<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ X ] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended December 31, 1993.
Commission file number 0-8590
EQUITABLE OF IOWA COMPANIES
(Exact name of registrant as specified in its charter)
Iowa 42-1083593
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
604 Locust Street, P.O. Box 1635
Des Moines, Iowa 50306
(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number, including area code : (515) 245-6911
Securities Registered Pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Common Stock New York Stock Exchange
Securities Registered Pursuant to Section 12(g) of the Act: None
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 (229.405 of this chapter) 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. [ ].
The aggregate market value of voting stock (Common Stock) held by
nonaffiliates of the registrant as of February 24, 1994, was $741,467,000.
As of February 24, 1994, 31,522,823 shares of Common Stock are issued and
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information contained in registrant's proxy statement for the
annual meeting of shareholders to be held April 28, 1994, is incorporated
by reference into Part III hereof.
<PAGE>
<PAGE>
PART I
ITEM 1. Business
Overview
Equitable of Iowa Companies ("company"), a Des Moines, Iowa based insurance
holding company organized in 1977, is a provider of individual annuity and
life insurance products, targeting middle-income individuals and small
businesses throughout the United States. Through its insurance
subsidiaries, Equitable Life Insurance Company of Iowa ("Equitable Life")
and USG Annuity & Life Company ("USG"), the company offers its products in
49 states and the District of Columbia. Equitable Life was founded in 1867
and is the oldest life insurance company west of the Mississippi. The
company began actively marketing annuity products in 1988, principally
through USG, which was acquired by the company in 1988 as a shell
organization. Both Equitable Life and USG are rated "A+" (Superior) by
A.M. Best. A.M. Best's ratings are directed toward the protection of
policyholders, not investors.
The company has had a rapid rate of growth in assets over the past few
years, primarily as a result of increased demand for its annuity products.
The company's total assets grew 27%, 16% and 26% in 1993, 1992 and 1991,
respectively. Industry-wide asset growth averaged 7% in 1992 and 10% in
1991, based on information compiled by the American Council of Life
Insurance. The company's total assets at December 31, 1993 were $6.4
billion, compared to $5.1 billion at December 31, 1992. The company
achieved its growth in assets while generating spreads and an overall level
of profitability that met or exceeded its objectives.
In 1993, the company increased the number of authorized shares of common
stock from 35,000,000 to 70,000,000 shares and declared a 2-for-1 stock
split to holders of record on May 12, 1993. On October 21, 1993 a public
offering of 2,300,000 shares of common stock was completed netting a per
share price of $33.16 to the company after underwriting discount and
expenses.
Strategy
The company's continuing strategy to achieve its growth and profit goals is
to:
- offer a diversified portfolio of annuity and life insurance
products designed to appeal to a broad range of customers in the
fast-growing retirement savings market segment;
- expand its existing base of over 33,000 agents;
- provide superior, cost-effective service to its policyholders and
agents, brokers and other producers;
- maintain high quality ratings;
- issue competitive products with protection from early policy
termination; and
- maintain high quality investments having maturities consistent
with the characteristics of the company's policy liabilities.
The company believes that, because of its diversified portfolio of annuity
and life insurance products, it is well-positioned to take advantage of
certain demographic and economic trends that are expected to increase
demand for these types of products. These trends include: an aging "baby
boomer" segment of the population that is increasingly concerned about
retirement and estate planning; an increase in the number of families that
are concerned about maintaining their standard of living at retirement;
lower public confidence that government and employer-provided benefits at
retirement will be sufficient; and the recent increase in individual
federal income tax rates.
The company believes that ratings also are important in attracting
customers, and give it a competitive advantage over other companies in the
annuity marketplace. The company intends to manage its business to
preserve its current ratings.
The company structures its products to contractually protect itself from
early policy termination. The majority of the company's life insurance
products currently sold incorporate a charge for early withdrawal of the
cash value of the policy. In addition, all deferred annuity policies sold
by the company include surrender charges, which generally decline over time
and apply only during a stated period. In recent years, the company has
increased the average surrender charges and lengthened the average period
during which charges are assessed.
The company's investment strategy emphasizes current income and low credit
risk. The persistency of the company's products enables the company to
lengthen the duration of its investments. Longer maturities typically
provide higher yields than shorter maturities. These higher yields,
together with the overall quality of the investment portfolio, allow the
company to maintain competitive crediting rates on its interest-sensitive
products.
Products
The company offers, through its insurance subsidiaries, a portfolio of life
insurance and annuity products designed to meet the needs of its customers
for supplemental retirement income, estate planning and protection from
unexpected death. For all products, the target market is middle-income
individuals, families and small businesses throughout the United States.
The company requires that each of its products be priced to earn an
adequate margin between the return to the policyholder and the return
earned by the company on its investments.
Annuities. Annuities are long-term savings vehicles that are particularly
attractive to customers over the age of 50 who are planning for retirement
and seeking secure, tax-deferred savings products. The individual annuity
business is a growing segment of the savings and retirement market, and
among the fastest growing segments of the life insurance industry. Annuity
products currently enjoy an advantage over certain other retirement savings
products, because the payment of federal income taxes on interest credited
on annuity policies is deferred during the investment accumulation period.
