.
Shareholder Dividend Restrictions. In 1999, the Holding Company received a
shareholder dividend of $150 million from Equitable Life, the first since
demutualization. Under the New York Insurance Law, Equitable Life is permitted
to pay shareholder dividends only if it files notice of its intention to declare
such a dividend and the amount thereof with the Superintendent and the
Superintendent, who by statute has broad discretion in such matters, does not
disapprove the distribution. See Note 18 of Notes to Consolidated Financial
Statements. Equitable Life has begun to review with the New York Insurance
Department the potential for paying additional shareholder dividends in 2000.
Regulation of Investments. The Insurance Group is subject to state laws and
regulations that require diversification of its investment portfolio and limit
the amount of investments in certain investment categories such as below
investment grade fixed maturities, equity real estate and other equity
investments. Failure to comply with these laws and regulations would cause
investments exceeding regulatory limitations to be treated as non-admitted
assets for purposes of measuring statutory surplus, and, in some instances,
require divestiture. As of December 31, 1999, the Insurance Group's investments
were in substantial compliance with all such regulations.
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Federal Initiatives. Although the Federal government generally does not directly
regulate the insurance business, many Federal laws affect the business in a
variety of ways. There are a number of existing, newly enacted or recently
proposed Federal laws which may significantly affect the Insurance Group,
including employee benefits regulation, removal of barriers preventing banks
from engaging in the insurance and mutual fund businesses, the taxation of
insurance companies and the taxation of insurance products. These initiatives
are generally in a preliminary stage and consequently management cannot assess
their potential impact on the Insurance Group at this time. The Administration's
fiscal year 2001 revenue proposals announced in February 2000 contain provisions
which, if enacted, could have an adverse impact on sales of business-owned life
insurance and sales of cash value life insurance in connection with certain
employer welfare benefit plans. In addition, certain provisions would affect the
taxation of insurance companies, including a requirement to capitalize increased
percentages of their net premiums to approximate acquisition costs for certain
categories of insurance contracts. Management cannot predict what other
proposals may be made, what legislation, if any, may be introduced or enacted
nor what the effect of any such legislation might be.
ERISA Considerations. The Insurance Group and the Investment Subsidiaries act as
fiduciaries in certain cases, and accordingly are subject to regulation by the
Department of Labor ("DOL") when providing products and services to employee
benefit plans governed by the Employee Retirement Income Security Act of 1974
("ERISA"). Severe penalties are imposed by ERISA on fiduciaries which violate
ERISA's prohibited transaction provisions or breach their duties to
ERISA-covered plans. In a case decided by the United States Supreme Court in
December, 1993 (John Hancock Mutual Life Insurance Company v. Harris Trust and
Savings Bank), the Court concluded that an insurance company general account
contract that had been issued to a pension plan should be divided into its
guaranteed and nonguaranteed components and that certain ERISA fiduciary
obligations should be applied with respect to the assets underlying the
nonguaranteed components. On January 5, 2000, the DOL issued final regulations
defining the circumstances under which an insurer will be deemed to have a safe
harbor from ERISA liability for its contracts that are not guaranteed benefit
contracts. Based upon these final regulations and a legal opinion obtained by
Equitable Life, management believes that its group annuity contracts, as
amended, are guaranteed benefit contracts and the General Account assets
underlying the contracts are not plan assets for ERISA purposes.
Environmental Considerations. As owners and operators of real property,
Equitable Life and certain of its subsidiaries are subject to extensive Federal,
state and local environmental laws and regulations. Inherent in such ownership
and operation is the risk there may be potential environmental liabilities and
costs in connection with any required remediation of such properties. Equitable
Life routinely conducts or causes to be conducted on its behalf environmental
assessments for real estate being acquired for investment and before taking
title through foreclosure to real property collateralizing mortgages held by
Equitable Life. Based on these environmental assessments and compliance with
environmental procedures approved by Equitable Life, management believes that
any costs associated with compliance with environmental laws and regulations
regarding such properties would not be material to the consolidated financial
position of Equitable Life. Furthermore, although Equitable Life and certain of
its subsidiaries hold equity positions in companies that could potentially be
subject to environmental liabilities, management believes, based on its
assessment of the businesses and properties of these companies and the level of
involvement of Equitable Life and its subsidiaries in the operation and
management of such companies, any environmental liabilities with respect to
these investments would not be material to the consolidated financial position
of Equitable Life.
Market Conduct. The Insurance Marketplace Standards Association ("IMSA") is a
voluntary market conduct compliance association whose mission is to improve
standards of ethical market conduct. In 1998, Equitable Life became a member of
IMSA, which required Equitable Life to adopt IMSA's "Principles and Code of
Ethical Market Conduct", and in conformity with IMSA's Assessment Handbook, to
conduct a self-assessment regarding Equitable Life's practices in the marketing
and sales of individually-sold life and annuity products, and to have an
independent IMSA-approved assessor determine that Equitable Life had a
reasonable basis for its findings.
Securities Laws. Equitable Life, its insurance subsidiary, and certain policies
and contracts offered by the Insurance Group, are subject to regulation under
the Federal securities laws administered by the Securities and Exchange
Commission (the "SEC") and under certain state securities laws. The SEC conducts
regular examinations of the Insurance Group's operations, and makes occasional
requests for particular information from the Insurance Group. Equitable Life has
complied with the SEC's limited inspection and inquiry in 1997 and 1998
concerning the marketing and sales practices associated with variable insurance
products. Certain Separate Accounts of Equitable Life are registered as
investment companies under the Investment Company Act of 1940, as amended (the
"Investment Company Act"). Separate Account interests under certain annuity
contracts and insurance policies issued by Equitable Life are also registered
under the Securities Act of 1933, as amended (the "Securities Act"). AXA
Advisors, Donaldson, Lufkin & Jenrette Securities Corporation ("DLJSC"),
DLJdirect, Inc. and EDI and certain other subsidiaries of Equitable Life are
registered as broker-dealers (collectively the "Broker-Dealers") under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). The
Broker-Dealers are subject to extensive regulation (as discussed below in
"Investment Banking" with reference to DLJSC), and are members of, and subject
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to regulation by, the NASD and various other self regulatory organizations
("SROs"). As a result of registration under the Exchange Act and SRO
memberships, the Broker-Dealers are subject to overlapping schemes of regulation
which cover all aspects of their securities business. Such regulations cover
matters including capital requirements, the use and safekeeping of customers'
funds and securities, recordkeeping and reporting requirements, supervisory and
organizational procedures intended to assure compliance with securities laws and
rules of the SROs and to prevent improper trading on "material nonpublic"
information, employee-related matters, limitations on extensions of credit in
securities transactions, required procedures for trading on securities exchanges
and in over-the-counter markets, and procedures for the clearance and settlement
of trades. A particular focus of the applicable regulations concerns the
relationship between broker-dealers and their customers. As a result, the
Broker-Dealers in some instances may be required to make "suitability"
determinations as to certain customer transactions, are limited in the amounts
that they may charge customers, cannot trade ahead of their customers and must
make certain required disclosures to their customers.
Equitable Life, AXA Advisors and certain of the Investment Subsidiaries also are
registered as investment advisors under the Investment Advisers Act of 1940, as
amended (the "Investment Advisers Act"). Many of the investment companies
managed by the Investment Subsidiaries, including a variety of mutual funds and
other pooled investment vehicles, are registered with the SEC under the
Investment Company Act. All aspects of Equitable Life's, AXA Advisors' and the
Investment Subsidiaries' investment advisory activities are subject to various
Federal and state laws and regulations and to the laws in those foreign
countries in which they conduct business. Such laws and regulations relate to,
among other things, limitations on the ability of investment advisors to charge
performance-based or non-refundable fees to clients, recordkeeping and reporting
requirements, disclosure requirements, limitations on principal transactions
between an advisor or its affiliates and advisory clients, as well as general
anti-fraud prohibitions. The state securities law requirements applicable to
registered investment advisors are in certain cases more comprehensive than
those imposed under the Federal securities laws. The failure to comply with such
laws may result in possible sanctions including the suspension of individual
employees, limitations on the activities in which the investment advisor may
engage, suspension or revocation of the investment advisor's registration as an
advisor, censure and/or fines.
Investment Banking and Brokerage. DLJ's business and the securities industry in
general are subject to extensive regulation in the United States at both the
Federal and state level, as well as by industry SROs. A number of Federal
regulatory agencies are charged with safeguarding the integrity of the
securities and other financial markets and with protecting the interests of
customers participating in those markets. DLJSC is registered as a broker-dealer
with the SEC and in all 50 states and the District of Columbia, as a futures
commission merchant with the Commodities Futures Trading Commission (the
"CFTC"), as an investment advisor with the SEC and in certain states, and is
also designated a primary dealer in United States government securities by the
Federal Reserve Bank of New York. It is also a member of, and subject to
regulation by, the NASD, the NYSE, the Chicago Board of Trade ("CBOT"), the
National Futures Association and various other self-regulatory organizations.
Broker-dealers are subject to regulation by state securities administrators in
those states in which they conduct business. Broker-dealers are also subject to
regulations that cover all aspects of the securities business. As a futures
commission merchant, DLJSC is subject to the requirements of the CFTC and the
CBOT, including the provision of certain disclosure documents, prohibitions
against trading ahead of customers and other fraudulent trading practices,
provisions as to the handling of customer funds and reporting and recordkeeping
requirements. See "Regulation - Securities Laws". The SEC, other governmental
regulatory authorities, including state securities commissions, and SROs may
institute administrative or judicial proceedings, which may result in censure,
fine, the issuance of cease-and-desist orders, the suspension or expulsion of a
broker-dealer or member, its officers or employees or other similar
consequences.
DLJ's businesses may be materially affected not only by regulations applicable
to them as a financial market intermediary, but also by regulations of general
application. For example, the volume of DLJ's underwriting, merger and
acquisition and merchant banking businesses in any year could be affected by,
among other things, existing and proposed tax legislation, antitrust policy and
other governmental regulations and policies (including the interest rate
policies of the Federal Reserve Board) and changes in interpretation or
enforcement of existing laws and rules that affect the business and financial
communities. From time to time, various forms of anti-takeover legislation and
legislation that could affect the benefits associated with financing leveraged
transactions with high yield securities have been proposed that, if enacted,
could adversely affect the volume of merger and acquisition and merchant banking
business, which in turn could adversely affect DLJ's underwriting, advisory and
trading revenues related thereto.
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As broker-dealers registered with the SEC and member firms of the NYSE, DLJSC
and certain of its subsidiaries are subject to the capital requirements of the
SEC and of the NYSE and/or NASD. These capital requirements specify minimum
levels of capital, computed in accordance with regulatory requirements ("net
capital"), that the Broker-Dealers are required to maintain and also limit the
amount of leverage that the Broker-Dealers are able to obtain in their
businesses. Compliance with regulatory capital requirements could limit those
operations of the Broker-Dealers that require the intensive use of capital, such
as DLJSC's underwriting and trading activities, and the financing of customer
account balances, and also restrict DLJ's ability to pay dividends, pay
interest, repay debt, and redeem or purchase shares of its outstanding capital
stock. A change in such rules, or the imposition of new rules, affecting the
scope, coverage, calculation or amount of capital requirements, or a significant
operating loss or any unusually large charge against capital, would adversely
affect the ability of DLJ to pay dividends or to expand or even maintain present
levels of business. Rule 15c3-1 under the Exchange Act limits the ability of
stockholders of a registered broker-dealer to withdraw excess capital from that
broker-dealer, if such withdrawal would impair the broker-dealer's net capital.
This rule could limit the payment of dividends and the making of loans and
advances by the Broker-Dealers to Equitable Life and the Holding Company.
In addition to being regulated in the U.S., DLJ's business is subject to
regulation by various foreign governments and regulatory bodies. DLJ has
broker-dealer subsidiaries that are subject to regulation by the Securities and
Futures Authority of the United Kingdom, the Securities and Futures Commission
of Hong Kong and the Ontario Securities Commission.
Additional legislation and regulations, including those relating to the
activities of affiliates of broker-dealers, changes in rules promulgated by the
SEC, the CFTC or other United States or foreign governmental regulatory
authorities and SROs or changes in the interpretations or enforcement of
existing laws and rules may adversely affect the manner of operation and
profitability of DLJ.
Year 2000
Equitable Life'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 agents, employees, affiliates, vendors and clients, and
recording information for accounting, investment and management information
purposes. Following the implementation of Equitable Life's, Alliance's and DLJ's
Year 2000 compliance initiatives, no Year 2000 problems were encountered that
could have a material adverse effect on the business, financial condition or
results of operations of Equitable Life.
Principal Shareholder
AXA is the majority shareholder of the Holding Company, beneficially owning
(together with certain of its affiliates) at March 1, 2000, 60.0% of the
outstanding shares of Common Stock of the Holding Company. All shares of the
Holding Company's Common Stock beneficially owned by AXA have been deposited in
the voting trust referred to below. AXA is the holding company for an
international group of insurance and related financial services companies. AXA's
insurance operations include activities in life insurance, property and casualty
insurance and reinsurance. The insurance operations are diverse geographically,
with activities principally in Western Europe, North America, and the
Asia/Pacific area and, to a lesser extent, in Africa and South America. AXA is
also engaged in asset management, investment banking, securities trading,
brokerage, real estate and other financial services activities principally in
the United States, as well as in Western Europe and the Asia/Pacific area.
Neither AXA nor any affiliate of AXA has any obligation to provide additional
capital or credit support the Holding Company or any of its subsidiaries.
Voting Trust. In connection with AXA's application to the Superintendent for
approval of its acquisition of capital stock of the Holding Company, AXA and the
initial Trustees of the Voting Trust (Claude Bebear, Patrice Garnier and Henri
de Clermont-Tonnerre) entered into a Voting Trust Agreement dated as of May 12,
1992 (as amended by the First Amendment dated January 22, 1997, the "Voting
Trust Agreement"). The Voting Trust Agreement requires AXA and certain
affiliates ("AXA Parties") to deposit any shares of the Holding Company's Common
Stock and preferred stock held by them in the Voting Trust. The Voting Trust
Agreement also provides (subject to limited exceptions) that in the event that
any AXA Party acquires additional shares of such stock, or any other stock of
the Holding Company having the power to vote in the election of directors of the
Holding Company, it shall promptly deposit such shares in the Voting Trust. Only
AXA Parties and certain other affiliates of AXA may deposit shares of Holding
Company capital stock into the Voting Trust or be holders of voting trust
certificates representing deposited shares. The purpose of the Voting Trust is
to ensure for insurance regulatory purposes that certain indirect minority
shareholders of AXA will not be able to exercise control over the Holding
Company or Equitable Life.
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AXA and any other holder of voting trust certificates will remain the beneficial
owner of the shares deposited by it, except that the Trustees will be entitled
to exercise all voting rights attaching to the deposited shares so long as such
shares remain subject to the Voting Trust. In voting the deposited shares, the
Trustees must act to protect the legitimate economic interests of AXA and any
other holders of voting trust certificates (but with a view to ensuring that
certain indirect minority shareholders of AXA do not exercise control over the
Holding Company or Equitable Life). All dividends and distributions (other than
those which are paid in the form of shares required to be deposited in the
Voting Trust) in respect of deposited shares will be paid directly to the
holders of voting trust certificates. If a holder of voting trust certificates
sells or transfers deposited shares to a person which is not an AXA Party and is
not (and does not, in connection with such sale or transfer, become) a holder of
voting trust certificates, the shares sold or transferred will be released from
the Voting Trust. The Voting Trust has an initial term of ten years and is
subject to extension with the prior approval of the New York Superintendent. For
more information on Equitable Life's 1992 demutualization see Notes 2 and 7 of
Notes to Consolidated Financial Statements.
AXA Sublicense. The name "AXA" and the AXA trademark are owned by Finaxa, an
affiliate of AXA. In 1996, AXA and Finaxa entered into a Licensing Agreement
pursuant to which Finaxa granted AXA a non-exclusive license (the "AXA License")
to use the AXA trademark in certain jurisdictions. The AXA License grants AXA
the right, subject to the prior written approval of Finaxa, to grant sublicenses
to companies controlled, directly or indirectly, by AXA. The AXA License may be
terminated upon three months prior written notice by either party; however,
Finaxa may not exercise its termination right for so long as it is AXA's largest
shareholder. The right to use the name "AXA" will be sublicensed from AXA at no
charge to the Holding Company nor to any subsidiary of the Holding Company. If
the AXA License is terminated, any sublicenses granted would also terminate.
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Part I, Item 2.
PROPERTIES
Insurance
Equitable Life leases on a long-term basis approximately 799,000 square feet of
office space located at 1290 Avenue of the Americas, New York, New York, which
serves as the Holding Company and Equitable Life's headquarters Additionally,
Equitable Life leases an aggregate of approximately 100,000 square feet of
office space at 30 Rockefeller Center, 1301 Avenue of the Americas, 21 Penn
Plaza and at the AMA Building on various short term leases. Equitable Life also
has the following major leases: 244,000 square feet in Secaucus, NJ under a
lease that expires in 2011 for its Annuity Operations use; 152,000 square feet
in Charlotte, North Carolina, under a lease that expires in 2013, for use by its
National Operations Center; 76,200 square feet in Alpharetta, GA under a lease
that expires in 2006 for its Distribution Organizations' training and support
use; and 67,800 square feet in Leonia, NJ under a lease that expires in 2009 for
its Information Technology processing use. In addition, Equitable Life leases
property both domestically and abroad, the majority of which houses sales and
distribution operations. Management believes its facilities are adequate for its
present needs in all material respects. For additional information, see Notes 19
and 20 of Notes to Consolidated Financial Statements.
Equitable Life subleases its office space at 1290 Avenue of the Americas to the
New York City Industrial Development Agency (the "IDA"), and sub-subleases that
space back from the IDA, in connection with the IDA's granting of sales tax
benefits to Equitable Life.
Investment Services - DLJ
DLJ's principal executive offices are presently located at 277 Park Avenue, New
York, New York and occupy approximately 1.2 million square feet under a lease
expiring in 2021. DLJ has leased space at 280 Park Avenue, New York, New York,
aggregating approximately 192,000 square feet under leases expiring at various
dates through 2014. DLJ also leases space at 120 Broadway, New York, New York,
aggregating approximately 94,000 square feet. This lease expires in 2006.
DLJ's principal London-based broker-dealer subsidiary is located at 99
Bishopsgate and 111 Old Broad Street and occupies approximately 225,000 square
feet under leases expiring at various dates through 2018.
Pershing also leases approximately 471,000 square feet in Jersey City, New
Jersey, under leases that expire at various dates through 2009. In 1999, DLJ's
online brokerage subsidiary entered into a lease at Harborside Financial Center
in Jersey City, New Jersey aggregating approximately 160,000 square feet. DLJ
also owns land and a building with approximately 142,000 square feet in Florham
Park, New Jersey.
In addition, DLJ leases an aggregate of approximately one million square feet
for its domestic and international regional offices, the leases for which expire
at various dates through 2014. Other domestic offices are located in Atlanta,
Austin, Boston, Charlotte, Chicago, Dallas, Deerfield, Denver, Houston, Jersey
City, Los Angeles, Menlo Park, Miami, Oak Brook, Parsippany, Philadelphia and
San Francisco. Its foreign office locations are Bangalore, Buenos Aires,
Frankfurt, Geneva, Hong Kong, London, Lugano, Melbourne, Mexico City, Monterrey,
Moscow, Paris, Sao Paulo, Seoul, Singapore, Taipei and Tokyo.
DLJ believes that its present facilities are adequate for its current needs.
Investment Services - Alliance
Alliance's principal executive offices at 1345 Avenue of the Americas, New York,
New York are occupied pursuant to a lease that extends until 2016. Alliance
currently occupies approximately 407,000 square feet at this location. Alliance
also occupies approximately 114,097 square feet at 135 West 50th Street, New
York, New York under
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leases expiring in 2016. Alliance also occupies approximately 4,594 square feet
at 709 Westchester Avenue and 21,057 square feet at 925 Washington Avenue, White
Plains, New York, under leases expiring in 2004. Alliance and two of its
subsidiaries occupy approximately 134,000 square feet of space in Secaucus, New
Jersey pursuant to a lease which extends until 2016, approximately 92,100 square
feet of space in San Antonio, Texas pursuant to a lease which extends until 2009
and approximately 59,033 square feet at the Glenmaura Corporate Centre,
Scranton, Pennsylvania, under a lease expiring in 2004.
Alliance also leases space in San Francisco, California, Chicago, Illinois,
Greenwich, Connecticut, Minneapolis, Minnesota, and Beechwood, Ohio. Its
subsidiaries lease space in Windhoek, Namibia, London, England, Paris, France,
Tokyo, Japan, Sydney, Australia, Toronto, Canada, Luxembourg, Singapore, Manama,
Bahrain, Mumbai, New Delhi, Bangalore, Pune, Calcutta and Chennai, India,
Johannesburg, South Africa and Istanbul, Turkey. Joint venture subsidiaries and
affiliates of Alliance have offices in Vienna, Austria, Sao Paulo, Brazil, Hong
Kong, Seoul, South Korea, Warsaw, Poland, Moscow, Russia, Cairo, Egypt, Talinn,
Estonia, Harare, Zimbabwe, Prague, Czech Republic and Bucharest, Romania.
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Part I, Item 3.
LEGAL PROCEEDINGS
A number of lawsuits have been filed against life and health insurers in the
jurisdictions in which Equitable Life and its subsidiaries do business involving
insurers' sales practices, alleged agent misconduct, alleged failure to properly
supervise agents, and other matters. Some of the lawsuits have resulted in the
award of substantial judgments against other insurers, including material
amounts of punitive damages, or in substantial settlements. In some states,
juries have substantial discretion in awarding punitive damages. Equitable Life,
Equitable Variable Life Insurance Company ("EVLICO," which was merged into
Equitable Life effective January 1, 1997, but whose existence continues for
certain limited purposes, including the defense of litigation) and The Equitable
of Colorado, Inc. ("EOC"), like other life and health insurers, from time to
time are involved in such litigation. Among litigations against Equitable Life,
EVLICO and EOC of the type referred to in this paragraph are the litigations
described in the following seven paragraphs.
An action was instituted in April 1995, against Equitable Life and its wholly
owned subsidiary, EOC, in New York state court, entitled Sidney C. Cole, et al.
v. The Equitable Life Assurance Society of the United States and The Equitable
of Colorado, Inc. The action is brought by the holders of a joint survivorship
whole life policy issued by EOC. The action purports to be on behalf of a class
consisting of all persons who from January 1, 1984 purchased life insurance
policies sold by Equitable Life and EOC based upon allegedly uniform sales
presentations and policy illustrations. The complaint puts in issue various
alleged sales practices that plaintiffs assert, among other things,
misrepresented the stated number of years that the annual premium would need to
be paid. Plaintiffs seek damages in an unspecified amount, imposition of a
constructive trust, and seek to enjoin Equitable Life and EOC from engaging in
the challenged sales practices. In June 1996, the court issued a decision and
order dismissing with prejudice plaintiffs' causes of action for fraud,
constructive fraud, breach of fiduciary duty, negligence, and unjust enrichment,
and dismissing without prejudice plaintiffs' cause of action under the New York
State consumer protection statute. The only remaining causes of action were for
breach of contract and negligent misrepresentation. In April 1997, plaintiffs
noticed an appeal from the court's June 1996 order. In June 1997, plaintiffs
filed their memorandum of law and affidavits in support of their motion for
class certification. In August 1997, Equitable Life and EOC moved for summary
judgment dismissing plaintiffs' remaining claims of breach of contract and
negligent misrepresentation and in February 1998, the court granted Equitable
Life and EOC's motion for summary judgment. The court therefore denied as moot
plaintiffs' motion to certify the class. In April 1998, plaintiffs noticed their
appeal from that decision and from the June 1996 decision, the appeal from which
had been dismissed. The appeal has been briefed and argued.
In May 1996, an action entitled Elton F. Duncan, III v. The Equitable Life
Assurance Society of the United States was commenced against Equitable Life in
the Civil District Court for the Parish of Orleans, State of Louisiana. The
action originally was brought by an individual who purchased a whole life policy
from Equitable Life in 1989. In September 1997, with leave of the court,
plaintiff filed a second amended petition naming six additional policyholder
plaintiffs and three new sales agent defendants. The sole named individual
defendant in the original petition is also named as a defendant in the second
amended petition. Plaintiffs purport to represent a class consisting of all
persons who purchased whole life or universal life insurance policies from
Equitable Life from January 1, 1981 through July 22, 1992. Plaintiffs allege
improper sales practices based on allegations of misrepresentations concerning
one or more of the following: the number of years that premiums would need to be
paid; a policy's suitability as an investment vehicle; and the extent to which a
policy was a proper replacement policy. Plaintiffs seek damages, including
punitive damages, in an unspecified amount. In October 1997, Equitable Life
filed (i) exceptions to the second amended petition, asserting deficiencies in
pleading of venue and vagueness; and (ii) a motion to strike certain
allegations. In January 1998, the court heard argument on Equitable Life's
exceptions and motion to strike. Those motions are under consideration by the
court. Plaintiffs moved for class certification in August 1998. Equitable Life
opposed that motion and moved for summary judgment dismissing the amended
petition in its entirety; consideration of the summary judgment motion has been
deferred. In December 1999, the court issued a judgment denying plaintiffs'
motion for class certification and assessing costs of the proceeding against the
plaintiffs. Plaintiffs have appealed that decision.
In July 1996, an action entitled Michael Bradley v. Equitable Variable Life
Insurance Company was commenced in New York state court, Kings County. The
action is brought by the holder of a variable life insurance policy issued by
EVLICO. The plaintiff purports to represent a class consisting of all persons or
3-1
<PAGE>
entities who purchased one or more life insurance policies issued by EVLICO from
January 1, 1980. The complaint puts at issue various alleged sales practices and
alleges misrepresentations concerning the extent to which the policy was a
proper replacement policy and the number of years that the annual premium would
need to be paid. Plaintiff seeks damages, including punitive damages, in an
unspecified amount and also seeks injunctive relief prohibiting EVLICO from
canceling policies for failure to make premium payments beyond the alleged
stated number of years that the annual premium would need to be paid. EVLICO
answered the complaint, denying the material allegations. In September 1996,
Equitable Life, EVLICO and EOC made a motion to have this proceeding moved from
Kings County Supreme Court to New York County for joint trial or consolidation
with the Cole action. The motion was denied by the court in Cole in January
1997. Plaintiff then moved for certification of a nationwide class consisting of
all persons or entities who, since January 1, 1980, were sold one or more life
insurance products based on misrepresentations as to the number of years that
the annual premium would need to be paid, and/or who were allegedly induced to
purchase additional policies from EVLICO using the cash value accumulated in
existing policies. Defendants have opposed this motion. In August 1998, EVLICO
and EOC moved for summary judgment on all causes of action. Briefing on the
summary judgment motion and on plaintiff's motion for class certification is
completed, although discovery regarding class certification issues is the
subject of ongoing motion practice. A hearing on plaintiff's motions to compel
discovery and for class certification, and on EVLICO and EOC's motion for
summary judgment, was held in January 2000. Those motions have been submitted to
the court for decision.
In January 1996, an amended complaint was filed in an action entitled Frank
Franze Jr. and George Busher, individually and on behalf of all others similarly
situated v. The Equitable Life Assurance Society of the United States, and
Equitable Variable Life Insurance Company in the United States District Court
for the Southern District of Florida. The action was brought by two individuals
who purchased variable life insurance policies. The plaintiffs purport to
represent a nationwide class consisting of all persons who purchased variable
life insurance policies from Equitable Life and EVLICO since September 30, 1991.
The amended complaint alleges that Equitable Life's and EVLICO's agents were
trained not to disclose fully that the product being sold was life insurance.
Plaintiffs allege violations of the Federal securities laws and seek rescission
of the contracts or compensatory damages and attorneys' fees and expenses.
Equitable Life and EVLICO have answered the amended complaint, denying the
material allegations and asserting certain affirmative defenses. In May 1999,
the Magistrate Judge issued a Report and Recommendation recommending that the
District Judge deny Equitable Life's and EVLICO's motion for summary judgment
and grant plaintiffs' motion for class certification. In July 1999, Equitable
Life and EVLICO filed Objections to the Report and Recommendation and urged that
the District Judge reject the Magistrate's recommendations and grant Equitable
Life's and EVLICO's motion for summary judgment and deny plaintiffs' motion for
class certification. The parties have completed briefing on the Objections.
In December 1999, an action styled Bradley H. Kane, individually and on behalf
of himself and all others similarly situated v. The Equitable Life Assurance
Society of the United States was commenced in the Court of Common Pleas of
Philadelphia County, Pennsylvania. The action was brought by an individual who
had purchased a whole life insurance policy issued by Equitable Life. Plaintiff
purports to represent a class consisting of all persons who purchased ownership
interests in whole life insurance policies issued by Equitable Life and who have
had or may have Equitable Life demand or seek additional premium payments beyond
the alleged stated number of years that the annual premium would need to be paid
and/or whose payments for the policies have not earned returns at the stated or
illustrated rates. The complaint puts at issue various alleged sales practices
and alleges misrepresentations concerning the number of years that the annual
premium would need to be paid and the investment return that could be expected.
The complaint alleges claims for fraudulent inducement to contract, breach of
contract, fraud, negligent misrepresentation, violation of The Pennsylvania
Unfair Trade and Deceptive Practices Act, unjust enrichment and imposition of a
constructive trust. Plaintiff seeks damages in an unspecified amount, costs
including attorneys' fees and expert witness fees, equitable and injunctive
relief including the imposition of a constructive trust, rescission of the
policies for those class members who wish it, and other unspecified remedies
allowed by Pennsylvania consumer protection law. In January 2000, Equitable Life
removed the case to the United States District Court for the Eastern District of
Pennsylvania. Plaintiff filed a motion to remand the case to State Court.
Equitable Life has not yet responded to the complaint or plaintiff's remand
motion. The parties have executed an agreement settling the plaintiff's claims
on an individual basis. The dismissal of plaintiff's claims is subject to court
approval.
3-2
<PAGE>
Although the outcome of litigation cannot be predicted with certainty,
particularly in the early stages of an action, the Company's management believes
that the ultimate resolution of the Cole, Duncan, Bradley, Franze, and Kane
litigations should not have a material adverse effect on the financial position
of the Company. The Company's management cannot make an estimate of loss, if
any, or predict whether or not any such litigation will have a material adverse
effect on the Company's results of operations in any particular period.
In two previously disclosed actions, Dr. James H. Greenwald, et al. v. The
Equitable Life Assurance Society of the United States and Stanley L. Harris, and
Dennis Hill, et al. v. Equitable Variable Life Insurance Company, The Equitable
Life Assurance Society of the United States and Jerry Vucovich, the plaintiffs'
claims have been settled on an individual basis and the actions have been
dismissed.
On September 12, 1997, the United States District Court for the Northern
District of Alabama, Southern Division, entered an order certifying James Brown
as the representative of a class consisting of "[a]ll African-Americans who
applied but were not hired for, were discouraged from applying for, or would
have applied for the position of Sales Agent in the absence of the
discriminatory practices, and/or procedures in the [former] Southern Region of
AXA Financial from May 16, 1987 to the present." The second amended complaint in
James W. Brown, on behalf of others similarly situated v. The Equitable Life
Assurance Society of the United States, alleges, among other things, that
Equitable Life discriminated on the basis of race against African-American
applicants and potential applicants in hiring individuals as sales agents.
Plaintiffs seek a declaratory judgment and affirmative and negative injunctive
relief, including the payment of back-pay, pension and other compensation. The
court referred the case to mediation, which is pending. Although the outcome of
any litigation cannot be predicted with certainty, the Company's management
believes that the ultimate resolution of this matter should not have a material
adverse effect on the financial position of the Company. The Company's
management cannot make an estimate of loss, if any, or predict whether or not
such matter will have a material adverse effect on the Company's results of
operations in any particular period.
In November 1997, an amended complaint was filed in Peter Fischel, et al. v. The
Equitable Life Assurance Society of the United States alleging, among other
things, that Equitable Life violated ERISA by eliminating certain alternatives
pursuant to which agents of Equitable Life could qualify for health care
coverage. In March 1999, the United States District Court for the Northern
District of California entered an order certifying a class consisting of "[a]ll
current, former and retired Equitable agents, who while associated with
Equitable satisfied [certain alternatives] to qualify for health coverage or
contributions thereto under applicable plans." Plaintiffs allege various causes
of action under ERISA, including claims for enforcement of alleged promises
contained in plan documents and for enforcement of agent bulletins, breach of a
unilateral contract, breach of fiduciary duty and promissory estoppel. The
parties are currently engaged in discovery. Although the outcome of any
litigation cannot be predicted with certainty, the Company's management believes
that the ultimate resolution of this matter should not have a material adverse
effect on the financial position of the Company. The Company's management cannot
make an estimate of loss, if any, or predict whether or not such matter will
have a material adverse effect on the Company's results of operations in any
particular period.
In January 2000, the California Supreme Court denied Equitable Life's petition
for review of an October 1999 decision by the California Court of Appeal which
reversed the dismissal by the Superior Court of Orange County, California of an
action entitled BT-I v. The Equitable Life Assurance Society of the United
States. The action was commenced in 1995 by a real estate developer in
connection with a limited partnership formed in 1991 with Equitable Life on
behalf of Prime Property Fund ("PPF"). Equitable Life serves as investment
manager for PPF, an open-end, commingled real estate separate account of
Equitable Life for pension clients. Plaintiff alleges breach of fiduciary duty
and other claims principally in connection with PPF's 1995 purchase and
subsequent foreclosure of the loan which financed the partnership's property.
Plaintiff seeks compensatory and punitive damages. The case has been remanded to
the Superior Court for further proceedings. Although the outcome of litigation
cannot be predicted with certainty, the Company's management believes that the
ultimate resolution of this matter should not have a material adverse effect on
the financial position of the Company. The Company's management cannot make an
estimate of loss, if any, or predict whether or not this matter will have a
material adverse effect on the Company's results of operations in any particular
period.
3-3
<PAGE>
In September 1999, a complaint was filed in an action entitled R.S.M. Inc., et
al. v. Alliance Capital Management L.P., et al. in the Chancery Court of the
State of Delaware. The action was brought on behalf of a purported class of
owners of limited partnership units of Alliance Capital Management Holding L.P.
("Alliance Holding") challenging the then-proposed reorganization of Alliance
Holding. Named defendants include Alliance Holding, four Alliance Holding
executives, the general partner of Alliance Holding and Alliance, which is a
wholly owned indirect subsidiary of Equitable Life, and Alliance, which is the
operating partnership whose units are not publicly traded. Equitable Life is
obligated to indemnify the defendants for losses and expenses arising out of the
litigation. Plaintiffs allege, inter alia, inadequate and misleading
disclosures, breaches of fiduciary duties, and the improper adoption of an
amended partnership agreement by Alliance Holding. The complaint seeks, inter
alia, payment of unspecified money damages and an accounting of all benefits
alleged to have been improperly obtained by the defendants. In October 1999, the
parties entered into a Memorandum of Understanding that set forth a proposed
settlement of the action and provided for confirmatory discovery prior to
seeking court approval of the settlement; the parties are continuing to discuss
the possible settlement. Although the outcome of any litigation cannot be
predicted with certainty, the Company's management believes that the ultimate
resolution of this matter should not have a material adverse effect on the
financial position of the Company. The Company's management cannot make an
estimate of loss, if any, or predict whether or not such matter will have a
material adverse effect on the Company's results of operations in any particular
period.
In July 1995, a Consolidated and Supplemental Class Action Complaint ("Original
Complaint") was filed against the Alliance North American Government Income
Trust, Inc. (the "Fund"), Alliance Holding and certain other defendants
affiliated with Alliance Holding, including the Holding Company, alleging
violations of Federal securities laws, fraud and breach of fiduciary duty in
connection with the Fund's investments in Mexican and Argentine securities. In
September 1996, the United States District Court for the Southern District of
New York granted the defendants' motion to dismiss all counts of the Original
Complaint. In October 1997, the United States Court of Appeals for the Second
Circuit affirmed that decision. In October 1996, plaintiffs filed a motion for
leave to file an amended complaint. The principal allegations of the proposed
amended complaint are that (i) the Fund failed to hedge against currency risk
despite representations that it would do so, (ii) the Fund did not properly
disclose that it planned to invest in mortgage-backed derivative securities and
(iii) two advertisements used by the Fund misrepresented the risks of investing
in the Fund. In October 1998, the United States Court of Appeals for the Second
Circuit issued an order granting plaintiffs' motion to file an amended complaint
alleging that the Fund misrepresented its ability to hedge against currency risk
and denying plaintiffs' motion to file an amended complaint alleging that the
Fund did not properly disclose that it planned to invest in mortgage-backed
derivative securities and that certain advertisements used by the Fund
misrepresented the risks of investing in the Fund. In December 1999, the United
States District Court for the Southern District of New York granted defendants'
motion for summary judgment on all claims against all defendants. Plaintiffs
filed motions for reconsideration of the court's ruling; these motions are
pending. On March 24, 2000 Alliance announced that a memorandum of understanding
had been signed with the lawyers for the plaintiffs settling this action. Under
the settlement Alliance will permit Fund shareholders to invest up to $250
million in mutual funds managed by Alliance free of initial sales charges. Like
all class action settlements, the settlement is subject to court approval. In
connection with its reorganization, Alliance assumed any liabilities which
Alliance Holding may have with respect to this action. Alliance and Alliance
Holding believe that the allegations in the amended complaint are without merit
and intend to defend vigorously against this action. While the ultimate outcome
of this matter cannot be determined at this time, management of Alliance Holding
and Alliance do not expect that it will have a material adverse effect on
Alliance Holding's or Alliance's results of operations or financial condition.
3-4
<PAGE>
In January 1996, a purported purchaser of certain notes and warrants to purchase
shares of common stock of Rickel Home Centers, Inc. ("Rickel") filed a class
action complaint against DLJSC and certain other defendants for unspecified
compensatory and punitive damages in the U. S. District Court for the Southern
District of New York. The suit was brought on behalf of the purchasers of
126,457 units consisting of $126,457,000 aggregate principal amount of 13 1/2%
senior notes due 2001 and 126,457 warrants to purchase shares of common stock of
Rickel issued by Rickel in October 1994. The complaint alleges violations of
Federal securities laws and common law fraud against DLJSC, as the underwriter
of the units and as an owner of 7.3% of the common stock of Rickel, against Eos
Partners, L.P., and General Electric Capital Corporation, each as owners of
44.2% of the common stock of Rickel, and against members of the board of
directors of Rickel, including a DLJSC managing director. The complaint seeks to
hold DLJSC liable for alleged misstatements and omissions contained in the
prospectus and registration statement filed in connection with the offering of
the units, alleging that the defendants knew of financial losses and a decline
in value of Rickel in the months prior to the offering and did not disclose such
information. The complaint also alleges that Rickel failed to pay its
semi-annual interest payment due on the units on December 15, 1995, and that
Rickel filed a voluntary petition for reorganization pursuant to Chapter 11 of
the Bankruptcy Code on January 10, 1996. In April 1999, the complaint against
DLJSC and the other defendants was dismissed. The plaintiffs have appealed.
DLJSC intends to defend itself vigorously against all of the allegations
contained in the complaint.
In October 1995, DLJSC was named as a defendant in a purported class action
filed in a Texas State Court on behalf of the holders of $550 million principal
amount of subordinated redeemable discount debentures of National Gypsum
Corporation ("NGC") canceled in connection with a Chapter 11 plan of
reorganization for NGC consummated in July 1993. The named plaintiff in the
State Court action also filed an adversary proceeding in the U.S. Bankruptcy
Court for the Northern District of Texas seeking a declaratory judgment that the
confirmed NGC plan of reorganization does not bar the class action claims.
Subsequent to the consummation of NGC's plan of reorganization, NGC's shares
traded for values substantially in excess of, and in 1995 NGC was acquired for a
value substantially in excess of, the values upon which NGC's plan of
reorganization was based. The two actions arise out of DLJSC's activities as
financial advisor to NGC in the course of NGC's Chapter 11 reorganization
proceedings. The class action complaint alleges that the plan of reorganization
submitted by NGC was based upon projections by NGC and DLJSC which intentionally
understated forecasts, and provided misleading and incorrect information in
order to hide NGC's true value and that defendants breached their fiduciary
duties by, among other things, providing false, misleading or incomplete
information to deliberately understate the value of NGC. The class action
complaint seeks compensatory and punitive damages purportedly sustained by the
class. On October 10, 1997, DLJSC and others were named as defendants in a new
adversary proceeding in the Bankruptcy Court brought by the NGC Settlement
Trust, an entity created by the NGC plan of reorganization to deal with
asbestos-related claims. The Trust's allegations are substantially similar to
the claims in the State Court action. On January 21, 1998, the Bankruptcy Court
ruled that the State Court plaintiff's claims were not barred by the NGC plan of
reorganization insofar as they alleged nondisclosure of certain cost reductions
announced by NGC in October 1993. DLJSC appealed the Bankruptcy Court's January
1998 ruling to the U.S. District Court for the Northern District of Texas. On
May 7, 1998, DLJSC and others were named as defendants in a second action filed
in a Texas State Court brought by the NGC Settlement Trust. The allegations of
this second Texas State Court action are substantially similar to those of the
earlier class action pending in the State Court. In an amended order dated
January 5, 1999, the State Court granted the class action plaintiff's motion for
class certification. In an order dated March 1, 1999, the State Court granted
motions for summary judgment filed by DLJSC and the other defendants in both
State Court actions. The plaintiffs have appealed. DLJSC intends to defend
itself vigorously against all of the allegations contained in the complaints.
3-5
<PAGE>
In November 1998, three purported class actions (Gillet v. Goldman, Sachs & Co.
et al., Prager v. Goldman, Sachs & Co. et al. and Holzman v. Goldman, Sachs &
Co. et al.) were filed in the U.S. District Court for the Southern District of
New York against more than 25 underwriters of initial public offering
securities, including DLJSC. The complaints allege that defendants conspired to
fix the "fee" paid for underwriting initial public offering securities by
setting the underwriters' discount or "spread" at 7%, in violation of the
Federal antitrust laws. The complaints seek treble damages in an unspecified
amount and injunctive relief as well as attorneys' fees and costs. On March 15,
1999, the plaintiffs filed a Consolidated Amended Complaint captioned In re
Public Offering Fee Antitrust Litigation. A motion by all defendants to dismiss
the complaints on several grounds is pending. Separately, the U.S. Department of
Justice has issued a Civil Investigative Demand to several investment banking
firms, including DLJSC, seeking documents and information relating to "alleged"
price-fixing with respect to underwriting spreads in initial public offerings.
The government has not made any charges against DLJSC or the other investment
banking firms. DLJSC is cooperating with the Justice Department in providing the
requested information and believes that no violation of law by DLJSC has
occurred.
Although there can be no assurance, DLJ's management does not believe that the
ultimate outcome of the three matters described above to which DLJSC is a party
will have a material adverse effect on DLJ's consolidated financial condition.
Based upon the information currently available to it, DLJ's management cannot
predict whether or not these matters will have a material adverse effect on
DLJ's results of operations in any particular period.
In addition to the matters described above, Equitable Life and its subsidiaries
and DLJ are involved in various legal actions and proceedings in connection with
their businesses. Some of the actions and proceedings have been brought on
behalf of various alleged classes of claimants and certain of these claimants
seek damages of unspecified amounts. While the ultimate outcome of such matters
cannot be predicted with certainty, in the opinion of management no such matter
is likely to have a material adverse effect on the Company's consolidated
financial position or results of operations.
3-6
<PAGE>
Part I, Item 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Omitted pursuant to General Instruction I to Form 10-K.
4-1
<PAGE>
Part II, Item 5.
MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
All of Equitable Life's common equity is owned by AXA Client Solutions, LLC, a
wholly owned direct subsidiary of AXA Financial, Inc. Consequently, there is no
established public trading market for Equitable Life's common equity. In 1999,
Equitable Life paid a shareholder dividend of $150 million, the first since
demutualization. For information on Equitable Life's present and future ability
to pay dividends, see Note 18 of Notes to Consolidated Financial Statements
(Item 8 of this report).
5-1
<PAGE>
Part II, Item 6.