The company offers a variety of annuity products. Single premium deferred
annuities ("SPDAs"), in general, are savings vehicles in which the
policyholder, or annuitant, makes a single premium payment to an insurance
company. The insurance company credits the account of the annuitant with
earnings at an interest rate (the "crediting rate"), which is declared by
the insurance company from time to time and may exceed but may not be lower
than any contractually guaranteed minimum crediting rate. All of the
company's annuities have a minimum guaranteed crediting rate. The company
also offers flexible premium deferred annuities ("FPDAs"). FPDAs are
deferred annuities in which the policyholder may elect to make more than
one premium payment. The company does not currently underwrite variable
annuity products, although the company is developing plans to market these
products in 1994.
The company had 160,000 in force deferred annuity policies at December 31,
1993, with an average account balance of $26,000.
At least once each month the company establishes an interest crediting rate
for its new annuity policies. In determining the company's interest
crediting rate on new policies, management considers the competitive
position of the company, prevailing market rates and the profitability of
the annuity product. The company maintains the initial crediting rate for
a minimum period of one year. Thereafter, the company may adjust the
crediting rate not more frequently than once a year. In establishing
renewal crediting rates, the company primarily considers the anticipated
yield on its investment portfolio. Interest rates credited on the
company's in force annuity policies ranged from 4.5% to 10.0% at December
31, 1993. All of the company's annuity products have minimum guaranteed
crediting rates ranging from 3.0% to 4.5% for the life of the policy. At
December 31, 1993, less than 6% of the company's in force annuity policies
had rates credited for a multi-year period.
Certain of the company's annuity policies have a bonus crediting rate for
the first year of the policy, which typically exceeds the annual crediting
rate by 0.5% to 2.5%. The bonus and the base crediting rates are fully
disclosed in the annuity contract. The expected renewal crediting rate on
such policies is lower than the expected rate on the company's comparable
products that do not have a bonus feature.
The company incorporates a number of features in its annuity products
designed to reduce the early withdrawal or surrender of the policies and to
partially compensate the company for lost investment opportunities and
costs if policies are withdrawn early. Under the terms of the company's
policies, the policyholder is permitted to withdraw all or part of the
premium paid plus the amount credited to his or her account, less a
surrender charge for withdrawals. Certain of the company's deferred
annuity contracts provide for penalty-free partial withdrawals, typically
up to 10% of the accumulation value annually. Surrender charge periods on
annuity policies currently range from five years to the term of the policy,
with the majority of such policies being issued with a surrender charge
period of more than seven years. The average length of the surrender
period on the company's deferred annuity policies issued during 1993 was
10.6 years. The initial surrender charge on annuity policies generally
ranges from 5% to 20% of the premium and decreases over the surrender
charge period. At December 31, 1993, 75% of the company's annuity
liabilities were subject to a surrender charge of 5% or more, and only 4%
carried no surrender penalty.
In 1992, the company introduced a number of annuity products with a Market
Value Adjustment feature, in which a "market value adjustment" is applied
to adjust the applicable surrender charge (either up or down but not below
the amount of the initial premium plus credited interest at a stated rate)
during the surrender charge period. MVA policies accounted for 53% of the
company's total annuity sales during 1993 and 18% of total annuity
liabilities at December 31, 1993.
The company also markets tax-qualified retirement annuities that meet the
requirements of Section 403(b) of the Internal Revenue Code of 1986
("TSAs") to employees of public schools and certain other tax-exempt
organizations. Teachers and other school employees purchase TSAs through
automatic payroll deductions. TSA products tend to be purchased by
customers who are younger than purchasers of the company's other annuity
products. Therefore, the company's specialty TSA products tend to
incorporate features that are attractive to customers in this younger age
bracket (early 40s to early 50s) who have a longer period to retirement,
such as combining a higher crediting interest rate with a longer surrender
charge period. The company believes that the market for TSAs is attractive
because TSAs broaden its customer base and provide an on-going source of
premium renewals. During 1993, the company derived 6% of its annuity
premiums from TSAs and expects this percentage to continue to grow over
time. In addition to TSAs, the company also sells other tax-qualified
retirement annuities such as individual retirement annuities and simplified
employee pension plans. Total tax-qualified retirement annuity premiums
totalled $390 million, or 35% of total annuities sold during 1993.
Life Insurance Products. The company offers a variety of traditional,
universal and term life insurance products. Traditional life insurance
policies incorporate a fixed premium schedule and combine guaranteed
insurance protection with a savings feature. Traditional life policies
cost more than comparable term life insurance coverage when the
policyholder is younger but less as the policyholder grows older. The
policyholder may borrow against the accumulated cash value, with policy
loans typically available at a rate of interest lower than that available
from other lending sources. The policyholder may also choose to surrender
the policy at any time and receive the accumulated cash value, less any
applicable withdrawal charge, rather than continuing the insurance
protection. The company currently offers fixed premium current interest
and other traditional life insurance products, and its insurance in force
also includes participating policies.
Universal life insurance products provide whole life insurance and
adjustable rates of return related to current interest rates.
Policyholders may vary the frequency and size of their premium payments,
although policy benefits may also fluctuate according to such payments.
Term life insurance policies provide insurance protection for unexpected
death during the period in which the policy is in force, generally one,
five, ten or twenty years. These products are designed to meet customers'
shorter-term needs because the policies do not have an investment feature
and no cash value is built up. Term life premiums are accordingly lower
than certain of the company's other products. The company's current term
life products include annually renewable term and five-year, ten-year and
fifteen-year renewable and convertible term.
In order to discourage early policy withdrawals and to partially compensate
the company for lost investment opportunities and costs if policies are
terminated, all of the company's universal life and interest-sensitive
policies issued since 1986 have incorporated withdrawal charges or similar
provisions. At December 31, 1993, 16% of the company's life insurance
liabilities were subject to such charges.
Reserves. In accordance with applicable insurance regulations, the company
records as liabilities in its statutory financial statements, actuarially
determined reserves that are calculated to meet future obligations under
outstanding insurance policies. The reserves are based on statutorily
recognized methods using prescribed morbidity and mortality tables, as
applicable, and interest rates. Reserves include premium deposits, claims
that have been reported but are not yet paid, claims that have been
incurred but have not been reported, and claims in the process of
settlement. The company's reserves satisfy statutory requirements.
The reserves reflected in the company's Consolidated Financial Statements
are calculated based on generally accepted accounting principles ("GAAP").
These reserves are based upon the company's best estimates of mortality,
persistency, expenses and investment income, with appropriate provisions
for adverse statistical deviation, and the use of the net level premium
method for all non interest-sensitive products and at full account value
with no reduction for surrender penalties, for interest-sensitive products.
GAAP reserves differ from statutory reserves due to the use of different
assumptions regarding mortality and interest rates and the introduction of
lapse assumptions into the GAAP reserve calculation.
The following table sets forth certain consolidated information regarding
the development of the company's annuity and insurance business and its
reserves calculated based on GAAP for each of the five years in the period
ended December 31, 1993. Premiums represent premiums and deposits received
(as adjusted for due and deferred premiums), and include premiums on
universal life and investment contracts as well as premiums on traditional
products.
(Table following)
<PAGE>
<PAGE>
<TABLE>
PRODUCTS AND SOURCES OF BUSINESS
(Dollars in thousands)
<CAPTION>
As of and for the year ended
December 31 1993 1992 1991 1990 1989
_________________________________________________________________________________
<S> <C> <C> <C> <C> <C>
First year and single premiums:
Annuities and
other investment
contracts $1,104,222 $871,310 $461,805 $590,922 $814,734
Universal life 11,345 8,139 10,904 12,460 8,253
Fixed premium
current interest 4,404 4,594 4,103 5,067 4,761
Participating -- -- 12,420 12,615 14,297
Term and other 2,826 1,977 1,698 2,160 1,289
___________ ___________ ___________ ___________ ___________
Total first-year
and single
premiums $1,122,797 $886,020 $490,930 $623,224 $843,334
=========== =========== =========== =========== ===========
Total premiums:
Annuities and
other investment
contracts $1,117,255 $883,951 $474,447 $599,334 $819,253
Universal life 44,784 38,993 39,251 37,294 31,268
Fixed premium
current interest 14,821 13,178 11,462 10,239 7,809
Traditional whole
life nonpar 7,146 7,794 8,549 9,559 10,636
Participating 31,323 32,550 35,240 37,626 41,638
Term and other 8,401 2,678 7,245 12,664 6,993
___________ ___________ ___________ ___________ ___________
Total premiums $1,223,730 $979,144 $576,194 $706,716 $917,597
=========== =========== =========== =========== ===========
New life insurance written (at face amount):
Universal life $628,086 $510,409 $584,693 $712,387 $600,165
Fixed premium
current interest 157,567 166,249 160,228 210,302 234,276
Term and other 630,923 721,369 393,327 425,441 448,115
___________ ___________ ___________ ___________ ___________
Total new life
insurance
written $1,416,576 $1,398,027 $1,138,248 $1,348,130 $1,282,556
=========== =========== =========== =========== ===========
</TABLE>
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
As of and for the year ended
December 31 1993 1992 1991 1990 1989
_________________________________________________________________________________
<S> <C> <C> <C> <C> <C>
Life insurance in force (at face amount): 1
Universal life $4,637,995 $4,178,116 $3,955,898 $3,684,396 $3,258,494
Fixed premium
current interest 891,499 805,204 721,003 639,894 502,442
Traditional whole
life nonpar 385,984 407,934 437,630 480,991 535,467
Participating 1,112,765 1,159,629 1,242,055 1,348,223 1,457,695
Term and other 2,589,638 2,376,443 2,035,146 1,946,654 1,837,680
___________ ___________ ___________ ___________ ___________
Total life
insurance
in force $9,617,881 $8,927,326 $8,391,732 $8,100,158 $7,591,778
=========== =========== =========== =========== ===========
Reserves:
Annuities and
other investment
contracts $4,440,259 $3,320,188 $2,443,545 $1,932,489 $1,275,516
Universal life 296,435 264,584 240,033 212,202 181,266
Fixed premium
current interest 67,035 55,456 45,349 36,707 27,954
Traditional whole
life nonpar 154,929 153,038 158,774 158,402 160,121
Participating 581,291 575,627 580,079 587,652 595,933
Term and other 38,136 34,620 31,635 31,957 26,833
___________ ___________ ___________ ___________ ___________
Total reserves $5,578,085 $4,403,513 $3,499,415 $2,959,409 $2,267,623
=========== =========== =========== =========== ===========
</TABLE>
1 Before reduction for ceded reinsurance of: 1993 - $1,326,020; 1992 -
$1,242,003; 1991 - $1,066,555; 1990 - $996,939 and 1989 - $861,853.