SELECTED CONSOLIDATED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
At or For the Years Ended December 31,
------------------------------------------------------------------------------
1999 1998 1997 1996 1995
--------------- --------------- --------------- -------------- --------------
(In Millions)
<S> <C> <C> <C> <C> <C>
Consolidated Statements of Earnings Data
Total revenues(1)(2)(3).................... $ 6,224.0 $ 5,562.7 $ 5,119.4 $ 4,872.2 $ 4,528.8
Total benefits and other deductions(4)..... 4,914.1 4,378.9 4,448.7 4,663.6 4,032.7
--------------- --------------- --------------- -------------- --------------
Earnings from continuing operations
before Federal income taxes and
minority interest........................ 1,309.9 1,183.8 670.7 208.6 496.1
Federal income tax expense(5).............. 332.0 353.1 91.5 9.7 120.5
Minority interest in net income of
consolidated subsidiaries................ 199.4 125.2 54.8 81.7 62.8
--------------- --------------- --------------- -------------- --------------
Earnings from continuing operations before
cumulative effect of accounting change... 778.5 705.5 524.4 117.2 312.8
Discontinued operations, net of
Federal income taxes(6)(7)............... 28.1 2.7 (87.2) (83.8) -
Cumulative effect of accounting changes
net of Federal income taxes.............. - - - (23.1) -
--------------- --------------- --------------- -------------- --------------
Net Earnings............................... $ 806.6 $ 708.2 $ 437.2 $ 10.3 $ 312.8
=============== =============== =============== ============== ==============
Consolidated Balance Sheets Data
Total assets(3)(8)......................... $ 99,795.5 $ 87,940.8 $ 81,357.7 $ 73,607.8 $ 69,209.0
Long-term debt............................. 850.9 1,002.4 1,294.5 1,592.8 1,899.3
Total liabilities(3)(8).................... 94,028.0 82,528.2 76,497.2 69,523.8 64,950.9
Shareholder's equity....................... 5,767.5 5,412.6 4,860.5 4,084.0 4,258.1
<FN>
(1) Total revenues included additions to asset valuation allowances and
writedowns of fixed maturities and, in 1997 and 1996, equity real estate,
for continuing operations aggregating $291.4 million, $187.8 million,
$482.7 million, $178.6 million and $197.6 million for 1999, 1998, 1997,
1996 and 1995, respectively. In 1997, additions to valuation allowances of
$227.6 million were recorded related to the accelerated equity real estate
sales program and $132.3 million of writedowns on real estate held for
production of income were recorded. As a result of the implementation of
SFAS No. 121, 1996 results include the release of valuation allowances of
$152.4 million on equity real estate and the recognition of impairment
losses of $144.0 million on real estate held for production of income.
(2) Total revenues for the year ended December 31, 1997 included a pre-tax
gain of $252.1 million from the sale of ERE.
(3) The results of the Closed Block are reported on one line in the
consolidated statements of earnings. Total assets and total liabilities,
respectively, include the assets and liabilities of the Closed Block. See
Note 7 of Notes to Consolidated Financial Statements.
(4) In 1999, revisions to estimated future gross profits used to determine the
amortization of DAC for universal life and investment-type products
resulted in a writedown of DAC of $131.7 million. See Note 2 of Notes to
Consolidated Financial Statements. In 1996, the Company wrote off $145.0
million of unamortized DAC on disability income ("DI") products and
strengthened reserves by $248.0 million for the DI and Pension Par lines
of business. As a result, earnings from continuing operations decreased by
$255.5 million ($393.0 million pre-tax).
6-1
<PAGE>
(5) In 1997, the Company released $97.5 million of tax reserves related to
years prior to 1989.
(6) Discontinued operations, net of Federal income taxes included additions to
asset valuation allowances and writedowns of fixed maturities and, in 1997
and 1996, equity real estate, which totaled $50.5 million, $33.2 million,
$212.5 million, $36.0 million and $38.2 million for 1999, 1998, 1997, 1996
and 1995, respectively. In 1997, additions to valuation allowances of
$79.8 million were recognized related to the accelerated equity real
estate sales program and $92.5 million of writedowns on real estate held
for production of income were recognized. The implementation of SFAS No.
121 in 1996 resulted in the release of existing valuation allowances of
$71.9 million on equity real estate and recognition of impairment losses
of $69.8 million on real estate held for production of income.
(7) As a result of the 1999, 1998, 1997 and 1996 reviews of the allowance for
future losses for discontinued operations, management released the
allowance in 1999 and 1998 and increased the allowance in 1997 and 1996.
As a result, net earnings increased by $28.1 million and $2.7 million for
1999 and 1998, respectively, and decreased by $87.2 million and $83.8
million for 1997 and 1996, respectively. Incurred (losses) gains of
($19.3) million, $50.3 million, ($154.4) million, ($23.7) million and
($25.1) million for the years ended December 31, 1999 1998, 1997, 1996 and
1995, respectively, were (charged) credited to discontinued operations
allowance for future losses. See Note 8 of Notes to Consolidated Financial
Statements.
(8) Assets and liabilities relating to discontinued operations are not
reflected on the consolidated balance sheets of the Company, except that
the net amount due to continuing operations for intersegment loans made to
discontinued operations in excess of continuing operations' obligations to
fund discontinued operations' accumulated deficit was reflected as
"Amounts due from discontinued operations" in 1997, 1996 and 1995.
</FN>
</TABLE>
6-2
<PAGE>
Part II, Item 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management's discussion and analysis ("MD&A") for the Company which follows
should be read in conjunction with the Consolidated Financial Statements and
related footnotes included elsewhere in this report.
COMBINED OPERATING RESULTS
The combined and segment-level discussions for the Insurance and Investment
Services segments in this MD&A are presented on an operating results basis.
Amounts reported in the GAAP financial statements have been adjusted to exclude
investment gains/losses, net of related DAC and other charges and the effect of
unusual or non-recurring events and transactions. A reconciliation of pre-tax
operating earnings, as adjusted, to GAAP reported earnings from continuing
operations precedes each discussion. A discussion of significant adjustments
begins on the next page.
The following table presents the results of operations outside of the Closed
Block combined on a line-by-line basis with the Closed Block's operating
results. The Insurance analysis, which begins on page 7-4, likewise combines the
Closed Block amounts on a line-by-line basis. The MD&A addresses the combined
results of operations unless noted otherwise. The Investment Services discussion
begins on pages 7-8.
7-1
<PAGE>
Combined Operating Results:
<TABLE>
<CAPTION>
1999 1998 1997
----------------- ----------------- -----------------
(In Millions)
<S> <C> <C> <C>
Operating Results:
Policy fee income and premiums............................ $ 2,431.0 $ 2,304.6 $ 2,238.5
Net investment income..................................... 2,809.7 2,797.8 2,857.7
Commissions, fees and other income........................ 2,166.8 1,504.9 1,229.8
----------------- ----------------- ----------------
Total revenues........................................ 7,407.5 6,607.3 6,326.0
----------------- ----------------- ----------------
Interest credited to policyholders' account balances...... 1,092.8 1,167.2 1,281.0
Policyholders' benefits................................... 2,048.7 2,092.5 2,030.5
Other operating costs and expenses........................ 2,726.5 2,233.2 2,140.7
----------------- ----------------- ----------------
Total benefits and other deductions................... 5,868.0 5,492.9 5,452.2
----------------- -----------------
----------------
Pre-tax operating earnings before minority interest....... 1,539.5 1,114.4 873.8
Minority interest......................................... (216.8) (141.5) (108.5)
----------------- ----------------- ----------------
Pre-tax operating earnings................................ 1,322.7 972.9 765.3
Pre-tax Adjustments:
Investment gains (losses), net of DAC
and other charges....................................... (97.9) 69.4 (289.6)
Gain on sale of ERE....................................... - - 249.8
Intangible asset writedown................................ - - (120.9)
Non-recurring DAC adjustments............................. (131.7) - -
Restructuring charges..................................... - - (42.4)
----------------- ----------------- ----------------
Total pre-tax adjustments............................. (229.6) 69.4 (203.1)
Minority interest......................................... 216.8 141.5 108.3
----------------- ----------------- ----------------
GAAP Reported:
Earnings from continuing operations before
Federal income taxes and minority interest.............. 1,309.9 1,183.8 670.7
Federal income taxes...................................... 332.0 353.1 91.5
Minority interest in net income of consolidated
subsidiaries............................................ 199.4 125.2 54.8
----------------- ----------------- ----------------
Earnings from continuing operations....................... 778.5 705.5 524.4
Discontinued operations, net of Federal income taxes...... 28.1 2.7 (87.2)
----------------- ----------------- ----------------
Net Earnings................................................ $ 806.6 $ 708.2 $ 437.2
================= ================= ================
</TABLE>
Pre-tax adjustments to GAAP reported earnings in calculating operating earnings
for 1999 reflect the exclusion of $97.9 million of investment losses, net of
related DAC and other charges. Investment losses of $294.9 million related to
writedowns and sales of General Account fixed maturities were partially offset
by gains of $87.8 million on other equity investments. Additional offsets
included a $95.8 million gain related to the sale of an approximately 18%
interest in DLJdirect's financial performance through the sale of a new class of
DLJ common stock, the $83.5 million of gains recognized upon reclassification of
publicly-traded common equities to a trading portfolio and $14.7 million of
gains resulting from the exercise of subsidiaries' options and conversion of DLJ
RSUs. In addition, the $131.7 million non-recurring DAC adjustments that
resulted from the revisions to estimated future gross profits related to the
investment asset reallocation in second quarter are excluded from 1999 operating
results (see Note 2 of Notes to Consolidated Financial Statements).
The 1998 pre-tax adjustments reflect the exclusion of $69.4 million of net
investment gains (excluding related DAC and other charges and credits totaling
$30.8 million). Investment gains on General Account Investment Assets totaled
$67.6 million, principally due to gains on sales of equity real estate. An
additional $30.3 million resulted from the exercise of subsidiaries' options and
conversion of DLJ RSUs.
7-2
<PAGE>
Pre-tax adjustments for 1997 included losses of $345.1 million (net of related
DAC amortization of $59.0 million) in connection with the real estate sales
program. Also excluded were the gain on Equitable Life's sale of ERE, the
Alliance writedown of Cursitor-related intangible assets and restructuring costs
in connection with cost reduction programs.
During fourth quarter 1997, the Company released approximately $97.5 million of
tax reserves related to continuing operations for years prior to 1989. The
effect is included in Federal income taxes for 1997. See "Discontinued
Operations" for a discussion of significant reserve strengthening actions which
affected discontinued operations' results in 1997.
Continuing Operations
1999 Compared to 1998 - Pre-tax operating earnings increased for both segments
in 1999. Federal income taxes decreased as the effect of higher operating
earnings was offset by the tax benefits related to subsidiary stock
transactions. Minority interest in net income of consolidated subsidiaries was
higher principally due to increased earnings at Alliance and to reductions in
the Company's economic interest in Alliance's operations to 57.2% at December
31, 1999 from 57.7% at December 31, 1998.
The $800.2 million increase in revenues for 1999 compared to 1998 was attributed
primarily to the $661.9 million increase in commissions, fees and other income
principally due to increased business activity within Investment Services and to
a $126.4 million increase in policy fee income and premiums. Net investment
income increased $11.9 million for 1999 as higher income on the General Account
Investment Assets offset the decline in interest income from discontinued
operations' borrowings.
For 1999, total benefits and other deductions increased $375.1 million from
1998, reflecting increases in other operating costs and expenses of $493.3
million partially offset by a $43.8 million decrease in policyholders' benefits
and a $74.4 million decrease in interest credited to policyholders. The increase
in other operating costs and expenses principally resulted from increased
operating costs of $397.4 million in Investment Services.
1998 Compared to 1997 - The higher pre-tax operating earnings for 1998 reflected
increased earnings by the Insurance and Investment Services segments. Federal
income taxes increased due to the higher pre-tax results of operations, the 1997
tax reserve release and the 3.5% Federal tax on partnership gross income from
the active conduct of a trade or business which was imposed on certain publicly
traded limited partnerships, including Alliance, effective January 1, 1998.
Minority interest in net income of consolidated subsidiaries was higher
principally due to increased earnings at Alliance and to reductions in the
Company's ownership interest in Alliance's operations to 57.7% at December 31,
1998 from 57.9% and at December 31, 1997.
The $281.3 million increase in revenues for 1998 compared to 1997 was attributed
primarily to the $275.1 million increase in commissions, fees and other income
principally due to increased business activity within Investment Services and to
a $66.1 million increase in policy fee income and premiums. Net investment
income decreased $59.9 million for 1998 principally due to a $45.1 million
decrease for Insurance.
For 1998, total benefits and other deductions increased $40.7 million from 1997,
reflecting increases in other operating costs and expenses of $92.5 million and
a $62.0 million increase in policyholders' benefits partially offset by a $113.8
million decrease in interest credited to policyholders. The increase in other
operating costs and expenses principally resulted from increased operating costs
of $179.4 million in Investment Services.
7-3
<PAGE>
Combined Operating Results By Segment
Insurance. The following table combines the Closed Block amounts with the
operating results of operations outside of the Closed Block on a line-by-line
basis:
Insurance - Combined Operating Results
(In Millions)
<TABLE>
<CAPTION>
1999
-------------------------------------------
Insurance Closed 1998 1997
Operations Block Combined Combined Combined
------------- ------------ ------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
Operating Results:
Universal life and investment-type
product policy fee income............ $ 1,253.9 $ - $ 1,253.9 $ 1,056.2 $ 950.5
Premiums............................... 558.2 618.9 1,177.1 1,248.4 1,287.9
Net investment income.................. 2,170.8 574.2 2,745.0 2,732.1 2,777.2
Commissions, fees and other income..... 213.7 (11.1) 202.6 137.9 118.1
Contribution from the Closed Block..... 86.4 (86.4) - - -
------------- ------------ ------------- ------------- -------------
Total revenues..................... 4,283.0 1,095.6 5,378.6 5,174.6 5,133.7
------------- ------------ ------------- ------------- -------------
Interest credited to policyholders'
account balances..................... 1,078.2 14.6 1,092.8 1,167.1 1,281.0
Policyholders' benefits................ 1,038.6 1,010.1 2,048.7 2,092.5 2,030.5
Deferred policy acquisition costs...... (382.6) 65.5 (317.1) (272.9) (127.2)
All other operating costs
and expenses......................... 1,653.1 5.4 1,658.5 1,499.3 1,442.4
------------- ------------ ------------- ------------- -------------
Total benefits and
other deductions................. 3,387.3 1,095.6 4,482.9 4,486.0 4,626.7
------------- ------------ ------------- ------------- -------------
Pre-tax operating earnings............. 895.7 - 895.7 688.6 507.0
Pre-tax Adjustments:
Investment gains (losses), net of
related DAC and other charges......... (208.4) - (208.4) 41.7 (292.5)
Non-recurring DAC adjustments.......... (131.7) - (131.7) - -
Restructuring charges.................. - - - - (41.7)
------------- ------------ ------------- ------------- -------------
Total pre-tax adjustments.......... (340.1) - (340.1) 41.7 (334.2)
------------- ------------ ------------- ------------- -------------
GAAP Reported:
Earnings (Loss) from Continuing
Operations before Federal
Income Taxes......................... $ 555.6 $ - $ 555.6 $ 730.3 $ 172.8
============= ============ ============= ============= =============
</TABLE>
1999 Compared to 1998 - Insurance pre-tax operating earnings for 1999 rose 30.1%
to $895.7 million compared to $688.6 million in the prior year, driven by
improvements in net interest margins, fee income and insurance spreads,
partially offset by higher expenses and DAC amortization. Revenues increased
$204.4 million to $5.38 billion in 1999. Higher revenues resulted from policy
fee income increases of $197.7 million on variable and interest-sensitive life
and annuity products due to higher sales and appreciation and $64.8 higher
commissions, fees and other income principally due to higher mutual fund and
investment product sales. These increases were partially offset by $71.3 million
lower premiums principally on traditional life and individual health insurance
policies. Net investment income increased slightly as higher income on other
equity investments, mortgages and cash and cash equivalents was offset by lower
income on equity real estate and fixed maturities.
7-4
<PAGE>
In 1999, total benefits and other deductions declined slightly from 1998. There
was a $159.2 million increase in other operating costs and expenses. This
increase was principally due to increased commissions and other variable
expenses due to increased sales volume, higher information technology costs and
expenses related to the strategic initiatives in connection with the
introduction and repositioning of brands, new products and services, field force
restructuring and financial planning/advisory training and higher compensation
and benefits. Lower interest expense on lower short-term borrowings partially
offset these increases. The $74.6 million decrease in interest credited on
policyholders' account balances was primarily due to lower crediting rates in
1999 as compared to 1998. DAC capitalization increased by $100.6 million to
$709.8 million primarily related to increased deferrable expenses related to
higher sales volume and DAC amortization was $56.4 million higher due
principally to reactivity to mortality, General Account investment spread and
fee income. The $43.8 million decrease in policyholders' benefits primarily
resulted from lower traditional life insurance mortality and lower reserve
increases due to lower renewal premiums.
1998 Compared to 1997 - Insurance operating earnings for 1998 reflected an
increase of $181.6 million from the prior year. Total revenues increased by
$40.9 million primarily due to a $105.7 million increase in policy fees and a
$19.8 million increase in commissions, fees and other income, offset by a $45.1
million decrease in investment income and a $39.5 million decline in premiums.
Policy fee income for 1998 increased to $1.06 billion in 1998 due to higher
insurance and annuity account balances. The decrease in investment income
primarily was due to $27.4 million lower income on General Account Investment
Assets and a $26.7 million decrease in interest income on loans to discontinued
operations in 1998. The decrease in premiums during 1998 principally was due to
lower traditional life and individual health premiums.
Total benefits and other deductions for 1998 declined $140.7 million from 1997.
A $113.9 million decrease in interest credited on policyholders' account
balances resulted from moderately lower crediting rates on slightly lower
General Account balances which more than offset the decline in net investment
income. The decline in policyholders' account balances was primarily due to the
single large company-owned life insurance ("COLI") policy surrendered in the
first quarter of 1998. DAC capitalization increased by $101.3 million primarily
related to increased sales volume and DAC amortization was $44.4 million lower
due principally to reactivity to mortality, general account investment spread
and fee income. There were $96.4 million higher commission expenses due to
increased sales, partially offset by a $39.5 million decrease in other general
operating costs principally related to lower interest expense. The $62.0 million
increase in policyholders' benefits primarily resulted from higher death claims
experience on a higher in force book of business.
7-5
<PAGE>
Premiums and Deposits - The following table lists sales for major insurance
product lines. Premiums are presented gross of reinsurance ceded.
Premiums and Deposits
(In Millions)
<TABLE>
<CAPTION>
1999 1998 1997
----------------- ---------------- -----------------
<S> <C> <C> <C>
Retail:
Annuities
First year.............................................. $ 3,484.2 $ 3,014.4 $ 2,627.9
Renewal................................................. 1,812.6 1,707.1 1,600.9
----------------- ---------------- ----------------
5,296.8 4,721.5 4,228.8
Life(1)
First year.............................................. 407.7 426.1 409.3
Renewal................................................. 2,211.2 2,160.0 2,121.3
----------------- ---------------- ----------------
2,618.9 2,586.1 2,530.6
Other(2)
First year.............................................. 10.5 11.3 36.4
Renewal................................................. 381.0 398.8 384.8
----------------- ---------------- ----------------
391.5 410.1 421.2
----------------- ---------------- ----------------
Total retail........................................ 8,307.2 7,717.7 7,180.6
Wholesale:
Annuities
First year.............................................. 2,229.6 1,686.8 648.4
Renewal................................................. 43.5 10.5 -
----------------- ---------------- ----------------
Total wholesale..................................... 2,273.1 1,697.3 648.4
----------------- ---------------- ----------------
Total Premiums and Deposits............................... $ 10,580.3 $ 9,415.0 $ 7,829.0
================= ================ ================
<FN>
(1) Includes variable, interest-sensitive and traditional life products.
(2) Includes reinsurance assumed and health insurance.
</FN>
</TABLE>
First year premiums and deposits for insurance and annuity products for 1999
increased from the prior year's level by $993.4 million primarily due to higher
sales of individual annuities by both the retail and wholesale distribution
channels, partially offset by an $18.4 million decline in life sales. In fourth
quarter 1999, first year life sales increased due to sales of a new series of
variable life products introduced in 1999. Renewal premiums and deposits
increased by $171.9 million during 1999 over 1998 as increases in the larger
block of annuity and variable life business were partially offset by decreases
in traditional life policies.
First year premiums and deposits for insurance and annuity products for 1998
increased from prior year's level by $1.42 billion primarily due to higher sales
of individual annuities. Renewal premiums and deposits increased by $169.4
million during 1998 over 1997 as increases in the larger block of individual
annuities and variable and interest-sensitive life policies were partially
offset by decreases in the traditional life product line. The 43.5% increase in
first year individual annuities premiums and deposits in 1998 over the prior
year included a $1.04 billion increase in sales of a line of retirement annuity
products sold through expanded wholesale distribution channels over the $648.4
million sold through that distribution channel in 1997. Compared with 1997,
sales of annuities by the retail sales associates rose 14.7% to $3.01 billion in
1998.
7-6
<PAGE>
Surrenders and Withdrawals - The following table presents surrender and
withdrawal amounts and rates for major insurance product lines.
Surrenders and Withdrawals
(In Millions)
<TABLE>
<CAPTION>
1999 1998 1997
-------------------------- ------------------------- -----------------------
Amount Rate (1) Amount Rate (1) Amount Rate (1)
--------------- ---------- ------------- ----------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
Annuities........................ $ 3,756.7 9.7% $ 2,773.1 8.7% $ 2,540.8 9.6%
Variable and interest-sensitive
life........................... 612.8 3.8% 1,080.2 7.5%(2) 498.9 3.8%
Traditional life................. 345.8 4.2% 353.1 4.4% 372.9 4.6%
--------------- ------------- ------------
Total............................ $ 4,715.3 $ 4,206.4 $ 3,412.6
=============== ============= ==============
<FN>
(1) Surrender rates are based on the average surrenderable future policy
benefits and/or policyholders' account balances for the related policies
and contracts in force during 1999, 1998 and 1997, respectively.
(2) Excluding the single large COLI surrender, the surrender rate would have
been 3.6%.
</FN>
</TABLE>
Policy and contract surrenders and withdrawals increased $508.9 million during
1999 compared to 1998. The 1998 total included the first quarter 1998 surrender
of $561.8 million related to a single large COLI contract. Since policy loans
were outstanding on the surrendered contract, there were no cash outflows.
Excluding the effect of this one surrender, the $1.07 billion increase in 1999
over 1998 resulted from higher surrenders and withdrawals due to both the
growing size and maturity of the book of annuities and variable and
interest-sensitive life business partially offset by the decrease in the
traditional life surrender rate. Policy and contract surrenders and withdrawals
increased $793.8 million during 1998 compared to 1997 principally due to the
COLI surrender mentioned above. Excluding the effect of this one surrender, the
remaining $232.0 million increase resulted from higher surrenders and
withdrawals in the larger book of individual annuities and variable and
interest-sensitive life policies.
The persistency of life insurance and annuity products is a critical element of
their profitability. As of December 31, 1999, all in force individual life
insurance policies (other than individual life term policies without cash values
which comprise 8.9% of in force policies) and approximately 96% of individual
annuity contracts (as measured by reserves) were surrenderable. However, a
surrender charge often applies in the early contract years and declines to zero
over time. Contracts without surrender provisions cannot be terminated prior to
maturity.
Margins on Insurance and Annuity Products - The segment's results significantly
depend on profit margins between investment results from General Account
Investment Assets and interest credited on insurance and annuity products.
During 1999, margins widened as lower average crediting rates more than offset
lower investment yields. In 1999, the crediting rate ranges were: 4.25% to 6.40%
for variable and interest-sensitive life insurance; 4.15% to 6.00% for variable
deferred annuities; 4.05% to 7.00% for SPDA contracts; and 5.00% for retirement
investment accounts.
Margins on insurance and annuity products are affected by interest rate
fluctuations. Rising interest rates result in a decline in the market value of
assets. However, the positive cash flows from renewal premiums and payments of
principal and interest on existing assets would make an early disposition of
investment assets to meet operating cash flow requirements unlikely. Rising
interest rates also would result in available cash flows being invested at
higher interest rates, which would help support a gradual increase in new
business and renewal interest rates on interest-sensitive products. A sharp,
sudden rise in interest rates without a concurrent increase in crediting rates
could result in higher surrenders, particularly for annuities. The effect of
such surrenders would be to reduce earnings modestly over the long term while
increasing earnings in the period of the surrenders to the extent surrender
charges were applicable. To protect against sharp increases in interest rates,
Equitable Life maintains an interest rate cap program designed to hedge
crediting rate increases on interest-sensitive annuity contracts. At December
31, 1999, the notional amounts of contracts outstanding totaled $7.58 billion,
as compared to $8.45 billion at December 31, 1998.
7-7
<PAGE>
If interest rates fall, crediting interest rates and dividends would be adjusted
subject to competitive pressures. Only a minority of Equitable Life's insurance
policies and annuity contracts have fixed interest rates locked in at issue. The
majority of contracts are adjustable, having guaranteed minimum rates ranging
from approximately 2.5% to 5.5%. Approximately 90% of the life policies have a
minimum rate of 4.5% or lower. Should interest rates fall below such policy
minimums, adjustments to life policies' mortality and expense charges could
cover the shortfall in most situations. Lower crediting interest rates and
dividends could result in higher surrenders. To protect against interest rate
decreases, Equitable Life maintains interest rate floors; at both December 31,
1999 and 1998, the outstanding notional amount of contracts totaled $2.0
billion.
Investment Services. The following table presents the operating results of the
Investment Services segment, which consists principally of the operations of
Alliance as well as the Company's equity in DLJ's earnings. Alliance's
operations were conducted by Alliance Holding prior to its reorganization in
October 1999. For information on the reorganization, see Note 1 of Notes to
Consolidated Financial Statements, "Liquidity and Capital Resources - Alliance,"
and the Alliance Holding Report on Form 10-K for the year ended December 31,
1999:
Investment Services - Operating Results
(In Millions)
<TABLE>
<CAPTION>
1999 1998 1997
----------------- ----------------- -----------------
<S> <C> <C> <C>
Operating Results:
Investment advisory and services fees(1).................. $ 1,331.8 $ 953.0 $ 699.0
Distribution revenues..................................... 441.8 301.9 216.9
Equity in DLJ's earnings.................................. 183.0 112.4 128.9
Other revenues(1)......................................... 96.1 71.1 155.2
----------------- ----------------- ----------------
Total revenues........................................ 2,052.7 1,438.4 1,200.0
----------------- ----------------- ----------------
Promotion and servicing................................... 620.7 460.3 312.2
Employee compensation and benefits........................ 508.6 340.9 264.3
All other operating expenses.............................. 279.6 211.4 256.7
----------------- ----------------- ----------------
Total expenses........................................ 1,408.9 1,012.6 833.2
----------------- ----------------- ----------------
Pre-tax operating earnings before minority interest....... 643.8 425.8 366.8
Minority interest......................................... (216.8) (141.5) (108.5)
----------------- ----------------- ----------------
Pre-tax operating earnings................................ 427.0 284.3 258.3
Pre-tax Adjustments:
Investment gains (losses), net of DAC .................... 110.5 27.7 2.9
Gain on sale of ERE....................................... - - 249.8
Intangible asset writedown................................ - - (120.9)
Restructuring charges..................................... - - (.7)
----------------- ----------------- ----------------
Total pre-tax adjustments............................. 110.5 27.7 131.1
Minority interest........................................... 216.8 141.5 108.5
----------------- ----------------- ----------------
GAAP Reported:
Earnings from Continuing Operations before
Federal Income Taxes and Minority Interest............... $ 754.3 $ 453.5 $ 497.9
================= ================= ================
<FN>
(1) Includes fees earned by Alliance and, in 1998 and 1997, EREIM totaling
$44.3 million, $61.8 million and $87.4 million in 1999, 1998 and 1997,
respectively, for services provided to the Insurance Group and
unconsolidated real estate joint ventures.
</FN>
</TABLE>
7-8
<PAGE>
1999 Compared to 1998 - Pre-tax operating earnings before minority interest for
the Investment Services segment increased 51.2% in 1999 to $643.8 million. Total
revenues were $2.05 billion, a 42.7% increase over 1998. Investment advisory and
service fees at Alliance were $1.33 billion, a $378.8 million increase over the
prior year. The 39.7% fee increase was primarily due to increased sales of
mutual funds, asset appreciation and higher performance fees related to mutual
funds and third party clients, partially offset by lower performance fees from
affiliates, notably the Equitable Life General Account. Distribution revenues at
Alliance were $139.9 million higher in 1999 than in 1998 principally due to
higher average equity mutual fund assets under management due to strong sales
and to market appreciation. DLJ's earnings contribution for 1999 increased 62.8%
to $183.0 million reflecting record revenue levels as compared to the prior
year's results which were affected by losses from emerging markets in the second
half of 1998.
Expenses for Investment Services increased $396.3 million to $1.41 billion in
1999 as compared to $1.01 billion in 1998. Promotion and servicing expenses at
Alliance were $160.4 million higher primarily due to increased distribution plan
payments to financial intermediaries resulting from higher average domestic,
offshore and cash management assets under management. Other promotion and
servicing expense increases were primarily due to $55.1 million higher
amortization of deferred sales commissions, higher travel and entertainment
costs and higher promotional expenditures related to mutual fund sales
initiatives. Alliance's employee compensation and benefits totaled $508.6
million, a 49.2% increase over the prior year. Incentive compensation's increase
was principally related to Alliance's higher operating earnings while increased
base compensation and commissions were due to increased headcount in the mutual
fund and technology areas and to salary increases. The $68.2 million increase in
all other operating expenses related principally to higher expenses incurred for
the Year 2000 project and other technology initiatives, higher interest on
deferred compensation and debt and increased occupancy costs.
1998 Compared to 1997 - Investment Service's pre-tax operating earnings before
minority interest for 1998 increased $59.0 million from the prior year. Revenues
totaled $1.44 billion for 1998, an increase of 19.9% from 1997. Alliance's 1998
investment advisory and service fees increased $254.0 million as higher overall
mutual fund sales and market appreciation led to higher average assets under
management. Distribution revenues grew $85.0 million due to higher average
equity mutual fund assets under management and higher average cash assets under
management. Equity in DLJ's earnings declined $16.5 million as losses in the
emerging markets more than offset increased profitability in DLJ's other
business groups. Other revenues declined $84.1 million in 1998 as compared to
the prior year due to the inclusion of EREIM's $91.6 million of revenues through
its sale date in June 1997.
Total expenses for Investment Services increased $179.4 million during 1998. The
$148.1 million increase in promotion and servicing expenses at Alliance resulted
from higher distribution plan payments resulting from higher average offshore
mutual fund, cash management and domestic equity mutual fund assets under
management. Employee compensation and benefits rose $76.6 million in 1998 as
Alliance's increased operating earnings resulted in higher incentive
compensation and as business expansion led to a 24% increase in headcount from
December 31, 1997. The decline in all other operating expenses principally
resulted from the $76.8 million decrease attributed to the sale of EREIM in June
1997.
7-9
<PAGE>
Fees and Assets Under Management. Breakdowns of fees and assets under management
by AXA Financial, including DLJ and Equitable Life and its consolidated
subsidiaries, follow:
Fees and Assets Under Management
(In Millions)
<TABLE>
<CAPTION>
At or for the Years Ended December 31,
-------------------------------------------------------
1999 1998 1997
----------------- ---------------- -----------------
<S> <C> <C> <C>
FEES:
Third parties............................................. $ 1,405.4 $ 997.7 $ 747.2
Equitable Life Separate Accounts.......................... 107.6 99.7 88.8
Equitable Life General Account and other.................. 43.7 46.6 74.6
----------------- ---------------- ----------------
Total Fees................................................ $ 1,556.7 $ 1,144.0 $ 910.6
================= ================ ================
ASSETS UNDER MANAGEMENT:
Assets by Manager
Alliance:
Third party............................................. $ 301,366 $ 228,321 $ 165,137
Equitable Life General Account, the Holding Company and
its other affiliates.................................. 25,475 24,179 24,942
Equitable Life Separate Accounts........................ 41,480 34,159 28,575
----------------- ---------------- ----------------
Total Alliance............................................ 368,321 286,659 218,654
----------------- ---------------- ----------------
DLJ:
Third party............................................. 39,189 24,386 17,208
DLJ invested assets..................................... 29,415 14,292 16,851
----------------- ---------------- ----------------
Total DLJ................................................. 68,604 38,678 34,059
----------------- ---------------- ----------------
Equitable Life:
Equitable Life (non-Alliance) General Account........... 12,774 14,452 14,469
Equitable Life Separate Accounts - EQ Advisors Trust.... 6,397 3,024 877
Equitable Life real estate related Separate Accounts.... 3,851 4,151 5,546
Equitable Life Separate Accounts - other................ 2,726 1,968 1,541
----------------- ---------------- ----------------
Total Equitable Life...................................... 25,748 23,595 22,433
----------------- ---------------- ----------------
Total by Account:
Third party(1)......................................... 340,555 252,707 182,345
General Account and other(2)........................... 67,664 52,923 56,262
Separate Accounts....................................... 54,454 43,302 36,539
----------------- ---------------- ----------------
Total Assets Under Management............................. $ 462,673 $ 348,932 $ 275,146
================= ================ ================
<FN>
(1) Includes $2.47 billion, $2.44 billion and $2.13 billion of assets managed on
behalf of AXA affiliates at December 31, 1999, 1998 and 1997, respectively.
Third party assets under management include 100% of the estimated fair value
of real estate owned by joint ventures in which third party clients own an
interest.
(2) Includes invested assets of Equitable Life and AXA Financial not managed by
the Investment Subsidiaries, principally invested assets of subsidiaries and
policy loans, totaling approximately $34.18 billion, $21.36 billion and
$23.16 billion at December 31, 1999, 1998 and 1997, respectively, and
mortgages and equity real estate totaling $7.11 billion and $7.38 billion at
December 31, 1999 and 1998, respectively.
</FN>
</TABLE>
Fees for assets under management increased 36.1% during 1999 from 1998 as a
result of the continued growth in assets under management for third parties.
Total assets under management increased $113.74 billion, primarily due to $73.05
billion higher third party assets under management at Alliance. The Alliance
growth in 1999 was principally due to market appreciation and net sales of
mutual funds and other products. DLJ's third party assets under management
increased in 1999 by $14.80 billion or 60.7% principally due to new business in
their Asset Management Group and Merchant Banking Funds.
7-10
<PAGE>
Fees for assets under management increased $73.42 billion or 25.6% during 1998
from 1997 also as a result of the continued growth in assets under management
for third parties. Total party assets under management increased $68.77 billion
at Alliance. The Alliance growth in 1998 was principally due to market
appreciation, increased sales of Equitable Separate Account based individual
annuity contracts and net sales of mutual funds and other products. DLJ's third
party assets under management increased in 1998 by $7.18 billion or 41.7%
principally due to new business in their Asset Management Group.
GENERAL ACCOUNT INVESTMENT PORTFOLIO
Management discusses the Closed Block assets and the assets outside of the
Closed Block on a combined basis as General Account Investment Assets. The
combined portfolio and its investment results supports the insurance and annuity
liabilities of Equitable Life's continuing operations. The following table
reconciles the consolidated balance sheet asset amounts to General Account
Investment Assets.
General Account Investment Asset Carrying Values
December 31, 1999
(In Millions)
<TABLE>
<CAPTION>
General
Balance Account
Sheet Closed Investment
Balance Sheet Captions: Total Block Other (1) Assets
- ----------------------- ----------------- ---------------- ------------------ -----------------
<S> <C> <C> <C> <C>
Fixed maturities:
Available for sale(2)..................... $ 18,599.7 $ 4,014.0 $ (75.8) $ 22,689.5
Held to maturity.......................... 133.2 - - 133.2
Mortgage loans on real estate............... 3,270.0 1,704.2 - 4,974.2
Equity real estate.......................... 1,160.2 89.3 (1.7) 1,251.2
Policy loans................................ 2,257.3 1,593.9 - 3,851.2
Other equity investments.................... 671.2 36.3 .1 707.4
Other invested assets(3).................... 2,113.4 .9 1,466.0 648.3
----------------- ---------------- ------------------ -----------------
Total investments......................... 28,205.0 7,438.6 1,388.6 34,255.0
Cash and cash equivalents................... 628.0 67.7 123.4 572.3
Equitable Life debt and other (4)........... - - 767.0 (767.0)
----------------- ---------------- ------------------ -----------------
Total....................................... $ 28,833.0 $ 7,506.3 $ 2,279.0 $ 34,060.3
================= ================ ================== =================
<FN>
(1) Assets listed in the "Other" category principally consist of assets held in
portfolios other than the General Account (primarily the investment in DLJ)
which are not managed as part of General Account Investment Assets and
certain reclassifications and intercompany adjustments. The "Other"
category is deducted in arriving at General Account Investment Assets.
(2) Fixed maturities available for sale are reported at estimated fair value.
At December 31, 1999, the amortized costs of the General Account's
available for sale and held to maturity fixed maturity portfolios were
$23.59 billion and $133.2 million, respectively, compared with estimated
market values of $22.69 billion and $133.2 million, respectively.
(3) Includes Investment in and loans to affiliates in the balance sheet total
column.
(4) Includes Equitable Life debt and other miscellaneous assets and
liabilities related to General Account Investment Assets and reclassified
from various balance sheet lines.
</FN>
</TABLE>
7-11
<PAGE>
Asset Valuation Allowances and Writedowns
The following table shows asset valuation allowances and additions to and
deductions from such allowances for the periods indicated.
General Account Investment Assets
Valuation Allowances
(In Millions)
<TABLE>
<CAPTION>
Equity Real
Mortgages Estate Total
----------------- ---------------- ---------------
<S> <C> <C> <C>
Balances at January 1, 1998............................... $ 74.3 $ 345.5 $ 419.8
Additions............................................... 22.5 77.3 99.8
Deductions(1)........................................... (51.4) (211.0) (262.4)
----------------- ---------------- ---------------
Balances at December 31, 1998............................. 45.4 211.8 257.2
Additions............................................... 7.5 75.6 83.1
Deductions(1)........................................... (20.8) (141.6) (162.4)
----------------- ---------------- ---------------
Balances at December 31, 1999............................. $ 32.1 $ 145.8 $ 177.9
================= ================ ===============
<FN>
(1) Primarily reflects releases of allowances due to asset dispositions.
</FN>
</TABLE>
Writedowns on fixed maturities, principally below investment grade securities,
aggregated $226.5 million, $101.6 million and $15.2 million in 1999, 1998 and
1997, respectively. The increases in writedowns on fixed maturities in 1999 and
1998 were primarily attributable to high yield and emerging market securities.
Writedowns on equity real estate totaled $165.2 million in 1997; there were no
real estate writedowns in 1999 and 1998. The 1997 equity real estate writedowns
principally resulted from changes in assumptions related to real estate holding
periods and property cash flows.
General Account Investment Assets
The following table shows the amortized cost, valuation allowances and net
amortized cost of major categories of General Account Investment Assets as of
December 31, 1999 and net amortized cost as of December 31, 1998.
General Account Investment Assets
(In Millions)
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998
------------------------------------------------ ----------------------
Net Net
Amortized Valuation Amortized Amortized
Cost Allowances Cost Cost
--------------- ------------- --------------- ----------------------
<S> <C> <C> <C> <C>
Fixed maturities(1)...................... $ 23,719.1 $ - $ 23,719.1 $ 22,804.8
Mortgages................................ 5,006.3 (32.1) 4,974.2 4,443.3
Equity real estate....................... 1,397.0 (145.8) 1,251.2 1,774.1
Other equity investments................. 826.2 - 826.2 769.4
Policy loans............................. 3,851.2 - 3,851.2 3,727.9
Cash and short-term investments(2)....... 1,220.6 - 1,220.6 1,597.8
------------------------------ --------------- ----------------------
Total.................................... $ 36,020.4 $ (177.9) $ 35,842.5 $ 35,117.3
============================== =============== ======================
<FN>
(1) Excludes unrealized losses of $896.4 million and unrealized gains of
$814.3 million on fixed maturities classified as available for sale at
December 31, 1999 and 1998, respectively.
(2) Comprises "Cash and cash equivalents" and short-term investments included
within the "Other invested assets" caption on the consolidated balance
sheet.
</FN>
</TABLE> 7-12
<PAGE>
Investment Results of General Account Investment Assets
The following table summarizes investment results by asset category for the
periods indicated.
Investment Results By Asset Category
(Dollars In Millions)
<TABLE>
<CAPTION>
1999 1998 1997
----------------------------- ----------------------------- -----------------------------
(1) (1) (1)
Yield Amount Yield Amount Yield Amount
------------ --------------- ----------- --------------- ------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
Fixed Maturities:
Income...................... 7.95% $ 1,834.9 8.08% $ 1,854.2 8.12% $ 1,842.6
Investment gains(losses).... (1.31)% (294.9) (0.09)% (21.6) 0.42% 94.0
------------ --------------- ----------- --------------- ------------ ---------------
Total....................... 6.64% $ 1,540.0 7.99% $ 1,832.6 8.54% $ 1,936.6
Ending assets(2)............ $ 24,171.2 $ 23,254.5 $ 23,944.9
Mortgages:
Income...................... 8.66% $ 403.3 9.31% $ 363.8 9.56% $ 387.1
Investment gains(losses).... (0.04)% (1.9) (0.26)% (10.0) (0.49)% (19.1)
------------ --------------- ----------- --------------- ------------ ---------------
Total....................... 8.62% $ 401.4 9.05% $ 353.8 9.07% $ 368.0
Ending assets(3)............ $ 5,019.6 $ 4,472.8 $ 4,003.1
Equity Real Estate:
Income(4)................... 7.38% $ 94.2 8.10% $ 145.2 2.90% $ 73.7
Investment gains(losses).... (1.28)% (16.0) 4.16% 71.3 (16.15)% (432.4)
------------ --------------- ----------- --------------- ------------ ---------------
Total....................... 6.10% $ 78.2 12.26% $ 216.5 (13.25)% $ (358.7)
Ending assets(4)............ $ 1,014.4 $ 1,398.2 $ 1,970.5
Other Equity Investments:
Income...................... 25.94% $ 196.3 10.98% $ 125.1 19.32% $ 198.6
Investment gains(losses).... 13.10% 87.8 2.57% 27.9 1.54% 14.8
------------ --------------- ----------- --------------- ------------ ---------------
Total....................... 39.04% $ 284.1 13.55% $ 153.0 20.86% $ 213.4
Ending assets(5)............ $ 827.8 $ 859.1 $ 1,269.5
Policy Loans:
Income...................... 6.75% $ 246.8 6.93% $ 249.8 7.25% $ 285.6
Ending assets............... $ 3,851.2 $ 3,727.9 $ 4,123.1
Cash and Short-term
Investments:
Income...................... 7.73% $ 74.7 11.03% $ 52.5 6.35% $ 23.0
Ending assets(6)............ $ 1,222.3 $ 1,625.3 $ 327.2
Equitable Life Debt and Other:
Interest expense and other. 7.85% $ (50.0) 7.05% $ (48.3) 7.27% $ (43.0)
Ending liabilities......... $ (767.0) $ (598.1) $ (647.0)
Total:
Income(7)................... 8.29% $ 2,800.2 8.26% $ 2,742.3 8.13% $ 2,767.6
Investment gains(losses).... (0.69)% (225.0) 0.21% 67.6 (1.03)% (342.7)
------------ --------------- ----------- --------------- ------------ ---------------
Total(8).................... 7.60% $ 2,575.2 8.47% $ 2,809.9 7.10% $ 2,424.9
Ending net assets........... $ 35,339.5 $ 34,739.7 $ 34,991.3
<FN>
(1) Yields have been calculated on a compound annual effective rate basis
using the quarterly average asset carrying values, excluding unrealized
gains (losses) in fixed maturities and adjusted for the current year's
income, gains (losses) and fees.
(2) Fixed maturities investment assets are shown net of securities purchased
but not yet paid for of $8.4 million, $4.7 million and $73.3 million, and
include accrued income of $413.5 million, $392.4 million and $393.7
million, amounts due from securities sales of $29.4 million, $29.6 million
and $17.1 million and other assets of $17.5 million, $31.4 million and
$30.1 million at December 31, 1999, 1998 and 1997, respectively.
(3) Mortgage investment assets include accrued income of $59.2 million, $56.6
million and $74.3 million and are adjusted for related liability balances
of $(13.8) million, $(27.1) million and $(24.2) million at December 31,
1999, 1998 and 1997, respectively.
7-13
<PAGE>
(4) Equity real estate carrying values are shown, and equity real estate
yields are calculated, net of third party debt and minority interest of
$251.4 million, $381.3 million and $568.0 million at December 31, 1999,
1998 and 1997, respectively. The carrying values include accrued income of
$27.8 million, $31.6 million and $35.7 million and are adjusted for
related liability balances of $(13.2) million, $(20.3) million and
$(101.4) million as of December 31, 1999, 1998 and 1997, respectively.
Equity real estate income is shown net of operating expenses,
depreciation, third party interest expense and minority interest. Third
party interest expense and minority interest totaled $19.1 million, $35.7
million and $52.9 million for 1999, 1998 and 1997, respectively.
(5) Other equity investment assets include accrued income and pending trade
settlements of $1.6 million, $0.0 million and $0.6 million at December 31,
1999, 1998 and 1997, respectively.