Sales are not concentrated in any geographical area, nor are assets and
profitability separately attributed to geographical areas. The states
from which the most life and annuity premiums were received are: 1993 -
California 15.9%; 1992 - California 11.6%; 1991 - Texas 13.6%; 1990 - Texas
14.5% and 1989 - California 11.0%.<PAGE>
<PAGE>
Marketing and Distribution
The company maintains a diverse distribution network that seeks to provide
high quality service to its customers, including the company's
policyholders, agents, brokers and other producers, while controlling
costs. USG has a variable cost distribution system and markets its
products through over 32,000 insurance brokerage agents and 70 financial
institutions, such as banks and thrifts. Equitable Life distributes its
products through a sales force of approximately 290 career agents, 420
insurance brokerage agents and 210 other personal producers. During 1993,
sales through insurance brokerage agents and financial institutions
represented 95% of the company's annuity sales, and 18% of life insurance
sales.
Since 1992, the company has offered certain life insurance products through
USG's distribution network and certain of USG's annuity products through
Equitable Life's agents and producers. The company intends to continue to
take advantage of opportunities to expand the range of products offered
through both distribution networks.
USG relies primarily on national and regional wholesale marketing
organizations to market its products and to recruit agents and other
producers. The organizations typically recruit agents for USG by
advertising USG's products and its commission structure, through direct
mail advertising, or through seminars for insurance agents and brokers.
These organizations bear most of the costs incurred in marketing USG and
its products. USG compensates the marketing organization by paying it a
percentage of the commissions earned on new annuity and insurance policies
generated by the agents recruited by the organizations. USG generally does
not enter into exclusive arrangements with these marketing organizations.
Certain of the marketing organizations with which USG has a relationship
are specialty organizations that have a marketing expertise or a
distribution system relating to a particular product, such as TSA policies.
USG believes that use of wholesale marketing organizations is a
cost-effective means of recruiting capable agents and brokers, and
advertising its products. The company employs marketing personnel and
customer service representatives who respond by telephone to questions from
agents, brokers and other producers regarding USG and its products. The
company believes that the high level of service it provides to the agents,
brokers and other producers who market and sell its products helps
establish a relationship between the company and its sales force, and that
such interaction also provides marketing opportunities.
Equitable Life utilizes a career insurance agent system to sell its
individual life insurance and annuity policies. Located nationwide, these
career agents primarily distribute Equitable Life products. Equitable Life
provides the agents with a professional support program that includes a
competitive benefits package, ongoing training, assistance in professional
certification, and advertising and advanced sales support. In addition,
Equitable Life provides conferences and seminars designed to motivate and
train its career agents. Equitable Life also distributes its products
through an increasing number of insurance brokerage agents and other
personal producers, who are provided with a comparable professional support
program, but not the benefits package offered to career agents.
Ratings
A. M. Best, an independent insurance industry rating organization, assigns
fifteen letter ratings to insurance companies. A. M. Best's ratings
currently range from "A++" to "F" and some insurance companies are not
rated. A. M. Best performs a quantitative and qualitative evaluation for
each company it rates. The quantitative evaluation compares a company's
performance to industry standards established by A. M. Best in three areas:
profitability, leverage, and liquidity. The qualitative evaluation
examines eight factors for each company: spread of risk, quality and
appropriateness of the reinsurance program, quality and diversification of
assets, adequacy of policy or loss reserves, adequacy of surplus, capital
structure, management's experience and objectives, and policyholders'
confidence. A. M. Best also may review other qualitative factors.
Publications of A. M. Best indicate that "A+" and "A++" ratings are
assigned to those companies which, in A. M. Best's opinion, have achieved
superior overall performance when compared to the standards established by
A. M. Best and generally have demonstrated a strong ability to meet their
policyholder obligations over a long period of time. A. M. Best's ratings
are directed toward the protection of policyholders, not investors.
Equitable Life has received A. M. Best's quality rating of "A+" (Superior)
(or comparable rating) since the ratings were established in 1905. USG has
also received A. M. Best's rating of "A+" (Superior), which was based on
the consolidated financial condition and operating performance of USG and
its parent, Equitable Life.
Underwriting
Substantially all of the life insurance policies written by the company's
insurance subsidiaries are individually underwritten, although standardized
underwriting procedures have been adopted for certain coverages. The
company uses information from a prospective policyholder's application, and
in some cases, inspection reports, doctors' statements or medical
examinations, to determine whether a policy should be issued as applied
for, issued at a higher premium because of unfavorable factors, or
rejected. In addition, the company may request medical examinations from
any applicant, regardless of age and amount of insurance, if information
obtained from the application or other sources indicates an examination is
advisable before determining to underwrite the risk. The company requires
medical examinations for applicants for insurance in excess of prescribed
amounts. Underwriting with respect to annuities is minimal.
The increasing incidence of Acquired Immune Deficiency Syndrome ("AIDS") is
expected to adversely affect mortality rates for the life insurance
industry. The company regularly requires applicants for insurance in
excess of $100,000 to submit to blood screening for AIDS, drug and alcohol
abuse and other factors.
Investments
The company's investment philosophy emphasizes the careful underwriting of
credit risk, identifying relative values within a range of investment
choices, providing liquidity to meet operating needs and maximizing current
income. As part of its objective of effective asset-liability management,
the company conducts computer simulations which model its assets and
liabilities under commonly used stress-test interest rate scenarios. Based
on the results of these computer simulations, the company's investment
portfolio has been structured with a view to maintaining a desired
investment spread between the yield on portfolio assets and the rate
credited on its reserves.
Competition
The insurance and annuity business is highly competitive with numerous
companies offering similar products through comparable marketing and
distribution systems. Companies typically compete for policyholders on the
basis of benefit rates, financial strength and customer service and compete
for agents and brokers on the basis of commissions, financial strength and
customer service. The company maintains competitive policy benefit rates.
However, the company believes that it competes primarily on the basis of
its high-level of customer service and its financial strength.
Regulation
The company's life insurance operations are conducted in a highly regulated
environment. Each aspect of the company's insurance operations may be
affected by regulatory authorities to some degree. Each of the company's
insurance subsidiaries is subject to the insurance laws of the state in
which it is organized and of the other jurisdictions in which it transacts
business. Such laws and regulations and the level of supervisory authority
that may be exercised by the state insurance agencies vary from
jurisdiction to jurisdiction. The primary regulators of the Company's
insurance operations are the Commissioner of Insurance for the State of
Iowa for Equitable Life and the Commissioner of Insurance for the State of
Oklahoma for USG.
State insurance laws generally provide regulators with broad administrative
and supervisory powers related to the grant and revocation of licenses to
transact business, the establishment of guaranty fund associations, the
licensing of agents, the approval of policy forms, the establishment of
reserve requirements, the prescription of the form and content of required
financial statements and reports, the determination of the reasonableness
and adequacy of statutory capital and surplus, and the regulation of the
type and amount of investments permitted.
Although the federal government does not directly regulate the insurance
industry, federal initiatives often have an impact on the insurance
business. Federal legislation has been proposed from time to time relating
in general to the solvency of insurers and other subjects.
Recently, the insurance regulatory framework has been placed under
increased scrutiny by various states and the National Association of
Insurance Commissioners ("NAIC"). Various states have considered or
enacted legislation that changes, and in many cases increases, the state's
authority to regulate insurance companies. The NAIC, in conjunction with
state regulators, also has been reviewing existing insurance laws and
regulations. The NAIC recently approved and recommended to the states for
adoption and implementation several regulatory initiatives designed to
reduce the risk of insurance company insolvencies. These initiatives
include new investment reserve requirements, risk-based capital standards,
and restrictions on an insurance company's ability to pay dividends to its
stockholders.
Other Operations
Locust Street Securities, Inc. ("LSSI"), a wholly-owned subsidiary of the
company, markets mutual funds, variable annuities, tax-exempt bond funds
and investment-oriented products of other companies primarily through
Equitable Life career agents. Founded in 1968, LSSI also contracts with
agents of other companies to be a wholesaler of broker/dealer products.
LSSI has a distribution network of approximately 550 representatives in 44
states.
Employees
At December 31, 1993, the company had 379 full-time and 8 part-time
employees. The company provides its employees with a comprehensive range
of employee benefit programs. The company believes that its employee
relations are excellent.
ITEM 2. Properties
Substantially all of the company's business is carried on in leased
facilities located at 604 Locust Street, 699 Walnut Street, and 700 Locust
Street in Des Moines, Iowa. All owned properties consist of real estate
held for investment purposes or acquired through foreclosure. Property and
equipment primarily represent leasehold improvements at the company's
headquarters and at various agency offices and office furniture and
equipment, and are not considered to be significant to the company's
overall operations. Property and equipment are reported at cost less
allowances for depreciation. The company believes that its present
facilities are adequate for its anticipated needs.
ITEM 3. Legal Proceedings
From time to time, in the ordinary course of business, the company is
involved in litigation. Management believes it is unlikely that the
outcome of any pending litigation will have a material adverse effect on
the company's financial condition.
ITEM 4. Submission of Matters to a Vote of Security Holders
None.<PAGE>
<PAGE>
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder
Matters.
Stock Symbols
Prior to September 13, 1993, the company's common stock was quoted on the
NASDAQ National Market System with a stock symbol of EQIC. On and after
September 13, 1993, the company's common stock was quoted on the New York
Stock Exchange with a stock symbol of EIC.
Quarterly Stock Quotations
The following table shows the range of high and low closing sales prices
per share of Common Stock of the company for the periods indicated as
reported on the NASDAQ National Market System prior to September 13, 1993.