(6) Cash and short-term investments are shown net of financing arrangements of
$(300.6) million at December 31, 1997 as well as accrued income and cash
in transit totaling $1.8 million, $5.6 million and $2.3 million at
December 31, 1999, 1998 and 1997, respectively.
(7) Total investment income includes non-cash income from amortization,
payment-in-kind distributions and undistributed equity earnings of $59.6
million, $52.7 million and $52.8 million for 1999, 1998 and 1997,
respectively. Investment income is shown net of depreciation of $22.5
million, $31.5 million and $80.9 million for 1999, 1998 and 1997,
respectively.
(8) Total yields are shown before deducting investment fees paid to investment
advisors. These fees include asset management, acquisition, disposition,
accounting and legal fees. If investment fees had been deducted, total
yields would have been 7.33%, 8.19% and 6.79% for 1999, 1998 and 1997,
respectively.
</FN>
</TABLE>
Fixed Maturities. The fixed maturities portfolio consists largely of investment
grade corporate debt securities, including significant amounts of U.S.
government and agency obligations. Investment income on fixed maturities
decreased $19.3 million in 1999 from 1998 due to lower yields. The investment
losses in 1999 were due to $226.5 million in writedowns primarily on domestic
and emerging market high-yield securities and net losses of $68.4 million on
sales. At year end 1999, 76.9% of total fixed maturities were publicly traded;
87.4% of below investment grade securities were publicly traded. At December 31,
1999, the Company held collateralized mortgage obligations ("CMOs") with an
amortized cost of $2.45 billion, including $2.04 billion in publicly traded
CMOs, $2.66 billion of mortgage pass-through securities, and $1.47 billion of
public and private asset-backed securities. Fixed maturities by NAIC rating are
shown in the following table.
Fixed Maturities
By Credit Quality
(In Millions)
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998
-------------------------------------- -----------------------------------
Equivalent
NAIC Rating Agency Amortized Estimated Amortized Estimated
Rating Designation Cost Fair Value Cost Fair Value
- -------------- ---------------------- ------------------ ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
1-2 Aaa/Aa/A and Baa..... $ 20,561.4 $ 19,973.0 $ 19,588.1 $ 20,712.6
3-6 Ba and lower......... 3,157.7 2,849.7 3,217.7 2,907.5
------------------ ----------------- ----------------- -----------------
------------------ ----------------- ----------------- -----------------
Total Fixed Maturities.............. $ 23,719.1 $ 22,822.7 $ 22,805.8 $ 23,620.1
================== ================= ================= =================
</TABLE>
Management defines problem fixed maturities as securities (i) as to which
principal and/or interest payments are in default or are to be restructured
pursuant to commenced negotiations or (ii) issued by a company that went into
bankruptcy subsequent to the acquisition of such securities. The amortized cost
of problem fixed maturities was $154.0 million (0.6% of the total amortized cost
of this category) at December 31, 1999 compared to $94.9 million (0.4%) at
December 31, 1998 and $31.0 million (0.1%) at December 31, 1997. In 1999,
additions to problem fixed maturities were concentrated in domestic high-yield
and emerging market securities and were related to an increased level of
defaults in these securities during the year.
The Company does not accrue interest income on problem fixed maturities unless
management believes the full collection of principal and interest is probable.
Interest not accrued on problem fixed maturities totaled $42.5 million, $13.1
million and $10.5 million for 1999, 1998 and 1997, respectively. The amortized
cost of wholly or partially non-accruing problem fixed maturities was $116.1
million, $82.1 million and $28.9 million at December 31, 1999, 1998 and 1997,
respectively.
7-14
<PAGE>
Based on its monitoring of fixed maturities, management identifies a class of
potential problem fixed maturities. This class includes those fixed maturities
not currently classified as problems but for which management has serious doubts
as to the issuer's ability to comply with the present debt payment terms and
which may result in the security becoming a problem or being restructured. The
decision whether to classify a performing fixed maturity security as a potential
problem involves significant subjective judgments by management as to likely
future industry conditions and developments with respect to the issuer. The
amortized cost of potential problem fixed maturities was $42.7 million at
December 31, 1999, as compared to $74.9 million and $17.9 million at December
31, 1998 and 1997, respectively.
Mortgages. At December 31, 1999, the mortgage portfolio included commercial
($3.05 billion), agricultural ($1.96 billion) and residential loans ($0.7
million). In 1999, the $39.5 million investment income increase on mortgages
resulted from lower interest rates on a larger asset base.
At December 31, 1999, 1998 and 1997, respectively, management identified
impaired mortgage loans with carrying values of $148.8 million, $158.0 million
and $240.8 million. The provision for losses for these impaired loans was $27.1
million, $39.1 million and $69.2 million at those same respective dates. Income
earned on impaired loans in 1999, 1998 and 1997, respectively, was $15.3
million, $17.0 million and $24.6 million, including cash received of $14.8
million, $15.3 million and $23.0 million.
Management categorizes commercial mortgages 60 days or more past due and
agricultural mortgages 90 days or more past due, as well as all mortgages in the
process of foreclosure, as problem mortgages. Based on its monthly monitoring of
mortgages, management identifies a class of potential problem mortgages, which
consists of mortgage loans not currently classified as problems but for which
management has serious doubts as to the ability of the borrower to comply with
the present loan payment terms and which may result in the loan becoming a
problem or being restructured. The decision whether to classify a performing
mortgage loan as a potential problem involves significant subjective judgments
by management as to likely future industry conditions and developments with
respect to the borrower or the individual mortgaged property. Potential problem
commercial mortgages decreased during 1999 primarily due to foreclosures.
Problem, Potential Problem and Restructured Mortgages
Amortized Cost
(In Millions)
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------
1999 1998 1997
----------------- ---------------- -----------------
<S> <C> <C> <C>
COMMERCIAL MORTGAGES...................................... $ 3,048.2 $ 2,660.7 $ 2,305.8
Problem commercial mortgages(1)........................... .5 .4 19.3
Potential problem commercial mortgages.................... 120.6 170.7 180.9
Restructured commercial mortgages(2)...................... 130.7 116.4 194.9
AGRICULTURAL MORTGAGES.................................... $ 1,957.4 $ 1,826.9 $ 1,719.2
<FN>
(1) All problem commercial mortgages were delinquent mortgage loans at
December 31, 1999, 1998 and 1997; there were no mortgage loans in process
of foreclosure at December 31, 1999, 1998 and 1997.
(2) Excludes restructured commercial mortgages of $1.7 million that are shown
as problems at December 31, 1997, and excludes $0.2 million, $24.5 million
and $57.9 million of restructured commercial mortgages that are shown as
potential problems at December 31, 1999, 1998 and 1997, respectively.
</FN>
</TABLE>
7-15
<PAGE>
For 1999, scheduled amortization payments and prepayments received on commercial
mortgage loans aggregated $158.1 million. For 1999, $133.8 million of commercial
mortgage loan maturity payments were scheduled. Of that total, $50.8 million
(37.8%) were paid as due, $63.8 million (47.7%) were granted short-term
extensions of up to six months, $18.5 million (13.8%) were foreclosed upon and
$0.9 million (0.7%) were extended for a weighted average of 6.8 years at a
weighted average interest rate of 9.0%.
During 2000, approximately $394.2 million of commercial mortgage principal
payments are scheduled, including $377.3 million of payments at maturity on
commercial mortgage balloon loans. An additional $649.6 million of commercial
mortgage principal payments, including $616.6 million of payments at maturity on
commercial mortgage balloon loans, are scheduled for 2001 and 2002. Depending on
market conditions and lending practices in future years, some maturing loans may
have to be refinanced, restructured or foreclosed upon. During 1999, 1998 and
1997, the amortized cost of new foreclosed commercial mortgages totaled $45.5
million, $40.1 million and $153.5 million, respectively.
Equity Real Estate. Equity real estate consists primarily of office, retail,
industrial, mixed use and other properties. Office properties constituted the
largest component (57.7% of amortized cost) of this portfolio at December 31,
1999.
Proceeds from the sale of equity real estate totaled $576.6 million, $1.05
billion and $386.0 million in 1999, 1998 and 1997, respectively, with recognized
gains of $50.0 million, $124.1 million and $50.5 million, respectively. The
carrying value of the equity real estate at date of sale reflected total
writedowns and additions to valuation allowances on the properties taken in
periods prior to their sale of $126.8 million, $189.8 million and $61.1 million,
respectively. In connection with the accelerated real estate sales program, at
December 31, 1997, Equitable Life reclassified $1.5 billion depreciated cost of
continuing and discontinued operations' equity real estate from "held for
production of income" to "held for sale". Since held for sale properties are
carried at the lower of depreciated cost or estimated fair value, less
disposition costs, the reclassification generated additions to valuation
allowances of $243.0 million for continuing operations in fourth quarter 1997.
Also, during fourth quarter 1997, the review of the equity real estate portfolio
identified properties held for production of income which were impaired,
resulting in writedowns of $161.1 million for continuing operations. The total
pre-tax impact of these 1997 actions was $345.1 million (net of related DAC
amortization of $59.0 million) for continuing operations. In addition, these
real estate actions contributed to a $129.6 million strengthening of
discontinued operations' allowance for future losses in fourth quarter 1997. At
December 31, 1999, the depreciated cost of continuing operations' held for sale
real estate portfolio totaled $616.9 million, excluding related valuation
allowances of $145.8 million.
Management establishes valuation allowances on individual properties identified
as held for sale. The objective is to fully reserve for anticipated shortfalls
between depreciated cost and sales proceeds. On a quarterly basis, the valuation
allowances on real estate held for sale are adjusted to reflect changes in
market values in relation to depreciated cost. As the equity real estate sales
program continues into 2000, management expects further reductions to this
portfolio will depend on market conditions, the level of mortgage foreclosures
and expenditures required to fund necessary or desired improvements to
properties. It is management's policy not to invest substantial new funds in
equity real estate except to safeguard values in existing investments or to
honor outstanding commitments.
At December 31, 1999, the overall vacancy rate for the General Account's real
estate office properties was 6.8%, with a vacancy rate of 5.5% for properties
acquired as investment real estate and 17.3% for properties acquired through
foreclosure. The national commercial office vacancy rate was 9.6% (as of
September 30, 1999) as measured by CB Commercial. Lease rollover rates for
office properties for 2000, 2001 and 2002 range from 8.1% to 11.5%.
At December 31, 1999, the equity real estate portfolio included $805.5 million
depreciated cost of properties acquired as investment real estate (or 57.7% of
depreciated cost of equity real estate held) and $591.5 million (42.3%)
amortized cost of properties acquired through foreclosure, including
in-substance foreclosure. Cumulative writedowns recognized on foreclosed
properties were $144.2 million through December 31, 1999. As of December 31,
1999, the carrying value of the equity real estate properties was 62.6% of their
original cost. The depreciated cost of foreclosed equity real estate totaled
$754.4 million (38.0%) and $955.1 million (29.5%) at year end 1998 and 1997,
respectively.
7-16
<PAGE>
Other Equity Investments. Other equity investments consist of LBO, mezzanine,
venture capital and other limited partnership interests ($481.0 million or 58.1%
of the amortized cost of this portfolio at December 31, 1999), alternative
limited partnerships ($193.3 million or 23.4%) and common stock and other equity
securities ($153.5 million or 18.5%). Alternative funds utilize trading
strategies that may be leveraged. These funds attempt to protect against market
risk through a variety of methods including short sales, financial futures,
options and other derivative instruments. Other equity investments can produce
significant volatility in investment income since they predominantly are
accounted for in accordance with the equity method which treats increases and
decreases in the estimated fair value of the underlying assets (or allocable
portion thereof, in the case of partnerships), whether realized or unrealized,
as investment income or loss to the General Account. The excess of Separate
Accounts assets over Separate Accounts liabilities at December 31, 1999, 1998
and 1997 were $118.7 million, $89.4 million and $231.0 million, respectively.
This excess represented an investment by the General Account principally in
equity securities. As demonstrated by the market volatility and negative returns
experienced in the latter half of 1998, returns on equity investments are very
volatile and investment results for any period are not representative of any
other period.
Commencing in third quarter 1998, in response to a perceived increase in the
price volatility of publicly-traded equity markets, the Company began to reduce
its holdings of common stock investments. With the persistence of high price
volatility, management believed that publicly-traded common stocks should be
actively managed to control risk and generate investment returns. Effective
January 1, 1999, all investments in publicly-traded common equity securities in
the General Account portfolio were designated as "trading securities" for the
purpose of classification under SFAS No. 115 and all changes in the investments'
fair value are being reported through earnings.
DISCONTINUED OPERATIONS
In 1991, management adopted a plan to discontinue the business of certain
pension operations consisting of Wind-Up Annuities and GIC lines of business and
recorded an allowance for future losses based on management's best judgment at
that time. During 1997, the allowance for future losses was strengthened by
$134.1 million. The principal factor in the 1997 reserve strengthening action
was the change in projected cash flows for equity real estate due to
management's plan to accelerate the sale of equity real estate.
Management's quarterly process for evaluating the allowance for future losses
applies the current period's results of discontinued operations against the
allowance, re-estimates future losses, and adjusts the allowance, if
appropriate. Additionally, as part of the annual planning process that takes
place in the fourth quarter of each year, investment and benefit cash flow
projections are prepared. These projections were utilized in the fourth quarter
evaluation of the adequacy of the allowance for future losses. 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 for future losses, 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.
Results of Operations. Post-tax earnings of $28.1 million were recognized in
1999 compared to $2.7 million in 1998 and post-tax losses of $(87.2) million in
1997. The allowance for future losses totaled $242.2 million at December 31,
1999.
For 1999, Discontinued Operations Investment Assets produced investment results
totaling $82.3 million, a $79.5 million decrease as compared to 1998 results.
Investment income declined $28.8 million to $95.8 million in 1999, as lower
income on other equity investments, equity real estate and mortgages more than
offset higher income on fixed maturities. In 1999, there were investment losses
of $13.5 million as compared to $37.2 million of investment gains in the prior
year. In 1999, $18.3 million in losses on equity real estate were recorded
compared to gains of $41.2 million in 1998. The 1999 real estate losses resulted
as the gains on sales were more than offset by additions to valuation allowances
on held for sale properties. Losses on fixed maturities were $13.5 million
higher in 1999 principally due to the writedown oftwo issues. These losses more
than offset the $19.1 million of gains on other equity investments as compared
to a $3.3 million loss in 1998. Investment income yields were 8.95% in 1999.
7-17
<PAGE>
In 1998, investment results from Discontinued Operations Investment Assets
totaled $161.8 million, as compared to $(23.0) million in 1997 principally due
to investment gains of $37.2 million as compared to the $173.7 million of
investment losses in 1997. The 1997 investment losses resulted from the fourth
quarter 1997 increases in valuation allowances of $80.2 million and writedowns
relating to equity real estate of $92.5 million. This increase in investment
gains (losses) was partially offset by a $26.1 million decrease in investment
income in 1998, principally reflecting a decrease of $38.4 million for other
equity investments. There was a $20.4 million loss on mortgage loans in 1997
compared to the 1998 gain of $0.3 million and gains of $41.2 million compared to
$151.1 million of losses on equity real estate. Investment income yields
decreased to 11.69% from 12.37% in 1997, principally due to lower returns on
other equity investments.
Interest credited and policyholders' benefits on Wind-Up Annuities and GIC
contracts were $96.2 million in 1999, as compared to $99.1 million and $108.0
million in 1998 and 1997, respectively. The weighted average crediting rates
were 9.5%, 9.6% and 9.3% in 1999, 1998 and 1997, respectively. No interest
expense on intersegment borrowings by discontinued operations from continuing
operations was reported in 1999, compared with $26.6 million and $53.3 million
in 1998 and 1997, respectively, as such borrowings were repaid in 1998.
At year end 1999, $993.3 million of policyholders' liabilities were outstanding,
substantially all of which relate to Wind-Up Annuities. During 1998, the $660.0
million of intersegment borrowings outstanding at December 31, 1997 were repaid.
See Notes 2 and 8 of Notes to Consolidated Financial Statements.
Cash Flow Projections. At December 31, 1999, estimates of annual net cash flows
for discontinued operations in 2000 and 2001 were $218.7 million and $46.2
million, respectively. At December 31, 1998, the projections for 1999 and 2000
were $255.5 million and $16.7 million, respectively. The increase in estimated
2000 net cash flows was principally due to a higher level of assumed cash flows
resulting from equity real estate sales. Other material assumptions used in
determining these projections included the following: future estimated annual
investment income yields on the existing portfolio of 6.9% to 9.1% in the 1999
projection (compared to 7.8% to 9.7% used in the 1998 projection); use of
proceeds from equity real estate sales and other maturing investment assets to
pay benefits on Wind-Up Annuities and maturing liabilities, with reinvestment of
excess funds; and mortality experience for Wind-Up Annuities based on the 1983
Group Annuity Mortality table with projections for mortality improvements.
Investment Assets by Selected Asset Category. For information on the asset
categories and valuation allowances and writedowns, see Note 8 of Notes to
Consolidated Financial Statements.
Fixed Maturities - During 1999, discontinued operations began reinvesting excess
cash flow in investment grade fixed maturities. At December 31, 1999, the
amortized cost of the fixed maturities portfolio totaled $90.2 million.
Mortgages - As of December 31, 1999, discontinued operations commercial
mortgages totaled $427.9 million (91.9% of amortized cost of the category) and
agricultural loans totaled $28.6 million (8.1%). Potential problem commercial
mortgages totaled $6.1 million, $20.1 million and $15.4 million in 1999, 1998
and 1997, respectively, while restructured commercial mortgages aggregated $3.4
million, $106.2 million and $198.9 million, respectively.
For 1999, scheduled amortization payments and prepayments on commercial mortgage
loans aggregated $58.4 million. For 1999, $29.2 million of mortgage loan
maturity payments were scheduled, of which $26.4 million (90.4%) were paid as
due. During 2000, approximately $96.7 million of commercial mortgage principal
payments are scheduled, including $91.5 million of payments at maturity on
commercial mortgage balloon loans. An additional $139.2 million of principal
payments, including $130.2 million of payments at maturity on commercial
mortgage balloon loans, are scheduled from 2001 through 2002. Depending on the
condition of the real estate market and lending practices in future years, many
maturing loans may have to be refinanced, restructured or foreclosed upon.
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Equity Real Estate - During 1999, 1998 and 1997, discontinued operations
received proceeds from the sale of equity real estate of $52.3 million, $287.9
million and $183.5 million, respectively, and recognized gains of $5.3 million,
$41.3 million and $35.4 million, respectively. These gains reflected total
writedowns and additions to valuation allowances on properties sold of $14.6
million, $71.7 million and $22.9 million, respectively, at the date of sale. The
depreciated cost of discontinued operations' equity real estate properties held
for sale at December 31, 1999 was $152.8 million for which allowances of $54.8
million have been established.
Other Equity Investments - At December 31, 1999, discontinued operations' other
equity investments of $55.6 million consisted primarily of limited partnership
interests managed by third parties that invest in a selection of equity and
fixed income securities ($49.9 million or 89.7% of amortized cost of this
portfolio at that date). Discontinued operations' other equity investments also
included common stocks acquired in connection with limited partnership
investments, as well as other equity investments ($5.7 million or 10.3%).
Returns on other equity investments have been very volatile and investment
results for any period are not representative of any other period. Total
investment results on other equity investments were $23.4 million, $25.5 million
and $65.2 million in 1999, 1998 and 1997, respectively. These investment results
reflected yields of 31.65%, 17.79% and 28.77% for 1999, 1998 and 1997,
respectively.
YEAR 2000
Following the implementation of Equitable Life's, DLJ's and Alliance's Year 2000
compliance initiatives, no Year 2000 problems were encountered that could have a
material adverse effect on the business, financial condition or results of
operations of the Company. Through December 31, 1999, Year 2000 compliance
project costs were $32.1 million for Equitable Life, $90 million for DLJ and $43
million for Alliance.
LIQUIDITY AND CAPITAL RESOURCES
Equitable Life
The principal sources of Equitable Life cash flows are premiums, deposits and
charges on policies and contracts, investment income, repayments of principal
and proceeds from maturities and sales of General Account Investment Assets and
dividends and distributions from subsidiaries.
The Equitable Life liquidity requirements principally relate to the liabilities
associated with its various life insurance, annuity and group pension products
in its continuing operations; the liabilities of discontinued operations;
shareholder dividends; and operating expenses, including debt service. Equitable
Life liabilities include the payment of benefits under life insurance, annuity
and group pension products, as well as cash payments in connection with policy
surrenders, withdrawals and loans. Management may from time to time explore
selective acquisition opportunities in core insurance and investment management
businesses.
For the first time since the 1992 demutualization, Equitable Life paid a $150.0
million shareholder dividend in 1999. In 2000, Equitable Life expects to review
with the New York Insurance Department the potential for paying additional
shareholder dividends. Under New York Insurance Law, Equitable Life is permitted
to pay shareholder dividends only if it files notice of its intention to declare
such a dividend and the amount thereof with the Superintendent and the
Superintendent, who by statute has broad discretion in such matters, does not
disapprove the distribution. See Note 18 to Notes to Consolidated Financial
Statements.
Effective December 31, 1999, the Holding Company assumed primary liability from
Equitable Life for all current and future obligations of its Excess Retirement
Plan, Supplemental Executive Retirement Plan and certain other non-qualified
benefit plans that provide participants with medical, life insurance, and
deferred compensation benefits. Equitable Life remains secondarily liable. In
1999, Equitable Life paid $52.8 million in benefits on those plans.
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Equitable Life's liquidity requirements are regularly monitored to match cash
inflows with cash requirements. Daily cash needs are forecasted and projected
sources and uses of funds, as well as the asset, liability, investment and cash
flow assumptions underlying these projections, are reviewed periodically.
Adjustments are periodically made to the Equitable Life's investment policies
with respect to, among other things, the maturity and risk characteristics of
General Account Investment Assets to reflect changes in the business' cash needs
and also to reflect the changing competitive and economic environment.
Sources of Liquidity. The primary source of short-term liquidity to support
continuing and discontinued insurance operations is a pool of highly liquid,
high quality short-term instruments structured to provide liquidity in excess of
the expected cash requirements. At December 31, 1999, this asset pool included
an aggregate of $1.39 billion in highly liquid short-term investments, as
compared to $1.59 billion and $816.4 million at December 31, 1998 and 1997,
respectively. In addition, a substantial portfolio of public bonds including
U.S. Treasury and agency securities and other investment grade fixed maturities
is available to meet Equitable Life's liquidity needs.
Other liquidity sources include dividends and distributions particularly from
Alliance as well as DLJ. In 1999, Equitable Life received cash distributions
from Alliance of $203.5 million as compared to $157.0 million in 1998 and $125.7
million in 1997. Also in 1999, DLJ paid $10.0 million in dividends to Equitable
Life.
Management believes there is sufficient liquidity in the form of short-term
assets and its bond portfolio together with cash flows from operations and
scheduled maturities of fixed maturities to satisfy Equitable Life's liquidity
needs. In addition, in July 1999, the Board of Directors authorized an increase
in the limit on Equitable Life's commercial paper program to $1.00 billion from
$500.0 million. This program is available for general corporate purposes to
support Equitable Life's liquidity needs. The Board also authorized increasing
Equitable Life's existing $350.0 million bank credit facility to $700.0 million.
Equitable Life uses this program from time to time in its liquidity management.
At December 31, 1999, $166.9 million was outstanding under the commercial paper
program; there were no amounts outstanding under the back-up credit facility.
For more information on guarantees, commitments and contingencies, see Notes 11,
13, 14, 15 and 16 of Notes to Consolidated Financial Statements.
Factors Affecting Liquidity. Equitable Life's liquidity needs are affected by
fluctuations in the level of surrenders and withdrawals previously discussed in
"Combined Operating Results by Segment - Insurance - Surrenders and
Withdrawals". Management believes the Insurance Group has adequate internal
sources of funds for its presently anticipated needs.
Statutory Capital. Life insurers are subject to certain risk-based capital
("RBC") guidelines which provide a method to measure the adjusted capital
(statutory capital and surplus plus the Asset Valuation Reserve ("AVR") and
other adjustments) that a life insurance company should have for regulatory
purposes, taking into account the risk characteristics of the company's
investments and products. A life insurance company's RBC ratio depends upon many
factors, including its earnings, the mix of assets in its investment portfolio,
the nature of the products it sells and its rate of sales growth, as well as
changes in the RBC formulas required by regulators.
The RBC guidelines are intended to be a regulatory tool only. Equitable Life's
RBC ratio has improved in each of the last six years, and management believes
that Equitable Life's statutory capital, as measured by its year end 1999 RBC,
is adequate to support its current business needs and financial ratings.
On March 16, 1998, members of the NAIC approved its Codification of Statutory
Accounting Principles ("Codification") project. Codification provides regulators
and insurers with uniform statutory guidance, addressing areas where statutory
accounting previously was silent and changing certain existing statutory
positions. Equitable Life will be subject to Codification to the extent and in
the form adopted in New York State, which would require action by both the New
York legislature and the New York Insurance Department. In February 2000, the
Superintendent announced the New York Insurance Department's intention to
proceed with implementation of the Codification rules, subject to any provisions
in New York statutes which conflict with particular points in the Codification
rules. It is not possible to predict in what form, or when Codification will be
adopted in New York, and accordingly it is not possible to predict the effect of
Codification on Equitable Life.
At December 31, 1999, $29.1 million (or 0.7%) of the Insurance Group's aggregate
statutory capital and surplus (representing 0.5% of statutory capital and
surplus and AVR) resulted from surplus relief reinsurance. The level of surplus
relief reinsurance was reduced by approximately $81.9 million in 1999.
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Alliance
Alliance's principal sources of liquidity have been cash flows from operations
and the issuance, both publicly and privately, of debt and Units. Alliance
requires financial resources to fund commissions paid on certain back-end load
mutual fund sales, to fund distributions to Unitholders, to fund capital
expenditures and for general working capital purposes.
On October 29, 1999, Alliance Holding transferred its business to a newly-formed
private limited partnership following the reorganization approved by Unitholders
at their special meeting on September 22, 1999 and the expiration of the related
exchange offer. Separately, Equitable Life and its subsidiaries exchanged
substantially all of their public Alliance Holding's Units for limited
partnership interests and a general partnership interest in the new private
limited partnership. The new partnership is conducting Alliance's business
without change in management or employee responsibilities. Alliance Holding's
principal asset is its interest in the new partnership. Alliance Holding
functions as a holding company through which its Unitholders own an indirect
interest in Alliance, the new partnership. As a result of the reorganization and
exchange, Equitable Life and its subsidiaries' share of the private
partnership's income will not be subject to the 3.5% Federal tax on publicly
traded partnerships. In 1999 and 1998, the impact of this Federal tax on
Equitable Life and its subsidiaries was approximately $19 million and $18
million, respectively.
In July 1999, Alliance entered into a new $200.0 million three-year revolving
credit facility, increasing its borrowing capacity under all credit facilities
to $725.0 million. Like the existing credit facility, the new credit facility
will be used to fund commission payments to financial intermediaries for certain
mutual fund sales and for general working capital purposes. At December 31,
1999, Alliance had $384.7 million outstanding under its $425.0 million
commercial paper program. Proceeds are being used to fund commission payments
and for capital expenditures. There were no amounts outstanding under Alliance's
revolving credit facilities. In December 1999, Alliance established a $100.0
million ECN program to supplement its commercial paper program; there were no
ECNs outstanding at year end 1999.
DLJ
DLJ reported total assets as of December 31, 1999 of $109.0 billion. DLJ's
assets are highly liquid, with the majority consisting of securities inventories
and collateralized receivables. Such receivables include resale agreements and
securities borrowed, both of which are secured by U.S. government and agency
securities, and marketable corporate debt and equity securities. In addition,
DLJ has significant receivables that turn over frequently from customers,
brokers and dealers. To meet client needs, as a securities dealer, DLJ may carry
significant levels of trading inventories. As such, because of changes relating
to customer needs, economic and market conditions and proprietary trading
strategies, DLJ's assets vary significantly from period to period. A significant
portion of DLJ's borrowings is matched to the interest rate and expected holding
period of the corresponding assets.
In May 1999, DLJ issued a new class of its common stock to track the financial
performance of DLJdirect, its online brokerage business, selling shares
representing an approximately 18% interest in DLJdirect's financial performance
to the public. The offering raised more than $343 million of equity and resulted
in AXA Financial recognizing a non-cash pre-tax gain of $212.3 million ($116.5
million by the Holding Company and $95.8 million by Equitable Life).
Certain of DLJ's businesses are capital intensive. In addition to normal
operating requirements, capital is required to cover financing and regulatory
charges on securities inventories, merchant banking investments and investments
in fixed assets. DLJ's overall capital needs are continually reviewed to ensure
that its capital base can appropriately support the anticipated needs of its
businesses and meet the regulatory capital requirements of its subsidiaries.
Over the past few years, DLJ has been active in raising additional long-term
financing. At December 31, 1999, $650 million 5 7/8% senior notes and an
aggregate of $1.29 billion medium-term notes with various interest rates and
maturities have been issued.
In January 1998, DLJ issued an initial 3.5 million shares of fixed/adjustable
rate cumulative preferred stock, Series B, with a liquidation preference of $50
per share ($175.0 million aggregate liquidation value). Also, in 1998, DLJ
established a $2.00 billion commercial paper program. At December 31, 1999,
$1.16 billion of notes were outstanding under this program.
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The majority of DLJ's assets are financed through daily operations by repurchase
agreements, financial instruments sold and not yet purchased, securities loaned,
bank loans and through payables to brokers and dealers. Short-term funding
generally is obtained at rates related to Federal funds, LIBOR and money market
rates. Other borrowing costs are negotiated depending upon prevailing market
conditions. DLJ monitors overall liquidity by tracking the extent to which
unencumbered marketable assets exceed short-term unsecured borrowings. DLJ has a
$2.5 billion revolving credit facility, of which $1.9 billion may be unsecured.
There were no borrowings outstanding under this agreement at December 31, 1999.
Consolidated Cash Flows
Net cash provided by operating activities was $195.8 million for 1999 as
compared to $503.0 million in 1998 and $893.0 million in 1997.
Net cash used by investing activities amounted to $1.46 billion for 1999 as
compared to net cash provided by investing activities of $1.10 billion for 1998
and net cash used by investing activities of $603.1 million in 1997. In 1999,
investment purchases exceeded sales, maturities and repayments by $1.15 billion.
Discontinued operations repaid $660.0 million of loans from continuing
operations during 1998. Also in 1998, sales, maturities and repayments exceeded
purchases by $682.6 million. Decreases in loans to discontinued operations
totaled $420.1 million in 1997. Also in 1997, purchases exceeded sales,
maturities and repayments of investment assets by $116.6 million.
Net cash provided by financing activities was $645.2 million in 1999 as compared
to net cash used by financing activities of $661.2 million in 1998 and $528.2
million for 1997. During 1999, deposits to policyholders' account balances
exceeded withdrawals by $600.4 million. Short-term financings showed a net
increase of $378.2 million as compared to a net decrease of $243.5 million in
1998 while repayments of long-term debt were $41.3 million in 1999 compared to
$24.5 million in 1998. Net cash withdrawals from General Account policyholders'
account balances were $216.5 million and $605.1 million in 1998 and 1997,
respectively. In addition, in 1997, net repayments of long-term debt were $196.4
million.
The operating, investing and financing activities described above resulted in a
decrease in cash and cash equivalents of $617.5 million in 1999 as compared to
an increase of $945.0 million in 1998 and a $238.3 million decrease in 1997.
FORWARD-LOOKING STATEMENTS
The Company's management has made in this report, and from time to time may make
in its public filings and press releases as well as in oral presentations and
discussions, forward-looking statements concerning the Company's operations,
economic performance and financial condition. Forward-looking statements
include, among other things, discussions concerning the potential exposure of
the Company and DLJ to market risks, as well as statements expressing
management's expectations, beliefs, estimates, forecasts, projections and
assumptions, as indicated by words such as "believes," "estimates," "intends,"
"anticipates," "expects," "projects," "should," "probably," "risk," "target,"
"goals," "objectives," or similar expressions. The Company claims the protection
afforded by the safe harbor for forward-looking statements contained in the
Private Securities Litigation Reform Act of 1995, and assumes no duty to update
any forward-looking statement. Forward-looking statements are based on
management's expectations and beliefs concerning future developments and their
potential effects and are subject to risks and uncertainties. Actual results
could differ materially from those anticipated by forward-looking statements due
to a number of important factors including those discussed elsewhere in this
report and in the Company's other public filings, press releases, oral
presentations and discussions. The following discussion highlights some of the
more important factors that could cause such differences.
Market Risk. The businesses of the Company and its Investment Subsidiaries are
subject to market risks arising from their insurance asset/liability management,
investment management and trading activities. Primary market risk exposures
exist in the Insurance and Investment Services segments and result from interest
rate fluctuations, equity price movements, changes in credit quality and, at
DLJ, foreign currency exchange exposure. The nature of each of these risks is
discussed under the caption "Quantitative and Qualitative Disclosure About
Market Risk" and in Note 13 of Notes to Consolidated Financial Statements.
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Strategic Initiatives. Management continues to implement certain strategic
initiatives identified after a comprehensive review of AXA Financial's
organization and strategy conducted in late 1997. These initiatives are designed
to make AXA Financial a premier provider of financial planning, insurance and
investment management products and services. The "branding" initiative, which
consists in part of a reorganization of certain wholly owned subsidiaries and
changes to the names of such subsidiaries and the Holding Company, is designed
to separate product manufacturing under the "Equitable" name from product
distribution and the provision of financial planning services under the "AXA"
name.
Certain changes in the organization took place in 1999. The Holding Company
formed AXA Client Solutions, LLC ("AXA Client Solutions") in mid-September and
contributed its investment in Equitable Life to AXA Client Solutions. Also in
September, EQ Financial Consultants, Inc., a broker-dealer subsidiary of
Equitable Life, was merged into a new company, AXA Advisors. Equitable Life then
transferred AXA Advisors to AXA Distribution, a wholly owned direct subsidiary
of AXA Client Solutions. In 2000, management expects to further consolidate the
distribution and customer service activities under AXA Distribution. Also in
2000, management expects EquiSource of New York, Inc. and its subsidiaries to
merge into AXA Network, and for Equitable Life to transfer AXA Network to AXA
Distribution. Subsidiaries of AXA Distribution will sell insurance products of
Equitable Life, as well as of unaffiliated insurance companies, and other
investment products and services through retail sales associates. Equitable Life
will pay commissions and other fees to AXA Network and will in turn be
reimbursed for expenses such as occupancy and information technology incurred on
behalf of its affiliate. Equitable Life will continue to distribute its products
through its wholesale distribution channels. Implementation of these strategic
initiatives could affect certain historic trends in the Insurance segment.
Implementation is subject to various uncertainties, including those relating to
timing and expense, and the results of the implementation of these initiatives
could be other than what management intends. The Company may, from time to time,
explore selective acquisition opportunities in its core insurance and investment
management businesses.
Insurance. The Insurance Group's future sales of life insurance and annuity
products are dependent on numerous factors including successful implementation
of the strategic initiatives referred to above, the intensity of competition
from other insurance companies, banks and other financial institutions, the
strength and professionalism of distribution channels, the continued development
of additional channels, the financial and claims paying ratings of Equitable
Life, its reputation and visibility in the market place, its ability to develop,
distribute and administer competitive products and services in a timely,
cost-effective manner and its investment management performance. In addition,
the nature and extent of competition and the markets for products sold by the
Insurance Group may be materially affected by changes in laws and regulations,
including changes relating to savings, retirement funding and taxation as well
as changes resulting from the Gramm-Leach-Bliley Act. The Administration's
fiscal year 2001 revenue proposals contain provisions which, if enacted, could
have a material adverse impact on sales of certain insurance products and would
adversely affect the taxation of insurance companies. See "Business - Segment
Information - Insurance" and "Business - Regulation - Federal Initiatives". The
profitability of the Insurance Group depends on a number of factors, including
levels of gross operating expenses and the amount which can be deferred as DAC,
secular trends and the Company's mortality, morbidity, persistency and claims
experience, and profit margins between investment results from General Account
Investment Assets and interest credited on individual insurance and annuity
products. 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. See "Investment Results of
General Account Investment Assets". The ability of the Company to continue its
accelerated real estate sales program without incurring net losses will depend
on real estate markets for the remaining properties held for sale and the
negotiation of transactions which confirm management's expectations on property
values. For further information, including information concerning the writedown
in the fourth quarter of 1997 in connection with management's decision to
accelerate the sale of certain real estate assets, see "Investment Results of
General Account Investment Assets - Equity Real Estate". The Company's DI and
group pension businesses produced pre-tax losses in 1995 and 1996. In late 1996,
loss recognition studies for the DI and group pension businesses were completed.
As a result, $145.0 million of unamortized DAC on DI policies at December 31,
1996 was written off; reserves for directly written DI policies and DI
reinsurance assumed were strengthened by $175.0 million; and a Pension Par
premium deficiency reserve was established which resulted in a $73.0 million
pre-tax charge to results of continuing operations at December 31, 1996. Based
on the experience that emerged on these two books of business since 1996,
management continues to believe the DI and Pension Par reserves have been
calculated on a reasonable basis and are adequate. However, there can be no
assurance that they will be sufficient to provide for all future liabilities.
Equitable Life no longer underwrites new DI policies. Equitable Life is
reviewing the arrangements pursuant to which a third party manages claims
incurred under DI policies previously issued by Equitable Life and is exploring
its ability to dispose of the DI business through reinsurance.
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Investment Services. Alliance's revenues are largely dependent on the total
value and composition of assets under its management and are, therefore,
affected by market appreciation and depreciation, additions and withdrawals of
assets, purchases and redemptions of mutual funds and shifts of assets between
accounts or products with different fee structures. DLJ's business activities
include securities underwriting, sales and trading, merchant banking, financial
advisory services, investment research, venture capital, correspondent brokerage
services, online interactive brokerage services and asset management. These
activities are subject to various risks, including volatile trading markets and
fluctuations in the volume of market activity. Consequently, DLJ's net income
and revenues have been, and may continue to be, subject to wide fluctuations,
reflecting the impact of many factors beyond DLJ's control, including securities
market conditions, the level and volatility of interest rates, competitive
conditions and the size and timing of transactions. Over the last several years,
DLJ's results have been at historically high levels. See "Combined Operating
Results by Segment - Investment Services" for a discussion of the negative
impact on equity in DLJ's earnings in the second half of 1998 from losses in
emerging markets. Potential losses could result from DLJ's merchant banking
activities as a result of their capital intensive nature.
Discontinued Operations. The determination of the allowance for future losses
for the discontinued Wind-Up Annuities and GIC lines of business continues to
involve numerous estimates and subjective judgments including those regarding
expected performance of investment assets, ultimate mortality experience and
other factors which affect investment and benefit projections. There can be no
assurance the losses provided for will not differ from the losses ultimately
realized. To the extent actual results or future projections of discontinued
operations differ from management's current best estimates underlying the
allowance, the difference would be reflected as earnings or loss from
discontinued operations within the consolidated statements of earnings. In
particular, to the extent income, sales proceeds and holding periods for equity
real estate differ from management's previous assumptions, periodic adjustments
to the allowance are likely to result. See "Discontinued Operations" for further
information including a discussion of significant reserve strengthening in 1997
and the assumptions used in making cash flow projections.
Technology and Information Systems. The Company's and DLJ'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 agents, employees and
clients, and recording information for accounting and management information
purposes. Any significant difficulty associated with the operation of such
systems, or any material delay or inability to develop needed system
capabilities, could have a material adverse affect on the results of operations
of the Company and its Investment Subsidiaries and, ultimately, their ability to
achieve their 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
Company, like other life and health insurers, is involved in such litigation.
While no such lawsuit has resulted in an award or settlement of any material
amount against the Company to date, its results of operations and financial
condition could be affected by defense and settlement costs and any unexpected
material adverse outcomes in such litigations as well as in other material
litigations pending against the Company and its subsidiaries and DLJ. In
addition, examinations by Federal and state regulators could result in adverse
publicity, sanctions and fines. For further information, see "Business -
Regulation" and "Legal Proceedings".
Future Accounting Pronouncements. In the future, new accounting pronouncements
may have material effects on the Company's consolidated statements of earnings
and shareholders' equity. See Note 2 of Notes to Consolidated Financial
Statements for the pronouncements issued but not implemented. In addition,
members of the NAIC approved its Codification project providing regulators and
insurers with uniform statutory guidance, addressing areas where statutory
accounting previously was silent and changing certain existing statutory
positions. Equitable Life will be subject to Codification to the extent and in
the form adopted in New York State, which would require action by both the New
York legislature and the New York Insurance Department. In February 2000, the
Superintendent indicated the New York Insurance Department intends to proceed
with implementation of Codification rules, subject to any provisions in New York
statutes which conflict with particular points in the Codification rules. It is
not possible to predict in what form, or when Codification will be adopted in
New York, and accordingly it is not possible to predict the effect of
Codification on Equitable Life.
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Regulation. The businesses conducted by the Company and its subsidiaries and
affiliates 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 banking,
investment companies and investment advisors. Changes in the regulatory
environment could have a material impact on operations and results. The
activities of the Insurance Group and the Holding Company's other subsidiaries
conducting insurance related businesses are subject to the supervision of the
insurance regulators of each of the 50 states.
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Part II, Item 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
The Company's businesses are subject to market risks arising from its insurance
asset/liability management, asset management and trading activities. Such risks
are evaluated and managed by each business on a decentralized basis. Primary
market risk exposures result from interest rate fluctuations, equity price
movements and changes in credit quality.
Other-Than-Trading Activities
Alliance. Alliance's investments are divided into two portfolios: available for
sale investments and other investments. Alliance's available for sale portfolio
primarily includes equity and fixed income mutual funds and money market
investments. The carrying value of money market investments approximates fair
value. Although these assets are purchased for long-term investment, the
portfolio strategy considers them available for sale in response to changes in
market interest rates, equity prices and other relevant factors. Other
investments include Alliance's hedge fund investments. At December 31, 1999,
Alliance's interest rate, equity price and credit quality risks were not
material to the Company. For further information, see Alliance Holding's and
Alliance's Annual Reports on Form 10-K for the year ended December 31, 1999.
Insurance Group. Insurance Group results significantly depend on profit margins
between investment results from General Account Investment Assets and interest
credited on individual insurance and annuity products. Management believes its
fixed rate liabilities should be supported by a portfolio principally composed
of fixed rate investments that can generate predictable, steady rates of return.
Although these assets are purchased for long-term investment, the portfolio
management strategy considers them available for sale in response to changes in
market interest rates, changes in prepayment risk, changes in relative values of
asset sectors and individual securities and loans, changes in credit quality
outlook and other relevant factors. The objective of portfolio management is to
maximize returns, taking into account interest rate and credit risks. Insurance
asset/liability management includes strategies to minimize exposure to loss as
interest rates and economic and market conditions change. As a result, the fixed
maturity portfolio has modest exposure to call and prepayment risk and the vast
majority of mortgage holdings are fixed rate mortgages that carry yield
maintenance and prepayment provisions.
Insurance Group assets with interest rate risk include fixed maturities and
mortgage loans which make up 81.6% of the carrying value of General Account
Investment Assets. As part of its asset/liability management, quantitative
analyses are used to model the impact various changes in interest rates have on
assets with interest rate risk. The table that follows shows the impact an
immediate 100 basis point increase in interest rates at December 31, 1999 would
have on the fair value of fixed maturities and mortgages:
7A-1
<PAGE>
<TABLE>
<CAPTION>
Interest Rate Risk Exposure
(In Millions)
December 31, 1999 December 31, 1998
---------------------------------------- ------------------------------------
Fair +100 Basis Fair +100 Basis
Value Point Change Value Point Change
-------------------- ------------------- ---------------- -------------------
<S> <C> <C> <C> <C>
Continuing Operations:
Fixed maturities:
Fixed rate................... $ 21,498.2 $ 20,341.1 $ 22,332.6 $ 21,167.6
Floating rate................ 1,241.2 1,206.1 1,208.5 1,208.5
Mortgage loans................. 4,889.6 4,700.7 4,665.3 4,482.8
Discontinued Operations:
Fixed maturities:
Fixed rate................... $ 85.4 $ 81.4 $ 20.2 $ 19.5
Floating rate................ .1 .1 4.7 4.7
Mortgage loans................. 467.0 454.2 599.9 580.8
</TABLE>
A 100 basis point fluctuation in interest rates is a hypothetical rate scenario
used to demonstrate potential risk; it does not represent management's view of
future market changes. While these fair value measurements provide a
representation of interest rate sensitivity of fixed maturities and mortgage
loans, they are based on various portfolio exposures at a particular point in
time and may not be representative of future market results. These exposures
will change as a result of ongoing portfolio activities in response to
management's assessment of changing market conditions and available investment
opportunities.