Over-the-counter market quotations may reflect inter-dealer prices, without
retail mark-up, mark-down, or commissions and may not necessarily represent
actual transactions. Prices on or after September 13, 1993 are as reported
on the New York Stock Exchange. Prices prior to June 2, 1992 have been
adjusted to give effect to the two-for-one stock split payable to
stockholders of record as of May 14, 1992, and prices prior to June 1, 1993
have been adjusted to give effect to a second two-for-one stock split
payable to stockholders of record as of May 12, 1993. Prices prior to the
consolidation of the company's Class A and Class B common stock into a
single class of Common Stock on a one-for-one basis on May 1, 1992 reflect
prices of the company's Class B common stock.
<TABLE>
<CAPTION>
High Low Close
____________________________
<S> <C> <C> <C>
1992
First Quarter......... 13-7/8 9-5/8 13-3/16
Second Quarter...... 14-5/8 11-3/4 12-5/8
Third Quarter........ 18-3/4 13-1/4 17-5/8
Fourth Quarter....... 22-1/2 17-1/4 22-1/2
1993
First Quarter......... 28 20-7/8 24-3/4
Second Quarter...... 28-1/2 23 24
Third Quarter........ 39 24 38-1/2
Fourth Quarter....... 38-5/8 30-1/4 33-7/8
1994
First Quarter (as of
February 24, 1994)..... 34 29-1/8 33-1/4
</TABLE>
Number of Holders of Record
The number of holders of record of common stock was 946 at February 24,
1994, the dividend record date.
<PAGE>
Dividends
Cash dividends are paid quarterly, at an amount determined by the Board of
Directors. The corporation's bank credit arrangements restrict the amount
of dividends paid annually on its common stock. Also, insurance
regulations restrict the amount of dividends that can be paid to the
company by Equitable Life. See Note 1 to the consolidated financial
statements and Item 7, Management's Discussion and Analysis - Liquidity and
Capital Resources.
Dividends paid per share of common stock, after giving effect to the
2-for-1 stock splits as of May 12, 1993 and May 14, 1992, were $0.405 in
1993 and $0.35 in 1992.
Transfer Agent and Registrar
Boatmen's Trust Company, 510 Locust, P.O. Box 14768, St. Louis, Missouri
63178.
ITEM 6. Selected Financial Data
The following table sets forth a consolidated summary of selected financial
data for the company and its subsidiaries (all significant intercompany
accounts have been eliminated) for each of the last ten years. In this
table the years ended December 31, 1984 through 1987 have been restated to
reflect the implementation of SFAS No. 97 in 1988. In addition, the years
ended December 31, 1984 through 1991 have been restated to reflect the sale
of Younkers, Inc. in 1992 and treatment of that entity as a discontinued
operation. This summary should be read in conjunction with the related
consolidated financial statements and notes thereto.
(Table following)
<PAGE>
<PAGE>
<TABLE>
SELECTED FINANCIAL DATA
(Dollars in thousands, except per share data)
<CAPTION>
As of and for the year ended
December 31 1993 1992 1991 1990 1989
_________________________________________________________________________________
<S> <C> <C> <C> <C> <C>
Consolidated results:
Revenues $572,968 $458,374 $400,289 $340,750 $273,230
Operating income 1 68,911 49,309 40,121 35,636 24,399
Income from continuing
operations 2 87,156 57,260 24,740 20,772 26,083
Net income 3 87,156 54,506 40,530 23,204 20,609
Per share data: 4
Operating income 1 $2.33 $1.72 $1.42 $1.26 $0.85
Income from continuing
operations 2 2.95 1.99 0.87 0.74 0.91
Net income 3 2.95 1.90 1.43 0.82 0.72
Consolidated financial position:
Assets $6,431,435 $5,066,874 $4,231,361 $3,652,687 $2,896,253
Debt and redeemable
preferred stock 84,214 89,508 95,602 107,920 103,926
Stockholders'
equity 527,962 373,801 322,780 285,026 270,106
Common stock data: 4
Dividends per share $0.405 $0.35 $0.32 $0.29 $0.27
Book value per share 16.76 12.89 11.35 10.05 9.67
Price
range 20.88-39.00 9.63-22.50 4.25-10.88 3.38-8.00 5.50-9.06
Closing price 33.88 22.50 10.50 4.25 7.81
Shares outstanding
at year
end 31,504,586 28,994,640 28,428,176 28,366,588 27,937,600
Average shares
outstanding
during year 29,540,274 28,688,660 28,392,860 28,349,760 28,777,192
</TABLE>
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
As of and for the year ended
December 31 1993 1992 1991 1990 1989
_________________________________________________________________________________
<S> <C> <C> <C> <C> <C>
Ratios and other data:
Return on assets -
net income 1.5% 1.2% 1.0% 0.7% 0.8%
Return on equity -
operating income
(continuing
operations) 15.3% 15.2% 15.4% 16.1% 12.5%
Return on equity -
net income 19.3% 15.6% 13.3% 8.4% 7.5%
Year-end debt to
total capital 13.8% 19.3% 22.8% 27.5% 27.8%
Year-end price to
earnings 11.5x 11.8x 7.3x 5.2x 10.9x
Year-end price to
book value 2.0x 1.7x 0.9x 0.4x 0.8x
Year-end total market
capital-
ization $1,067,218 $652,379 $298,496 $120,558 $218,263
Pro forma amounts assuming change in accounting
for par business had been applied retroactively:
Income from continuing
operations $87,156 $57,260 $24,740 $20,772 $26,083
Net income 3 87,156 54,506 40,530 23,204 20,609
Income from continuing
operations
per share 2.95 1.99 0.87 0.74 0.91
Net income
per share 3 2.95 1.90 1.43 0.82 0.72
</TABLE>
1 Operating income equals income from continuing operations before
cumulative effect of change in accounting principles, excluding realized
gains or losses (net of related income taxes) and excluding amortization
of deferred policy acquisition costs related to realized gains and
losses (net of related income taxes). Operating income in 1991 excludes
the after-tax income effect ($10,259,000) ($(0.36) per share) of accrual
for insurance guaranty fund assessments.
2 Excludes the cumulative effect of changes in the method of accounting
for postretirement benefits (1992) and deferred income taxes (1991).
3 Includes the cumulative effect of changes in the method of accounting
for postretirement benefits of $(4,678,000) ($(0.16) per share) in 1992
and deferred income taxes of $9,444,000 ($0.34 per share) in 1991.
4 Share and per share amounts have been restated to reflect the 2-for-1
stock splits as of May 12, 1993 and May 14, 1992 and the reversion of
Class A and Class B stock to one class of common stock as of May 1,
1992.
<PAGE>
<PAGE>
<TABLE>
SELECTED FINANCIAL DATA - CONTINUED
(Dollars in thousands, except per share data)
<CAPTION>
As of and for the year ended
December 31 1988 1987 1986 1985 1984
_________________________________________________________________________________
<S> <C> <C> <C> <C> <C>
Consolidated results:
Revenues $198,008 $202,282 $203,721 $217,897 $187,760
Operating income 1 16,410 14,303 11,737 9,366 10,706
Income from continuing
operations 2 16,819 21,233 17,557 22,979 11,480
Net income 3 36,668 26,071 29,600 27,840 14,769
Per share data: 4
Operating income 1 $0.49 $0.40 $0.32 $0.21 $0.22
Income from continuing
operations 2 0.50 0.60 0.48 0.58 0.24
Net income 3 1.10 0.73 0.81 0.72 0.33
Consolidated financial position:
Assets $1,969,674 $1,688,091 $1,633,867 $1,664,333 $1,647,704
Debt and redeemable
preferred stock 54,231 25,500 41,889 38,540 48,313
Stockholders'
equity 276,610 248,046 257,217 239,717 220,727
Common stock data: 4
Dividends per share $0.25 $0.23 $0.21 $0.21 $0.21
Book value per share 8.37 7.35 7.09 6.61 6.09
Price
range 4.69-5.63 4.00-6.75 4.00-5.94 3.04-4.33 2.88-3.96
Closing price 5.50 4.25 5.75 4.21 3.10
Shares outstanding
at year
end 33,061,656 33,765,720 36,265,476 36,249,072 36,249,066
Average shares
outstanding
during year 33,259,548 35,495,744 36,258,786 36,249,072 37,292,808
</TABLE>
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
As of and for the year ended
December 31 1988 1987 1986 1985 1984
_________________________________________________________________________________
<S> <C> <C> <C> <C> <C>
Ratios and other data:
Return on assets -
net income 2.0% 1.6% 1.8% 1.7% 0.9%
Return on equity -
operating income
(continuing
operations) 9.1% 8.2% 7.4% 7.6% 9.2%
Return on equity -
net income 14.0% 10.3% 11.9% 12.1% 6.7%
Year-end debt to
total capital 16.4% 9.3% 14.0% 13.9% 18.0%
Year-end price to
earnings 5.0x 5.8x 7.1x 5.8x 9.4x
Year-end price to
book value 0.7x 0.6x 0.8x 0.6x 0.5x
Year-end total market
capital-
ization $181,839 $143,504 $208,526 $152,548 $112,523
Pro forma amounts assuming change in accounting
for par business had been applied retroactively:
Income from continuing
operations $16,819 $25,594 $22,628 $24,852 $14,325
Net income 3 25,113 30,432 34,671 29,713 17,614
Income from continuing
operations
per share 0.50 0.72 0.62 0.64 0.32
Net income
per share 3 0.76 0.86 0.95 0.77 0.41
</TABLE>
1 Operating income equals income from continuing operations before
cumulative effect of change in accounting principles, excluding realized
gains or losses (net of related income taxes).
2 Excludes the cumulative effect of the change in the method of accounting
for the participating line of business in 1988.
3 Includes the cumulative effect of change in the method of accounting for
the participating line of business of $11,555,000 ($0.35 per share) in
1988.
4 Share and per share data amounts have been restated to reflect the
2-for-1 stock splits as of May 12, 1993 and May 14, 1992 and the
reversion of Class A and Class B stock to one class of common stock as
of May 1, 1992. Additionally, 1985 and prior years have also been
restated to reflect the 50% stock dividend in December 1986.<PAGE>
<PAGE>
ITEM 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The purpose of this section is to discuss and analyze the company's
consolidated financial condition, liquidity and capital resources and
results of operations. This analysis should be read in conjunction with
the consolidated financial statements and related notes which appear
elsewhere in this report. The company reports financial results on a
consolidated basis. The consolidated financial statements include the
accounts of the company and its subsidiaries, all of which are wholly-owned
at December 31, 1993. The company's retail subsidiary, Younkers, Inc. was
sold through a public stock offering on April 29, 1992 and has been
classified as a discontinued operation. The company's primary subsidiaries
are Equitable Life Insurance Company of Iowa ("Equitable Life") and USG
Annuity & Life Company ("USG").