The Insurance Group investment portfolio also has direct holdings of public and
private equity securities. In addition, the General Account is exposed to equity
price risk from the excess of Separate Accounts assets over Separate Accounts
liabilities. The following table shows the potential exposure from equity
security investments, measured in terms of fair value, to an immediate 10% drop
in equity prices from those prevailing at December 31, 1999 and 1998:
<TABLE>
<CAPTION>
Equity Price Risk Exposure
(In Millions)
December 31, 1999 December 31, 1998
----------------------------------------- ------------------------------------
Fair -10% Equity Fair -10% Equity
Value Price Change Value Price Change
------------------ --------------------- -------------- ---------------------
<S> <C> <C> <C> <C>
Insurance Group:
Continuing operations........... $ 33.2 $ 29.9 $ 164.4 $ 148.0
Discontinued operations......... 5.7 5.1 19.3 17.4
Excess of Separate Accounts
assets over Separate Accounts
liabilities................. 121.4 109.3 91.0 81.9
</TABLE>
A 10% decrease in equity prices is a hypothetical scenario used to calibrate
potential risk and does not represent management's view of future market
changes. The fair value measurements shown are based on the equity securities
portfolio exposures at a particular point in time and these exposures will
change as a result of ongoing portfolio activities in response to management's
assessment of changing market conditions and available investment opportunities.
7A-2
<PAGE>
At years end 1999 and 1998, the aggregate carrying value of policyholders'
liabilities were $36,134.0 million and $35,618.7 million, respectively,
including $12,796.4 million and $12,954.0 million, respectively, of the General
Account's investment contracts. The aggregate fair value of those investment
contracts at years end 1999 and 1998 were $12,850.5 million and $13,455.0
million, respectively. The impact of a relative 1% decrease in interest rates
would be an increase in the fair value of those investment contracts to
$12,977.7 million and $13,644.0 million, respectively. Those investment
contracts represent only a portion of total policyholders' liabilities. As such,
meaningful assessment of net market risk exposure cannot be made by comparing
the results of the invested assets sensitivity analyses presented herein to the
potential exposure from the policyholders' liabilities quantified in this
paragraph.
Asset/liability management is integrated into many aspects of the Insurance
Group's operations, including investment decisions, product development and
determination of crediting rates. As part of its risk management process,
numerous economic scenarios are modeled, including cash flow testing required
for insurance regulatory purposes, to determine if existing assets would be
sufficient to meet projected liability cash flows. Key variables include
policyholder behavior, such as persistency, under differing crediting rate
strategies. On the basis of these more comprehensive analyses, management
believes there is no material solvency risk to Equitable Life with respect to
interest rate movements up or down of 100 basis points from year end 1999 levels
or with respect to a 10% drop in equity prices from year end 1999 levels.
As more fully described in Note 13 of Notes to Consolidated Financial
Statements, various derivative financial instruments are used to manage exposure
to fluctuations in interest rates, including interest rate swaps to convert
floating rate assets to fixed rate assets, interest rate caps and floors to
hedge crediting rates on interest-sensitive products, and interest rate futures
to hedge a decline in interest rates between receipt of funds and purchase of
appropriate assets. To minimize credit risk exposure associated with its
derivative transactions, each counterparty's credit is appraised and approved
and risk control limits and monitoring procedures are applied. Credit limits are
established and monitored on the basis of potential exposures which take into
consideration current market values and estimates of potential future movements
in market values given potential fluctuations in market interest rates.
While notional amount is the most commonly used measure of volume in the
derivatives market, it is not used by the Insurance Group as a measure of risk
as the notional amount greatly exceeds the possible credit and market loss that
could arise from such transactions. Mark to market exposure is a point-in-time
measure of the value of a derivative contract in the open market. A positive
value indicates existence of credit risk for the Insurance Group as the
counterparty would owe money to the Insurance Group if the contract were closed.
Alternatively, a negative value indicates the Insurance Group would owe money to
the counterparty if the contract were closed. If there is more than one
derivatives transaction outstanding with a counterparty, a master netting
arrangement exists with the counterparty. In that case, the market risk
represents the net of the positive and negative exposures with the single
counterparty. In management's view, the net potential exposure is the better
measure of credit risk.
At years end 1999 and 1998, the net market value exposure of the Insurance
Group's derivatives was $53.7 million and $71.7 million, respectively. The table
that follows shows the interest rate sensitivity of those derivatives, measured
in terms of fair value. These exposures will change as a result of ongoing
portfolio and risk management activities.
7A-3
<PAGE>
<TABLE>
<CAPTION>
Insurance Group - Derivative Financial Instruments
(In Millions, Except for Weighted Average Term)
Weighted
Average
Notional Term -100 Basis Fair +100 Basis
Amount (Years) Point Change Value Point Change
--------------- -------------- ----------------- ---------------- -------------------
<S> <C> <C> <C> <C> <C>
December 31, 1999
Swaps:
Floating to fixed
rate................ $ 92.3 0.35 $ 41.4 $ 9.8 $ (19.5)
Fixed to floating
rate................ 705.0 5.58 (2.1) (1.8) (1.9)
Options:
Caps.................. 7,775.0 3.25 16.0 45.5 103.1
Floors................ 2,000.0 2.28 .8 .2 -
--------------- ----------------- ---------------- -------------------
Total................... $ 10,572.3 3.20 $ 56.1 $ 53.7 $ 81.7
=============== ============== ================= ================ ===================
December 31, 1998
Swaps:
Floating to fixed
rate................ $ 623.2 5.67 $ 88.0 $ 57.5 $ 28.8
Fixed to floating
rate................ 257.7 0.93 (9.8) (8.0) (6.2)
Options:
Caps................... 8,650.0 3.89 3.4 14.2 41.4
Floors................. 2,000.0 3.28 22.8 8.0 3.0
--------------- ----------------- ---------------- -------------------
Total.................... $ 11,530.9 3.81 $ 104.4 $ 71.7 $ 67.0
=============== ============== ================= ================ ===================
</TABLE>
At year end 1999 and 1998, the aggregate fair values of long-term debt issued by
Equitable Life were $936.8 million and $1.18 billion, respectively. The table
below shows the potential fair value exposure to an immediate 100 basis point
decrease in interest rates from those prevailing at years end 1999 and 1998.
<TABLE>
<CAPTION>
Interest Rate Risk Exposure
(In Millions)
December 31, 1999 December 31, 1998
--------------------------------------- -------------------------------------
Fair -100 Basis Fair -100 Basis
Value Point Change Value Point Change
------------------ ------------------- ------------------ ------------------
<S> <C> <C> <C> <C>
Continuing Operations:
Fixed rate...................... $ 583.5 $ 621.4 $ 779.7 $ 828.4
Floating rate................... 251.4 251.3 251.3 251.3
Discontinued Operations:
Fixed rate...................... $ - $ - $ 45.1 $ 45.1
Floating rate................... 101.9 101.9 102.1 102.1
</TABLE>
Trading Activities
Exposure to risk and the ways in which DLJ manages the various types of risks on
a day-to-day basis is critical to its survival and financial success. DLJ
monitors its market and counterparty risk on a daily basis through a number of
control procedures designed to identify and evaluate the various risks to which
DLJ is exposed. DLJ has an independent risk oversight department to oversee risk
policies and risk monitoring and management capabilities throughout DLJ and to
coordinate the risk management practices of the various business groups. This
department is assisted by a credit risk management department responsible for
analyzing the credit worthiness of counterparties.
7A-4
<PAGE>
DLJ has established various committees to help senior management manage risk
associated with investment banking and merchant banking transactions. These
committees review potential clients and engagements, use experience with similar
clients and situations, analyze credit for certain commitments and analyze DLJ's
potential role as a principal investor. To control the risks associated with its
banking activities, various committees review the details of all transactions
before accepting an engagement.
From time to time, DLJ invests in certain merchant banking transactions or other
long-term corporate development investments. DLJ's Merchant Banking Group has
established several investment entities, each of which has formed its own
investment committee. These committees decide on all investments and
dispositions with respect to potential and existing portfolio companies. In
addition, each quarter, senior officers of DLJ meet to review merchant banking
and corporate development investments. After discussing the financial and
operational aspects of the companies involved, the senior officers recommend
carrying values for each investment to the Finance Committee. The Finance
Committee then reviews such recommendations and determines fair value.
DLJ often acts as principal in customer-related transactions in financial
instruments which expose DLJ to market risks. DLJ also engages in proprietary
trading and arbitrage activities and makes dealer markets in equity securities,
investment-grade corporate debt, high-yield securities, U.S. government and
agency securities, mortgages and mortgage-backed securities and selected
derivatives. As such, to facilitate customer order flow, DLJ maintains certain
amounts of inventories. DLJ covers its exposure to market risk by limiting its
net long or short position by selling or buying similar instruments and by
utilizing various derivative financial instruments in the exchange-traded and
OTC markets.
Position limits in trading and inventory accounts are established and monitored
continuously. Current and proposed underwriting, corporate development, merchant
banking and other commitments are subject to due diligence reviews by senior
management and by professionals in the appropriate business and support units
involved.
Trading activities generally result in inventory positions. Each day, position
and exposure reports are prepared by operations staff in each of the business
groups engaged in trading activities for traders, trading managers, department
managers, divisional management and group management. These reports are
independently reviewed by DLJ's corporate accounting group. The corporate
accounting group prepares a consolidated summarized position report listing both
long and short exposure and approved limits. The position report is distributed
to various levels of management throughout DLJ, including the Chief Executive
Officer, and it enables senior management to control inventory levels and
monitor the results of the trading groups. DLJ also reviews and monitors
inventory aging, pricing, concentration and securities' ratings.
In addition to position and exposure reports, DLJ produces a daily revenue
report that summarizes the trading, interest, commissions, fees, underwriting
and other revenue items for each of the business groups. Daily revenue is
reviewed for various risk factors and is independently verified by the corporate
accounting group. The daily revenue report is distributed to various levels of
management throughout DLJ, including the Chief Executive Officer, and together
with the position and exposure report enables senior management to monitor and
control overall activity of the trading groups.
7A-5
<PAGE>
Market Risk
Market risk represents the potential loss as a result of absolute and relative
price movements in financial instruments due to changes in interest rates,
foreign exchange rates, equity prices, and other factors. DLJ's exposure to
market risk is directly related to its role as financial intermediary in
customer-related transactions and to its proprietary trading activities. As of
December 31, 1999, DLJ's primary market risk exposures include interest rate
risk, credit spread risk and equity price risk. Interest rate risk results from
maintaining inventory positions and trading in interest rate sensitive financial
instruments and arises from various sources including changes in the absolute
and relative level of interest rates, interest rate volatility, mortgage
prepayment rates and the shape of the yield curves in various markets. To cover
its exposure to interest rate risk, DLJ enters into transactions in U.S.
government securities, options, swaps and futures and forward contracts designed
to reduce DLJ's risk profile. DLJ's investment grade and high-yield corporate
bonds, mortgages, equities, derivatives and convertible debt activities also
expose it to the risk of loss related to changes in credit spreads. Credit
spread risk arises from potential changes in an issuer's credit rating that
affect the value of financial instruments. Equity price risk results from
maintaining inventory positions and making markets in equity securities and
arises from changes in the level or volatility of equity prices, equity index
exposure and equity index spreads which affect the value of equity securities.
To cover its exposure to equity price risk, DLJ enters into transactions in
options and futures designed to reduce DLJ's risk profile.
Value At Risk
In 1997, DLJ developed a company-wide Value-at-Risk ("VAR") model. This model
used a variance-covariance approach with a confidence interval of 95% and a
one-day holding period, based on historical data for one year. DLJ has made
changes to the model since that date. In response to the volatile and illiquid
markets of the third quarter of 1998, which departed markedly from the normal
statistical distributions that underlie the variance-covariance approach, DLJ
has estimated VAR by using an historical simulation model based on two years of
weekly historical data, a 95% confidence interval, and a one-day holding period.
The effect of this change in approach was not material.
The VAR number is the statistically expected maximum loss on the fair value of
DLJ's market sensitive instruments for 19 of 20 trading days. In other words, on
1 out of every 20 trading days, the loss is expected to be statistically greater
than the VAR number. However, the model does not indicate how much greater.
VAR models are designed to assist in risk management and to provide senior
management with one probabilistic indicator of risk at the firm level. VAR
numbers should not be interpreted as a predictor of actual results. The VAR
model has been specifically tailored for DLJ's risk management needs and risk
profile.
DLJ's VAR model includes the following limitations: (i) a daily VAR does not
capture the risk inherent in trading positions that cannot be liquidated or
hedged in one day, (ii) VAR is based on historical market data and assumes that
past trading patterns will predict the future, (iii) all inherent market risks
cannot be perfectly modeled and (iv) correlations between market movements can
vary, particularly in times of market stress.
Because a VAR model alone is not a sufficient tool to measure and monitor market
risk, DLJ will continue to use other risk management measures such as stress
testing, independent review of position and trading limits and daily revenue
reports.
7A-6
<PAGE>
At December 31, 1999 and 1998, DLJ's company-wide VAR for trading was
approximately $17.0 million and $22.0 million, respectively. DLJ's company-wide
VAR for non-trading market risk sensitive instruments is not separately
disclosed because the amount is not significant. Due to the benefit of
diversification, DLJ's company-wide VAR is less than the sum of the individual
components. At December 31, 1999, 1998 and 1997, the three main components of
market risk, expressed in terms of theoretical fair values, had the following
VAR:
<TABLE>
<CAPTION>
December 31,
----------------------------------------
1999 1998 1997
------------ ------------ -----------
(In Millions)
<S> <C> <C> <C>
Trading:
Interest rate risk........................ $ 10 $ 16 $ 8
Equity risk............................... 14 11 8
Foreign currency exchange rate risk....... - - 1
</TABLE>
Credit Risk
Credit risk is the potential for loss resulting from a counterparty defaulting
on its obligations. Exposure to credit risk is generated by securities and
currency settlements, contracting derivative and forward transactions with
customers and dealers, and the holding in inventory of bonds and/or loans.
DLJ uses various means to manage its credit risk. The credit-worthiness of all
counterparties is analyzed at the outset of a credit relationship with DLJ.
These counterparties are subsequently reviewed on a periodic basis. DLJ sets a
maximum exposure limit for each counterparty, as well as for groups or classes
of counterparties. Furthermore, DLJ enters into master netting agreements when
feasible and demands collateral from certain counterparties or for certain types
of credit transactions.
The distribution of daily net trading revenues (losses) for 1999 ranged as
follows ($s in millions):
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
No. of Days............... 2 3 7 12 24 41 50
Net Revenues (Losses)..... $ (3) $ (2) $ (1) $ 0 $ 1 $ 2 $ 3
No. of Days............... 43 29 19 9 3 1 9
Net Revenues (Losses)..... $ 4 $ 5 $ 6 $ 7 $ 8 $ 9 $ 10+
</TABLE>
7A-7
<PAGE>
Part II, Item 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
Report of Independent Accountants....................................... F-1
Consolidated Financial Statements:
Consolidated Balance Sheets, December 31, 1999 and 1998............... F-2
Consolidated Statements of Earnings, Years Ended
December 31, 1999, 1998 and 1997.................................... F-3
Consolidated Statements of Shareholder's Equity, Years Ended
December 31, 1999, 1998 and 1997.................................... F-4
Consolidated Statements of Cash Flows, Years Ended
December 31, 1999, 1998 and 1997.................................... F-5
Notes to Consolidated Financial Statements............................ F-6
Report of Independent Accountants on Financial Statement Schedules...... F-42
Consolidated Financial Statement Schedules:
Schedule I - Summary of Investments - Other than Investments in
Related Parties, December 31, 1999.................................... F-43
Schedule II - Balance Sheets (Parent Company), December 31, 1999
1998 and 1997 ....................................................... F-44
Schedule II - Statements of Earnings (Parent Company), Years Ended
December 31, 1999, 1998 and 1997...................................... F-46
Schedule II - Statements of Cash Flows (Parent Company), Years Ended
December 31, 1999, 1998 and 1997...................................... F-47
Schedule III - Supplementary Insurance Information, Years Ended
December 31, 1999, 1998 and 1997...................................... F-48
Schedule IV - Reinsurance, Years Ended December 31, 1999, 1998 and 1997. F-51
FS-1
<PAGE>
February 1, 2000
Report of Independent Accountants
To the Board of Directors and Shareholder of
The Equitable Life Assurance Society of the United States
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of earnings, of shareholder's equity and comprehensive
income and of cash flows present fairly, in all material respects, the financial
position of The Equitable Life Assurance Society of the United States and its
subsidiaries ("Equitable Life") at December 31, 1999 and 1998, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1999, in conformity with accounting principles
generally accepted in the United States of America. These financial statements
are the responsibility of Equitable Life's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ PricewaterhouseCoopers LLP
F-1
<PAGE>
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
----------------- -----------------
(In Millions)
<S> <C> <C>
ASSETS
Investments:
Fixed maturities:
Available for sale, at estimated fair value............................. $ 18,599.7 $ 18,993.7
Held to maturity, at amortized cost..................................... 133.2 125.0
Mortgage loans on real estate............................................. 3,270.0 2,809.9
Equity real estate........................................................ 1,160.2 1,676.9
Policy loans.............................................................. 2,257.3 2,086.7
Other equity investments.................................................. 671.2 713.3
Investment in and loans to affiliates..................................... 1,201.8 928.5
Other invested assets..................................................... 911.6 808.2
----------------- -----------------
Total investments..................................................... 28,205.0 28,142.2
Cash and cash equivalents................................................... 628.0 1,245.5
Deferred policy acquisition costs........................................... 4,033.0 3,563.8
Other assets................................................................ 3,868.3 3,054.6
Closed Block assets......................................................... 8,607.3 8,632.4
Separate Accounts assets.................................................... 54,453.9 43,302.3
----------------- -----------------
Total Assets................................................................ $ 99,795.5 $ 87,940.8
================= =================
LIABILITIES
Policyholders' account balances............................................. $ 21,351.4 $ 20,857.5
Future policy benefits and other policyholders' liabilities................. 4,777.6 4,726.4
Short-term and long-term debt............................................... 1,407.9 1,181.7
Other liabilities........................................................... 3,133.6 3,474.3
Closed Block liabilities.................................................... 9,025.0 9,077.0
Separate Accounts liabilities............................................... 54,332.5 43,211.3
----------------- -----------------
Total liabilities..................................................... 94,028.0 82,528.2
----------------- -----------------
Commitments and contingencies (Notes 11, 13, 14, 15 and 16)
SHAREHOLDER'S EQUITY
Common stock, $1.25 par value 2.0 million shares authorized, issued
and outstanding........................................................... 2.5 2.5
Capital in excess of par value.............................................. 3,557.2 3,110.2
Retained earnings........................................................... 2,600.7 1,944.1
Accumulated other comprehensive (loss) income............................... (392.9) 355.8
----------------- -----------------
Total shareholder's equity............................................ 5,767.5 5,412.6
----------------- -----------------
Total Liabilities and Shareholder's Equity.................................. $ 99,795.5 $ 87,940.8
================= =================
</TABLE>
See Notes to Consolidated Financial Statements.
F-2
<PAGE>
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
CONSOLIDATED STATEMENTS OF EARNINGS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
----------------- ----------------- -----------------
(In Millions)
<S> <C> <C> <C>
REVENUES
Universal life and investment-type product policy fee
income...................................................... $ 1,257.5 $ 1,056.2 $ 950.6
Premiums...................................................... 558.2 588.1 601.5
Net investment income......................................... 2,240.9 2,228.1 2,282.8
Investment (losses) gains, net................................ (96.9) 100.2 (45.2)
Commissions, fees and other income............................ 2,177.9 1,503.0 1,227.2
Contribution from the Closed Block............................ 86.4 87.1 102.5
----------------- ----------------- -----------------
Total revenues.......................................... 6,224.0 5,562.7 5,119.4
----------------- ----------------- -----------------
BENEFITS AND OTHER DEDUCTIONS
Interest credited to policyholders' account balances.......... 1,078.2 1,153.0 1,266.2
Policyholders' benefits....................................... 1,038.6 1,024.7 978.6
Other operating costs and expenses............................ 2,797.3 2,201.2 2,203.9
----------------- ----------------- -----------------
Total benefits and other deductions..................... 4,914.1 4,378.9 4,448.7
----------------- ----------------- -----------------
Earnings from continuing operations before Federal
income taxes and minority interest.......................... 1,309.9 1,183.8 670.7
Federal income taxes.......................................... 332.0 353.1 91.5
Minority interest in net income of consolidated subsidiaries.. 199.4 125.2 54.8
----------------- ----------------- -----------------
Earnings from continuing operations........................... 778.5 705.5 524.4
Discontinued operations, net of Federal income taxes.......... 28.1 2.7 (87.2)
----------------- ----------------- -----------------
Net Earnings.................................................. $ 806.6 $ 708.2 $ 437.2
================= ================= =================
</TABLE>
See Notes to Consolidated Financial Statements.
F-3
<PAGE>
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY AND COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
----------------- ----------------- -----------------
(In Millions)
<S> <C> <C> <C>
Common stock, at par value, beginning and end of year......... $ 2.5 $ 2.5 $ 2.5
----------------- ----------------- -----------------
Capital in excess of par value, beginning of year............. 3,110.2 3,105.8 3,105.8
Additional capital in excess of par value..................... 447.0 4.4 -
----------------- ----------------- -----------------
Capital in excess of par value, end of year................... 3,557.2 3,110.2 3,105.8
----------------- ----------------- -----------------
Retained earnings, beginning of year.......................... 1,944.1 1,235.9 798.7
Net earnings.................................................. 806.6 708.2 437.2
Dividend paid to the Holding Company.......................... (150.0) - -
----------------- ----------------- -----------------
Retained earnings, end of year................................ 2,600.7 1,944.1 1,235.9
----------------- ----------------- -----------------
Accumulated other comprehensive income,
beginning of year........................................... 355.8 516.3 177.0
Other comprehensive (loss) income............................. (748.7) (160.5) 339.3
----------------- ----------------- -----------------
Accumulated other comprehensive (loss) income, end of year.... (392.9) 355.8 516.3
----------------- ----------------- -----------------
Total Shareholder's Equity, End of Year....................... $ 5,767.5 $ 5,412.6 $ 4,860.5
================= ================= =================
COMPREHENSIVE INCOME
Net earnings.................................................. $ 806.6 $ 708.2 $ 437.2
----------------- ----------------- -----------------
Change in unrealized (losses) gains, net of reclassification
adjustment.................................................. (776.9) (149.5) 343.7
Minimum pension liability adjustment.......................... 28.2 (11.0) (4.4)
----------------- ----------------- -----------------
Other comprehensive (loss) income............................. (748.7) (160.5) 339.3
----------------- ----------------- -----------------
Comprehensive Income.......................................... $ 57.9 $ 547.7 $ 776.5
================= ================= =================
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE>
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
----------------- ----------------- -----------------
(In Millions)
<S> <C> <C> <C>
Net earnings.................................................. $ 806.6 $ 708.2 $ 437.2
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Interest credited to policyholders' account balances........ 1,078.2 1,153.0 1,266.2
Universal life and investment-type product
policy fee income......................................... (1,257.5) (1,056.2) (950.6)
Investment losses (gains)................................... 96.9 (100.2) 45.2
Change in Federal income tax payable........................ 157.4 123.1 (74.4)
Change in property and equipment............................ (256.3) (81.8) (9.6)
Change in deferred acquisition costs........................ (260.7) (314.0) (220.7)
Other, net.................................................. (168.8) 70.9 399.7
----------------- ----------------- -----------------
Net cash provided by operating activities..................... 195.8 503.0 893.0
----------------- ----------------- -----------------
Cash flows from investing activities:
Maturities and repayments................................... 2,019.0 2,289.0 2,702.9
Sales....................................................... 7,572.9 16,972.1 10,385.9
Purchases................................................... (10,737.3) (18,578.5) (13,205.4)
(Increase) decrease in short-term investments............... (178.3) 102.4 (555.0)
Decrease in loans to discontinued operations................ - 660.0 420.1
Sale of subsidiaries........................................ - - 261.0
Other, net.................................................. (134.8) (341.8) (612.6)
----------------- ----------------- -----------------
Net cash (used) provided by investing activities.............. (1,458.5) 1,103.2 (603.1)
----------------- ----------------- -----------------
Cash flows from financing activities: Policyholders' account
balances:
Deposits.................................................. 2,366.2 1,508.1 1,281.7
Withdrawals............................................... (1,765.8) (1,724.6) (1,886.8)
Net increase (decrease) in short-term financings............ 378.2 (243.5) 419.9
Repayments of long-term debt................................ (41.3) (24.5) (196.4)
Payment of obligation to fund accumulated deficit of
discontinued operations................................... - (87.2) (83.9)
Dividend paid to the Holding Company........................ (150.0) - -
Other, net.................................................. (142.1) (89.5) (62.7)
----------------- ----------------- -----------------
Net cash provided (used) by financing activities.............. 645.2 (661.2) (528.2)
----------------- ----------------- -----------------
Change in cash and cash equivalents........................... (617.5) 945.0 (238.3)
Cash and cash equivalents, beginning of year.................. 1,245.5 300.5 538.8
----------------- ----------------- -----------------
Cash and Cash Equivalents, End of Year........................ $ 628.0 $ 1,245.5 $ 300.5
================= ================= =================
Supplemental cash flow information
Interest Paid............................................... $ 92.2 $ 130.7 $ 217.1
================= ================= =================
Income Taxes Paid........................................... $ 116.5 $ 254.3 $ 170.0
================= ================= =================
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE>
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1) ORGANIZATION
The Equitable Life Assurance Society of the United States ("Equitable
Life") is an indirect, wholly owned subsidiary of AXA Financial, Inc.
(the "Holding Company," and collectively with its consolidated
subsidiaries, "AXA Financial"). Equitable Life's insurance business is
conducted principally by Equitable Life and its wholly owned life
insurance subsidiaries, Equitable of Colorado ("EOC"), and, prior to
December 31, 1996, Equitable Variable Life Insurance Company ("EVLICO").
Effective January 1, 1997, EVLICO was merged into Equitable Life.
Equitable Life's investment management business, which comprises the
Investment Services segment, is conducted principally by Alliance
Capital Management L.P. ("Alliance"), and Donaldson, Lufkin & Jenrette,
Inc. ("DLJ"), an investment banking and brokerage affiliate. AXA, a
French holding company for an international group of insurance and
related financial services companies, is the Holding Company's largest
shareholder, owning approximately 58.0% at December 31, 1999 (53.0% if
all securities convertible into, and options on, common stock were to be
converted or exercised).
On September 20, 1999, as part of AXA Financial's "branding" strategic
initiative, EQ Financial Consultants, Inc., a broker-dealer subsidiary
of Equitable Life, was merged into a new company, AXA Advisors, LLC
("AXA Advisors"). Also, on September 21, 1999, AXA Advisors was
transferred by Equitable Life to AXA Distribution Holding Corporation
("AXA Distribution"), a wholly owned indirect subsidiary of the Holding
Company, for $15.3 million. The excess of the sales price over AXA
Advisors' book value has been recorded in Equitable Life's books as a
capital contribution. Equitable Life will continue to develop and market
the "Equitable" brand of life and annuity products, while AXA
Distribution and its subsidiaries begin to assume responsibility for
providing financial advisory services, product distribution and customer
relationship management.
The Insurance segment offers a variety of traditional, variable and
interest-sensitive life insurance products, disability income, annuity
products, mutual fund and other investment products to individuals and
small groups. It also administers traditional participating group
annuity contracts with conversion features, generally for corporate
qualified pension plans, and association plans which provide full
service retirement programs for individuals affiliated with professional
and trade associations. This segment includes Separate Accounts for
individual insurance and annuity products.
The Investment Services segment includes Alliance and the results of DLJ
which are accounted for on an equity basis. In 1999, Alliance
reorganized into Alliance Capital Management Holding L.P. ("Alliance
Holding") and Alliance (the "Reorganization"). Alliance Holding's
principal asset is its interest in Alliance and it functions as a
holding entity through which holders of its publicly traded units own an
indirect interest in the operating partnership. The Company exchanged
substantially all of its Alliance Holding units for units in Alliance
("Alliance Units"). As a result of the reorganization, the Company was
the beneficial owner of approximately 2% of Alliance Holding and 56% of
Alliance. Alliance provides diversified investment fund management
services to a variety of institutional clients, including pension funds,
endowments, and foreign financial institutions, as well as to individual
investors, principally through a broad line of mutual funds. This
segment includes institutional Separate Accounts which provide various
investment options for large group pension clients, primarily deferred
benefit contribution plans, through pooled or single group accounts. At
December 31, 1999, Equitable Life has a 31.7% ownership interest in DLJ.
DLJ's businesses include securities underwriting, sales and trading,
merchant banking, financial advisory services, investment research,
venture capital, correspondent brokerage services, online interactive
brokerage services and asset management. DLJ serves institutional,
corporate, governmental and individual clients both domestically and
internationally. Through June 10, 1997, this segment also includes
Equitable Real Estate Investment Management Inc. ("EREIM") which was
sold. EREIM provided real estate investment management services,
property management services, mortgage servicing and loan asset
management, and agricultural investment management.
F-6
<PAGE>
2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Principles of Consolidation
The accompanying consolidated financial statements are prepared in
conformity with generally accepted accounting principles ("GAAP") which
require management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
The accompanying consolidated financial statements include the accounts
of Equitable Life and those of its subsidiaries engaged in insurance
related businesses (collectively, the "Insurance Group"); other
subsidiaries, principally Alliance and through June 10, 1997, EREIM (see
Note 5); and those partnerships and joint ventures in which Equitable
Life or its subsidiaries has control and a majority economic interest
(collectively, including its consolidated subsidiaries, the "Company").
The Company's investment in DLJ is reported on the equity basis of
accounting. Closed Block assets, liabilities and results of operations
are presented in the consolidated financial statements as single line
items (see Note 7). Unless specifically stated, all other footnote
disclosures contained herein exclude the Closed Block related amounts.
All significant intercompany transactions and balances except those with
the Closed Block, DLJ and discontinued operations (see Note 8) have been
eliminated in consolidation. The years "1999," "1998" and "1997" refer
to the years ended December 31, 1999, 1998 and 1997, respectively.
Certain reclassifications have been made in the amounts presented for
prior periods to conform these periods with the 1999 presentation.
Closed Block
On July 22, 1992, Equitable Life established the Closed Block for the
benefit of certain individual participating policies which were in force
on that date. The assets allocated to the Closed Block, together with
anticipated revenues from policies included in the Closed Block, were
reasonably expected to be sufficient to support such business, including
provision for payment of claims, certain expenses and taxes, and for
continuation of dividend scales payable in 1991, assuming the experience
underlying such scales continues.
Assets allocated to the Closed Block inure solely to the benefit of the
Closed Block policyholders and will not revert to the benefit of the
Holding Company. No reallocation, transfer, borrowing or lending of
assets can be made between the Closed Block and other portions of
Equitable Life's General Account, any of its Separate Accounts or any
affiliate of Equitable Life without the approval of the New York
Superintendent of Insurance (the "Superintendent"). Closed Block assets
and liabilities are carried on the same basis as similar assets and
liabilities held in the General Account. The excess of Closed Block
liabilities over Closed Block assets represents the expected future
post-tax contribution from the Closed Block which would be recognized in
income over the period the policies and contracts in the Closed Block
remain in force.
Discontinued Operations
Discontinued operations at December 31, 1999, principally consists of
the Group Non-Participating Wind-Up Annuities ("Wind-Up Annuities"), for
which a premium deficiency reserve has been established. Management
reviews the adequacy of the allowance each quarter and believes the
allowance for future losses at December 31, 1999 is adequate to provide
for all future losses; however, the quarterly allowance review continues
to involve numerous estimates and subjective judgments regarding the
expected performance of 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 the discontinued operations differ from management's
current best estimates and assumptions underlying the allowance for
future losses, the difference would be reflected in the consolidated
statements of earnings in discontinued operations. In particular, to the
extent income, sales proceeds and holding periods for equity real estate
differ from management's previous assumptions, periodic adjustments to
the allowance are likely to result (see Note 8).
F-7
<PAGE>
Accounting Changes
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use,"
which requires capitalization of external and certain internal costs
incurred to obtain or develop internal-use computer software during the
application development stage. The Company applied the provisions of SOP
98-1 prospectively effective January 1, 1998. The adoption of SOP 98-1
did not have a material impact on the Company's consolidated financial
statements. Capitalized internal-use software is amortized on a
straight-line basis over the estimated useful life of the software.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 133, "Accounting
for Derivative Instruments and Hedging Activities," which establishes
accounting and reporting standards for derivative instruments, including
certain derivatives embedded in other contracts, and for hedging
activities. It requires all derivatives to be recognized on the balance
sheet at fair value. The accounting for changes in the fair value of a
derivative depends on its intended use. Derivatives not used in hedging
activities must be adjusted to fair value through earnings. Changes in
the fair value of derivatives used in hedging activities will, depending
on the nature of the hedge, either be offset in earnings against the
change in fair value of the hedged item attributable to the risk being
hedged or recognized in other comprehensive income until the hedged item
affects earnings. For all hedging activities, the ineffective portion of
a derivative's change in fair value will be immediately recognized in
earnings. In June 1999, the FASB issued SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB Statement No. 133," which defers the effective
date of SFAS No. 133 to all fiscal quarters of all fiscal years
beginning after June 15, 2000. The Company expects to adopt SFAS No. 133
effective January 1, 2001. Adjustments resulting from initial adoption
of the new requirements will be reported in a manner similar to the
cumulative effect of a change in accounting principle and will be
reflected in net income or accumulated other comprehensive income based
upon existing hedging relationships, if any. Management currently is
assessing the impact of adoption. However, Alliance's adoption of the
new requirements is not expected to have a significant impact on the
Company's consolidated balance sheet or statement of earnings. Also,
since most of DLJ's derivatives are carried at fair values, the
Company's consolidated earnings and financial position are not expected
to be significantly affected by DLJ's adoption of the new requirements.
Valuation of Investments
Fixed maturities identified as available for sale are reported at
estimated fair value. Fixed maturities, which the Company has both the
ability and the intent to hold to maturity, are stated principally at
amortized cost. The amortized cost of fixed maturities is adjusted for
impairments in value deemed to be other than temporary.
Valuation allowances are netted against the asset categories to which
they apply.
Mortgage loans on real estate are stated at unpaid principal balances,
net of unamortized discounts and valuation allowances. Valuation
allowances are based on the present value of expected future cash flows
discounted at the loan's original effective interest rate or the
collateral value if the loan is collateral dependent. However, if
foreclosure is or becomes probable, the measurement method used is
collateral value.
Real estate, including real estate acquired in satisfaction of debt, is
stated at depreciated cost less valuation allowances. At the date of
foreclosure (including in-substance foreclosure), real estate acquired
in satisfaction of debt is valued at estimated fair value. Impaired real
estate is written down to fair value with the impairment loss being
included in investment gains (losses), net. Valuation allowances on real
estate held for sale are computed using the lower of depreciated cost or
current estimated fair value, net of disposition costs. Depreciation is
discontinued on real estate held for sale.
F-8
<PAGE>
Policy loans are stated at unpaid principal balances.
Partnerships and joint venture interests in which the Company does not
have control or a majority economic interest are reported on the equity
basis of accounting and are included either with equity real estate or
other equity investments, as appropriate.
Equity securities, comprised of common stock classified as both trading
and available for sale securities, are carried at estimated fair value
and are included in other equity investments.
Short-term investments are stated at amortized cost which approximates
fair value and are included with other invested assets.
Cash and cash equivalents includes cash on hand, amounts due from banks
and highly liquid debt instruments purchased with an original maturity
of three months or less.
All securities are recorded in the consolidated financial statements on
a trade date basis.
Net Investment Income, Investment Gains, Net and
Unrealized Investment Gains (Losses)
Net investment income and realized investment gains (losses)
(collectively, "investment results") related to certain participating
group annuity contracts which are passed through to the contractholders
are reflected as interest credited to policyholders' account balances.
Realized investment gains (losses) are determined by specific
identification and are presented as a component of revenue. Changes in
valuation allowances are included in investment gains (losses).
Unrealized gains (losses) on publicly-traded common equity securities
classified as trading securities are reflected in net investment income.
Unrealized investment gains and losses on fixed maturities and equity
securities available for sale held by the Company are accounted for as a
separate component of accumulated comprehensive income, net of related
deferred Federal income taxes, amounts attributable to discontinued
operations, participating group annuity contracts and deferred policy
acquisition costs ("DAC") related to universal life and investment-type
products and participating traditional life contracts.
Recognition of Insurance Income and Related Expenses
Premiums from universal life and investment-type contracts are reported
as deposits to policyholders' account balances. Revenues from these
contracts consist of amounts assessed during the period against
policyholders' account balances for mortality charges, policy
administration charges and surrender charges. Policy benefits and claims
that are charged to expense include benefit claims incurred in the
period in excess of related policyholders' account balances.
Premiums from participating and non-participating traditional life and
annuity policies with life contingencies generally are recognized as
income when due. Benefits and expenses are matched with such income so
as to result in the recognition of profits over the life of the
contracts. This match is accomplished by means of the provision for
liabilities for future policy benefits and the deferral and subsequent
amortization of policy acquisition costs.
For contracts with a single premium or a limited number of premium
payments due over a significantly shorter period than the total period
over which benefits are provided, premiums are recorded as income when
due with any excess profit deferred and recognized in income in a
constant relationship to insurance in force or, for annuities, the
amount of expected future benefit payments.
Premiums from individual health contracts are recognized as income over
the period to which the premiums relate in proportion to the amount of
insurance protection provided.
F-9
<PAGE>
Deferred Policy Acquisition Costs
The costs of acquiring new business, principally commissions,
underwriting, agency and policy issue expenses, all of which vary with
and are primarily related to the production of new business, are
deferred. DAC is subject to recoverability testing at the time of policy
issue and loss recognition testing at the end of each accounting period.
For universal life products and investment-type products, DAC is
amortized over the expected total life of the contract group (periods
ranging from 25 to 35 years and 5 to 17 years, respectively) as a
constant percentage of estimated gross profits arising principally from
investment results, mortality and expense margins and surrender charges
based on historical and anticipated future experience, updated at the
end of each accounting period. The effect on the amortization of DAC of
revisions to estimated gross profits is reflected in earnings in the
period such estimated gross profits are revised. The effect on the DAC
asset that would result from realization of unrealized gains (losses) is
recognized with an offset to accumulated other comprehensive income in
consolidated shareholder's equity as of the balance sheet date.
As part of its asset/liability management process, in second quarter
1999, management initiated a review of the matching of invested assets
to Insurance product lines given their different liability
characteristics and liquidity requirements. As a result of this review,
management reallocated the current and prospective interests of the
various product lines in the invested assets. These asset reallocations
and the related changes in investment yields by product line, in turn,
triggered a review of and revisions to the estimated future gross
profits used to determine the amortization of DAC for universal life and
investment-type products. The revisions to estimated future gross
profits resulted in an after-tax writedown of DAC of $85.6 million (net
of a Federal income tax benefit of $46.1 million).
For participating traditional life policies (substantially all of which
are in the Closed Block), DAC is amortized over the expected total life
of the contract group (40 years) as a constant percentage based on the
present value of the estimated gross margin amounts expected to be
realized over the life of the contracts using the expected investment
yield. At December 31, 1999, the expected investment yield, excluding
policy loans, generally ranged from 7.75% grading to 7.5% over a 20 year
period. Estimated gross margin includes anticipated premiums and
investment results less claims and administrative expenses, changes in
the net level premium reserve and expected annual policyholder
dividends. The effect on the amortization of DAC of revisions to
estimated gross margins is reflected in earnings in the period such
estimated gross margins are revised. The effect on the DAC asset that
would result from realization of unrealized gains (losses) is recognized
with an offset to accumulated comprehensive income in consolidated
shareholder's equity as of the balance sheet date.
For non-participating traditional life DAC is amortized in proportion to
anticipated premiums. Assumptions as to anticipated premiums are
estimated at the date of policy issue and are consistently applied
during the life of the contracts. Deviations from estimated experience
are reflected in earnings in the period such deviations occur. For these
contracts, the amortization periods generally are for the total life of
the policy.
Policyholders' Account Balances and Future Policy Benefits
Policyholders' account balances for universal life and investment-type
contracts are equal to the policy account values. The policy account
values represents an accumulation of gross premium payments plus
credited interest less expense and mortality charges and withdrawals.
For participating traditional life policies, future policy benefit
liabilities are calculated using a net level premium method on the basis
of actuarial assumptions equal to guaranteed mortality and dividend fund
interest rates. The liability for annual dividends represents the
accrual of annual dividends earned. Terminal dividends are accrued in
proportion to gross margins over the life of the contract.
For non-participating traditional life insurance policies, future policy
benefit liabilities are estimated using a net level premium method on
the basis of actuarial assumptions as to mortality, persistency and
interest established at policy issue. Assumptions established at policy
issue as to mortality and persistency are based on the Insurance Group's
experience which, together with interest and expense assumptions,
includes a margin for adverse deviation.
F-10
<PAGE>
When the liabilities for future policy benefits plus the present value
of expected future gross premiums for a product are insufficient to
provide for expected future policy benefits and expenses for that
product, DAC is written off and thereafter, if required, a premium
deficiency reserve is established by a charge to earnings. Benefit
liabilities for traditional annuities during the accumulation period are
equal to accumulated contractholders' fund balances and after
annuitization are equal to the present value of expected future
payments. Interest rates used in establishing such liabilities range
from 2.25% to 11.5% for life insurance liabilities and from 2.25% to
8.35% for annuity liabilities.
Individual health benefit liabilities for active lives are estimated
using the net level premium method and assumptions as to future
morbidity, withdrawals and interest. Benefit liabilities for disabled
lives are estimated using the present value of benefits method and
experience assumptions as to claim terminations, expenses and interest.
While management believes its disability income ("DI") reserves have
been calculated on a reasonable basis and are adequate, there can be no
assurance reserves will be sufficient to provide for future liabilities.
Claim reserves and associated liabilities for individual DI and major
medical policies were $948.4 million and $951.7 million at December 31,
1999 and 1998, respectively. Incurred benefits (benefits paid plus
changes in claim reserves) and benefits paid for individual DI and major
medical are summarized as follows:
<TABLE>
<CAPTION>
1999 1998 1997
----------------- ---------------- -----------------
(In Millions)
<S> <C> <C> <C>
Incurred benefits related to current year.......... $ 150.7 $ 140.1 $ 132.3
Incurred benefits related to prior years........... 64.7 84.2 60.0
----------------- ---------------- -----------------
Total Incurred Benefits............................ $ 215.4 $ 224.3 $ 192.3
================= ================ =================
Benefits paid related to current year.............. $ 28.9 $ 17.0 $ 28.8
Benefits paid related to prior years............... 189.8 155.4 146.2
----------------- ---------------- -----------------
Total Benefits Paid................................ $ 218.7 $ 172.4 $ 175.0
================= ================ =================
</TABLE>
Policyholders' Dividends
The amount of policyholders' dividends to be paid (including those on
policies included in the Closed Block) is determined annually by
Equitable Life's board of directors. The aggregate amount of
policyholders' dividends is related to actual interest, mortality,
morbidity and expense experience for the year and judgment as to the
appropriate level of statutory surplus to be retained by Equitable Life.
At December 31, 1999, participating policies, including those in the
Closed Block, represent approximately 23.0% ($47.0 billion) of directly
written life insurance in force, net of amounts ceded.
Federal Income Taxes
The Company files a consolidated Federal income tax return with the
Holding Company and its consolidated subsidiaries. Current Federal
income taxes are charged or credited to operations based upon amounts
estimated to be payable or recoverable as a result of taxable operations
for the current year. Deferred income tax assets and liabilities are
recognized based on the difference between financial statement carrying
amounts and income tax bases of assets and liabilities using enacted
income tax rates and laws.
Separate Accounts
Separate Accounts are established in conformity with the New York State
Insurance Law and generally are not chargeable with liabilities that
arise from any other business of the Insurance Group. Separate Accounts
assets are subject to General Account claims only to the extent the
value of such assets exceeds Separate Accounts liabilities.
F-11
<PAGE>
Assets and liabilities of the Separate Accounts, representing net
deposits and accumulated net investment earnings less fees, held
primarily for the benefit of contractholders, and for which the
Insurance Group does not bear the investment risk, are shown as separate
captions in the consolidated balance sheets. The Insurance Group bears
the investment risk on assets held in one Separate Account; therefore,
such assets are carried on the same basis as similar assets held in the
General Account portfolio. Assets held in the other Separate Accounts
are carried at quoted market values or, where quoted values are not
available, at estimated fair values as determined by the Insurance
Group.
The investment results of Separate Accounts on which the Insurance Group
does not bear the investment risk are reflected directly in Separate
Accounts liabilities. For 1999, 1998 and 1997, investment results of
such Separate Accounts were $6,045.5 million, $4,591.0 million and
$3,411.1 million, respectively.
Deposits to Separate Accounts are reported as increases in Separate
Accounts liabilities and are not reported in revenues. Mortality, policy
administration and surrender charges on all Separate Accounts are
included in revenues.
Employee Stock Option Plan
The Company accounts for stock option plans sponsored by the Holding
Company, DLJ and Alliance in accordance with the provisions of
Accounting Principles Board Opinion ("APB") No. 25, "Accounting for
Stock Issued to Employees," and related interpretations. In accordance
with the opinion, compensation expense is recorded on the date of grant
only if the current market price of the underlying stock exceeds the
option strike price at the grant date. See Note 22 for the pro forma
disclosures for the Holding Company, DLJ and Alliance required by SFAS
No. 123, "Accounting for Stock-Based Compensation".
F-12
<PAGE>
3) INVESTMENTS
The following tables provide additional information relating to fixed
maturities and equity securities:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
----------------- ----------------- ---------------- -----------------
(In Millions)
<S> <C> <C> <C> <C>
December 31, 1999
Fixed Maturities:
Available for Sale:
Corporate.......................... $ 14,866.8 $ 139.5 $ 787.0 $ 14,219.3
Mortgage-backed.................... 2,554.5 2.3 87.8 2,469.0
U.S. Treasury, government and
agency securities................ 1,194.1 18.9 23.4 1,189.6
States and political subdivisions.. 110.0 1.4 4.9 106.5
Foreign governments................ 361.8 16.2 14.8 363.2
Redeemable preferred stock......... 286.4 1.7 36.0 252.1
----------------- ----------------- ---------------- -----------------
Total Available for Sale............. $ 19,373.6 $ 180.0 $ 953.9 $ 18,599.7
================= ================= ================ =================
Held to Maturity: Corporate......... $ 133.2 $ - $ - $ 133.2
================= ================= ================ =================
Equity Securities:
Common stock available for sale...... 25.5 1.5 17.8 9.2
Common stock trading securities...... 7.2 9.1 2.2 14.1
----------------- ----------------- ---------------- -----------------
Total Equity Securities................ $ 32.7 $ 10.6 $ 20.0 $ 23.3
================= ================= ================ =================
December 31, 1998
Fixed Maturities:
Available for Sale:
Corporate.......................... $ 14,520.8 $ 793.6 $ 379.6 $ 14,934.8
Mortgage-backed.................... 1,807.9 23.3 .9 1,830.3
U.S. Treasury, government and
agency securities................ 1,464.1 107.6 .7 1,571.0
States and political subdivisions.. 55.0 9.9 - 64.9
Foreign governments................ 363.3 20.9 30.0 354.2
Redeemable preferred stock......... 242.7 7.0 11.2 238.5
----------------- ----------------- ---------------- -----------------
Total Available for Sale............. $ 18,453.8 $ 962.3 $ 422.4 $ 18,993.7
================= ================= ================ =================
Held to Maturity: Corporate......... $ 125.0 $ - $ - $ 125.0
================= ================= ================ =================
Equity Securities:
Common stock available for sale...... $ 58.3 $ 114.9 $ 22.5 $ 150.7
================= ================= ================ =================
</TABLE>
For publicly traded fixed maturities and equity securities, estimated
fair value is determined using quoted market prices. For fixed
maturities without a readily ascertainable market value, the Company
determines an estimated fair value using a discounted cash flow
approach, including provisions for credit risk, generally based on the
assumption such securities will be held to maturity. Estimated fair
values for equity securities, substantially all of which do not have a
readily ascertainable market value, have been determined by the Company.
Such estimated fair values do not necessarily represent the values for
which these securities could have been sold at the dates of the
consolidated balance sheets. At December 31, 1999 and 1998, securities
without a readily ascertainable market value having an amortized cost of
$3,322.2 million and $3,539.9 million, respectively, had estimated fair
values of $3,177.7 million and $3,748.5 million, respectively.
F-13
<PAGE>
The contractual maturity of bonds at December 31, 1999 is shown below:
<TABLE>
<CAPTION>
Available for Sale
------------------------------------
Amortized Estimated
Cost Fair Value
---------------- -----------------
(In Millions)
<S> <C> <C>
Due in one year or less................................................ $ 479.1 $ 477.8
Due in years two through five.......................................... 2,991.8 2,921.2
Due in years six through ten........................................... 7,197.9 6,813.0
Due after ten years.................................................... 5,864.0 5,666.5
Mortgage-backed securities............................................. 2,554.4 2,469.1
---------------- -----------------
Total.................................................................. $ 19,087.2 $ 18,347.6
================ =================
</TABLE>
Corporate bonds held to maturity with an amortized cost and estimated
fair value of $133.2 million are due in one year or less.
Bonds not due at a single maturity date have been included in the above
table in the year of final maturity. Actual maturities will differ from
contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
The Insurance Group's fixed maturity investment portfolio includes
corporate high yield securities consisting of public high yield bonds,
redeemable preferred stocks and directly negotiated debt in leveraged
buyout transactions. The Insurance Group seeks to minimize the higher
than normal credit risks associated with such securities by monitoring
concentrations in any single issuer or a particular industry group.
Certain of these corporate high yield securities are classified as other
than investment grade by the various rating agencies, i.e., a rating
below Baa or National Association of Insurance Commissioners ("NAIC")
designation of 3 (medium grade), 4 or 5 (below investment grade) or 6
(in or near default). At December 31, 1999, approximately 14.9% of the
$18,344.3 million aggregate amortized cost of bonds held by the Company
was considered to be other than investment grade.
In addition, the Insurance Group is an equity investor in limited
partnership interests which primarily invest in securities considered to
be other than investment grade. The carrying values at December 31, 1999
and 1998 were $647.9 million and $562.6 million, respectively.
Investment valuation allowances and changes thereto are shown below:
<TABLE>
<CAPTION>
1999 1998 1997
----------------- ---------------- -----------------
(In Millions)
<S> <C> <C> <C>
Balances, beginning of year........................ $ 230.6 $ 384.5 $ 137.1
Additions charged to income........................ 68.2 86.2 334.6
Deductions for writedowns and
asset dispositions............................... (150.2) (240.1) (87.2)
----------------- ---------------- -----------------
Balances, End of Year.............................. $ 148.6 $ 230.6 $ 384.5
================= ================ =================
Balances, end of year comprise:
Mortgage loans on real estate.................... $ 27.5 $ 34.3 $ 55.8
Equity real estate............................... 121.1 196.3 328.7
----------------- ---------------- -----------------
Total.............................................. $ 148.6 $ 230.6 $ 384.5
================= ================ =================
</TABLE>
F-14
<PAGE>
At December 31, 1999, the carrying value of fixed maturities which are
non-income producing for the twelve months preceding the consolidated
balance sheet date was $152.1 million.
The payment terms of mortgage loans on real estate may from time to time
be restructured or modified. The investment in restructured mortgage
loans on real estate, based on amortized cost, amounted to $106.0
million and $115.1 million at December 31, 1999 and 1998, respectively.
Gross interest income on restructured mortgage loans on real estate that
would have been recorded in accordance with the original terms of such
loans amounted to $9.5 million, $10.3 million and $17.2 million in 1999,
1998 and 1997, respectively. Gross interest income on these loans
included in net investment income aggregated $8.2 million, $8.3 million
and $12.7 million in 1999, 1998 and 1997, respectively.
Impaired mortgage loans along with the related provision for losses were
as follows:
<TABLE>
<CAPTION>
December 31,
----------------------------------------
1999 1998
------------------- -------------------
(In Millions)
<S> <C> <C>
Impaired mortgage loans with provision for losses.................. $ 142.4 $ 125.4
Impaired mortgage loans without provision for losses............... 2.2 8.6
------------------- -------------------
Recorded investment in impaired mortgage loans..................... 144.6 134.0
Provision for losses............................................... (23.0) (29.0)
------------------- -------------------
Net Impaired Mortgage Loans........................................ $ 121.6 $ 105.0
=================== ===================
</TABLE>
Impaired mortgage loans without provision for losses are loans where the
fair value of the collateral or the net present value of the expected
future cash flows related to the loan equals or exceeds the recorded
investment. Interest income earned on loans where the collateral value
is used to measure impairment is recorded on a cash basis. Interest
income on loans where the present value method is used to measure
impairment is accrued on the net carrying value amount of the loan at
the interest rate used to discount the cash flows. Changes in the
present value attributable to changes in the amount or timing of
expected cash flows are reported as investment gains or losses.
During 1999, 1998 and 1997, respectively, the Company's average recorded
investment in impaired mortgage loans was $141.7 million, $161.3 million
and $246.9 million. Interest income recognized on these impaired
mortgage loans totaled $12.0 million, $12.3 million and $15.2 million
($0.0 million, $.9 million and $2.3 million recognized on a cash basis)
for 1999, 1998 and 1997, respectively.
The Insurance Group's investment in equity real estate is through direct
ownership and through investments in real estate joint ventures. At
December 31, 1999 and 1998, the carrying value of equity real estate
held for sale amounted to $382.2 million and $836.2 million,
respectively. For 1999, 1998 and 1997, respectively, real estate of
$20.5 million, $7.1 million and $152.0 million was acquired in
satisfaction of debt. At December 31, 1999 and 1998, the Company owned
$443.9 million and $552.3 million, respectively, of real estate acquired
in satisfaction of debt.
Depreciation of real estate held for production of income is computed
using the straight-line method over the estimated useful lives of the
properties, which generally range from 40 to 50 years. Accumulated
depreciation on real estate was $251.6 million and $374.8 million at
December 31, 1999 and 1998, respectively. Depreciation expense on real
estate totaled $21.8 million, $30.5 million and $74.9 million for 1999,
1998 and 1997, respectively.
F-15
<PAGE>
4) JOINT VENTURES AND PARTNERSHIPS
Summarized combined financial information for real estate joint ventures
(25 individual ventures at both December 31, 1999 and 1998) and for
limited partnership interests accounted for under the equity method, in
which the Company has an investment of $10.0 million or greater and an
equity interest of 10% or greater, follows:
<TABLE>
<CAPTION>
December 31,
------------------------------------
1999 1998
---------------- -----------------
(In Millions)
<S> <C> <C>
BALANCE SHEETS
Investments in real estate, at depreciated cost........................ $ 861.1 $ 913.7
Investments in securities, generally at estimated fair value........... 678.4 636.9
Cash and cash equivalents.............................................. 68.4 85.9
Other assets........................................................... 239.3 279.8
---------------- -----------------
Total Assets........................................................... $ 1,847.2 $ 1,916.3
================ =================
Borrowed funds - third party........................................... $ 354.2 $ 367.1
Borrowed funds - AXA Financial......................................... 28.9 30.1
Other liabilities...................................................... 313.9 197.2
---------------- -----------------
Total liabilities...................................................... 697.0 594.4
---------------- -----------------
Partners' capital...................................................... 1,150.2 1,321.9
---------------- -----------------
Total Liabilities and Partners' Capital................................ $ 1,847.2 $ 1,916.3
================ =================
Equity in partners' capital included above............................. $ 316.5 $ 365.6
Equity in limited partnership interests not included above and other... 524.1 390.1
---------------- -----------------
Carrying Value......................................................... $ 840.6 $ 755.7
================ =================
</TABLE>
<TABLE>
<CAPTION>
1999 1998 1997
----------------- ---------------- -----------------
(In Millions)
<S> <C> <C> <C>
STATEMENTS OF EARNINGS
Revenues of real estate joint ventures............. $ 180.5 $ 246.1 $ 310.5
Revenues of other limited partnership interests.... 455.1 128.9 506.3
Interest expense - third party..................... (39.8) (33.3) (91.8)
Interest expense - AXA Financial................... (2.5) (2.6) (7.2)
Other expenses..................................... (139.0) (197.0) (263.6)
----------------- ---------------- -----------------
Net Earnings....................................... $ 454.3 $ 142.1 $ 454.2
================= ================ =================
Equity in net earnings included above.............. $ 10.5 $ 44.4 $ 76.7
Equity in net earnings of limited partnership
interests not included above..................... 76.0 37.9 69.5
Other.............................................. - - (.9)
----------------- ---------------- -----------------
Total Equity in Net Earnings....................... $ 86.5 $ 82.3 $ 145.3
================= ================ =================
</TABLE>
F-16
<PAGE>
5) NET INVESTMENT INCOME AND INVESTMENT GAINS (LOSSES)
The sources of net investment income follows:
<TABLE>
<CAPTION>
1999 1998 1997
----------------- ---------------- -----------------
(In Millions)
<S> <C> <C> <C>
Fixed maturities................................... $ 1,499.8 $ 1,489.0 $ 1,459.4
Mortgage loans on real estate...................... 253.4 235.4 260.8
Equity real estate................................. 250.2 356.1 390.4
Other equity investments........................... 165.1 83.8 156.9
Policy loans....................................... 143.8 144.9 177.0
Other investment income............................ 161.3 185.7 181.7
----------------- ---------------- -----------------
Gross investment income.......................... 2,473.6 2,494.9 2,626.2
Investment expenses.............................. (232.7) (266.8) (343.4)
----------------- ---------------- -----------------
Net Investment Income.............................. $ 2,240.9 $ 2,228.1 $ 2,282.8
================= ================ =================
Investment (losses) gains, net, including changes in the valuation
allowances, follow:
1999 1998 1997
----------------- ---------------- -----------------
(In Millions)
Fixed maturities................................... $ (290.9) $ (24.3) $ 88.1
Mortgage loans on real estate...................... (3.3) (10.9) (11.2)
Equity real estate................................. (2.4) 74.5 (391.3)
Other equity investments........................... 88.1 29.9 14.1
Sale of subsidiaries............................... - (2.6) 252.1
Issuance and sales of Alliance Units............... 5.5 19.8 -
Issuance and sales of DLJ common stock............. 106.0 18.2 3.0
Other.............................................. .1 (4.4) -
----------------- ---------------- -----------------
Investment (Losses) Gains, Net..................... $ (96.9) $ 100.2 $ (45.2)
================= ================ =================
</TABLE>
Writedowns of fixed maturities amounted to $223.2 million, $101.6
million and $11.7 million for 1999, 1998 and 1997, respectively, and
writedowns of equity real estate amounted to $136.4 million for 1997. In
fourth quarter 1997, the Company reclassified $1,095.4 million
depreciated cost of equity real estate from real estate held for the
production of income to real estate held for sale. Additions to
valuation allowances of $227.6 million were recorded upon these
transfers. Additionally, in fourth quarter 1997, $132.3 million of
writedowns on real estate held for production of income were recorded.
For 1999, 1998 and 1997, respectively, proceeds received on sales of
fixed maturities classified as available for sale amounted to $7,138.6
million, $15,961.0 million and $9,789.7 million. Gross gains of $74.7
million, $149.3 million and $166.0 million and gross losses of $214.3
million, $95.1 million and $108.8 million, respectively, were realized
on these sales. The change in unrealized investment (losses) gains
related to fixed maturities classified as available for sale for 1999,
1998 and 1997 amounted to $(1,313.8) million, $(331.7) million and
$513.4 million, respectively.
On January 1, 1999, investments in publicly-traded common equity
securities in the General Account portfolio within other equity
investments amounting to $102.3 million were transferred from available
for sale securities to trading securities. As a result of this transfer,
unrealized investment gains of $83.3 million ($43.2 million net of
related DAC and Federal income taxes) were recognized as realized
investment gains in the consolidated statements of earnings. Net
unrealized holding gains of $7.0 million were included in net investment
F-17
<PAGE>
income in the consolidated statements of earnings for 1999. These
trading securities had a carrying value of $14.1 million and costs of
$7.2 million at December 31, 1999.
During 1999, DLJ completed its offering of a new class of its Common
Stock to track the financial performance of DLJdirect, its online
brokerage business. As a result of this offering, the Company recorded a
non-cash pre-tax realized gain of $95.8 million.
For 1999, 1998 and 1997, investment results passed through to certain
participating group annuity contracts as interest credited to
policyholders' account balances amounted to $131.5 million, $136.9
million and $137.5 million, respectively.
In 1997, Equitable Life sold EREIM (other than its interest in Column
Financial, Inc.) ("ERE") to Lend Lease Corporation Limited ("Lend
Lease"), for $400.0 million and recognized an investment gain of $162.4
million, net of Federal income tax of $87.4 million. Equitable Life
entered into long-term advisory agreements whereby ERE continues to
provide substantially the same services to Equitable Life's General
Account and Separate Accounts, for substantially the same fees, as
provided prior to the sale. Through June 10, 1997, the businesses sold
reported combined revenues of $91.6 million and combined net earnings of
$10.7 million.
On June 30, 1997, Alliance reduced the recorded value of goodwill and
contracts associated with Alliance's 1996 acquisition of Cursitor
Holdings L.P. and Cursitor Holdings Limited (collectively, "Cursitor")
by $120.9 million since Cursitor's business fundamentals no longer
supported the carrying value of its investment. The Company's earnings
from continuing operations for 1997 included a charge of $59.5 million,
net of a Federal income tax benefit of $10.0 million and minority
interest of $51.4 million. The remaining balance of intangible assets is
being amortized over its estimated useful life of 20 years.
Net unrealized investment gains (losses), included in the consolidated
balance sheets as a component of accumulated comprehensive income and
the changes for the corresponding years, follow:
<TABLE>
<CAPTION>
1999 1998 1997
----------------- ---------------- -----------------
(In Millions)
<S> <C> <C> <C>
Balance, beginning of year......................... $ 384.1 $ 533.6 $ 189.9
Changes in unrealized investment (losses) gains.... (1,486.6) (242.4) 543.3
Changes in unrealized investment losses
(gains) attributable to:
Participating group annuity contracts.......... 24.7 (5.7) 53.2
DAC............................................ 208.6 13.2 (89.0)
Deferred Federal income taxes.................. 476.4 85.4 (163.8)
----------------- ---------------- -----------------
Balance, End of Year............................... $ (392.8) $ 384.1 $ 533.6
================= ================ =================
Balance, end of year comprises:
Unrealized investment (losses) gains on:
Fixed maturities............................... $ (773.9) $ 539.9 $ 871.2
Other equity investments....................... (16.3) 92.4 33.7
Other, principally Closed Block................ 46.8 111.1 80.9
----------------- ---------------- -----------------
Total........................................ (743.4) 743.4 985.8
Amounts of unrealized investment gains
attributable to:
Participating group annuity contracts........ - (24.7) (19.0)
DAC.......................................... 80.8 (127.8) (141.0)
Deferred Federal income taxes................ 269.8 (206.8) (292.2)
----------------- ---------------- -----------------
Total.............................................. $ (392.8) $ 384.1 $ 533.6
================= ================ =================
</TABLE>
Changes in unrealized gains (losses) reflect changes in fair value of
only those fixed maturities and equity securities classified as
available for sale and do not reflect any changes in fair value of
policyholders' account balances and future policy benefits.
F-18
<PAGE>
6) ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Accumulated other comprehensive income (loss) represents cumulative
gains and losses on items that are not reflected in earnings. The
balances for the past three years follow:
<TABLE>
<CAPTION>
1999 1998 1997
----------------- ---------------- -----------------
(In Millions)
<S> <C> <C> <C>
Unrealized (losses) gains on investments........... $ (392.8) $ 384.1 $ 533.6
Minimum pension liability.......................... (.1) (28.3) (17.3)
----------------- ---------------- -----------------
Total Accumulated Other
Comprehensive (Loss) Income...................... $ (392.9) $ 355.8 $ 516.3
================= ================ =================
The components of other comprehensive income (loss) for the past three
years follow:
1999 1998 1997
----------------- ---------------- -----------------
(In Millions)
Net unrealized (losses) gains on investment securities:
Net unrealized (losses) gains arising during
the period..................................... $ (1,682.3) $ (186.1) $ 564.0
Adjustment to reclassify losses (gains)
included in net earnings during the period..... 195.7 (56.3) (20.7)
----------------- ---------------- -----------------
Net unrealized (losses) gains on investment
securities....................................... (1,486.6) (242.4) 543.3
Adjustments for policyholder liabilities,
DAC and deferred Federal income taxes............ 709.7 92.9 (199.6)
----------------- ---------------- -----------------
Change in unrealized losses (gains), net of
adjustments...................................... (776.9) (149.5) 343.7
Change in minimum pension liability................ 28.2 (11.0) (4.4)
----------------- ---------------- -----------------
Total Other Comprehensive (Loss) Income............ $ (748.7) $ (160.5) $ 339.3
================= ================ =================
</TABLE>
F-19
<PAGE>
7) CLOSED BLOCK
Summarized financial information for the Closed Block follows:
<TABLE>
<CAPTION>
December 31,
--------------------------------------
1999 1998
----------------- -----------------
(In Millions)
<S> <C> <C>
BALANCE SHEETS
Fixed Maturities:
Available for sale, at estimated fair value
(amortized cost, $4,144.8 and $4,149.0).......................... $ 4,014.0 $ 4,373.2
Mortgage loans on real estate........................................ 1,704.2 1,633.4
Policy loans......................................................... 1,593.9 1,641.2
Cash and other invested assets....................................... 194.4 86.5
DAC.................................................................. 895.5 676.5
Other assets......................................................... 205.3 221.6
----------------- -----------------
Total Assets......................................................... $ 8,607.3 $ 8,632.4
================= =================
Future policy benefits and policyholders' account balances........... $ 9,011.7 $ 9,013.1
Other liabilities.................................................... 13.3 63.9
----------------- -----------------
Total Liabilities.................................................... $ 9,025.0 $ 9,077.0
================= =================
</TABLE>
<TABLE>
<CAPTION>
1999 1998 1997
----------------- ---------------- -----------------
(In Millions)
<S> <C> <C> <C>
STATEMENTS OF EARNINGS
Premiums and other revenue......................... $ 619.1 $ 661.7 $ 687.1
Investment income (net of investment
expenses of $15.8, $15.5 and $27.0).............. 574.2 569.7 574.9
Investment (losses) gains, net..................... (11.3) .5 (42.4)
----------------- ---------------- -----------------
Total revenues............................... 1,182.0 1,231.9 1,219.6
----------------- ---------------- -----------------
Policyholders' benefits and dividends.............. 1,024.7 1,082.0 1,066.7
Other operating costs and expenses................. 70.9 62.8 50.4
----------------- ---------------- -----------------
Total benefits and other deductions.......... 1,095.6 1,144.8 1,117.1
----------------- ---------------- -----------------
Contribution from the Closed Block................. $ 86.4 $ 87.1 $ 102.5
================= ================ =================
</TABLE>
Impaired mortgage loans along with the related provision for losses
follows:
<TABLE>
<CAPTION>
December 31,
------------------------------------
1999 1998
---------------- -----------------
(In Millions)
<S> <C> <C>
Impaired mortgage loans with provision for losses...................... $ 26.8 $ 55.5
Impaired mortgage loans without provision for losses................... 4.5 7.6
---------------- -----------------
Recorded investment in impaired mortgages.............................. 31.3 63.1
Provision for losses................................................... (4.1) (10.1)
---------------- -----------------
Net Impaired Mortgage Loans............................................ $ 27.2 $ 53.0
================ =================
</TABLE>
During 1999, 1998 and 1997, the Closed Block's average recorded
investment in impaired mortgage loans was $37.0 million, $85.5 million
and $110.2 million, respectively. Interest income recognized on these
impaired mortgage loans totaled $3.3 million, $4.7 million and $9.4
million ($.3 million, $1.5 million and $4.1 million recognized on a cash
basis) for 1999, 1998 and 1997, respectively.
F-20
<PAGE>
Valuation allowances amounted to $4.6 million and $11.1 million on
mortgage loans on real estate and $24.7 million and $15.4 million on
equity real estate at December 31, 1999 and 1998, respectively.
Writedowns of fixed maturities amounted to $3.5 million for 1997.
Writedowns of equity real estate amounted to $28.8 million for 1997.
In fourth quarter 1997, $72.9 million depreciated cost of equity real
estate held for production of income was reclassified to equity real
estate held for sale. Additions to valuation allowances of $15.4 million
were recorded upon these transfers. Also in fourth quarter 1997, $28.8
million of writedowns on real estate held for production of income were
recorded.
Many expenses related to Closed Block operations are charged to
operations outside of the Closed Block; accordingly, the contribution
from the Closed Block does not represent the actual profitability of the
Closed Block operations. Operating costs and expenses outside of the
Closed Block are, therefore, disproportionate to the business outside of
the Closed Block.
F-21
<PAGE>
8) DISCONTINUED OPERATIONS
Summarized financial information for discontinued operations follows:
<TABLE>
<CAPTION>
December 31,
--------------------------------------
1999 1998
----------------- -----------------
(In Millions)
<S> <C> <C>
BALANCE SHEETS
Mortgage loans on real estate........................................ $ 454.6 $ 553.9
Equity real estate................................................... 426.6 611.0
Other equity investments............................................. 55.8 115.1
Other invested assets................................................ 87.1 24.9
----------------- -----------------
Total investments.................................................. 1,024.1 1,304.9
Cash and cash equivalents............................................ 164.5 34.7
Other assets......................................................... 213.0 219.0
----------------- -----------------
Total Assets......................................................... $ 1,401.6 $ 1,558.6
================= =================
Policyholders' liabilities........................................... $ 993.3 $ 1,021.7
Allowance for future losses.......................................... 242.2 305.1
Other liabilities.................................................... 166.1 231.8
----------------- -----------------
Total Liabilities.................................................... $ 1,401.6 $ 1,558.6
================= =================
</TABLE>
<TABLE>
<CAPTION>
1999 1998 1997
----------------- ---------------- -----------------
(In Millions)
<S> <C> <C> <C>
STATEMENTS OF EARNINGS
Investment income (net of investment
expenses of $49.3, $63.3 and $97.3).............. $ 98.7 $ 160.4 $ 188.6
Investment (losses) gains, net..................... (13.4) 35.7 (173.7)
Policy fees, premiums and other income............. .2 (4.3) .2
----------------- ---------------- -----------------
Total revenues..................................... 85.5 191.8 15.1
Benefits and other deductions...................... 104.8 141.5 169.5
(Losses charged) earnings credited to allowance
for future losses................................ (19.3) 50.3 (154.4)
----------------- ---------------- -----------------
Pre-tax loss from operations....................... - - -
Pre-tax earnings from releasing (loss from
strengthening) the allowance for future
losses........................................... 43.3 4.2 (134.1)
Federal income tax (expense) benefit............... (15.2) (1.5) 46.9
----------------- ---------------- -----------------
Earnings (Loss) from Discontinued Operations....... $ 28.1 $ 2.7 $ (87.2)
================= ================ =================
</TABLE>
The Company's quarterly process for evaluating the allowance for future
losses applies the current period's results of the discontinued
operations against the allowance, re-estimates future losses and adjusts
the allowance, if appropriate. Additionally, as part of the Company's
annual planning process which takes place in the fourth quarter of each
year, investment and benefit cash flow projections are prepared. These
updated assumptions and estimates resulted in a release of allowance in
1999 and 1998 and strengthening of allowance in 1997.
In fourth quarter 1997, $329.9 million depreciated cost of equity real
estate was reclassified from equity real estate held for production of
income to real estate held for sale. Additions to valuation allowances
of $79.8 million were recognized upon these transfers. Also in fourth
quarter 1997, $92.5 million of writedowns on real estate held for
production of income were recognized.
F-22
<PAGE>
Benefits and other deductions includes $26.6 million and $53.3 million
of interest expense related to amounts borrowed from continuing
operations in 1998 and 1997, respectively.
Valuation allowances of $1.9 million and $3.0 million on mortgage loans
on real estate and $54.8 million and $34.8 million on equity real estate
were held at December 31, 1999 and 1998, respectively. Writedowns of
equity real estate were $95.7 million in 1997.
During 1999, 1998 and 1997, discontinued operations' average recorded
investment in impaired mortgage loans was $13.8 million, $73.3 million
and $89.2 million, respectively. Interest income recognized on these
impaired mortgage loans totaled $1.7 million, $4.7 million and $6.6
million ($.0 million, $3.4 million and $5.3 million recognized on a cash
basis) for 1999, 1998 and 1997, respectively.
At December 31, 1999 and 1998, discontinued operations had real estate
acquired in satisfaction of debt with carrying values of $24.1 million
and $50.0 million, respectively.
9) SHORT-TERM AND LONG-TERM DEBT
Short-term and long-term debt consists of the following:
<TABLE>
<CAPTION>
December 31,
--------------------------------------
1999 1998
----------------- -----------------
(In Millions)
<S> <C> <C>
Short-term debt...................................................... $ 557.0 $ 179.3
----------------- -----------------
Long-term debt:
Equitable Life:
Surplus notes, 6.95% due 2005...................................... 399.5 399.4
Surplus notes, 7.70% due 2015...................................... 199.7 199.7
Other.............................................................. .4 .3
----------------- -----------------
Total Equitable Life........................................... 599.6 599.4
----------------- -----------------
Wholly Owned and Joint Venture Real Estate:
Mortgage notes, 5.43% - 9.5%, due through 2017..................... 251.3 392.2
----------------- -----------------
Alliance:
Other.............................................................. - 10.8
----------------- -----------------
Total long-term debt................................................. 850.9 1,002.4
----------------- -----------------
Total Short-term and Long-term Debt.................................. $ 1,407.9 $ 1,181.7
================= =================
</TABLE>
Short-term Debt
Equitable Life has a $700.0 million bank credit facility available to
fund short-term working capital needs and to facilitate the securities
settlement process. The credit facility consists of two types of
borrowing options with varying interest rates and expires in September
2000. The interest rates are based on external indices dependent on the
type of borrowing and at December 31, 1999 range from 5.76% to 8.5%.
There were no borrowings outstanding under this bank credit facility at
December 31, 1999.
Equitable Life has a commercial paper program with an issue limit of
$1.0 billion. This program is available for general corporate purposes
used to support Equitable Life's liquidity needs and is supported by
Equitable Life's existing $700.0 million bank credit facility. At
December 31, 1999, there were $166.9 million outstanding under this
program.
Alliance has a $425.0 million five-year revolving credit facility with a
group of commercial banks. Under the facility, the interest rate, at the
option of Alliance, is a floating rate generally based upon a defined
prime rate, a rate related to the London Interbank Offered Rate
("LIBOR") or the Federal Funds Rate. A facility fee is payable on the
total facility. During July 1999, Alliance increased the size of its
commercial paper program by $200.0 million from $425.0 million for a
total available limit of $625.0 million. Borrowings from the revolving
credit facility and the original commercial paper program may not exceed
$425.0 million in the aggregate. The revolving credit facility provides
backup liquidity for commercial paper issued under Alliance's commercial
paper program and can be used as a direct source of borrowing. The
revolving credit facility contains covenants that require Alliance to,
F-23
<PAGE>
among other things, meet certain financial ratios. At December 31, 1999,
Alliance had commercial paper outstanding totaling $384.7 million at an
effective interest rate of 5.9%; there were no borrowings outstanding
under Alliance's revolving credit facility.
In December 1999, Alliance established a $100.0 million extendible
commercial notes ("ECN") program to supplement its commercial paper
program. ECN's are short-term debt instruments that do not require any
back-up liquidity support.
Long-term Debt
Several of the long-term debt agreements have restrictive covenants
related to the total amount of debt, net tangible assets and other
matters. At December 31, 1999, the Company is in compliance with all
debt covenants.
The Company has pledged real estate, mortgage loans, cash and securities
amounting to $323.6 million and $640.2 million at December 31, 1999 and
1998, respectively, as collateral for certain short-term and long-term
debt.
At December 31, 1999, aggregate maturities of the long-term debt based
on required principal payments at maturity was $3.0 million for 2000 and
$848.7 million for 2005 and thereafter.
10) FEDERAL INCOME TAXES
A summary of the Federal income tax expense in the consolidated
statements of earnings follows:
<TABLE>
<CAPTION>
1999 1998 1997
----------------- ---------------- -----------------
(In Millions)
<S> <C> <C> <C>
Federal income tax expense (benefit):
Current.......................................... $ 174.0 $ 283.3 $ 186.5
Deferred......................................... 158.0 69.8 (95.0)
----------------- ---------------- -----------------
Total.............................................. $ 332.0 $ 353.1 $ 91.5
================= ================ =================
</TABLE>
F-24
<PAGE>
The Federal income taxes attributable to consolidated operations are
different from the amounts determined by multiplying the earnings before
Federal income taxes and minority interest by the expected Federal
income tax rate of 35%. The sources of the difference and their tax
effects follow:
<TABLE>
<CAPTION>
1999 1998 1997
----------------- ---------------- -----------------
(In Millions)
<S> <C> <C> <C>
Expected Federal income tax expense................ $ 458.4 $ 414.3 $ 234.7
Non-taxable minority interest...................... (47.8) (33.2) (38.0)
Non-taxable subsidiary gains....................... (37.1) (6.4) -
Adjustment of tax audit reserves................... 27.8 16.0 (81.7)
Equity in unconsolidated subsidiaries.............. (64.0) (39.3) (45.1)
Other.............................................. (5.3) 1.7 21.6
----------------- ---------------- -----------------
Federal Income Tax Expense......................... $ 332.0 $ 353.1 $ 91.5
================= ================ =================
</TABLE>
The components of the net deferred Federal income taxes are as follows:
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998
--------------------------------- ---------------------------------
Assets Liabilities Assets Liabilities
--------------- ---------------- --------------- ---------------
(In Millions)
<S> <C> <C> <C> <C>
Compensation and related benefits...... $ - $ 37.7 $ 235.3 $ -
Other.................................. - 20.6 27.8 -
DAC, reserves and reinsurance.......... - 329.7 - 231.4
Investments............................ 115.1 - - 364.4
--------------- ---------------- --------------- ---------------
Total.................................. $ 115.1 $ 388.0 $ 263.1 $ 595.8
=============== ================ =============== ===============
</TABLE>
At December 31, 1999, $236.8 million in deferred tax assets were
transferred to the Holding Company in conjunction with its assumption of
the non-qualified employee benefit liabilities. See Note 12 for
discussion of the benefit plans transferred.
The deferred Federal income taxes impacting operations reflect the net
tax effects of temporary differences between the carrying amounts of
assets and liabilities for financial reporting purposes and the amounts
used for income tax purposes. The sources of these temporary differences
and their tax effects follow:
<TABLE>
<CAPTION>
1999 1998 1997
----------------- ---------------- -----------------
(In Millions)
<S> <C> <C> <C>
DAC, reserves and reinsurance...................... $ 83.2 $ (7.7) $ 46.2
Investments........................................ 3.2 46.8 (113.8)
Compensation and related benefits.................. 21.0 28.6 3.7
Other.............................................. 50.6 2.1 (31.1)
----------------- ---------------- -----------------
Deferred Federal Income Tax
Expense (Benefit)................................ $ 158.0 $ 69.8 $ (95.0)
================= ================ =================
</TABLE>
F-25
<PAGE>
The Internal Revenue Service (the "IRS") is in the process of examining
the Holding Company's consolidated Federal income tax returns for the
years 1992 through 1996. Management believes these audits will have no
material adverse effect on the Company's results of operations.
11) REINSURANCE AGREEMENTS
The Insurance Group assumes and cedes reinsurance with other insurance
companies. The Insurance Group evaluates the financial condition of its
reinsurers to minimize its exposure to significant losses from reinsurer
insolvencies. Ceded reinsurance does not relieve the originating insurer
of liability. The effect of reinsurance (excluding group life and
health) is summarized as follows:
<TABLE>
<CAPTION>
1999 1998 1997
----------------- ---------------- -----------------
(In Millions)
<S> <C> <C> <C>
Direct premiums.................................... $ 420.6 $ 438.8 $ 448.6
Reinsurance assumed................................ 206.7 203.6 198.3
Reinsurance ceded.................................. (69.1) (54.3) (45.4)
----------------- ---------------- -----------------
Premiums........................................... $ 558.2 $ 588.1 $ 601.5
================= ================ =================
Universal Life and Investment-type Product
Policy Fee Income Ceded.......................... $ 69.7 $ 75.7 $ 61.0
================= ================ =================
Policyholders' Benefits Ceded...................... $ 99.6 $ 85.9 $ 70.6
================= ================ =================
Interest Credited to Policyholders' Account
Balances Ceded................................... $ 38.5 $ 39.5 $ 36.4
================= ================ =================
</TABLE>
Since 1997, the Company reinsures on a yearly renewal term basis 90% of
the mortality risk on new issues of certain term, universal and variable
life products. The Company's retention limit on joint survivorship
policies is $15.0 million. All in force business above $5.0 million is
reinsured. The Insurance Group also reinsures the entire risk on certain
substandard underwriting risks and in certain other cases.
The Insurance Group cedes 100% of its group life and health business to
a third party insurer. Premiums ceded totaled $.1 million, $1.3 million
and $1.6 million for 1999, 1998 and 1997, respectively. Ceded death and
disability benefits totaled $44.7 million, $15.6 million and $4.3
million for 1999, 1998 and 1997, respectively. Insurance liabilities
ceded totaled $510.5 million and $560.3 million at December 31, 1999 and
1998, respectively.
F-26
<PAGE>
12) EMPLOYEE BENEFIT PLANS
The Company sponsors qualified and non-qualified defined benefit plans
covering substantially all employees (including certain qualified
part-time employees), managers and certain agents. The pension plans are
non-contributory. Equitable Life's benefits are based on a cash balance
formula or years of service and final average earnings, if greater,
under certain grandfathering rules in the plans. Alliance's benefits are
based on years of credited service, average final base salary and
primary social security benefits. The Company's funding policy is to
make the minimum contribution required by the Employee Retirement Income
Security Act of 1974 ("ERISA").
Effective December 31, 1999, the Holding Company legally assumed primary
liability from Equitable Life for all current and future obligations of
its Excess Retirement Plan, Supplemental Executive Retirement Plan and
certain other employee benefit plans that provide participants with
medical, life insurance, and deferred compensation benefits; Equitable
Life remains secondarily liable. The amount of the liability associated
with employee benefits transferred was $676.5 million, including $183.0
million of non-qualified pension benefit obligations and $394.1 million
of postretirement benefits obligations at December 31, 1999. This
transfer was recorded as a non-cash capital contribution to Equitable
Life.
Components of net periodic pension (credit) cost for the qualified and
non-qualified plans follow:
<TABLE>
<CAPTION>
1999 1998 1997
----------------- ---------------- -----------------
(In Millions)
<S> <C> <C> <C>
Service cost....................................... $ 36.7 $ 33.2 $ 32.5
Interest cost on projected benefit obligations..... 131.6 129.2 128.2
Actual return on assets............................ (189.8) (175.6) (307.6)
Net amortization and deferrals..................... 7.5 6.1 166.6
----------------- ---------------- -----------------
Net Periodic Pension Cost (Credit)................. $ (14.0) $ (7.1) $ 19.7
================= ================ =================
</TABLE>
The projected benefit obligations under the qualified and non-qualified
pension plans were comprised of:
<TABLE>
<CAPTION>
December 31,
------------------------------------
1999 1998
---------------- -----------------
(In Millions)
<S> <C> <C>
Benefit obligations, beginning of year................................. $ 1,933.4 $ 1,801.3
Service cost........................................................... 36.7 33.2
Interest cost.......................................................... 131.6 129.2
Actuarial (gains) losses............................................... (53.3) 108.4
Benefits paid.......................................................... (123.1) (138.7)
---------------- -----------------
Subtotal before transfer............................................... 1,925.3 1,933.4
Transfer of Non-qualified Pension Benefit Obligation
to the Holding Company............................................... (262.5) -
---------------- -----------------
Benefit Obligation, End of Year........................................ $ 1,662.8 $ 1,933.4
================ =================
</TABLE>
F-27
<PAGE>
The funded status of the qualified and non-qualified pension plans was
as follows:
<TABLE>
<CAPTION>
December 31,
------------------------------------
1999 1998
---------------- -----------------
(In Millions)
<S> <C> <C>
Plan assets at fair value, beginning of year........................... $ 2,083.1 $ 1,867.4
Actual return on plan assets........................................... 369.0 338.9
Contributions.......................................................... .1 -
Benefits paid and fees................................................. (108.5) (123.2)
---------------- -----------------
Plan assets at fair value, end of year................................. 2,343.7 2,083.1
Projected benefit obligations.......................................... 1,925.3 1,933.4
---------------- -----------------
Excess of plan assets over projected benefit obligations............... 418.4 149.7
Unrecognized prior service cost........................................ (5.2) (7.5)
Unrecognized net (gain) loss from past experience different
from that assumed.................................................... (197.3) 38.7
Unrecognized net asset at transition................................... (.1) 1.5
---------------- -----------------
Subtotal before transfer............................................... 215.8 182.4
Transfer of Accrued Non-qualified Pension Benefit Obligation
to the Holding Company............................................... 183.0 -
---------------- -----------------
Prepaid Pension Cost, Net.............................................. $ 398.8 $ 182.4
================ =================
</TABLE>
The prepaid pension cost for pension plans with assets in excess of
projected benefit obligations was $412.2 million and $363.9 million and
the accrued liability for pension plans with projected benefit
obligations in excess of plan assets was $13.5 million and $181.5
million at December 31, 1999 and 1998, respectively.
The pension plan assets include corporate and government debt
securities, equity securities, equity real estate and shares of group
trusts managed by Alliance. The discount rate and rate of increase in
future compensation levels used in determining the actuarial present
value of projected benefit obligations were 8.0% and 6.38%,
respectively, at December 31, 1999 and 7.0% and 3.83%, respectively, at
December 31, 1998. As of January 1, 1999 and 1998, the expected
long-term rate of return on assets for the retirement plan was 10.0% and
10.25%, respectively.
The Company recorded, as a reduction of shareholder's equity, an
additional minimum pension liability of $.1 million, $28.3 million and
$17.3 million, net of Federal income taxes, at December 31, 1999, 1998
and 1997, respectively, primarily representing the excess of the
accumulated benefit obligation of the non-qualified pension plan over
the accrued liability. The aggregate accumulated benefit obligation and
fair value of plan assets for pension plans with accumulated benefit
obligations in excess of plan assets were $325.7 million and $36.3
million, respectively, at December 31, 1999 and $309.7 million and $34.5
million, respectively, at December 31, 1998.
Prior to 1987, the qualified plan funded participants' benefits through
the purchase of non-participating annuity contracts from Equitable Life.
Benefit payments under these contracts were approximately $30.2 million,
$31.8 million and $33.2 million for 1999, 1998 and 1997, respectively.
The Company provides certain medical and life insurance benefits
(collectively, "postretirement benefits") for qualifying employees,
managers and agents retiring from the Company (i) on or after attaining
age 55 who have at least 10 years of service or (ii) on or after
attaining age 65 or (iii) whose jobs have been abolished and who have
attained age 50 with 20 years of service. The life insurance benefits
are related to age and salary at retirement. The costs of postretirement
benefits are recognized in accordance with the provisions of SFAS No.
106. The Company continues to fund postretirement benefits costs on a
pay-as-you-go basis and, for 1999, 1998 and 1997, the Company made
estimated postretirement benefits payments of $29.5 million, $28.4
million and $18.7 million, respectively.
F-28
<PAGE>
The following table sets forth the postretirement benefits plan's
status, reconciled to amounts recognized in the Company's consolidated
financial statements:
<TABLE>
<CAPTION>
1999 1998 1997
----------------- ---------------- -----------------
(In Millions)
<S> <C> <C> <C>
Service cost....................................... $ 4.7 $ 4.6 $ 4.5
Interest cost on accumulated postretirement
benefits obligation.............................. 34.4 33.6 34.7
Unrecognized prior service costs................... (7.0) - -
Net amortization and deferrals..................... 8.4 .5 1.9
----------------- ---------------- -----------------
Net Periodic Postretirement Benefits Costs......... $ 40.5 $ 38.7 $ 41.1
================= ================ =================
</TABLE>
<TABLE>
<CAPTION>
December 31,
------------------------------------
1999 1998
---------------- -----------------
(In Millions)
<S> <C> <C>
Accumulated postretirement benefits obligation, beginning
of year.............................................................. $ 490.4 $ 490.8
Service cost........................................................... 4.7 4.6
Interest cost.......................................................... 34.4 33.6
Contributions and benefits paid........................................ (29.5) (28.4)
Actuarial gains........................................................ (29.0) (10.2)
---------------- -----------------
Accumulated postretirement benefits obligation, end of year............ 471.0 490.4
Unrecognized prior service cost........................................ 26.9 31.8
Unrecognized net loss from past experience different
from that assumed and from changes in assumptions.................... (86.0) (121.2)
---------------- -----------------
Subtotal before transfer............................................... 411.9 401.0
Transfer to the Holding Company........................................ (394.1) -
---------------- -----------------
Accrued Postretirement Benefits Cost................................... $ 17.8 $ 401.0
================ =================
</TABLE>
Since January 1, 1994, costs to the Company for providing these medical
benefits available to retirees under age 65 are the same as those
offered to active employees and medical benefits will be limited to 200%
of 1993 costs for all participants.
The assumed health care cost trend rate used in measuring the
accumulated postretirement benefits obligation was 7.5% in 1999,
gradually declining to 4.75% in the year 2010, and in 1998 was 8.0%,
gradually declining to 2.5% in the year 2009. The discount rate used in
determining the accumulated postretirement benefits obligation was 8.0%
and 7.0% at December 31, 1999 and 1998, respectively.
If the health care cost trend rate assumptions were increased by 1%, the
accumulated postretirement benefits obligation as of December 31, 1999
would be increased 3.55%. The effect of this change on the sum of the
service cost and interest cost would be an increase of 3.91%. If the
health care cost trend rate assumptions were decreased by 1% the
accumulated postretirement benefits obligation as of December 31, 1999
would be decreased by 4.38%. The effect of this change on the sum of the
service cost and interest cost would be a decrease of 4.96%.
F-29
<PAGE>
13) DERIVATIVES AND FAIR VALUE OF FINANCIAL INSTRUMENTS
Derivatives
The Insurance Group primarily uses derivatives for asset/liability risk
management and for hedging individual securities. Derivatives mainly are
utilized to reduce the Insurance Group's exposure to interest rate
fluctuations. Accounting for interest rate swap transactions is on an
accrual basis. Gains and losses related to interest rate swap
transactions are amortized as yield adjustments over the remaining life
of the underlying hedged security. Income and expense resulting from
interest rate swap activities are reflected in net investment income.
The notional amount of matched interest rate swaps outstanding at
December 31, 1999 and 1998, respectively, was $797.3 million and $880.9
million. The average unexpired terms at December 31, 1999 ranged from
two months to 5.0 years. At December 31, 1999, the cost of terminating
swaps in a loss position was $1.8 million. Equitable Life maintains an
interest rate cap program designed to hedge crediting rates on
interest-sensitive individual annuities contracts. The outstanding
notional amounts at December 31, 1999 of contracts purchased and sold
were $7,575.0 million and $875.0 million, respectively. The net premium
paid by Equitable Life on these contracts was $51.6 million and is being
amortized ratably over the contract periods ranging from 1 to 4 years.
Income and expense resulting from this program are reflected as an
adjustment to interest credited to policyholders' account balances.
DLJ enters into certain contractual agreements referred to as
derivatives or off-balance-sheet financial instruments primarily for
trading purposes and to provide products for its clients. DLJ performs
the following activities: writing over-the-counter ("OTC") options to
accommodate customer needs; trading in forward contracts in U.S.
government and agency issued or guaranteed securities; trading in
futures contracts on equity based indices, interest rate instruments,
and currencies; and issuing structured products based on emerging market
financial instruments and indices. DLJ also enters into swap agreements,
primarily equity, interest rate and foreign currency swaps. DLJ is not
significantly involved in commodity derivative instruments.
Fair Value of Financial Instruments
The Company defines fair value as the quoted market prices for those
instruments that are actively traded in financial markets. In cases
where quoted market prices are not available, fair values are estimated
using present value or other valuation techniques. The fair value
estimates are made at a specific point in time, based on available
market information and judgments about the financial instrument,
including estimates of the timing and amount of expected future cash
flows and the credit standing of counterparties. Such estimates do not
reflect any premium or discount that could result from offering for sale
at one time the Company's entire holdings of a particular financial
instrument, nor do they consider the tax impact of the realization of
unrealized gains or losses. In many cases, the fair value estimates
cannot be substantiated by comparison to independent markets, nor can
the disclosed value be realized in immediate settlement of the
instrument.
Certain financial instruments are excluded, particularly insurance
liabilities other than financial guarantees and investment contracts.
Fair market value of off-balance-sheet financial instruments of the
Insurance Group was not material at December 31, 1999 and 1998.
F-30
<PAGE>
Fair values for mortgage loans on real estate are estimated by
discounting future contractual cash flows using interest rates at which
loans with similar characteristics and credit quality would be made.
Fair values for foreclosed mortgage loans and problem mortgage loans are
limited to the estimated fair value of the underlying collateral if
lower.
Fair values of policy loans are estimated by discounting the face value
of the loans from the time of the next interest rate review to the
present, at a rate equal to the excess of the current estimated market
rates over the current interest rate charged on the loan.
The estimated fair values for the Company's association plan contracts,
supplementary contracts not involving life contingencies ("SCNILC") and
annuities certain, which are included in policyholders' account
balances, and guaranteed interest contracts are estimated using
projected cash flows discounted at rates reflecting expected current
offering rates.
The estimated fair values for variable deferred annuities and single
premium deferred annuities ("SPDA"), which are included in
policyholders' account balances, are estimated by discounting the
account value back from the time of the next crediting rate review to
the present, at a rate equal to the excess of current estimated market
rates offered on new policies over the current crediting rates.
Fair values for long-term debt are determined using published market
values, where available, or contractual cash flows discounted at market
interest rates. The estimated fair values for non-recourse mortgage debt
are determined by discounting contractual cash flows at a rate which
takes into account the level of current market interest rates and
collateral risk. The estimated fair values for recourse mortgage debt
are determined by discounting contractual cash flows at a rate based
upon current interest rates of other companies with credit ratings
similar to the Company. The Company's carrying value of short-term
borrowings approximates their estimated fair value.
The following table discloses carrying value and estimated fair value
for financial instruments not otherwise disclosed in Notes 3, 7 and 8:
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------------------
1999 1998
--------------------------------- ---------------------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
--------------- ---------------- --------------- ---------------
(In Millions)
<S> <C> <C> <C> <C>
Consolidated Financial Instruments:
Mortgage loans on real estate.......... $ 3,270.0 $ 3,239.3 $ 2,809.9 $ 2,961.8
Other limited partnership interests.... 647.9 647.9 562.6 562.6
Policy loans........................... 2,257.3 2,359.5 2,086.7 2,370.7
Policyholders' account balances -
investment contracts................. 12,740.4 12,800.5 12,892.0 13,396.0
Long-term debt......................... 850.9 834.9 1,002.4 1,025.2
Closed Block Financial Instruments:
Mortgage loans on real estate.......... $ 1,704.2 $ 1,650.3 $ 1,633.4 $ 1,703.5
Other equity investments............... 36.3 36.3 56.4 56.4
Policy loans........................... 1,593.9 1,712.0 1,641.2 1,929.7
SCNILC liability....................... 22.8 22.5 25.0 25.0
Discontinued Operations Financial
Instruments:
Mortgage loans on real estate.......... $ 454.6 $ 467.0 $ 553.9 $ 599.9
Fixed maturities....................... 85.5 85.5 24.9 24.9
Other equity investments............... 55.8 55.8 115.1 115.1
Guaranteed interest contracts.......... 33.2 27.5 37.0 34.0
Long-term debt......................... 101.9 101.9 147.1 139.8
</TABLE>
F-31
<PAGE>
14) COMMITMENTS AND CONTINGENT LIABILITIES
The Company has provided, from time to time, certain guarantees or
commitments to affiliates, investors and others. These arrangements
include commitments by the Company, under certain conditions: to make
capital contributions of up to $59.4 million to affiliated real estate
joint ventures; and to provide equity financing to certain limited
partnerships of $373.8 million at December 31, 1999, under existing loan
or loan commitment agreements.
Equitable Life is the obligor under certain structured settlement
agreements which it had entered into with unaffiliated insurance
companies and beneficiaries. To satisfy its obligations under these
agreements, Equitable Life owns single premium annuities issued by
previously wholly owned life insurance subsidiaries. Equitable Life has
directed payment under these annuities to be made directly to the
beneficiaries under the structured settlement agreements. A contingent
liability exists with respect to these agreements should the previously
wholly owned subsidiaries be unable to meet their obligations.
Management believes the satisfaction of those obligations by Equitable
Life is remote.
The Insurance Group had $24.9 million of letters of credit outstanding
at December 31, 1999.
15) LITIGATION
Insurance Group
Life Insurance and Annuity Sales Cases
A number of lawsuits are pending as individual claims and purported
class actions against Equitable Life, its subsidiary insurance company
and a former insurance subsidiary. These actions involve, among other
things, sales of life and annuity products for varying periods from 1980
to the present, and allege, among other things, sales practice
misrepresentation primarily involving: the number of premium payments
required; the propriety of a product as an investment vehicle; the
propriety of a product as a replacement of an existing policy; and
failure to disclose a product as life insurance. Some actions are in
state courts and others are in U.S. District Courts in different
jurisdictions, and are in varying stages of discovery and motions for
class certification.
In general, the plaintiffs request an unspecified amount of damages,
punitive damages, enjoinment from the described practices, prohibition
against cancellation of policies for non-payment of premium or other
remedies, as well as attorneys' fees and expenses. Similar actions have
been filed against other life and health insurers and have resulted in
the award of substantial judgments, including material amounts of
punitive damages, or in substantial settlements. Although the outcome of
litigation cannot be predicted with certainty, particularly in the early
stages of an action, the Company's management believes that the ultimate
resolution of these cases should not have a material adverse effect on
the financial position of the Company. The Company's management cannot
make an estimate of loss, if any, or predict whether or not any such
litigation will have a material adverse effect on the Company's results
of operations in any particular period.
Discrimination Case
Equitable Life is a defendant in an action, certified as a class action
in September 1997, in the United States District Court for the Northern
District of Alabama, Southern Division, involving alleged discrimination
on the basis of race against African-American applicants and potential
applicants in hiring individuals as sales agents. Plaintiffs seek a
declaratory judgment and affirmative and negative injunctive relief,
including the payment of back-pay, pension and other compensation.
Although the outcome of litigation cannot be predicted with certainty,
the Company's management believes that the ultimate resolution of this
matter should not have a material adverse effect on the financial
position of the Company. The Company's management cannot make an
estimate of loss, if any, or predict whether or not such matter will
have a material adverse effect on the Company's results of operations in
any particular period.
F-32
<PAGE>
Agent Health Benefits Case
Equitable Life is a defendant in an action, certified as a class action
in March 1999, in the United States District Court for the Northern
District of California, alleging, among other things, that Equitable
Life violated ERISA by eliminating certain alternatives pursuant to
which agents of Equitable Life could qualify for health care coverage.
The class consists of "[a]ll current, former and retired Equitable
agents, who while associated with Equitable satisfied [certain
alternatives] to qualify for health coverage or contributions thereto
under applicable plans." Plaintiffs allege various causes of action
under ERISA, including claims for enforcement of alleged promises
contained in plan documents and for enforcement of agent bulletins,
breach of unilateral contract, breach of fiduciary duty and promissory
estoppel. The parties are currently engaged in discovery. Although the
outcome of any litigation cannot be predicted with certainty, the
Company's management believes that the ultimate resolution of this
matter should not have a material adverse effect on the financial
position of the Company. The Company's management cannot make an
estimate of loss, if any, or predict whether or not such matter will
have a material adverse effect on the Company's results of operations in
any particular period.
Primary Property Fund Case
In January 2000, the California Supreme Court denied the Company's
petition for review of an October 1999 decision by the California
Superior Court of Appeal. Such decision reversed the dismissal by the
Supreme Court of Orange County, California of an action which was
commenced in 1995 by a real estate developer in connection with a
limited partnership formed in 1991 with the Company on behalf of Prime
Property Fund ("PPF"). The Company serves as investment manager for PPF,
an open-end, commingled real estate separate account of The Company for
pension clients. Plaintiff alleges breach of fiduciary duty and other
claims principally in connection with PPF's 1995 purchase and subsequent
foreclosure of the loan which financed the partnership's property.
Plaintiff seeks compensatory and punitive damages. The case has been
remanded to the Superior Court for further proceedings. Although the
outcome of litigation cannot be predicted with certainty, the Company's
management believes that the ultimate resolution of this matter should
not have a material adverse effect on the financial position of the
Company. The Company's management cannot make an estimate of loss, if
any, or predict whether or not this matter will have a material adverse
effect on the Company's results of operations in any particular period.
Alliance Capital
In July 1995, a class action complaint was filed against Alliance North
American Government Income Trust, Inc. (the "Fund"), Alliance Holding
and certain other defendants affiliated with Alliance, including the
Holding Company, alleging violations of Federal securities laws, fraud
and breach of fiduciary duty in connection with the Fund's investments
in Mexican and Argentine securities. The original complaint was
dismissed in 1996; on appeal, the dismissal was affirmed. In October
1996, plaintiffs filed a motion for leave to file an amended complaint,
alleging the Fund failed to hedge against currency risk despite
representations that it would do so, the Fund did not properly disclose
that it planned to invest in mortgage-backed derivative securities and
two Fund advertisements misrepresented the risks of investing in the
Fund. In October 1998, the U.S. Court of Appeals for the Second Circuit
issued an order granting plaintiffs' motion to file an amended complaint
alleging that the Fund misrepresented its ability to hedge against
currency risk and denying plaintiffs' motion to file an amended
complaint containing the other allegations. In December 1999, the United
States District Court for the Southern District of New York granted the
defendants' motion for summary judgment on all claims against all
defendants. Later in December 1999, the plaintiffs filed motions for
reconsideration of the Court's ruling. These motions are currently
pending with the Court.
In connection with the Reorganization, Alliance assumed any liabilities
which Alliance Holding may have with respect to this action. Alliance
and Alliance Holding believe that the allegations in the amended
complaint are without merit and intend to vigorously defend against
these claims. While the ultimate outcome of this matter cannot be
determined at this time, management of Alliance Holding and Alliance do
not expect that it will have a material adverse effect on Alliance
Holding's or Alliance's results of operations or financial condition.
F-33
<PAGE>
DLJSC
Donaldson, Lufkin & Jenrette Securities Corporation ("DLJSC") is a
defendant along with certain other parties in a class action complaint
involving the underwriting of units, consisting of notes and warrants to
purchase common shares, of Rickel Home Centers, Inc. ("Rickel"), which
filed a voluntary petition for reorganization pursuant to Chapter 11 of
the Bankruptcy Code. The complaint seeks unspecified compensatory and
punitive damages from DLJSC, as an underwriter and as an owner of 7.3%
of the common stock, for alleged violation of Federal securities laws
and common law fraud for alleged misstatements and omissions contained
in the prospectus and registration statement used in the offering of the
units. In April 1999, the complaint against DLJSC and the other
defendants was dismissed. The plaintiffs have appealed. DLJSC intends to
defend itself vigorously against all the allegations contained in the
complaint.
DLJSC is a defendant in a purported class action filed in a Texas State
Court on behalf of the holders of $550 million principal amount of
subordinated redeemable discount debentures of National Gypsum
Corporation ("NGC"). The debentures were canceled in connection with a
Chapter 11 plan of reorganization for NGC consummated in July 1993. The
litigation seeks compensatory and punitive damages for DLJSC's
activities as financial advisor to NGC in the course of NGC's Chapter 11
proceedings. In March 1999, the Court granted motions for summary
judgment filed by DLJSC and the other defendants. The plaintiffs have
appealed. DLJSC intends to defend itself vigorously against all the
allegations contained in the complaint.
In November 1998, three purported class actions were filed in the U.S.
District Court for the Southern District of New York against more than
25 underwriters of initial public offering securities, including DLJSC.
The complaints allege that defendants conspired to fix the "fee" paid
for underwriting initial public offering securities by setting the
underwriters' discount or "spread" at 7%, in violation of the Federal
antitrust laws. The complaints seek treble damages in an unspecified
amount and injunctive relief as well as attorneys' fees and costs. In
March 1999, the plaintiffs filed a consolidated amended complaint. A
motion by all defendants to dismiss the complaints on several grounds is
pending. Separately, the U.S. Department of Justice has issued a Civil
Investigative Demand to several investment banking firms, including
DLJSC, seeking documents and information relating to "alleged"
price-fixing with respect to underwriting spreads in initial public
offerings. The Justice Department has not made any charges against DLJSC
or the other investment banking firms. DLJSC is cooperating with the
Justice Department in providing the requested information and believes
that no violation of law by DLJSC has occurred.
Although there can be no assurance, DLJ's management does not believe
that the ultimate resolution of the litigations described above to which
DLJSC is a party will have a material adverse effect on DLJ's
consolidated financial condition. Based upon the information currently
available to it, DLJ's management cannot predict whether or not such
litigations will have a material adverse effect on DLJ's results of
operations in any particular period.
Other Matters
In addition to the matters 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.
16) LEASES
The Company has entered into operating leases for office space and
certain other assets, principally information technology equipment and
office furniture and equipment. Future minimum payments under
noncancelable leases for 2000 and the four successive years are $111.2
million, $93.3 million, $78.3 million, $71.9 million, $66.5 million and
$523.7 million thereafter. Minimum future sublease rental income on
these noncancelable leases for 2000 and the four successive years is
$5.2 million, $4.1 million, $2.8 million, $2.8 million, $2.8 million and
$23.8 million thereafter.
F-34
<PAGE>
At December 31, 1999, the minimum future rental income on noncancelable
operating leases for wholly owned investments in real estate for 2000
and the four successive years is $120.7 million, $113.5 million, $96.0
million, $79.7 million, $74.1 million and $354.6 million thereafter.
17) OTHER OPERATING COSTS AND EXPENSES
Other operating costs and expenses consisted of the following:
<TABLE>
<CAPTION>
1999 1998 1997
----------------- ---------------- -----------------
(In Millions)
<S> <C> <C> <C>
Compensation costs................................. $ 1,010.6 $ 772.0 $ 721.5
Commissions........................................ 549.5 478.1 409.6
Short-term debt interest expense................... 16.7 26.1 31.7
Long-term debt interest expense.................... 76.3 84.6 121.2
Amortization of policy acquisition costs........... 314.5 292.7 287.3
Capitalization of policy acquisition costs......... (709.9) (609.1) (508.0)
Writedown of policy acquisition costs.............. 131.7 - -
Rent expense, net of sublease income............... 113.9 100.0 101.8
Cursitor intangible assets writedown............... - - 120.9
Other.............................................. 1,294.0 1,056.8 917.9
----------------- ---------------- -----------------
Total.............................................. $ 2,797.3 $ 2,201.2 $ 2,203.9
================= ================ =================
</TABLE>
During 1997, the Company restructured certain operations in connection
with cost reduction programs and recorded a pre-tax provision of $42.4
million. The amount paid during 1999 associated with cost reduction
programs totaled $15.6 million. At December 31, 1999, the remaining
liabilities associated with cost reduction programs was $8.8 million.
The 1997 cost reduction program included costs related to employee
termination and exit costs.
18) INSURANCE GROUP STATUTORY FINANCIAL INFORMATION
Equitable Life is restricted as to the amounts it may pay as shareholder
dividends. Under the New York Insurance Law, the Superintendent has
broad discretion to determine whether the financial condition of a stock
life insurance company would support the payment of dividends to its
shareholders. For 1999, 1998 and 1997, statutory net income (loss)
totaled $547.0 million, $384.4 million and ($351.7) million,
respectively. Statutory surplus, capital stock and Asset Valuation
Reserve ("AVR") totaled $5,570.6 million and $4,728.0 million at
December 31, 1999 and 1998, respectively. In September 1999, $150.0
million in dividends were paid to the Holding Company by Equitable Life,
the first such payment since Equitable Life's demutualization in 1992.
At December 31, 1999, the Insurance Group, in accordance with various
government and state regulations, had $26.8 million of securities
deposited with such government or state agencies.
The differences between statutory surplus and capital stock determined
in accordance with Statutory Accounting Principles ("SAP") and total
shareholder's equity under GAAP are primarily: (a) the inclusion in SAP
of an AVR intended to stabilize surplus from fluctuations in the value
of the investment portfolio; (b) future policy benefits and
policyholders' account balances under SAP differ from GAAP due to
differences between actuarial assumptions and reserving methodologies;
(c) certain policy acquisition costs are expensed under SAP but deferred
under GAAP and amortized over future periods to achieve a matching of
revenues and expenses; (d) external and certain internal costs incurred
to obtain or develop internal use computer software during the
application development stage is capitalized under GAAP but expensed
under SAP; (e) Federal income taxes are generally accrued under SAP
based upon revenues and expenses in the Federal income tax return while
under GAAP deferred taxes provide for timing differences between
recognition of revenues and expenses for financial reporting and income
tax purposes; (f) the valuation of assets under SAP and GAAP differ due
to different investment valuation and depreciation methodologies, as
well as the deferral of interest-related realized capital gains and
losses on fixed income investments; and (g) differences in the accrual
methodologies for post-employment and retirement benefit plans.
F-35
<PAGE>
19) BUSINESS SEGMENT INFORMATION
The Company's operations consist of Insurance and Investment Services.
The Company's management evaluates the performance of each of these
segments independently and allocates resources based on current and
future requirements of each segment. Management evaluates the
performance of each segment based upon operating results adjusted to
exclude the effect of unusual or non-recurring events and transactions
and certain revenue and expense categories not related to the base
operations of the particular business net of minority interest.
Information for all periods is presented on a comparable basis.
Intersegment investment advisory and other fees of approximately $75.6
million, $61.8 million and $84.1 million for 1999, 1998 and 1997,
respectively, are included in total revenues of the Investment Services
segment. These fees, excluding amounts related to discontinued
operations of $.5 million, $.5 million and $4.2 million for 1999, 1998
and 1997, respectively, are eliminated in consolidation.
The following tables reconcile each segment's revenues and operating
earnings to total revenues and earnings from continuing operations
before Federal income taxes and cumulative effect of accounting change
as reported on the consolidated statements of earnings and the segments'
assets to total assets on the consolidated balance sheets, respectively.
<TABLE>
<CAPTION>
Investment
Insurance Services Elimination Total
--------------- ----------------- --------------- ----------------
(In Millions)
<S> <C> <C> <C> <C>
1999
Segment revenues..................... $ 4,283.0 $ 2,052.7 $ (23.8) $ 6,311.9
Investment (losses) gains............ (199.4) 111.5 - (87.9)
--------------- ----------------- --------------- ----------------
Total Revenues....................... $ 4,083.6 $ 2,164.2 $ (23.8) $ 6,224.0
=============== ================= =============== ================
Pre-tax operating earnings........... $ 895.7 $ 427.0 $ - $ 1,322.7
Investment (losses) gains , net of
DAC and other charges.............. (208.4) 110.5 - (97.9)
Non-recurring DAC adjustments........ (131.7) - - (131.7)
Pre-tax minority interest............ - 216.8 - 216.8
--------------- ----------------- --------------- ----------------
Earnings from Continuing
Operations......................... $ 555.6 $ 754.3 $ - $ 1,309.9
=============== ================= =============== ================
Total Assets......................... $ 86,842.7 $ 12,961.7 $ (8.9) $ 99,795.5
=============== ================= =============== ================
1998
Segment revenues..................... $ 4,029.8 $ 1,438.4 $ (5.7) $ 5,462.5
Investment gains..................... 64.8 35.4 - 100.2
--------------- ----------------- --------------- ----------------
Total Revenues....................... $ 4,094.6 $ 1,473.8 $ (5.7) $ 5,562.7
=============== ================= =============== ================
Pre-tax operating earnings........... $ 688.6 $ 284.3 $ - $ 972.9
Investment gains, net of
DAC and other charges.............. 41.7 27.7 - 69.4
Pre-tax minority interest............ - 141.5 - 141.5
--------------- ----------------- --------------- ----------------
Earnings from Continuing
Operations......................... $ 730.3 $ 453.5 $ - $ 1,183.8
=============== ================= =============== ================
Total Assets......................... $ 75,626.0 $ 12,379.2 $ (64.4) $ 87,940.8
=============== ================= =============== ================
</TABLE>
F-36
<PAGE>
<TABLE>
<CAPTION>
Investment
Insurance Services Elimination Total
--------------- ----------------- --------------- ----------------
<S> <C> <C> <C> <C>
1997
Segment revenues..................... $ 3,990.8 $ 1,200.0 $ (7.7) $ 5,183.1
Investment (losses) gains............ (318.8) 255.1 - (63.7)
--------------- ----------------- --------------- ----------------
Total Revenues....................... $ 3,672.0 $ 1,455.1 $ (7.7) $ 5,119.4
=============== ================= =============== ================
Pre-tax operating earnings........... $ 507.0 $ 258.3 $ - $ 765.3
Investment (losses) gains, net of
DAC and other charges.............. (292.5) 252.7 - (39.8)
Non-recurring costs and expenses..... (41.7) (121.6) - (163.3)
Pre-tax minority interest............ - 108.5 - 108.5
--------------- ----------------- --------------- ----------------
Earnings from Continuing
Operations......................... $ 172.8 $ 497.9 $ - $ 670.7
=============== ================= =============== ================
Total Assets......................... $ 67,762.4 $ 13,691.4 $ (96.1) $ 81,357.7
=============== ================= =============== ================
</TABLE>
20) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The quarterly results of operations for 1999 and 1998 are summarized
below:
<TABLE>
<CAPTION>
Three Months Ended
------------------------------------------------------------------------------
March 31 June 30 September 30 December 31
----------------- ----------------- ------------------ ------------------
(In Millions)
<S> <C> <C> <C> <C>
1999
Total Revenues................ $ 1,484.3 $ 1,620.3 $ 1,512.1 $ 1,607.3
================= ================= ================== ==================
Earnings from Continuing
Operations.................. $ 187.3 $ 222.6 $ 186.5 $ 182.1
================= ================= ================== ==================
Net Earnings.................. $ 182.0 $ 221.3 $ 183.1 $ 220.2
================= ================= ================== ==================
1998
Total Revenues................ $ 1,470.2 $ 1,422.9 $ 1,297.6 $ 1,372.0
================= ================= ================== ==================
Earnings from Continuing
Operations.................. $ 212.8 $ 197.0 $ 136.8 $ 158.9
================= ================= ================== ==================
Net Earnings.................. $ 213.3 $ 198.3 $ 137.5 $ 159.1
================= ================= ================== ==================
</TABLE>
F-37
<PAGE>
21) INVESTMENT IN DLJ
At December 31, 1999, the Company's ownership of DLJ interest was
approximately 31.71%. The Company's ownership interest in DLJ will
continue to be reduced upon the exercise of options granted to certain
DLJ employees and the vesting of forfeitable restricted stock units
acquired by DLJ employees. DLJ restricted stock units represent
forfeitable rights to receive approximately 5.2 million shares of DLJ
common stock through February 2000.
The results of operations of DLJ are accounted for on the equity basis
and are included in commissions, fees and other income in the
consolidated statements of earnings. The Company's carrying value of DLJ
is included in investment in and loans to affiliates in the consolidated
balance sheets.
Summarized balance sheets information for DLJ, reconciled to the
Company's carrying value of DLJ, are as follows:
<TABLE>
<CAPTION>
December 31,
------------------------------------
1999 1998
---------------- -----------------
(In Millions)
<S> <C> <C>
Assets:
Trading account securities, at market value............................ $ 27,982.4 $ 13,195.1
Securities purchased under resale agreements........................... 29,538.1 20,063.3
Broker-dealer related receivables...................................... 44,998.1 34,264.5
Other assets........................................................... 6,493.5 4,759.3
---------------- -----------------
Total Assets........................................................... $ 109,012.1 $ 72,282.2
================ =================
Liabilities:
Securities sold under repurchase agreements............................ $ 56,474.4 $ 35,775.6
Broker-dealer related payables......................................... 37,207.4 26,161.5
Short-term and long-term debt.......................................... 6,518.6 3,997.6
Other liabilities...................................................... 4,704.5 3,219.8
---------------- -----------------
Total liabilities...................................................... 104,904.9 69,154.5
DLJ's company-obligated mandatorily redeemed preferred
securities of subsidiary trust holding solely debentures of DLJ...... 200.0 200.0
Total shareholders' equity............................................. 3,907.2 2,927.7
---------------- -----------------
Total Liabilities, Cumulative Exchangeable Preferred Stock and
Shareholders' Equity................................................. $ 109,012.1 $ 72,282.2
================ =================
DLJ's equity as reported............................................... $ 3,907.2 $ 2,927.7
Unamortized cost in excess of net assets acquired in 1985
and other adjustments................................................ 22.9 23.7
The Holding Company's equity ownership in DLJ.......................... (1,341.4) (1,002.4)
Minority interest in DLJ............................................... (1,479.3) (1,118.2)
---------------- -----------------
The Company's Carrying Value of DLJ.................................... $ 1,109.4 $ 830.8
================ =================
</TABLE>
F-38
<PAGE>
Summarized statements of earnings information for DLJ reconciled to the
Company's equity in earnings of DLJ is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---------------- ---------------- ----------------
(In Millions)
<S> <C> <C> <C>
Commission, fees and other income................... $ 4,145.1 $ 3,150.5 $ 2,430.7
Net investment income............................... 2,175.3 2,189.1 1,652.1
Principal Transactions, net......................... 825.9 67.4 557.7
----------------- ---------------- -----------------
Total revenues...................................... 7,146.3 5,407.0 4,640.5
Total expenses including income taxes............... 6,545.6 5,036.2 4,232.2
----------------- ---------------- -----------------
Net earnings........................................ 600.7 370.8 408.3
Dividends on preferred stock........................ 21.2 21.3 12.2
----------------- ---------------- -----------------
Earnings Applicable to Common Shares................ $ 579.5 $ 349.5 $ 396.1
================= ================ =================
DLJ's earnings applicable to common shares as
reported.......................................... $ 579.5 $ 349.5 $ 396.1
Amortization of cost in excess of net assets
acquired in 1985.................................. (.9) (.8) (1.3)
The Holding Company's equity in DLJ's earnings...... (222.7) (136.8) (156.8)
Minority interest in DLJ............................ (172.9) (99.5) (109.1)
----------------- ---------------- -----------------
The Company's Equity in DLJ's Earnings.............. $ 183.0 $ 112.4 $ 128.9
================= ================ =================
</TABLE>
22) ACCOUNTING FOR STOCK-BASED COMPENSATION
The Holding Company sponsors a stock incentive plan for employees of
Equitable Life. DLJ and Alliance each sponsor their own stock option
plans for certain employees. The Company has elected to continue to
account for stock-based compensation using the intrinsic value method
prescribed in APB No. 25. Had compensation expense for the Holding
Company, DLJ and Alliance Stock Option Incentive Plan options been
determined based on SFAS No. 123's fair value based method, the
Company's pro forma net earnings for 1999, 1998 and 1997 would have been
$757.1 million, $678.4 million and $426.3 million, respectively.
The fair values of options granted after December 31, 1994, used as a
basis for the pro forma disclosures above, were estimated as of the
grant dates using the Black-Scholes option pricing model. The option
pricing assumptions for 1999, 1998 and 1997 follow:
<TABLE>
<CAPTION>
Holding Company DLJ Alliance
------------------------------ ------------------------------- ----------------------------------
1999 1998 1997 1999 1998 1997 1999 1998 1997
--------- ---------- --------- ---------- -------------------- --------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Dividend yield...... 0.31% 0.32% 0.48% 0.56% 0.69% 0.86% 8.70% 6.50% 8.00%
Expected
volatility........ 28% 28% 20% 36% 40% 33% 29% 29% 26%
Risk-free interest
rate.............. 5.46% 5.48% 5.99% 5.06% 5.53% 5.96% 5.70 4.40% 5.70%
Expected life
in years.......... 5 5 5 5 5 5 7 7.2 7.2
Weighted average
fair value per
option at
grant-date........ $10.78 $11.32 $6.13 $17.19 $16.27 $10.81 $3.88 $3.86 $2.18
</TABLE>
F-39
<PAGE>
A summary of the Holding Company, DLJ and Alliance's option plans
follows:
<TABLE>
<CAPTION>
Holding Company DLJ Alliance
----------------------------- ----------------------------- -----------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Price of Price of Price of
Shares Options Shares Options Units Options
(In Millions) Outstanding (In Millions) Outstanding (In Millions) Outstanding
--------------- ------------- --------------- ------------- -----------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance as of
January 1, 1997........ 13.4 $10.40 22.2 $14.03 10.0 $ 9.54
Granted................ 6.4 $20.93 6.4 $30.54 2.2 $18.28
Exercised.............. (3.2) $10.13 (.2) $16.01 (1.2) $ 8.06
Forfeited.............. (.8) $11.72 (.2) $13.79 (.4) $10.64
--------------- ------------- ---------------
Balance as of
December 31, 1997...... 15.8 $14.53 28.2 $17.78 10.6 $11.41
Granted................ 8.6 $33.13 1.5 $38.59 2.8 $26.28
Exercised.............. (2.2) $10.59 (1.4) $14.91 (.9) $ 8.91
Forfeited.............. (.8) $23.51 (.1) $17.31 (.2) $13.14
--------------- ------------- ---------------
Balance as of
December 31, 1998...... 21.4 $22.00 28.2 $19.04 12.3 $14.92
Granted................ 4.3 $31.70 4.8 $45.23 2.0 $30.18
Exercised.............. (2.4) $13.26 (2.2) $34.61 (1.5) $ 9.51
Forfeited.............. (.6) $24.29 (.1) $15.85 (.3) $17.79
--------------- ------------- ---------------
Balance as of
December 31, 1999...... 22.7 $24.60 30.7 $23.30 12.5 $17.95
=============== ============= ===============
</TABLE>
F-40
<PAGE>
Information about options outstanding and exercisable at December 31,
1999 follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------------------- -------------------------------------
Weighted
Average Weighted Weighted
Range of Number Remaining Average Number Average
Exercise Outstanding Contractual Exercise Exercisable Exercise
Prices (In Millions) Life (Years) Price (In Millions) Price
-------------------- ----------------- ---------------- --------------- ------------------ ----------------
<S> <C> <C> <C> <C> <C>
Holding
Company
--------------------
$ 9.06 -$13.88 5.6 4.2 $10.50 10.9 $18.98
$14.25 -$22.63 5.2 7.7 $20.95 - -
$25.32 -$34.59 8.2 8.7 $29.08 - -
$40.97 -$41.28 3.7 8.6 $41.28 - -
----------------- ------------------
$ 9.06 -$41.28 22.7 7.3 $24.60 10.9 $18.98
================= ================ =============== ================== ================
DLJ
--------------------
$13.50 -$25.99 20.2 8.4 $14.61 20.6 $16.62
$26.00 -$38.99 4.9 7.8 $33.99 - -
$39.00 -$52.875 4.8 9.0 $43.28 - -
$53.00 -$76.875 .8 9.7 $57.09 - -
----------------- ------------------
$13.50 -$76.875 30.7 8.4 $23.30 20.6 $16.62
================= ================ =============== ================== ================
Alliance
--------------------
$ 3.66 -$ 9.81 2.6 3.8 $ 8.31 2.2 $ 8.12
$ 9.88 -$12.56 3.3 5.6 $11.16 2.6 $10.92
$13.75 -$18.47 1.8 7.9 $18.34 .7 $18.34
$18.78 -$26.31 2.8 8.9 $26.16 .6 $26.06
$27.31 -$30.94 2.0 9.9 $30.24 - -
----------------- ------------------
$ 3.66 -$30.94 12.5 7.0 $17.95 6.1 $12.12
================= ================ =============== ================== ================
</TABLE>
F-41
<PAGE>
Report of Independent Accountants on
Consolidated Financial Statement Schedules
February 1, 2000
To the Board of Directors of
The Equitable Life Assurance Society of the United States
Our audits of the consolidated financial statements referred to in our report
dated February 1, 2000 appearing on page F-1 of this Annual Report on Form 10-K
also included an audit of the consolidated financial statement schedules listed
in Item 14 of this Form 10-K. In our opinion, these consolidated financial
statement schedules present fairly, in all material respects, the information
set forth therein when read in conjunction with the related consolidated
financial statements.
/s/ PricewaterhouseCoopers LLP
F-42
<PAGE>
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
SCHEDULE I
SUMMARY OF INVESTMENTS - OTHER THAN INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 1999
<TABLE>
<CAPTION>
Estimated Carrying
Type of Investment Cost (A) Fair Value Value
- ------------------ ----------------- ---------------- ---------------
(In Millions)
<S> <C> <C> <C>
Fixed maturities:
U.S. government, agencies and authorities................. $ 1,194.1 $ 1,189.6 $ 1,189.6
State, municipalities and political subdivisions.......... 110.0 106.5 106.5
Foreign governments....................................... 361.8 363.2 363.2
Public utilities.......................................... 1,267.9 1,247.5 1,247.5
All other corporate bonds................................. 16,286.6 15,574.0 15,574.0
Redeemable preferred stocks............................... 286.4 252.1 252.1
----------------- ---------------- ---------------
Total fixed maturities.................................... 19,506.8 18,732.9 18,732.9
----------------- ---------------- ---------------
Equity securities:
Common stocks:
Industrial, miscellaneous and all other............... 32.7 23.3 23.3
Mortgage loans on real estate............................. 3,270.0 3,239.3 3,270.0
Real estate............................................... 523.6 xxx 523.6
Real estate acquired in satisfaction of debt.............. 443.9 xxx 443.9
Real estate joint ventures................................ 192.7 xxx 192.7
Policy loans.............................................. 2,257.3 2,359.5 2,257.3
Other limited partnership interests....................... 647.9 647.9 647.9
Investment in and loans to affiliates..................... 1,201.8 1,201.8 1,201.8
Other invested assets..................................... 911.6 911.6 911.6
----------------- ---------------- ---------------
Total Investments......................................... $ 28,988.3 $ 27,116.3 $ 28,205.0
================= ================ ===============
<FN>
(A) Cost for fixed maturities represents original cost, reduced by repayments
and writedowns and adjusted for amortization of premiums or accretion of
discount; for equity securities, cost represents original cost; for other
limited partnership interests, cost represents original cost adjusted for
equity in earnings and distributions.
</FN>
</TABLE>
F-43
<PAGE>
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
SCHEDULE II
BALANCE SHEETS (PARENT COMPANY)
DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
----------------- -----------------
(In Millions)
<S> <C> <C>
ASSETS
Investment:
Fixed maturities:
Available for sale, at estimated fair value (amortized cost of
$19,111.3 and $18,207.0, respectively)................................ $ 18,345.8 $ 18,740.4
Held to maturity, at amortized cost..................................... 133.2 125.0
Mortgage loans on real estate............................................. 3,270.0 2,921.7
Equity real estate........................................................ 1,280.7 1,568.6
Policy loans.............................................................. 2,054.8 1,894.2
Investments in and loans to affiliates.................................... 1,400.7 1,104.8
Other invested assets..................................................... 1,412.6 1,394.6
----------------- -----------------
Total investments..................................................... 27,897.8 27,749.3
Cash and cash equivalents................................................... 495.7 1,107.4
Deferred policy acquisition costs........................................... 3,977.4 3,512.2
Amounts due from discontinued operations.................................... 30.9 2.7
Other assets................................................................ 1,706.3 1,517.2
Closed Block assets......................................................... 8,607.3 8,632.4
Separate Accounts assets.................................................... 54,453.9 43,302.3
----------------- -----------------
Total Assets................................................................ $ 97,169.3 $ 85,823.5
================= =================
LIABILITIES
Policyholders' account balances............................................. $ 20,974.4 $ 20,532.8
Future policy benefits and other policyholders' liabilities................. 4,714.4 4,644.3
Short-term and long-term debt............................................... 1,014.8 878.3
Other liabilities........................................................... 1,340.7 2,067.2
Closed Block liabilities.................................................... 9,025.0 9,077.0
Separate Accounts liabilities............................................... 54,332.5 43,211.3
----------------- -----------------
Total liabilities..................................................... 91,401.8 80,410.9
----------------- -----------------
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.............................................. 3,557.2 3,110.2
Retained earnings........................................................... 2,600.7 1,944.1
Accumulated other comprehensive income...................................... (392.9) 355.8
----------------- -----------------
Total shareholder's equity............................................ 5,767.5 5,412.6
----------------- -----------------
Total Liabilities and Shareholder's Equity.................................. $ 97,169.3 $ 85,823.5
================= =================
</TABLE>
The financial information of The Equitable Life Assurance Society of the United
States (Parent Company) should be read in conjunction with the Consolidated
Financial Statements and Notes thereto.
F-44
<PAGE>
Effective December 31, 1999, the Holding Company assumed primary liability from
Equitable Life for all current and future obligations of its Excess Retirement
Plan, Supplemental Executive Retirement Plan and certain other employee benefit
plans that provide participants with medical, life insurance and deferred
compensation benefits; Equitable Life remains secondarily liable. The amount of
liability associated with employee benefits assumed was $676.5 million,
including $183.0 million of non-qualified pension benefit obligations and $394.1
million of postretirement benefit obligations at December 31, 1999. In addition,
Equitable Life transferred to the Holding Company the deferred tax assets
totaling $236.8 million related to the assumed employee benefit plans.
F-45
<PAGE>
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
SCHEDULE II
STATEMENTS OF EARNINGS (PARENT COMPANY)
YEARS ENDED DECEMBER 31, 1999, 1998, 1997
<TABLE>
<CAPTION>
1999 1998 1997
----------------- ----------------- ----------------
(In Millions)
<S> <C> <C> <C>
REVENUES
Universal life and investment-type product policy fee
income........................................................ $ 1,252.5 $ 1,051.3 $ 936.4
Premiums........................................................ 549.5 577.1 593.3
Net investment income........................................... 2,180.6 2,111.5 2,098.3
Investment (losses) gains, net.................................. (223.9) 15.7 (216.3)
Equity in earnings of subsidiaries ............................. 411.2 269.7 258.9
Commissions, fees and other income.............................. 82.6 35.4 34.7
Contribution from the Closed Block.............................. 86.4 87.1 102.5
----------------- ----------------- -----------------
Total revenues............................................ 4,338.9 4,147.8 3,807.8
----------------- ----------------- -----------------
BENEFITS AND OTHER DEDUCTIONS
Interest credited to policyholders' account balances............ 1,056.1 1,122.6 1,196.0
Policyholders' benefits......................................... 1,029.1 1,014.5 965.3
Other operating costs and expenses.............................. 1,265.3 1,055.9 1,119.5
----------------- ----------------- -----------------
Total benefits and other deductions....................... 3,350.5 3,193.0 3,280.8
----------------- ----------------- -----------------
Earnings from continuing operations before Federal income
taxes......................................................... 988.4 954.8 527.0
Federal income tax expense...................................... (209.9) (249.3) (2.6)
----------------- ----------------- -----------------
Earnings from continuing operations............................. 778.5 705.5 524.4
Discontinued operations, net of Federal income taxes............ 28.1 2.7 (87.2)
----------------- ----------------- -----------------
Net Earnings.................................................... $ 806.6 $ 708.2 $ 437.2
================= ================= =================
</TABLE>
F-46
<PAGE>
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
SCHEDULE II
STATEMENTS OF CASH FLOWS (PARENT COMPANY)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
----------------- ----------------- ----------------
(In Millions)
<S> <C> <C> <C>
Net earnings.................................................... $ 806.6 $ 708.2 $ 437.2
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Interest credited to policyholders' account balances.......... 1,056.1 1,122.6 1,196.0
Universal life and investment-type policy fee income.......... (1,252.5) (1,051.3) (936.4)
Investment losses (gains), net................................ 223.9 (15.7) 216.3
Equity in net earnings of subsidiaries........................ (411.2) (269.7) (259.5)
Dividends from subsidiaries................................... 155.3 120.3 300.8
Other, net.................................................... (250.7) (221.8) (95.3)
----------------- ----------------- ----------------
Net cash provided by operating activities....................... 327.5 392.6 859.1
----------------- ----------------- ----------------
Cash flows from investing activities:
Maturities and repayments..................................... 1,997.8 2,250.6 2,619.2
Sales......................................................... 7,494.2 16,883.8 10,308.9
Purchases..................................................... (10,640.0) (18,347.2) (13,102.2)
Decrease in loans to discontinued operations.................. (28.1) 660.0 420.1
(Increase) decrease in short-term investments................. (100.3) 18.3 (493.3)
Increase in policy loans...................................... (160.6) (153.7) (156.6)
Other, net.................................................... (142.0) (104.2) (154.8)
----------------- ----------------- ----------------
Net cash (used) provided by investing activities................ (1,579.0) 1,207.6 (558.7)
----------------- ----------------- ----------------
Cash flows from financing activities:
Policyholders' account balances:
Deposits.................................................... 2,405.7 1,535.1 1,280.7
Withdrawals................................................. (1,753.1) (1,713.5) (1,869.7)
Net increase (decrease) in short-term financings.............. 167.6 (351.1) 348.0
Repayments of long-term debt.................................. (30.5) (16.7) (190.3)
Payment of obligation to fund accumulated deficit of
discontinued operations..................................... - (87.2) (83.9)
Dividend paid to the Holding Company.......................... (150.0) - -
Other......................................................... .1 12.7 19.5
----------------- ----------------- ----------------
Net cash provided (used) by financing activities................ 639.8 (620.7) (495.7)
----------------- ----------------- ----------------
Change in cash and cash equivalents............................. (611.7) 979.5 (195.3)
Cash and cash equivalents, beginning of year.................... 1,107.4 127.9 323.2
----------------- ----------------- ----------------
Cash and Cash Equivalents, End of Year.......................... $ 495.7 $ 1,107.4 $ 127.9
================= ================= ================
Supplemental cash flow information
Interest Paid................................................. $ 92.2 $ 130.7 $ 215.3
================= ================= ================
Income Taxes Paid............................................. $ 116.5 $ 254.3 $ 170.0
================= ================= ================
</TABLE>
F-47
<PAGE>
<TABLE>
<CAPTION>
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
SCHEDULE III
SUPPLEMENTARY INSURANCE INFORMATION
AT AND FOR THE YEAR ENDED DECEMBER 31, 1999
Future Policy Policy Amortization
Deferred Benefits Charges (1) Policyholders' of Deferred (2)
Policy Policyholders' and Other and Net Benefits and Policy Other
Acquisition Account Policyholders' Premium Investment Interest Acquisition Operating
Segment Costs Balance Funds Revenue Income Credited Cost Expense
- ------------------- -------------- -------------- -------------- ----------- ----------- --------------- ------------- ------------
(In Millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Insurance.......... $ 4,033.0 $ 21,351.4 $ 4,777.6 $ 1,815.7 $ 2,176.2 $ 2,116.8 $ 446.2 $ 965.0
Investment
Services......... - - - - 12.9 - - 1,409.9
Consolidation/
Elimination...... - - - - 51.8 - - (23.8)
-------------- -------------- -------------- ------------ ----------- -------------- ------------- ------------
Total.............. $ 4,033.0 $ 21,351.4 $ 4,777.6 $ 1,815.7 $ 2,240.9 $ 2,116.8 $ 446.2 $ 2,351.1
============== ============== ============== ============ =========== ============== ============= ============
<FN>
(1) Net investment income is based upon specific identification of portfolios
within segments.
(2) Operating expenses are principally incurred directly by a segment.
</FN>
</TABLE>
F-48
<PAGE>
<TABLE>
<CAPTION>
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
SCHEDULE III
SUPPLEMENTARY INSURANCE INFORMATION
AT AND FOR THE YEAR ENDED DECEMBER 31, 1998
Future Policy Policy Amortization
Deferred Benefits Charges (1) Policyholders' of Deferred (2)
Policy Policyholders' and Other and Net Benefits and Policy Other
Acquisition Account Policyholders' Premium Investment Interest Acquisition Operating
Segment Costs Balance Funds Revenue Income Credited Cost Expense
- ------------------- -------------- -------------- -------------- ----------- ----------- --------------- ------------- ------------
(In Millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Insurance.......... $ 3,563.8 $ 20,857.5 $ 4,726.4 $ 1,644.3 $ 2,162.4 $ 2,177.6 $ 292.7 $ 894.0
Investment
Services......... - - - - 12.2 .1 - 1,020.2
Consolidation/
Elimination...... - - - - 53.5 - - (5.7)
- ------------------- -------------- -------------- -------------- ----------- ----------- --------------- ------------- ------------
Total.............. $ 3,563.8 $ 20,857.5 $ 4,726.4 $ 1,644.3 $ 2,228.1 $ 2,177.7 $ 292.7 $ 1,908.5
============== ============== ============== ============ =========== ============== ============= ============
<FN>
(1) Net investment income is based upon specific identification of portfolios
within segments.
(2) Operating expenses are principally incurred directly by a segment.
</FN>
</TABLE>
F-49
<PAGE>
<TABLE>
<CAPTION>
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
SCHEDULE III
SUPPLEMENTARY INSURANCE INFORMATION
AT AND FOR THE YEAR ENDED DECEMBER 31, 1997
Policy Amortization
Charges (1) Policyholders' of Deferred (2)
and Net Benefits and Policy Other
Premium Investment Interest Acquisition Operating
Segment Revenue Income Credited Cost Expense
- ------------------------------------------------- ----------- ------------ --------------- ------------- ------------
(In Millions)
<S> <C> <C> <C> <C> <C>
Insurance........................................ $ 1,552.0 $ 2,202.3 $ 2,244.8 $ 287.3 $ 967.1
Investment Services.............................. .1 14.5 - - 957.2
Consolidation/Elimination........................ - 66.0 - - (7.7)
----------- ------------ --------------- ------------- ------------
Total............................................ $ 1,552.1 $ 2,282.8 $ 2,244.8 $ 287.3 $ 1,916.6
=========== ============ =============== ============= ============
<FN>
(1) Net investment income is based upon specific identification of portfolios
within segments.
(2) Operating expenses are principally incurred directly by a segment.
</FN>
</TABLE>
F-50
<PAGE>
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
SCHEDULE IV
REINSURANCE (A)
AT AND FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
Assumed Percentage
Ceded to from of Amount
Gross Other Other Net Assumed
Amount Companies Companies Amount to Net
----------------- ---------------- ----------------- ----------------- ---------------
(Dollars In Millions)
<S> <C> <C> <C> <C> <C>
1999
Life insurance in force(B)... $ 256,231.0 $ 40,892.0 $ 44,725.0 $ 260,064.0 17.2%
================= ================ ================= =================
Premiums:
Life insurance and
annuities.................. $ 247.9 $ 42.6 $ 131.9 $ 337.2 39.12%
Accident and health.......... 172.8 26.6 74.8 221.0 33.85%
----------------- ---------------- ----------------- -----------------
Total Premiums............... $ 420.7 $ 69.2 $ 206.7 $ 558.2 37.03%
================= ================ ================= =================
1998
Life insurance in force(B)... $ 246,910.0 $ 34,471.0 $ 47,957.0 $ 260,396.0 18.42%
================= ================ ================= =================
Premiums:
Life insurance and
annuities.................. $ 254.6 $ 30.2 $ 122.7 $ 347.1 35.35%
Accident and health.......... 185.5 25.4 80.9 241.0 33.57%
----------------- ---------------- ----------------- -----------------
Total Premiums............... $ 440.1 $ 55.6 $ 203.6 $ 588.1 34.62%
================= ================ ================= =================
1997
Life insurance in force(B)... $ 238,336.0 $ 17,004.1 $ 44,708.3 $ 266,040.2 16.81%
================= ================ ================= =================
Premiums:
Life insurance and
annuities.................. $ 248.9 $ 18.3 $ 124.1 $ 354.7 34.99%
Accident and health.......... 201.3 28.7 74.2 246.8 30.06%
----------------- ---------------- ----------------- -----------------
Total Premiums............... $ 450.2 $ 47.0 $ 198.3 $ 601.5 32.97%
================= ================ ================= =================
<FN>
(A) Includes amounts related to the discontinued group life and health business.
(B) Includes in force business related to the Closed Block.
</FN>
</TABLE>
F-51
<PAGE>
Part II, Item 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
9-1
<PAGE>
Part III, Item 10.
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Omitted pursuant to General Instruction I to Form 10-K.
10-1
<PAGE>
Part III, Item 11.
EXECUTIVE COMPENSATION
Omitted pursuant to General Instruction I to Form 10-K.
11-1
<PAGE>
Part III, Item 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of all of Equitable Life's Common Stock as of March 15, 2000, with
respect to which AXA Client Solutions, LLC has sole investment and voting power.
<TABLE>
<CAPTION>
Amount and Nature
Name and Address of Beneficial Percent
Title of Class of Beneficial Owner Ownership of Class
- -------------------------- ----------------------------------------- ------------------------ ---------------
<S> <C> <C> <C>
Common Stock AXA Client Solutions, LLC 2,000,000 100%
1290 Avenue of the Americas
New York, New York 10104
</TABLE>
12-1
<PAGE>
Part III, Item 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Omitted pursuant to General Instruction I to Form 10-K.
13-1
<PAGE>
Part IV, Item 14.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K
(A) The following documents are filed as part of this report:
1. Financial Statements
The financial statements are listed in the Index to Consolidated
Financial Statements and Schedules on page FS-1.
2. Consolidated Financial Statement Schedules
The consolidated financial statement schedules are listed in the
Index to Consolidated Financial Statements and Schedules on page
FS-1.
3. Exhibits:
The exhibits are listed in the Index to Exhibits which begins on
page E-1.
(B) Reports on Form 8-K
None
14-1
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, The Equitable Life Assurance Society of the United States has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Date: March 27, 2000 THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE
UNITED STATES
By: /s/ Edward D. Miller
-------------------------------------------
Name: Edward D. Miller
Chairman of the Board and
Chief Executive Officer, Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
<TABLE>
<S> <C> <C>
/s/ Edward D. Miller Chairman of the Board and March 27, 2000
- ------------------------------- Chief Executive Officer, Director
Edward D. Miller
/s/ Stanley B. Tulin Vice Chairman of the Board and March 27, 2000
- ------------------------------- Chief Financial Officer, Director
Stanley B. Tulin
/s/ Michael Hegarty President and Chief Operating Officer, March 27, 2000
- ------------------------------- Director
Michael Hegarty
/s/ Alvin H. Fenichel Senior Vice President and Controller March 27, 2000
- -------------------------------
Alvin H. Fenichel
/s/ Henri de Castries Director March 27, 2000
- -------------------------------
Henri de Castries
/s/ Francoise Colloc'h Director March 27, 2000
- -------------------------------
Francoise Colloc'h
/s/ Joseph L. Dionne Director March 27, 2000
- -------------------------------
Joseph L. Dionne
/s/ Denis Duverne Director March 27, 2000
- -------------------------------
Denis Duverne
Director March , 2000
- -------------------------------
Jean-Rene Fourtou
/s/ Norman C. Francis Director March 27, 2000
- -------------------------------
Norman C. Francis
S-1
<PAGE>
/s/ Donald J. Greene Director March 27, 2000
- -------------------------------
Donald J. Greene
/s/ John T. Hartley Director March 27, 2000
- -------------------------------
John T. Hartley
/s/ John H. F. Haskell, Jr. Director March 27, 2000
- -------------------------------
John H. F. Haskell, Jr.
/s/ Nina Henderson Director March 27, 2000
- -------------------------------
Nina Henderson
/s/ W. Edwin Jarmain Director March 27, 2000
- -------------------------------
W. Edwin Jarmain
/s/ George T. Lowy Director March 27, 2000
- -------------------------------
George T. Lowy
/s/ Didier Pineau-Valencienne Director March 27, 2000
- -------------------------------
Didier Pineau-Valencienne
/s/ George J. Sella, Jr. Director March 27, 2000
- -------------------------------
George J. Sella, Jr.
/s/ Peter J. Tobin Director March 27, 2000
- -------------------------------
Peter J. Tobin
/s/ Dave H. Williams Director March 27, 2000
- -------------------------------
Dave H. Williams
</TABLE>
S-2
<PAGE>
<TABLE>
<CAPTION>
INDEX TO EXHIBITS
<S> <C> <C> <C>
Tag
Number Description Method of Filing Value
- ---------- ----------------------------------------- --------------------------------------------- ----------
3.1 Restated Charter of Equitable Life, Filed as Exhibit 3.1(a) to registrant's
as amended January 1, 1997 annual report on Form 10-K for the year ended
December 31, 1996 and incorporated
herein by reference
3.2 Restated By-laws of Equitable Life, Filed as Exhibit 3.2(a) to registrant's
as amended November 21, 1996 annual report on Form 10-K for the year ended
December 31, 1996 and incorporated
herein by reference
10.1 Standstill and Registration Filed as Exhibit 10(c) to Amendment
Rights Agreement, dated as of July No. 1 to the Holding Company's
18, 1991, as amended, between the Form S-1 Registration Statement
Holding Company, Equitable (No.33-48115), dated May 26, 1992 and
Life and AXA incorporated herein by reference
10.2 Cooperation Agreement, dated as Filed as Exhibit 10(d) to the Holding
of July 18, 1991, as amended Company's Form S-1 Registration
among Equitable Life, the Holding Statement (No. 33-48115), dated May 26,
Company and AXA 1992 and incorporated herein
by reference
10.3 Letter Agreement, dated May Filed as Exhibit 10(e) to the Holding
12, 1992, among the Holding Company's Form S-1 Registration
Company, Equitable Life and Statement (No. 33-48115), dated May 26,
AXA 1992 and incorporated herein
by reference
10.4 Amended and Restated Reinsurance Filed as Exhibit 10(o) to the Holding
Agreement, dated as of March Company's Form S-1 Registration
29, 1990, between Equitable Life Statement (No. 33-48115), dated May 26,
and First Equicor Life 1992 and incorporated herein
Insurance Company by reference
10.5 Fiscal Agency Agreement between Filed as Exhibit 10.5 to registrant's
Equitable Life and The Chase annual report on Form 10-K for the year
Manhattan Bank, N.A. ended December 31, 1995 and
incorporated herein by reference
10.6(a) Lease, dated as of July 20, 1995, Filed as Exhibit 10.26(a) to the Holding
between 1290 Associates and Company's annual report on Form 10-K
Equitable Life for the year ended December 31, 1996
and incorporated herein by reference
</TABLE>
E-1
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Tag
Number Description Method of Filing Page
- ---------- ----------------------------------------- --------------------------------------------- ----------
10.6(b) First Amendment of Lease Agree- Filed as Exhibit 10.26(b) to the Holding
ment, dated as of December 28, Company's annual report on Form 10-K
1995, between 1290 Associates, for the year ended December 31, 1996
L.L.C. and Equitable Life and incorporated herein by reference
10.6(c) Amended and Restated Company Filed as Exhibit 10.26(c) to the Holding
Lease Agreement (Facility Realty), Company's annual report on Form 10-K
made as of May 1, 1996, by and for the year ended December 31, 1996
between Equitable Life and the IDA and incorporated herein by reference
10.6(d) Amended and Restated Lease Agree- Filed as Exhibit 10.26(d) to the Holding
ment (Project Property), made and Company's annual report on Form 10-K
entered into as of May 1, 1996, by for the year ended December 31, 1996
and between the IDA, Equitable and incorporated herein by reference
Life and EVLICO
10.7 Distribution and Servicing Agreement Filed herewith
between AXA Advisors (as successor to
Equico Securities, Inc.) and
Equitable Life dated as of
May 1, 1994
10.8 Agreement for Cooperative and Joint Filed herewith
Use of Personnel, Property and
Services between
Equitable Life and AXA Advisors
dated as of September 21, 1999
10.9 General Agent Sales Agreement Filed herewith
between Equitable Life and
AXA Network, LLC dated as of
January 1, 2000
10.10 Agreement for Services by Filed herewith
Equitable Life to AXA Network
dated as of January 1, 2000
27 Financial Data Schedule Filed herewith
</TABLE>
E-2
DISTRIBUTION AND SERVICING AGREEMENT
This DISTRIBUTION AND SERVICING AGREEMENT, dated as of May 1, 1994, is
made by and among Equico Securities, Inc. ("Equico"), The Equitable Life
Assurance Society of the United States ("Equitable") and Equitable Variable Life
Insurance Company ("Equitable Variable"), as follows:
WHEREAS, pursuant to a Distribution Agreement, dated as of May 1, 1994,
Equico is the principal underwriter of The Hudson River Trust ("Trust"), a
series mutual fund registered under the Investment Company Act of 1940 ("1940
Act") whose shareholders are separate accounts of Equitable and Equitable
Variable and of other insurance companies;
WHEREAS, both Equitable and Equitable Variable issue variable insurance
contracts ("Variable Contracts") whose net premiums or considerations are
allocated in whole or in part to the respective separate accounts of Equitable
and Equitable Variable for investment in the Trust, for direct investment or for
investment in other funding media ("Separate Accounts");
WHEREAS; units of interest in the Separate Accounts are registered
under the Securities Act of 1933 ("1933 Act") to the extent such registration is
required;
WHEREAS, Equitable and Equitable Variable are each broker-dealers
registered under the Securities Exchange Act of 1934, as amended ("1934 Act"),
and each is a member of the National Association of Securities Dealers, Inc.
("NASD");
-1-
<PAGE>
-2-
WHEREAS, the Variable Contracts (including all Variable Contracts issued
by Equitable Variable) are offered and sold by members of Equitable's agency
force, or by insurance brokers under contract with Equitable, who are also
registered representatives of Equico and of Equitable ("Agents");
WHEREAS, Equitable and Equitable Variable each desire to engage Equico, a
wholly-owned subsidiary of Equitable which is a registered broker-dealer under
the 1934 Act and a member of the NASD, to assume the responsibilities set forth
in this Agreement with respect to the distribution of the Variable Contracts,
including in particular the responsibility for compliance with broker-dealer
requirements under federal and any applicable state or foreign securities laws
and the NASD Rules of Fair Practice ("NASD Rules") with respect to the offering
of the Variable Contracts, and Equico desires to assume such responsibilities;
WHEREAS, Equico desires to utilize Equitable's services and personnel in
carrying out certain of its responsibilities under this Agreement, and Equitable
is willing to furnish the same on the terms and conditions hereinafter set
forth;
NOW, THEREFORE, the parties hereto agree as follows:
<PAGE>
-3-
ARTICLE I.
Distribution Responsibility for the Variable Contracts
ss.1.1 Equitable and Equitable Variable authorize Equico to act, and
Equico agrees to serve, as broker-dealer in connection with the distribution of
their respective Variable Contracts to the extent provided in this Agreement.
Equico shall be fully responsible for carrying out all compliance and
supervisory obligations in connection with the distribution of the Variable
Contracts, as required by the NASD Rules and by federal and any applicable state
or foreign securities laws. Equitable shall be fully responsible for
compensating the Agents for their sales of Variable Contracts, as provided in
Section 1.4.
ss.1.2 Without limiting the generality of Section 1.1, Equico agrees that
it shall be fully responsible for:
(A) Requiring that each person who is authorized to offer and
sell the Variable Contracts is duly registered as a representative of Equico and
is appropriately licensed, registered or otherwise qualified to offer and sell
the Variable Contracts under the federal securities laws and any applicable
securities laws of each state or other jurisdiction in which the Variable
Contracts offered by such person may be lawfully sold;
(B) Training, supervising and directing the Agents for purposes
of complying on a continuous basis with the NASD Rules and with federal and
state securities laws applicable in connection with the offer and sale of the
Variable Contracts. In this connection, Equico shall:
<PAGE>
-4-
(i) Establish and implement reasonable written procedures
which provide for diligent supervision of sales practices of the Agents;
(ii) Require that Agents shall recommend the purchase of
Variable Contracts only upon reasonable grounds to believe that the purchase is
suitable for each prospective purchaser, and verify their compliance with such
requirement;
(iii) Provide a sufficient number of registered principals and
an adequate compliance staff to carry out the responsibilities set forth herein;
and
(iv) Impose disciplinary measures on the Agents.
(C) Oversight of the securities activities of all persons engaged
directly or indirectly in operations of Equico, Equitable and Equitable Variable
related to the offer or sale of the Variable Products, each of whom shall be
considered a "person associated" with Equico, as defined in Section 3(a)(18) of
the 1934 Act. Equico shall have full responsibility for each such person with
regard to his or her training, supervision and control, as contemplated by
Section 15 of the 1934 Act, and, in that connection, shall have the authority to
require that disciplinary action be taken with respect to such persons.
ss.1.3 Equico represents that it is a broker-dealer duly registered under
the 1934 Act and is a member in good standing of the NASD and, to the extent
necessary to perform the activities contemplated hereunder, is duly registered,
or otherwise qualified, under the securities laws of every state or other
jurisdiction in
<PAGE>
-5-
which the Variable Contracts are available for sale, and Equico agrees to
maintain such status. Consistent with its designation as distributor of the
Variable Contracts, as provided in Section 1.1 of this Agreement, Equico
acknowledges that it may be deemed to be an "underwriter" or a "principal
underwriter" of the Separate Accounts under the federal securities laws.
ss.1.4 Equitable shall have exclusive responsibility for the payment of
commissions or other fees in accordance with the applicable agreements between
each Agent and Equitable relating to the Variable Contracts. All compensation
paid by Equitable to the Agents with respect to sales of the Variable Contracts
shall be paid by Equitable on its own behalf or on behalf of Equitable Variable
(with respect to sales of Variable Contracts issued by Equitable Variable), and
shall be reflected on the books and records of Equitable and, to the extent
related to Variable Contracts issued by Equitable Variable, on the books and
records of Equitable Variable. The responsibility of Equitable shall include the
performance of all activities necessary in order that the payment of
compensation hereunder complies with all applicable federal securities laws and
state securities and insurance laws. Equitable and Equitable Variable retain the
ultimate right to determine the rates of commission and other fees to be paid to
the Agents in connection with their respective Variable Contracts. Nothing
contained in this Agreement shall obligate Equico to pay any commissions or
other fees to Agents or to reimburse any Agents for expenses incurred by them,
nor shall Equico have any responsibility for the adequacy or accuracy of any
amount paid to an Agent in connection with the sale of the Variable Contracts.
Equico shall have no right or interest whatsoever in any commissions or other
fees payable to Agents by Equitable by Equitable Variable.
<PAGE>
-6-
ss.1.5 Equitable represents that it is a broker-dealer duly registered
under the 1934 Act and is a member in good standing of the NASD. If Equitable
shall determine, in its sole judgment, that such status is not required for the
purpose of properly discharging its responsibility under Section 1.4 of this
Agreement, Equitable may terminate its status as a registered broker-dealer
without notice to the other parties hereto.
ss.1.6 Equitable Variable agrees to cooperate fully with Equico and with
Equitable in the proper discharge of the responsibilities allocated to them
under this Article I. While undertaking to provide such cooperation and to
perform various activities on its own behalf hereunder, Equitable Variable
assumes no duties or responsibilities under this Agreement in its capacity as a
registered broker-dealer and, accordingly, shall be under no obligation to
maintain such status.
ss.1.7 Equico, Equitable and Equitable Variable shall each cause to be
maintained and preserved such accounts, books and other documents as are
required by the 1934 Act and 1940 Act and any other applicable laws and
regulations. In particular, without limiting the foregoing, Equico shall cause
all the books and records in connection with the offer and sale of the Variable
Contracts to be maintained and preserved in conformity with the requirements of
Rules 17a-3 and 17a-4 under the 1934 Act, to the extent that such requirements
are applicable to the Variable Contracts. The payment of premiums, purchase
payments, commissions and other fees and payments in connection with the
Variable Contracts shall be reflected on the books and records of Equitable and
of Equitable Variable, as provided in Section 1.4 hereof and as may otherwise be
<PAGE>
-7-
required under applicable NASD regulations and federal and applicable state
securities laws requirements.
ss.1.8 Equico, Equitable and Equitable Variable shall each submit to all
regulators and administrative bodies having jurisdiction over the sales of the
Variable Contracts, present or future, any information, reports or other
material that any such body by reason of this Agreement may request or require
pursuant to applicable laws or regulations. In particular, without limiting the
foregoing, Equitable and Equitable Variable agree that any books and records
which they maintain pursuant to Section 1.5 of this Agreement which are required
to be maintained under Rule 17a-3 or 17a-4 of the 1934 Act shall be subject to
inspection by the SEC in accordance with Section 17(a) of the 1934 Act.
ss.1.9 Equico and Equitable each agree and understand that all documents,
reports, records, books, files and other materials required under applicable
NASD regulations and federal and state securities laws relative to the sale of
Variable Contracts shall be the property of Equico, with the exception of those
books and records maintained by Equitable pursuant to Section 1.4 which relate
to sales compensation and shall be the joint property of Equitable and Equico.
If, however, such documents, reports, records, books, files and other materials
which are the property of Equico are required by applicable regulation or law to
be maintained also by Equitable or by Equitable Variable, such material shall be
the joint property of Equico, Equitable or Equitable Variable. All other
documents, reports, records, books, files and other materials maintained
relative to this Agreement shall be the property of Equitable or of Equitable
Variable, depending upon the identity of the issuer of the Variable Contracts
involved. Upon the
<PAGE>
-8-
termination of this Agreement, all such material shall be returned to the
applicable party.
ss.1.10 Equico, Equitable and Equitable Variable from time to time during
the term of this Agreement, shall allocate among themselves, subject to a right
of further delegation, the administrative responsibility for maintaining and
preserving the books, records and accounts kept in connection with the Variable
Contracts; provided however, in the case of books, records and accounts kept
pursuant to a requirement of applicable law or regulation, the ultimate
responsibility for maintaining and preserving such books, records and accounts
shall be that of the party which is required to maintain or preserve such books,
records and accounts under the applicable law or regulation, and such books,
records and accounts shall be maintained and preserved under the supervision of
that party. Equico, Equitable and Equitable Variable shall cause each other to
be furnished with such reports as each may reasonably request for the purpose of
meeting its respective reporting and recordkeeping requirements under such
regulations and laws and under the insurance laws of the State of New York and
any other applicable states or jurisdictions.
ARTICLE II.
Procedures for Sale of Variable Contracts
ss.2.1 Equitable and Equitable Variable each represent and warrant that
units of interest of their respective Separate Accounts offered under the
Variable Contracts are registered under the 1933 Act to the extent such
registration is required, that the Separate Accounts are registered under the
1940 Act unless
<PAGE>
-9-
exempt from such registration, and that the Variable Contracts are qualified to
be sold under the insurance laws and any applicable securities laws of all
states and other jurisdictions in which the Variable Contracts are authorized
for sale. Equitable and Equitable Variable each further represent and warrant
that each of them is a life insurance company duly organized under the laws of
the State of New York and in good standing and authorized to conduct business
under the laws of each state in which the Variable Contracts are offered and
sold.
ss.2.2 Equico will require that the Agents use only the effective
prospectuses, statements of additional information ("SAIs") and other authorized
materials in soliciting and selling the Variable Contracts. Equico is not
authorized to give any information or to make any representations concerning the
Variable Contracts other than those contained in the current prospectus or SAI
therefor filed with the Securities and Exchange Commission ("SEC") or in such
materials as may be authorized by Equitable or by Equitable Variable.
ss.2.3 All applications for Variable Contracts shall be made on
application forms supplied by Equitable or by Equitable Variable, as
appropriate, and all payments collected by Equico shall be remitted by Equico
promptly in full, together with such application or enrollment forms and any
other required documentation, directly to Equitable or to Equitable Variable, as
appropriate, at the address indicated on such application or to such other
address as Equitable or Equitable Variable may, from time to time, designate in
writing. Equico shall review all such applications for suitability. Checks or
money orders in payment on any Variable Contract shall be drawn to the order of
"The Equitable Life Assurance Society of the United States" or "Equitable
Variable Life Insurance Company", as appropriate. All applications for Variable
Contracts shall be subject
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to acceptance or rejection by Equitable or by Equitable Variable at their
respective discretion.
ss.2.4 All money payable in connection with any of the Variable
Contracts, whether as premiums, purchase payments or otherwise, and whether paid
by, or on behalf of any applicant or contractowner, is the property of Equitable
or of Equitable Variable and shall be transmitted promptly in accordance with
the administrative procedures of Equitable and Equitable Variable without any
deduction or offset for any reason, including by example but not limitation, any
deduction or offset for compensation claimed by Equico or payable to the Agents.
No cash payments shall be accepted by Equico in connection with the Variable
Contracts.
ss.2.5 Equitable and Equitable Variable shall be responsible for payment
of the costs of printing the prospectuses, SAIs and sales material used in
connection with the solicitation of applications for the Variable Contracts and
to allocate such costs between themselves. Equitable and Equitable Variable
shall provide to Equico copies of such prospectuses, SAIs and sales material in
such number as Equico shall reasonably request. Equitable and Equitable Variable
shall make available to Equico copies of all financial statements and other
documents that Equico shall reasonably request for use in connection with the
distribution of the Variable Contracts.
ss.2.6 Notwithstanding anything in this Agreement to the contrary, Equico
may enter into sales agreements with independent broker-dealers for the sale of
the Variable Contracts, subject to the prior written approval of Equitable and
of Equitable Variable of each such sales agreement and the terms thereof. All
such
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sales agreements entered into by Equico shall provide that each independent
broker-dealer will assume full responsibility for continued compliance by itself
and its associated persons with the NASD Rules and applicable federal and state
securities and insurance laws. All associated persons of such independent
broker-dealer soliciting applications for the Variable Contracts shall be duly
and appropriately licensed or appointed for the sale of the Variable Contracts
under the NASD Rules and federal and state securities and insurance laws in
which such person shall offer or sell the Variable Contracts.
ss.2.7 Equitable shall apply for and maintain the proper insurance
licenses for each of the Agents selling the Variable Contracts in all states or
jurisdictions in which the Variable Contracts are offered for sale by such
Agent. Equitable and Equitable Variable reserve the right to refuse to appoint
any proposed agent, or independent broker-dealer, and to terminate an Agent or
independent broker-dealer once appointed. Equitable and Equitable Variable shall
promptly notify Equico of each such termination. Equitable agrees to be
responsible for all licensing or other fees required under pertinent state
insurance laws to properly authorize Agents for the sale of the Variable
Contracts; however, the foregoing shall not limit Equitable's right to collect
such amount from any person or entity other than Equico.
ss.2.8 The parties hereto recognize that any person selling the Variable
Contracts as contemplated by this Agreement shall be acting as an insurance
agent of Equitable or of Equitable Variable or as an insurance broker, and that
the rights of Equico to supervise such persons shall be limited to the extent
specifically described herein or required under applicable federal or state
securities laws or NASD regulations. Such persons shall not be considered
employees of Equico and
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shall be considered agents of Equico only as and to the extent required by such
laws and regulations. Further, it is intended by the parties hereto that such
persons are and shall continue to be considered to have a common law independent
contractor relationship with Equitable and Equitable Variable and not to be
common law employees of Equitable or of Equitable Variable, unless any contract
between Equitable and any person selling the Variable Contracts specifically
provides otherwise.
ss.2.9 Consistent with the responsibility of Equico to discharge all
compliance and supervisory obligations relating to the distribution of the
Variable Contracts as provided in this Agreement and consistent with the
authority given to Equico hereunder, Equitable and Equitable Variable shall
retain the ultimate right of control over, and responsibility for, the issuance,
servicing and marketing of their respective Variable Contracts. In that
connection, Equitable and Equitable Variable shall review and approve all
advertising concerning the Variable Contacts issued by each of them; however,
Equico shall be responsible for filing such materials, as required, with the
NASD and with state securities regulators and for obtaining such approvals as
may be necessary.
ss.2.10 Unless otherwise agreed in writing by Equitable or by Equitable
Variable, neither Equico nor any Agent nor any independent broker-dealer shall
have an interest in any surrender charges, deductions or other fees payable to
Equitable or to Equitable Variable.
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ARTICLE III.
Services and Personnel Provided by Equitable
ss.3.1 Equitable agrees to furnish compliance and related support
services, including personnel, to assist Equico in the performance of the
services which Equico is required to provide hereunder. In furnishing such
services, all personnel of Equitable shall be subject at all times to the
supervision and control of Equico.
ARTICLE IV.
Compensation and Expenses
ss.4.1 Equico shall be compensated, not less frequently than quarterly,
by Equitable and by Equitable Variable for its services under this Agreement in
an aggregate annual amount which shall be equal to the actual expenses incurred
by Equico to provide compliance and related support services, plus a percentage
of such expenses which shall approximate the annual rate of profit earned by
Equico from its performance of comparable services for unaffiliated clients.
ss.4.2 Equico shall pay the costs and expenses, direct and indirect,
incurred by Equitable in furnishing services and personnel, pursuant to Article
III of this Agreement. In determining the basis for the apportionment of
expenses, specific identification or estimates based on time, company assets,
square footage or any other mutually agreeable method providing for a fair and
reasonable allocation of cost may be used, provided such method is in conformity
with the requirements of Section 1712 of the New York Insurance Law and New York
Insurance
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Department Regulation No. 33. The charge to Equico for such apportioned expenses
shall be at cost as described in this Section 4.2.
ss.4.3 Within 45 days after the end of each calendar quarter, and more
often if desired, Equitable shall submit to Equico a statement of apportioned
expenses showing the basis for such apportionment; and settlement shall be made
within 15 days thereafter. The statement of apportioned expenses shall set forth
in reasonable detail the nature of the expenses being apportioned and other
relevant information to support the charge.
ss.4.4 To enable Equitable to compensate Agents for the sale of Variable
Contracts issued by Equitable Variable, Equitable Variable shall furnish
Equitable with a schedule of the commissions and other fees payable with respect
to each form of Variable Contract issued by it, together with a list of rules
and procedures applicable to the payment of such compensation. Equitable
Variable agrees to reimburse Equitable for commissions and service fees (not in
excess of the amounts specified by Equitable Variable) paid to the Agents for
the sale of its Variable Contracts pursuant to Section 1.4 of this Agreement.
ARTICLE V.
Term of Agreement
ss.5.1 Subject to termination as herein provided, this Agreement shall
remain in full force and effect for a two-year period commencing on the date
first above written, and this Agreement shall continue in full force and effect
from year to year thereafter, until terminated as herein provided.
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ss.5.2 This Agreement may be terminated by any party hereto on not less
than 60 days' prior written notice to the other parties or by an agreement in
writing signed by all of the parties hereto, except that data processing
services may not be terminated on less that 180 days' prior written notice, if
requested by Equico in writing promptly following its receipt of written notice
of termination of this Agreement. This Agreement shall automatically be
terminated in the event of its assignment.
ss.5.3 Upon termination of this Agreement, all authorizations, rights,
and obligations shall cease except the obligations to settle accounts hereunder,
including the settlement of monies due in connection with Variable Contracts in
effect at the time of termination or issued pursuant to applications received by
Equitable or by Equitable Variable prior to termination.
ARTICLE VI.
Miscellaneous
ss.6.1 Should an irreconcilable difference of opinion arise between or
among the parties to this Agreement as to the interpretation of any matter
respecting this Agreement, it is hereby mutually agreed that such differences
shall be submitted to arbitration as the sole remedy available to the parties.
Such arbitration shall be in accordance with the rules of the American
Arbitration Association, the arbitrators shall have extensive experience in the
insurance industry, and the arbitration shall take place in New York, New York.
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ss.6.2 For purposes of this Agreement, the term "Variable Contracts"
shall not include any variable insurance contract issued by Equitable which is
not offered and sold by employees or agents of Equitable.
ss.6.3 This Agreement replaces the Sales Agreement, dated December 23,
1985, as amended, between Equitable Variable and Equitable, which shall
terminate on the effective date hereof.
ss.6.4 If any provision of this Agreement shall be held or made invalid
by a court decision, statute, rule, or otherwise, the remainder of this
Agreement shall not be affected thereby.
ss.6.5 This Agreement constitutes the entire agreement between the
parties hereto and may not be modified except in a written instrument executed
by all parties hereto.
ss.6.6 This Agreement shall be subject to the provisions of the 1934 Act
and, to the extent applicable, the 1940 Act and the rules, regulations and
rulings thereunder and of the NASD, from time to time in effect, including such
exemptions from the 1940 Act as the SEC may grant, and the terms hereof shall be
interpreted and construed in accordance therewith.
ss.6.7 This Agreement shall be interpreted in accordance with the laws of
the State of New York.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
signed by their respective officials thereunto duly authorized, as of the day
and year first above written.
THE EQUITABLE LIFE ASSURANCE
SOCIETY OF THE UNITED STATES
By: /s/ Joseph J. Melone
---------------------------
Joseph J. Melone
Chairman and
Chief Executive Officer
EQUITABLE VARIABLE LIFE
INSURANCE COMPANY
By: /s/ Samuel B. Shlesinger
--------------------------
Samuel B. Shlesinger
Senior Vice President
EQUICO SECURITIES, INC.
By: /s/ Richard V. Silver
--------------------------
Richard V. Silver
President and
Chief Operating Officer
AGREEMENT FOR COOPERATIVE AND JOINT USE OF PERSONNEL, PROPERTY AND
SERVICES BETWEEN THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED
STATES AND AXA ADVISORS, LLC
Agreement made as of the 21st day of September, 1999 between THE
EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES, a New York stock life
insurance company ("Equitable Life") and AXA ADVISORS, LLC, a Delaware limited
liability company ("AXA Advisors").
WHEREAS, both Equitable Life and AXA Advisors are wholly-owned
subsidiaries of AXA Financial, Inc.;
WHEREAS, AXA Advisors distributes variable life insurance and annuity
contracts issued by Equitable Life and shares of investment companies to which
Equitable Life acts as investment advisor, as well as various other securities,
products and services;
WHEREAS, AXA Advisors desires to utilize Equitable Life personnel,
property and services in carrying out its management, administrative and other
corporate functions and Equitable Life is willing to furnish the same on the
terms and conditions hereinafter set forth;
WHEREAS, Equitable Life desires to be reimbursed for its costs and
expenses incurred in rendering such services; and
WHEREAS, both Equitable Life and AXA Advisors desire to enter into an
agreement that supersedes the Clerical and Personnel Services Agreement dated
June 15, 1983 and the Shared Facilities and Personnel Agreement dated December
14, 1971 between Equitable Life and Equico Securities, Inc. (whose successor, EQ
Financial Consultants, Inc., merged with and into AXA Advisors on September 20,
1999);
NOW, THEREFORE, the parties do hereby agree as follows:
1. Equitable Life from time to time may provide, as available, to AXA
Advisors the personnel, property and services reasonably necessary to perform
its management, administrative and other corporate functions, including (but not
limited to) the following:
a) general corporate and management functions, such as corporate
finance, strategic planning, accounting, tax, auditing, legal,
human resources, corporate and financial communications, marketing,
public relations and advertising, risk management, communications,
technology, data processing, and corporate secretarial;
b) distribution of variable life insurance and annuity contracts
issued by Equitable Life and shares of investment companies to
which Equitable Life acts as investment advisor, as well as various
other securities, products and services;
c) solicitation of orders for purchases of contracts, securities,
products and services distributed by AXA Advisors, including
through the mailing of
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<PAGE>
prospectuses and other informational materials to AXA Advisors
account holders, Equitable Life policyholders, and their
beneficiaries;
d) processing of payments and disbursements to registered
representatives; and
e) licensing and supervision of registered representatives
to ensure compliance with legal requirements imposed by the NASD,
SEC, and other regulatory authorities.
2. a) Equitable Life shall permit AXA Advisors to include copies of
prospectuses and other informational materials in such of Equitable Life's
routine mailings to policyholders and beneficiaries as Equitable Life and AXA
Advisors shall mutually agree upon.
b) Equitable Life shall also cause such of its agents or employees as
shall be agreed upon between the parties from time to time to become qualified,
at AXA Advisors' expense, as registered representatives of AXA Advisors to
solicit orders for the purchase of securities through the use of prospectuses
and other informational materials provided by AXA Advisors, in accordance with
the solicitation procedures specified by AXA Advisors. Each of these registered
representatives shall be subject to the supervision of and the compliance
procedures imposed by AXA Advisors, and Equitable Life agrees to cooperate with
AXA Advisors in insuring compliance by each of these registered representatives
with such procedures.
3. The services provided by Equitable Life under this Agreement shall not
include any services provided to AXA Advisors by Equitable Life pursuant to
separate agreements.
4. AXA Advisors shall pay Equitable Life the actual costs (direct and
indirect) and expenses incurred by Equitable Life in furnishing personnel,
property and services pursuant to this Agreement. In determining the basis for
the apportionment of costs and expenses, specific identification or estimates
based on time, company assets, square footage or any other mutually agreeable
method providing for a fair and reasonable allocation of costs and expenses may
be used provided such method is in conformity with generally accepted accounting
principles and with the requirements of Section 1505(a) of the New York
Insurance Law and New York Insurance Department Regulation No. 33. The charge to
each party for such apportioned expenses shall be at cost as described in this
Section 4.
5. Within 45 days after the end of each calendar quarter, and more often
if desired, Equitable Life shall submit to AXA Advisors a statement of
apportioned expenses showing the basis for the apportionment of each item.
Settlement, which shall be on a cost basis, shall be made 30 days thereafter.
The statement of apportioned expenses shall set forth in reasonable detail the
nature of the costs and expenses being apportioned and other relevant
information to support the charges. Notwithstanding any provision to the
contrary contained herein, the parties may extend or modify any settlement date
or other deadline in this Section 5 or elsewhere in this Agreement by mutual
agreement.
6. Each party shall have the right to conduct an audit of the books,
records and accounts of the other party upon giving reasonable notice of its
intent to conduct such an audit. In the event of such audit, each party shall
give to the other party reasonable cooperation and access to all books, records
and accounts necessary to the audit.
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<PAGE>
7. Each party shall be and remain sole owner of its records, including
but not limited to business and corporate records, regardless of the use or
possession by either party of the other party's records. Equitable Life and AXA
Advisors shall each individually maintain separate books, accounts and records
in respect to personnel, property and services provided under this Agreement and
shall cooperate and use reasonable efforts to prepare and/or obtain in a timely
fashion any and all books, accounts, records or other documentation as may be
necessary or desirable in connection with this Agreement and/or the personnel,
property or services provided hereunder.
8. The books, accounts and records of Equitable Life and AXA Advisors as
to all transactions between them under this Agreement shall be maintained so as
to clearly and accurately disclose the nature and details of the transactions,
including such accounting information as is necessary to support the
reasonableness of the charges under this Agreement.
9. Should an irreconcilable difference of opinion between Equitable Life
and AXA Advisors arise as to the interpretation of any matter respecting this
Agreement, it is hereby mutually agreed that such differences shall be submitted
to arbitration as the sole remedy available to both parties. Such arbitration
shall be in accordance with the rules of the American Arbitration Association,
the arbitrators shall have extensive experience in the insurance industry, and
the arbitration shall take place in New York, New York.
10. The term of this Agreement shall commence as of the effective date of
this Agreement and continue until terminated by either party on not less than 60
days prior written notice to the other party or by an agreement in writing
signed by both parties specifying the effective date of termination.
11. This Agreement shall be governed by and interpreted in accordance
with the laws of the State of New York.
12. The requirements of Equitable Life shall take precedence over the
requirements of AXA Advisors under this Agreement, and Equitable Life shall
furnish personnel, property and services to AXA Advisors only when Equitable
Life has available capacity to do so.
13. This Agreement shall inure to the benefit of and be binding upon the
successors and assigns of the parties hereto.
THE EQUITABLE LIFE ASSURANCE SOCIETY
OF THE UNITED STATES
By: /s/Kevin R. Byrne
--------------------------------
Name: Kevin R. Byrne
Title: Senior Vice President & Treasurer
AXA ADVISORS, LLC
By: /s/Michael F. McNelis
--------------------------------
Name: Michael F. McNelis
Title: President & COO
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GENERAL AGENT SALES AGREEMENT
AGREEMENT, dated as of January 1, 2000 by and between THE EQUITABLE
LIFE ASSURANCE SOCIETY OF THE UNITED STATES ("EQUITABLE"), a New York stock life
insurance company, having offices at 1290 Avenue of the Americas, New York, New
York 10104, and AXA NETWORK, LLC ("AXA Network"), a Delaware limited liability
company having offices at 4251 Crums Mill Road, Harrisburg, Pennsylvania 17112
and the additional affiliated entities of AXA Network executing this Agreement
below (AXA Network and such other entities being jointly and severally
hereinafter referred to as the "General Agent").
W I T N E S S E T H :
WHEREAS, Equitable is an insurance company which issues insurance
products in the states and other jurisdictions covered by this Agreement;
WHEREAS, the General Agent is a general agent which sells insurance
products in the states and other jurisdictions covered by this Agreement;
WHEREAS, Equitable desires to retain the General Agent to solicit
applications from the general public for Equitable insurance products and to
service the policies and contracts sold pursuant thereto and certain existing
policies and contracts, and the General Agent desires to solicit such
applications and service such policies and contracts;
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants and promises herein contained, the parties hereto agree as follows:
ARTICLE I
DEFINITIONS
ss.1.1 Defined Terms. In addition to any terms defined elsewhere in
this Agreement, the terms defined in this Section 1.1, whenever used in this
Agreement, shall have the respective meanings indicated herein.
a. Agent -- A person who (i) is either an employee of the
General Agent or of an affiliate of the General Agent, an independent contractor
under contract to the General Agent or, if Equitable of Colorado has previously
consented thereto, a general agent under contract to the General Agent or an
employee or independent contractor of such general agent, (ii) is duly licensed
and qualified to sell the Products and service the Contracts which such person
proposes to sell and service under the insurance laws of all states and
jurisdictions in which such person proposes to make such sales and service such
Contracts and (iii) only with respect to the sale of Variable Products by
individuals, is also a Representative of the Broker-Dealer.
b. Application -- An application for the purchase of a
Contract made on the form from time to time delivered to the General Agent by
Equitable for such purpose in accordance with Equitable's Policies and
Procedures.
c. Appointed Agent -- An Agent appointed by Equitable to
solicit Applications for the Products and to service Contracts in one or more
states or jurisdictions.
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d. Bank-Related Sales -- Any Application (i) made on the
premises of a bank, trust company, savings bank, savings and loan association,
thrift, credit union or similar institution (as the case may be, a "Bank"); (ii)
by means of personal, telephone, mail or other oral or written contacts
originating from the premises of a Bank; or (iii) to persons who are referred to
the General Agent by a Bank pursuant to customer lists, mailings, Bank employee
referrals or otherwise
e. Broker-Dealer -- AXA Advisors, LLC or such other
registered broker-dealer as Equitable may from time to time designate as a
Broker-Dealer hereunder in connection with the sale and servicing of Variable
Products.
f. Broker-of-Record -- As to any Contract, the general agent
designated by Equitable from time to time as the entity responsible for
effecting the sale or servicing of such Contract.
g. Contract -- Any policy, contract or certificate evidencing
an insurance or annuity obligation of Equitable in respect of any Product for
which the General Agent is the Broker-of-Record.
h. Equitable Sales Materials -- Sales Materials prepared by
Equitable and delivered to the General Agent or prepared by the General Agent
and approved by Equitable in writing for use by the General Agent in connection
with the solicitation of Applications and the servicing of Contracts.
i. Equitable's Policies and Procedures -- Such policies and
procedures, if any, with respect to the subject matter of this Agreement or any
aspect thereof, including, without limitation, the solicitation and sale of
Products, the solicitation and submission of Applications, the training and
qualification of Appointed Agents and the servicing of Contracts, as Equitable
may from time to time adopt on not less than thirty (30) days prior written
notice to the General Agent.
j. Premium -- Any premium, contribution or other
consideration relating to a Contract.
k. Product -- Any class of insurance policies or annuity
products issued by Equitable which Equitable, in its sole discretion, may from
time to time make available to the General Agent to sell or service.
l. Representative -- An individual who is at one and the same
time (i) an associated person (as that term is defined in Section 3(a)(18) of
the Securities Exchange Act of 1934, as amended) of the Broker-Dealer; (ii) duly
registered with the National Association of Securities Dealers, Inc. and any
applicable state or other jurisdictional securities regulatory authorities as a
registered person of the Broker-Dealer qualified to distribute variable life
insurance policies and annuity contracts such as the Variable Products in the
states or other jurisdictions in which such individual proposes to distribute
such policies and contracts and (iii) not subject to a statutory
disqualification (as that term is defined in the Securities Exchange Act of
1934, as amended).
m. Sales Materials -- All promotional, sales, marketing and
advertising materials relating to Equitable or the Products used or distributed
in connection with the solicitation of Applications and/or servicing of
Contracts, including, without limitation, illustrations, application forms,
contract forms, prospectuses, advertisements (such as material published, or
designed for use in, a newspaper, magazine or other periodical, radio,
television, internet, telephone or tape recording, videotape display, signs or
billboards, motion pictures or other public media), sales literature (i.e., any
written communication distributed or made generally available to customers or
the public, including
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brochures, circulars, research reports, market letters, form letters, seminar
texts, reprints or excerpts of any other advertisement, sales literature or
published article), and educational or training materials or other
communications.
n. Securities Laws -- All federal securities laws, including,
without limitation, the Securities Act of 1933, as amended, the Securities
Exchange Act of 1934, as amended, and the Investment Company Act of 1940, as
amended; all applicable state or foreign securities laws; all rules and
regulations promulgated with respect thereto and the Conduct Rules of the
National Association of Securities Dealers, Inc.
o. Variable Product - Any Product which is regulated by the
Securities Laws.
ss.1.2 Cross-references. All references in this Agreement to a
Section, Article or Exhibit are to a section, article exhibit of this Agreement,
unless otherwise indicated.
ARTICLE II
PRODUCT SALES
ss.2.1 Authority to Solicit and Service. Equitable hereby authorizes
the General Agent to solicit Applications for the Products and to service the
Contracts. The General Agent accepts such authorization and agrees to use its
best efforts to find purchasers for such Products acceptable to Equitable and to
service such Contracts. The General Agent acknowledges that the authorization to
solicit Applications for the Products and service Contracts granted hereunder is
not exclusive and that other agents and general agents will be soliciting
applications for the Products and/or similar products and servicing Equitable
policies and contracts in competition with the General Agent.
ss.2.2 Products Included Under Agreement. The Products which Equitable
makes available to the General Agent are the sole classes of policies and
contracts for which the General Agent is authorized to solicit Applications and
sell Contracts pursuant to this Agreement. The Contracts for which the General
Agent is designated as the Broker-of-Record are the sole policies and contracts
which the General Agent is authorized to service hereunder.
ss.2.3 General Agent Qualifications. The General Agent warrants and
represents that it is a life insurance agent licensed in each state and other
jurisdiction in which it intends to perform its functions and fulfill its
obligations hereunder. The General Agent shall, at all times when performing its
obligations under this Agreement, be duly licensed to sell Products and service
Contracts in each state or other jurisdiction in which it is soliciting
Applications and/or servicing Contracts. The General Agent shall use its best
efforts to become a licensed life insurance agent in all fifty states, the
District of Columbia, the Virgin Islands and Puerto Rico and to continue to be
so licensed throughout the term of this Agreement.
ss.2.4 Limitations on Authority. The General Agent shall not possess
or exercise any authority on behalf of Equitable other than that expressly
conferred pursuant this Agreement. The General Agent shall perform all its
obligations hereunder and shall cause all Agents to act in all respects in
connection with the subject matter hereof in accordance with Equitable's
Policies and Procedures. In particular, and without limiting the foregoing, the
General Agent shall not have any authority, nor shall it permit any Agent, to
(i) alter, modify, waive, forgive, cancel or change any of the terms, rates,
charges or conditions of any Contract or other contract entered into pursuant to
a Contract; (ii) make any representations concerning any of the terms, rates,
charges or provisions of any Contract except as expressly authorized in writing
by Equitable; (iii) extend the time for payment of any Premiums; (iv) receive
any moneys in
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payment of Premiums in respect of any Contract (except for the sole purpose of
forwarding the same to Equitable) or (v) make any representations concerning any
of the terms, rates, charges or provisions of any Contract except as expressly
authorized in writing by Equitable.
ss.2.5 Independent Contractor Status. Equitable and the General Agent
agree and confirm that the General Agent shall perform its obligations hereunder
as an independent contractor and nothing herein contained shall constitute the
General Agent, any of the Agents or any of the officers, directors, employees or
representatives of the General Agent as employees of Equitable. In performing
its obligations under this Agreement, the General Agent shall not be obligated
or expected to devote its full time and energies to the performance of its
obligations hereunder or to sell or solicit Applications for a specified number
of Contracts, nor shall the General Agent be obligated or expected to solicit
Applications for or sell the Products or service the Contracts on an exclusive
basis.
ss.2.6 Compliance With Applicable Laws. The General Agent shall
perform its obligations hereunder in compliance with, and cause its Agents to
comply with, all applicable insurance laws and regulations, including, without
limitation, state insurance laws and regulations governing insurance-related
activities and transactions. Notwithstanding the foregoing, Equitable has
retained the Broker-Dealer to oversee compliance with the Securities Laws in
connection with the solicitation, offering and servicing of Variable Products,
but the General Agent shall not violate any of the Securities Laws in performing
its obligations hereunder. The General Agent shall notify Equitable immediately
in writing if it receives notice of any governmental inquiry concerning its
compliance or the compliance of any of its Agents with any laws or regulations
in connection with the performance of its obligations hereunder or if it
otherwise learns that it is not in compliance with any such law or regulation.
ss.2.7 Restrictions on Sales Activity. The General Agent shall not
offer or attempt to offer any Contract, nor solicit Application for a Contract,
nor deliver any Contract, in any state or other jurisdiction in which such
Contract may not lawfully be sold or offered for sale, or permit any Agent to
make any such offer, attempt to offer, solicitation or delivery. For purposes of
determining where any Product may be offered and Applications solicited, the
General Agent may rely on written notification, as revised from time to time,
received from Equitable.
ARTICLE III
VARIABLE PRODUCTS
ss.3.1 Sales of Variable Products. Notwithstanding anything to the
contrary contained in this Agreement, solicitations and offers to sell Variable
Products and the servicing of Contracts for Variable Products may only be made
jointly with the Broker-Dealer. The General Agent shall not permit any Appointed
Agent to solicit Applications or sell or service a Contract for any Variable
Product unless such Appointed Agent is at the time of such solicitation, sale
and/or servicing a Representative of the Broker-Dealer. The General Agent may
rely on the instructions of the Broker-Dealer concerning the Securities Laws in
connection with the sale and servicing of the Variable Products.
ss.3.2 Compliance with SEC No Action Letter. The General Agent
warrants and represents that, in connection with the offering of Variable
Products hereunder, it is presently in compliance with Howard & Howard (sub.
nom. First of America Brokerage Services, Inc.) (avail. Sept. 28, 1995), a no
action letter issued by the staff of the Securities and Exchange Commission with
respect to the non-registration as a broker-dealer of an insurance agency
associated with a registered broker-dealer (the "No Action Letter"). The General
Agent shall, at all times during the term of this Agreement, perform all
obligations on its part to be performed in compliance with the No Action Letter,
as the same may be
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hereafter modified and amended by additional no action letters, legislation
and/or regulations. The General Agent shall not at any time during the term
hereof solicit any Application or offer to sell any Contract for a Variable
Product unless the General Agent is then in compliance with the No Action
Letter.
ARTICLE IV
APPOINTED AGENTS
ss.4.1 Agent Solicitation. The General Agent shall not permit any
individual to solicit an Application or offer to sell a Contract for a Product
or service any Contract unless such individual is at the time of such
solicitation and/or offer or servicing an Appointed Agent hereunder. The General
Agent shall not permit any Appointed Agent who at any time ceases to satisfy all
of the qualifications set forth in the definitions of Agent and/or Appointed
Agent in Article I above to solicit any Applications or sell or service any
Contracts. The General Agent shall not, and shall not permit any Appointed Agent
to, recommend the purchase of any Product to any customer without having
reasonable grounds to believe that such purchase is suitable for such customer,
based on information supplied by such customer after reasonable inquiry into
such customer's insurance and investment objectives and financial situation and
needs in accordance with applicable state insurance laws, rules or regulations.
ss.4.2 Authority to Recommend Agent Appointments. The General Agent
may recommend Agents to Equitable for appointment as Appointed Agents. Equitable
reserves the right in its sole discretion to refuse to appoint any Agent
proposed by the General Agent as an Appointed Agent. Equitable also reserves the
right, in its sole discretion, to terminate the appointment of any Appointed
Agent. The making of any recommendation by the General Agent shall be deemed to
constitute the warranty and representation of the General Agent that the
individual being recommended (a) satisfies all the criteria set forth in the
definition of "Agent" in this Agreement and (b) has the qualifications, good
character and moral fitness to act as an Appointed Agent and to hold himself or
herself out as such to the general public. The General Agent shall, upon written
request, confirm such warranties and representations in writing and shall
furnish Equitable with evidence of the same, acceptable to Equitable and
including, without limitation, proof of proper licensing and registration. It is
also understood and agreed that all matters concerning the licensing and/or
registration of any individual recommended for appointment as an Appointed Agent
under any applicable state insurance law shall be a matter directly between the
General Agent and such individual. The General Agent shall promptly notify
Equitable in writing if, at any time during the term hereof, any Appointed Agent
fails to satisfy any of the qualifications set forth in the foregoing warranty
and representation. Nothing in this Agreement shall be construed as requiring
Equitable to obtain a license or registration or issue a consent or appointment
to enable any particular individual to sell any Product. Equitable shall have no
obligation or responsibility for licensing insurance agents under applicable
state insurance laws.
ss.4.3 Supervisory Responsibilities. The General Agent shall be
responsible for the training, supervision, control and conduct of the Appointed
Agents in connection with their activities as insurance agents hereunder. The
General Agent shall supervise compliance by the Appointed Agents in respect of
all the terms and conditions of this Agreement in the performance of all
activities with respect to the subject matter hereof. The General Agent shall
not be responsible for the training, supervision, control or conduct of the
Appointed Agents in their capacity as Representatives of the Broker-Dealer.
ss.4.4 Tax Reporting Responsibility. The General Agent shall be solely
responsible under applicable tax laws for the reporting of compensation paid to
the Agents and for any withholding of taxes
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from compensation paid to the Agents, including, without limitation, FICA, FUTA,
and federal, state and local income taxes.
ARTICLE V
SALES PRACTICES
ss.5.1 Applications. Completed Applications shall be promptly
delivered to Equitable at such address as Equitable may from time to time
specify in writing. Equitable shall have the right in its sole discretion to
reject any Application and refund any Premium received.
ss.5.2 Sales Materials. Equitable will provide all Equitable Sales
Materials (other than Equitable Sales Materials prepared by the General Agent
and approved in writing by Equitable) to be used and/or distributed by the
General Agent and the Appointed Agents in connection with the solicitation of
Applications and sale or servicing of Contracts pursuant to this Agreement. The
General Agent shall not, and shall not permit any Appointed Agent to, solicit
any Application or offer to sell or service any Contract without delivering all
Equitable Sales Materials to the prospective purchaser required by applicable
state insurance laws, rules or regulations and Equitable's Policies and
Procedures. All Equitable Sales Materials shall be and remain the sole and
exclusive property of Equitable and shall be used or distributed by the General
Agent and the Appointed Agents solely and exclusively in connection with the
solicitation of Applications and/or servicing of Contracts. The General Agent
shall not, and shall not permit anyone to, distribute any Sales Materials with
respect to Equitable and/or the Products other than Equitable Sales Materials
and the General Agent shall not permit anyone other than Appointed Agents to use
or distribute Equitable Sales Materials. No Equitable Sales Materials shall be
used or distributed in any state or other jurisdiction unless approved by
Equitable in writing for use and/or distribution in such state or other
jurisdiction. Notwithstanding the foregoing, to the extent Equitable Sales
Materials with respect to any Variable Product may only be used and/or
distributed by a registered broker-dealer and its registered representative, the
General Agent shall have no obligation hereunder with respect to such Sales
Materials. Upon the termination of this Agreement, the General Agent will
promptly destroy or return to Equitable all Equitable Sales Materials and other
materials and supplies furnished by Equitable to the General Agent, except in
each case to the extent copies are required for the maintenance of records.
ss.5.3 Limitations on Advertising. The General Agent shall not, and
shall not permit any Appointed Agent to, advertise for, on behalf of, or with
respect to Equitable or any of the Products without prior written approval and
authorization from Equitable.
ss.5.4 Restrictions on Bank Sales. The General Agent shall not,
without the prior written consent of Equitable in each instance, offer or
attempt to offer any Product nor solicit any Application for any Product (i) by
means of personal, telephone, mail or other oral or written contacts originating
from the premises of a bank, trust company, savings bank, savings and loan
association, thrift, credit union or similar institution or (ii) to persons
referred to them by any such institution or through any customer lists,
mailings, employee referrals or any other sources of any such institution.
ss.5.5 Replacements of Equitable Products. The General Agent shall
not, and shall not permit any Agent to encourage any customer to, surrender or
replace a life insurance policy or annuity contract issued by Equitable in order
to purchase a Contract or, conversely, to surrender or exchange a Contract in
order to purchase another life insurance policy or annuity contract issued by
Equitable, except to the extent such surrenders or exchanges are made in
accordance with Equitable's Policies and Procedures. In the event that a life
insurance policy or annuity contract issued by Equitable is surrendered or
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exchanged in order to purchase a Contract, no compensation shall be paid under
this Agreement except as expressly provided to the contrary in Exhibit A.
ss.5.6 Premiums. All payments on account of Premiums for any Contract
shall be made in accordance with the relevant Contracts and other Equitable
Sales Materials as well as Equitable's Policies and Procedures. Equitable shall
not be liable for any error made in the investment of any Premium forwarded to
Equitable by the General Agent unless written instructions for investing such
Premium were delivered to Equitable simultaneously with or prior to the time
such Premium was forwarded to Equitable and such error resulted from Equitable's
negligence, gross negligence or intentional misconduct.
ss.5.7 Misdirected Payments. In the event that Premiums or loan
repayments are sent to the General Agent or any Agent, rather than to Equitable,
the General Agent shall, or shall cause such Agent to, promptly remit such
Premiums or loan repayments to Equitable.
ss.5.8 Delivery of Contracts. Upon the acceptance of an Application by
Equitable and receipt of the appropriate Premium therefor, Equitable will
forward the Contract applied for to the General Agent for delivery to the
purchaser thereof, and the General Agent shall deliver the Contract to the
purchaser within such period as may be allowed or required by Equitable's
Policies and Procedures. Each Contract delivered to a purchaser shall be
accompanied by a form of acknowledgment of receipt and such additional materials
as Equitable may from time to time require. The General Agent shall request that
the purchaser execute and return such acknowledgment of receipt and other
materials to Equitable within ten (10) days following receipt of the Contract
and shall inform such owner in writing that, unless and until such
acknowledgment of receipt is executed and returned to Equitable, no financial
transactions with respect to the Contract requested by such owner shall be
effected by Equitable except upon receipt of written instructions signed by such
owner, accompanied by a signature guaranty, in form acceptable to Equitable. For
purposes of this provision, no Contract shall be deemed to be issued by
Equitable until delivered by the General Agent to the purchaser thereof,
together with the acknowledgment and other materials provided for herein.
ss.5.9 Refunds of Premiums. In the event that Equitable rejects an
Application or a customer exercises his or her free look right under a Contract
in a timely manner, Equitable will refund any Premium received by Equitable on
account of such Application or Contract to the applicant or customer, as the
case may be, unless any portion of the Premium was paid to Equitable by another
insurance company as part of a 1035 exchange, in which case such portion shall
be refunded to such other insurance company. Equitable will promptly notify the
General Agent of all Premiums refunded and the party to whom such refunds were
paid.
ss.5.10 Directions Given on Behalf of Customers. Equitable may from
time to time in accordance with Equitable's Policies and Procedures accept
transfer or other instructions with respect to Contracts given by an Appointed
Agent on behalf of his or her customers, provided that the Appointed Agent has
first obtained from the customer written authorization therefor in form
acceptable to Equitable. The General Agent shall be solely responsible for the
accuracy and propriety of any instruction given or action taken by an Agent on
behalf of a customer. Equitable shall not have any responsibility or liability
for any action taken or omitted by it in good faith in reliance on or by
acceptance of such an instruction or action. No instructions shall be given or
actions taken by an Agent on behalf of a customer except in accordance with
Equitable's Policies and Procedures.
ss.5.11 Restrictions on Certain Investment Services. Without the prior
written consent of Equitable in each instance, the General Agent shall not, nor
shall it permit any Agent to, adopt,
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implement or offer any program, plan, arrangement or service to allocate
Premiums and/or Variable Account investments for market timing purposes, whether
conducted under powers of attorney or otherwise.
ARTICLE VI
CONFIDENTIALITY, REPORTING AND RECORDKEEPING
ss.6.1 Confidentiality. Equitable and the General Agent shall maintain
the confidentiality of all client lists, operations manuals, training manuals
and materials, products manuals or any other proprietary information acquired
from the other as a result of the contractual relationship contemplated in this
Agreement and shall not use such information for any purpose except in
furtherance of the purposes hereof without prior written consent. Neither
Equitable nor the General Agent shall use, disclose, reveal or publish any
confidential information so acquired to market products or services for itself
directly or indirectly without the prior written consent of the other. Nothing
contained in this Section 6.1 to the contrary shall prohibit either party hereto
from disclosing any information which such party is, in the opinion of such
party's counsel, compelled to disclose by law, regulation, court action or
similar process.
ss.6.2 Names and Trademarks. The General Agent shall not shall use,
nor permit any Agent to use, the Equitable name or any other name, trademark,
service mark, symbol or trade style that is now or may hereafter be owned by
Equitable, except in the manner and to the extent that such use is specifically
authorized in writing by Equitable.
ss.6.3 Maintenance of Books and Records. The General Agent shall
maintain such books and records concerning the activities of the Agents as may
be required by state insurance departments and other regulatory agencies to
reflect adequately the Contracts processed and/or serviced pursuant hereto. The
General Agent shall make such books and records available to Equitable, its
accountants, auditors and other representatives and all state and federal
regulators at any reasonable time upon written request. Each party shall be and
remain sole owner of its records, including but not limited to business and
corporate records, regardless of the use or possession by either party of the
other party's records. The books, accounts and records of Equitable and the
General Agent as to all transactions between them under this agreement shall be
maintained so as to clearly and accurately disclose the nature and details of
the transactions, including such accounting information as is necessary to
support the reasonableness of the charges under this Agreement. Equitable and
the General Agent shall each individually maintain separate books, accounts and
records in respect to personnel, property and services provided under this
Agreement and shall cooperate and use reasonable efforts to prepare and/or
obtain in a timely fashion any and all books, accounts, records or other
documentation as may be necessary or desirable in connection with this Agreement
and/or the personnel, property or services provided hereunder.
ss.6.4 Reports to Insurers. The General Agent shall promptly furnish
to Equitable at any reasonable time upon written request any reports and
information which Equitable may reasonably require for the purpose of meeting
its reporting and record keeping requirements under the insurance laws of any
state, under any applicable federal or state securities laws, rules or
regulations, or the rules of the National Association of Securities Dealers,
Inc.
ARTICLE VII
COMPENSATION, FEES AND EXPENSES
ss.7.1 Compensation Schedule. Equitable shall pay to the General
Agent, as compensation for the Contracts for which the General Agent is then the
Broker-of-Record, the amounts with respect such Contracts provided in the
schedules set forth in Exhibit A attached hereto and made a part hereof, as the
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same may be modified and amended from time to time by Equitable in its sole
discretion on not less than ten (10) days prior written notice. In no event
shall any compensation due and payable hereunder be in excess of any limitations
on compensation imposed by Section 4228 of the New York Insurance Law or any
other applicable law or regulation.
ss.7.2 Limitations on Compensation. The compensation provided in
Section 7.1 above shall constitute compensation in full for all services to be
performed by the General Agent hereunder. No compensation or reimbursement of
any kind shall be due and payable to the General Agent pursuant to this
Agreement except as expressly set forth in Exhibit A, as the same may be amended
from time to time as above provided. Except as provided in Equitable's Policies
and Procedures, no compensation or reimbursement of any kind otherwise due and
payable hereunder in respect of any Contract shall be due and payable unless and
until all Premiums then due and payable to Equitable pursuant to such Contract
have been received and accepted by Equitable. No compensation will be due and
payable hereunder in respect of any Application rejected by Equitable or any
Contract for which the free look right has been exercised, except as otherwise
provided to the contrary in Exhibit A attached hereto, and the General Agent
shall promptly reimburse Equitable for the amount of any compensation previously
paid to the General Agent in connection therewith.
ss.7.3 Costs and Expenses Paid by General Agent. Except as expressly
provided in this Agreement to the contrary, the General Agent shall be solely
responsible for the payment of all costs and expenses incurred by it in the
performance of its obligations under this Agreement, including, without
limitation, all costs and expenses from time to time of appointing and
reappointing Appointed Agents.
ss.7.4 Broker-Dealer Fees and Expenses. All fees and other
compensation, if any, due and payable to the Broker-Dealer in connection with
the solicitation and sale of Variable Products as contemplated herein shall be
the sole and exclusive obligation of Equitable, and the General Agent shall have
no obligation to pay any such fees or other compensation or reimburse the
Broker-Dealer for any costs or expenses incurred by the Broker-Dealer in
connection therewith, except as the General Agent and the Broker-Dealer may from
time to time agree to the contrary.
ss.7.5 No Rights of Agents to Compensation Paid by Equitable. No
Agent, director, officer, employee or representative of the General Agent shall
have any interest in this Agreement or any right to any compensation or other
sums dues and payable hereunder. The General Agent shall be solely responsible
for the payment of all commissions and other consideration of any kind to the
Agents.
ARTICLE VIII
COMPLAINTS AND INVESTIGATIONS
ss.8.1 Customer Complaints. Equitable and the General Agent shall give
prompt written notice to the other of any customer complaint (as such term is
defined in Equitable's Policies and Procedures) received by such party or any
affiliate thereof in connection with, relating to or arising out of any Product,
the solicitation of Applications pursuant hereto, any Contract issued pursuant
to this Agreement or any activity or conduct pertaining to the subject matter of
this Agreement. A copy of the customer complaint received (or a written summary
thereof if made orally) shall accompany such notice. Copies of all materials
relevant to such customer complaint shall, upon the written request of any other
party hereto, be promptly provided to the party requesting the same. Equitable
and the General Agent will cooperate in investigating all customer complaints,
will consult with each other prior to responding to a customer complaint
received by any of them and will attempt in good faith to reach agreement on the
response to each such customer complaint. If the parties are unable to agree on
the response to any customer complaint, each party shall have the right, upon
prior notice to the other parties, to issue its own
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response to such customer complaint, whether or not such complaint was
originally addressed to such party. Each party shall promptly give the other
parties copies of each response issued by such party.
ss.8.2 Regulatory and Judicial Proceedings. Equitable and the General
Agent shall give prompt written notice to the other of the commencement of any
regulatory investigation, proceeding or inquiry or of any judicial action or
proceeding in connection with, relating to or arising out of the solicitation of
Applications pursuant hereto, any Contract issued pursuant to this Agreement or
any activity or conduct pertaining thereto of which such party or any affiliate
thereof has knowledge. The parties shall each cooperate fully in any such
regulatory investigation, proceeding or inquiry or of any judicial action or
proceeding. Copies of all materials relevant to any such regulatory
investigation, proceeding or inquiry or of any judicial action or proceeding in
the possession of any party hereto shall, upon the written request of any other
party hereto, be promptly provided to the party requesting the same.
ARTICLE IX
TERM OF AGREEMENT
ss.9.1 Termination Without Cause. Either party may terminate this
Agreement for any reason whatsoever ninety (90) days after giving written
notice to the other party hereto.
ss.9.2 Termination for Cause. Either party may, at its option, cancel
and terminate this Agreement for cause thirty (30) days after giving written
notice to the other party of the occurrence of any breach or default hereunder
by such other party of any obligation or warranty or representation herein
contained, unless such other party commences in good faith to cure such breach
or default within such thirty (30) period, in which case such thirty (30) day
period shall be extended for such period as may be reasonably required to cure
such breach or default.
ss.9.3 Surviving Provisions. The provisions of Articles VI, VIII and
X shall survive termination of this Agreement.
ARTICLE X
INDEMNIFICATION
ss.10.1 Indemnification of Equitable. The General Agent shall
indemnify and hold harmless, Equitable, all direct and indirect Equitable
subsidiaries and all officers, directors, employees and representatives of the
foregoing from and against any and all losses, claims, damages or liabilities,
joint or several (including any investigative, legal and other expenses
reasonably incurred in connection with, and any amounts paid in settlement of,
any action, suit or proceeding or any claim asserted), to which they or any of
them may become subject, at common law or otherwise, insofar as such losses,
claims, damages or liabilities arise out of or are based upon any breach of any
warranty or representation by the General Agent hereunder or any default or
other failure on the General Agent's part to perform any of its obligations
hereunder.
ss.10.2 Indemnification of General Agent. Equitable shall indemnify
and hold harmless the General Agent, its parent AXA Distribution Holding
Company, all direct and indirect subsidiaries of AXA Distribution Holding
Company and all officers, directors, employees and representatives of the
foregoing from and against any and all losses, claims, damages or liabilities,
joint or several (including any investigative, legal and other expenses
reasonably incurred in connection with, and any amounts paid in settlement of,
any action, suit or proceeding or any claim asserted), to which they or any of
them may become subject, at common law or otherwise, insofar as such losses,
claims, damages or liabilities arise
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out of or are based upon any breach of any warranty or representation by the
Equitable hereunder or any default or other failure on Equitable's part to
perform any of its obligations hereunder:
ss.10.3 Notification and Procedures. After receipt by a party entitled
to indemnification ("Indemnified Party") under this Article X of notice of the
commencement of any action or threat of such action, if a claim in respect
thereof is to be made against any person obligated to provide indemnification
under this Article X ("Indemnifying Party"), such Indemnified Party will notify
the Indemnifying Party in writing of the commencement thereof as soon as
practicable thereafter, provided that the omission so to notify the Indemnifying
Party will not relieve it from any liability under this Article X, except to the
extent that the omission results in a failure of actual notice to the
Indemnifying Party and such Indemnifying Party is damaged solely as a result of
the failure to give such notice. The Indemnifying Party, upon the request of the
Indemnified Party, shall retain counsel reasonably satisfactory to the
Indemnified Party to represent the Indemnified Party and any others the
Indemnifying Party may designate in such proceeding and shall pay the fees and
disbursements of such counsel related to such proceeding. In any such
proceeding, any Indemnified Party shall have the right to retain its own
counsel, but the fees and expenses of such counsel shall be at the expense of
such Indemnified Party, unless (i) the Indemnifying Party and the Indemnified
Party shall have mutually agreed to the retention of such counsel or (ii) the
named parties to any such proceeding (including any impleaded parties) include
both the Indemnifying Party and the Indemnified Party and representation of both
parties by the same counsel would be inappropriate due to actual or potential
differing interests between them. The Indemnifying Party shall not be liable for
any settlement of any proceeding effected without its written consent, but if
such proceeding is settled with such consent or if final judgment is entered in
such proceeding for the plaintiff, the Indemnifying Party shall indemnify the
Indemnified Party from and against any loss or liability by reason of such
settlement or judgment.
ARTICLE XI
MISCELLANEOUS
ss.11.1 Headings. The headings in this Agreement are included for
convenience of reference only and in no way define or delineate any of the
provisions hereof or otherwise affect their construction or effect.
ss.11.2 Assignment Prohibited. This Agreement may not be assigned
directly or indirectly by merger, operation of law or otherwise by any party
hereto without the prior written consent of the other. Any direct or indirect
transfer, individually or in the aggregate, of more than fifty percent (50%) of
the ownership interests of any party by the holder or holders thereof shall
constitute an assignment for the purposes hereof.
ss.11.3 Prior Agreements and Amendments. This Agreement constitutes
the entire agreement between the parties hereto and supersedes all prior
agreements, either oral or written, between the parties with respect to the
Products, the solicitation of Applications and the sale and servicing of
Contracts and may not be modified or amended in any way except in writing signed
by both parties hereto unless expressly provided to the contrary herein.
ss.11.4 Counterparts. This Agreement may be executed in two or more
counterparts, each of which taken together shall constitute one and the same
instrument.
ss.11.5 Severability. If any provision of this Agreement shall be held
or made invalid by a court decision, statute, rule or otherwise, the remainder
of this Agreement shall not be affected thereby.
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ss.11.6 Notices. All notices under this Agreement shall be given in
writing and addressed as follows:
(a) if Equitable, to:
The Equitable Life Assurance Society
of the United States
1290 Avenue of the Americas
New York, New York 10104
Attention: President
with a copy to:
The Equitable Life Assurance Society
of the United States
1290 Avenue of the Americas
New York, New York 10104
Attention: Law Department
(b) if the General Agent, to:
AXA Network, LLC
1451 Crums Mill Road
Harrisburg, Pennsylvania 17112
Attention: President
with a copy to:
AXA Network, LLC
1290 Avenue of the Americas
New York, New York 10104
Attention: Counsel
or to such other address as such party may hereafter specify in writing. Each
such notice and each such copy thereof shall be either hand delivered, delivered
by overnight courier or transmitted by certified United States mail, return
receipt requested, and shall be effective upon delivery.
ss.11.7 Arbitration. Should an irreconcilable difference of opinion
arise between Equitable and the General Agent as to the interpretation of any
matter respecting this Agreement, it is hereby mutually agreed that such
differences shall be submitted to arbitration as the sole remedy available to
both parties. Such arbitration shall be in accordance with the rules of the
American Arbitration Association, the arbitrators shall have extensive
experience in the insurance industry, and the arbitration shall take place in
New York, New York.
ss.11.8 Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of New York, excluding its
conflict of laws provisions.
ss.11.9 No Waiver of Rights. The rights, remedies and obligations
contained in this Agreement are cumulative and are in addition to any and all
rights, remedies and obligations, at law or in equity, which the parties hereto
are entitled to under state and federal laws. Failure of any party to insist
upon strict compliance with any of the terms and/or conditions of this Agreement
shall not be construed as a waiver of any of the terms and/or conditions, but
the same shall remain in full force and effect. No
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waiver of any of the provisions of this Agreement shall be deemed, or shall
constitute, a waiver of any other provisions, whether or not similar, nor shall
any waiver constitute a continuing waiver.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective duly authorized officers.
THE EQUITABLE LIFE ASSURANCE SOCIETY
OF THE UNITED STATES
By:/s/Stanley B. Tulin
--------------------------------
Name:Stanley B. Tulin
-------------------------
Title: Vice Chairman and Chief
Financial Officer
-----------------------
AXA NETWORK, LLC
AXA NETWORK OF ALABAMA, LLC
AXA NETWORK OF CONNECTICUT, MAINE AND NEW
YORK, LLC
AXA NETWORK INSURANCE AGENCY OF
MASSACHUSETTS, LLC
EQUISOURCE OF NEVADA, INC. (to be renamed AXA
Network Of Nevada, Inc.)
EQUISOURCE OF PUERTO RICO, INC. (to be renamed AXA
Network Of Puerto Rico, Inc.)
EQUISOURCE OF NEW YORK, INC. as agent for EQUISOURCE
INSURANCE AGENCY OF TEXAS, INC. (to be
renamed AXA Network Insurance Agency
of Texas, Inc.)
By:/s/ Debra A. Brogan
---------------------
Name: Debra A. Brogan
Title: President
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EXHIBIT A
SCHEDULE 1
GENERAL AGENT COMPENSATION FOR LIFE INSURANCE SALES AND SERVICING
This Schedule 1 of Exhibit A is attached to and made part of the General Agent
Sales Agreement dated January 1, 2000 by and between The Equitable Life
Assurance Society of the United States and AXA Network, LLC.
Compensation to the General Agent in connection with the sale and servicing of
life insurance policies will be calculated on a policy by policy basis.
Compensation paid hereunder will be allocated to commissions and expense
allowances as the parties may from time to time agree consistent with the
provisions of Section 4228 of the New York State Insurance Law. Total
compensation to the General Agent in respect of the sale and servicing of each
life insurance policy will be a percentage of the premiums received by Equitable
in respect of such policy as more particularly set forth in the following table:
Type of Premium Percentage
--------------- ----------
First Policy Year
Scheduled Premiums 99.0%
Premiums up to Target 99.0%
Premiums in excess of Target 8.5%
Renewal Years 8.0%
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EXHIBIT A
SCHEDULE 2
GENERAL AGENT COMPENSATION Qualified Periodic Annuity Sales and Servicing
This Schedule 2 of Exhibit A is attached to and made part of the General Agent
Sales Agreement dated January 1, 2000 by and between The Equitable Life
Assurance Society of the United States and AXA Network, LLC.
Compensation to the General Agent in connection with the sale and servicing of
periodic premium annuity contracts qualified under Sections 401, 403 or 457 of
the Internal Revenue Code, as amended, will be calculated on a contract by
contract and certificate by certificate basis. Compensation paid hereunder will
be allocated to commissions and expense allowances as the parties may from time
to time agree consistent with the provisions of Section 4228 of the New York
State Insurance Law. Total compensation to the General Agent in respect of the
sale and servicing of each qualified periodic premium annuity contract or
certificate will be a percentage of the consideration received by Equitable in
respect of such contract or certificate as more particularly set forth in the
following table:
Type of Consideration Percentage
--------------------- ----------
First Policy Year 16.0%
Renewal Years 6.0%
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EXHIBIT A
SCHEDULE 3
GENERAL AGENT COMPENSATION FOR OTHER ANNUITY SALES AND SERVICING
This Schedule 3 of Exhibit A is attached to and made part of the General Agent
Sales Agreement dated January 1, 2000 by and between The Equitable Life
Assurance Society of the United States and AXA Network, LLC.
Compensation to the General Agent in connection with the sale and servicing of
all annuity contracts other than tax qualified periodic premium annuity
contracts will be calculated on a contract by contract and certificate by
certificate basis. Compensation paid hereunder will be allocated to commissions
and expense allowances as the parties may from time to time agree consistent
with the provisions of Section 4228 of the New York State Insurance Law. Total
compensation to the General Agent in respect of the sale and servicing of each
such contract or certificate will be a percentage of the consideration received
by Equitable in respect of such contract or certificate as more particularly set
forth in the following table:
Type of Consideration Percentage
--------------------- ----------
First Policy Year 8.5%
Renewal Years 8.5%
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EXHIBIT A
SCHEDULE 4
GENERAL AGENT COMPENSATION FOR HEALTH INSURANCE SALES AND SERVICING
This Schedule 4 of Exhibit A is attached to and made part of the General Agent
Sales Agreement dated January 1, 2000 by and between The Equitable Life
Assurance Society of the United States and AXA Network, LLC.
Compensation to the General Agent in connection with the sale and servicing of
all health insurance contracts and policies will be calculated on a contract by
contract and policy by policy basis. Total compensation to the General Agent in
respect of the sale and servicing of each health insurance contract or policy
will be a percentage of the premiums received by Equitable in respect of such
contract or policy as more particularly set forth in the following table:
Type of Contract or Policy Percentage
-------------------------- ----------
Major Medical Policies 10.0%
Disability Income Policies
First Year Premiums 99.0%
Renewal Year Premiums
Years 2-10 20.0%
Years 11 on 10.0%
iv
AGREEMENT FOR SERVICES BY THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE
UNITED STATES TO AXA NETWORK, LLC AND ITS SUBSIDIARIES
Agreement made as of the 1st day of January, 2000 between THE
EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES, a New York stock life
insurance company ("Equitable Life"); AXA NETWORK, LLC, a Delaware limited
liability company; and AXA Network, LLC's direct or indirect subsidiaries (AXA
Network, LLC and such subsidiaries hereinafter referred to as "AXA Network").
WHEREAS, both Equitable Life and AXA Network are indirect
wholly-owned subsidiaries of AXA Financial, Inc.;
WHEREAS, AXA Network desires to utilize Equitable Life
personnel, property and services in carrying out its management, administrative
and other functions and Equitable Life is willing to furnish the same on the
terms and conditions hereinafter set forth;
WHEREAS, Equitable Life desires to be reimbursed for its costs
and expenses incurred in rendering such services to AXA Network; and
WHEREAS, both Equitable Life and AXA Network desire to enter into an
agreement that supersedes the Services Agreement dated January 1, 1987 between
Equitable Life and Traditional Equinet Business Corporation of New York and its
subsidiaries (predecessor to AXA Network);
NOW, THEREFORE, the parties do hereby agree as follows:
1. Equitable Life from time to time may provide, as available, to AXA
Network the personnel, property and services reasonably necessary to perform its
management, administrative and other functions. The services to be furnished may
include, without limitation, management, corporate finance, strategic planning,
administration, office and general supplies, financial and cash management,
printing, accounting, tax, auditing, legal, human resources, corporate and
financial communications, marketing, risk management, communications,
technology, data processing and corporate secretarial services. The Equitable
Life services shall not include any services provided to AXA Network by
Equitable Life pursuant to separate agreements.
2. AXA Network shall pay the actual costs (direct and indirect) and
expenses incurred by Equitable Life in furnishing personnel, property and
services pursuant to this Agreement. In determining the basis for the
apportionment of costs and expenses, specific identification or estimates based
on time, company assets, square footage or any other mutually agreeable method
providing for a fair and reasonable allocation of costs and expenses may be used
provided such method is in conformity with generally accepted accounting
principles and with the requirements of Section 1505(a) of the New York
Insurance Law and New York Insurance Department Regulation No. 33. The charge to
AXA Network for such apportioned expenses shall be at cost as described in this
Section 2.
3. Within 45 days after the end of each calendar quarter, and more
often if desired, Equitable Life shall submit to AXA Network a statement of
apportioned expenses showing the basis
<PAGE>
for the apportionment of each item. Settlement, which shall be on a cost basis,
shall be made 45 days thereafter. The statement of apportioned expenses shall
set forth in reasonable detail the nature of the costs and expenses being
apportioned and other relevant information to support the charges.
4. (a) The total amount of each such statement shall be allocated among
the AXA Network entities executing this Agreement in the same proportion that
the volume of business of each one of the AXA Network entities bears to the
total volume of business of all the AXA Network entities for the period of time
to which the statement relates, provided that, if, in the judgment of the
management of the AXA Network entities, a specific charge or expense is
attributable to one or more of the AXA Network entities, such charge or expense
shall be allocated to such one of the AXA Network entities which in management's
judgment incurred such charge or expense.
(b) After the total amount of each statement has been
allocated as provided in (a) above, each one of the AXA Network entities shall
forward the amount of the statement allocated to it directly to Equitable Life
or, if the management of AXA Network so determines, the AXA Network entity shall
forward such amounts directly to AXA Network, LLC, which shall promptly forward
the total amount of the statement directly to Equitable Life on behalf of AXA
Network.
5. Each of Equitable Life and AXA Network shall have the right to
conduct an audit of the other's books, records and accounts, giving reasonable
notice of its intent to conduct such an audit. In the event of such an audit,
each shall give to the other reasonable cooperation and access to all books,
records and accounts necessary to the audit.
6. Each of Equitable Life and AXA Network shall be and remain sole
owner of its records, including but not limited to business and corporate
records, regardless of the use or possession by either of the other's records.
Equitable Life and AXA Network shall each individually maintain separate books,
accounts and records in respect to personnel, property and services provided
under this Agreement and shall cooperate and use reasonable efforts to prepare
and/or obtain in a timely fashion any and all books, accounts, records or other
documentation as may be necessary or desirable in connection with this Agreement
and/or the personnel, property or services provided hereunder.
7. The books, accounts and records of Equitable Life and AXA Network as
to all transactions between them under this Agreement shall be maintained so as
to clearly and accurately disclose the nature and details of the transactions,
including such accounting information as is necessary to support the
reasonableness of the charges under this Agreement.
8. Should an irreconcilable difference of opinion between Equitable
Life and AXA Network arise as to the interpretation of any matter respecting
this Agreement, it is hereby mutually agreed that such differences shall be
submitted to arbitration as the sole remedy available to the parties. Such
arbitration shall be in accordance with the rules of the American Arbitration
Association, the arbitrators shall have extensive experience in the insurance
industry, and the arbitration shall take place in New York, New York.
9. The term of this Agreement shall commence as of the effective date
of this Agreement and continue until terminated by either Equitable Life or AXA
Network on not less than 60 days prior written notice to the other or by an
agreement in writing signed by all parties specifying the effective date of
termination.
<PAGE>
10. This Agreement shall be governed by and interpreted in accordance
with the laws of the State of New York.
11. The requirements of Equitable Life shall take precedence over the
requirements of AXA Network under this Agreement, and Equitable Life shall
furnish personnel, property and services to AXA Network only when Equitable Life
has available capacity to do so.
12. No assignment of this Agreement shall be made by either Equitable
Life or AXA Network without the prior written consent of the other.
13. Subject to Section 12 above, this Agreement shall inure to the
benefit of and be binding upon the successors and assigns of the parties hereto.
THE EQUITABLE LIFE ASSURANCE SOCIETY OF
THE UNITED STATES
By: /s/ Stanley B. Tulin
---------------------------------------------
Name: Stanley B. Tulin
Title: Vice Chairman and Chief Financial
Officer
AXA NETWORK, LLC
AXA NETWORK OF ALABAMA, LLC
AXA NETWORK OF CONNECTICUT, MAINE AND
NEW YORK, LLC
AXA NETWORK INSURANCE AGENCY OF
MASSACHUSETTS, LLC
EQUISOURCE OF NEVADA, INC. (to be renamed AXA
Network Of Nevada, Inc.)
EQUISOURCE OF PUERTO RICO, INC. (to be renamed
AXA Network Of Puerto Rico, Inc.)
EQUISOURCE OF NEW YORK, INC. as agent for
EQUISOURCE INSURANCE AGENCY OF
TEXAS, INC. (to be renamed AXA Network
Insurance Agency of Texas, Inc.)
By: /s/ Debra A. Brogan
---------------------------------------------
Name: Debra A. Brogan
Title: President
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<DEBT-HELD-FOR-SALE> 18,599,700
<DEBT-CARRYING-VALUE> 133,200
<DEBT-MARKET-VALUE> 133,200
<EQUITIES> 671,200
<MORTGAGE> 3,270,000
<REAL-ESTATE> 1,160,200
<TOTAL-INVEST> 28,205,000
<CASH> 628,000
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 4,033,000
<TOTAL-ASSETS> 99,795,500
<POLICY-LOSSES> 0
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 4,777,600
<POLICY-HOLDER-FUNDS> 21,351,400
<NOTES-PAYABLE> 1,407,900
0
0
<COMMON> 2,500
<OTHER-SE> 5,765,000
<TOTAL-LIABILITY-AND-EQUITY> 99,975,500
1,815,700
<INVESTMENT-INCOME> 2,240,900
<INVESTMENT-GAINS> (96,900)
<OTHER-INCOME> 2,264,300
<BENEFITS> 1,038,600
<UNDERWRITING-AMORTIZATION> 446,200
<UNDERWRITING-OTHER> 2,351,100
<INCOME-PRETAX> 1,309,900
<INCOME-TAX> 332,000
<INCOME-CONTINUING> 778,500
<DISCONTINUED> 28,100
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 806,600
<EPS-BASIC> 0
<EPS-DILUTED> 0
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
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</TABLE>