FINANCIAL CONDITION
Investments
The company's total investments grew 27.5% in 1993 compared to 25.6% in
1992. This growth in the company's investment portfolio resulted from
record sales of the company's insurance and annuity products. The company
carefully monitors the growth of its insurance operations in order to
maintain adequate capital ratios. The sale of 2,300,000 shares of the
company's common stock in October 1993 generated net proceeds totalling
$76,264,000, $70,000,000 of which has been contributed to the company's
insurance subsidiaries to fund growth in these operations over the next
several years. With the availability of this capital, the company has
established a goal of growing assets at least 20% annually.
To support the company's annuities and life insurance products, cash flow
was invested primarily in fixed income investments. At December 31, 1993,
99.7% of the company's investments, excluding policy loans, were in cash or
fixed income investments. Fixed income investments consist of government
and agency mortgage-backed securities (6.5%); investment grade corporate
and conventional mortgage-backed securities, as determined by either
Standard & Poor's Corporation ("Standard & Poor's") or Moody's Investors
Service ("Moody's") (79.1%); below investment grade corporate securities
(6.6%) and mortgage loans on real estate (6.3%).
The company reports its fixed maturity securities at amortized cost. The
company purchases such investments with the intention to hold them to
maturity. Several factors demonstrate the company's ability to hold
investments until maturity. The company's insurance and annuity
liabilities are long term by nature. The company has generally experienced
low lapse rates on its insurance policies, and all whole life and annuity
policies currently being sold have features that tend to discourage lapse
or surrender of policies. In addition, one of the company's investment
objectives is to manage its portfolio so that the duration of its assets is
consistent with the duration of its liabilities.
In May 1993, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting
for Certain Investments in Debt and Equity Securities", which changes the
accounting treatment afforded the company's fixed maturity securities.
This SFAS is discussed below under the caption "Emerging Accounting and
Regulatory Issues."<PAGE>
<PAGE>
At December 31, 1993, the ratings assigned by Standard & Poor's and Moody's
to the individual securities in the company's fixed maturities portfolio
are summarized as follows:
<TABLE>
<CAPTION>
Carrying % of Estimated % of
Value Total Market Value Total
_______________________________________________
(Dollars in thousands)
<S> <C> <C> <C> <C>
Ratings assigned by
Standard & Poor's:
U.S. governments, agencies
& AAA Corporates $1,680,081 33.1% $1,744,217 32.3%
AA+ to AA- 257,178 5.1% 272,588 5.0%
A+ to A- 1,710,493 33.7% 1,869,991 34.6%
BBB+ to BBB- 880,202 17.3% 950,988 17.6%
BB+ to BB- 283,338 5.6% 293,277 5.4%
B+ to B- 64,337 1.3% 65,712 1.2%
D 7,058 0.1% 6,020 0.1%
Issues not rated by S&P
(by NAIC rating):
Rated 1 (AAA to A-) 93,737 1.8% 99,088 1.8%
Rated 2 (BBB+ to BBB-) 51,764 1.0% 53,620 1.0%
Rated 3 (BB+ to BB-) 44,037 0.9% 46,088 0.9%
Rated 4 (B+ to B-) 4,592 0.1% 5,162 0.1%
Rated 6 (CI, D) 698 0.0% 160 0.0%
Redeemable preferred stock 711 0.0% 447 0.0%
_______________________________________________
Total fixed maturities $5,078,226 100.0% $5,407,358 100.0%
===============================================
</TABLE>
<TABLE>
<CAPTION>
Carrying % of Estimated % of
Value Total Market Value Total
_______________________________________________
(Dollars in thousands)
<S> <C> <C> <C> <C>
Ratings assigned by Moody's:
U.S. governments, agencies
& Aaa Corporates $1,619,494 31.9% $1,680,702 31.1%
Aa1 to Aa3 220,244 4.3% 231,234 4.3%
A1 to A3 1,755,038 34.7% 1,916,365 35.4%
Baa1 to Baa3 874,751 17.2% 947,072 17.5%
Ba1 to Ba3 282,519 5.6% 294,296 5.4%
B1 to B3 61,749 1.2% 62,464 1.2%
Ca 7,058 0.1% 6,020 0.1%
Issues not rated by Moody's
(by NAIC rating):
Rated 1 (Aaa to A3) 152,563 3.0% 160,416 3.0%
Rated 2 (Baa1 to Baa3) 52,872 1.0% 54,970 1.0%
Rated 3 (Ba1 to Ba3) 45,937 0.9% 48,051 0.9%
Rated 4 (B1 to B3) 4,592 0.1% 5,161 0.1%
Rated 6 (CI, Ca) 698 0.0% 160 0.0%
Redeemable preferred stock 711 0.0% 447 0.0%
_______________________________________________
Total fixed maturities $5,078,226 100.0% $5,407,358 100.0%
===============================================
</TABLE>
Note: Estimated market values of publicly traded securities are as
reported by an independent pricing service. Market values of
conventional mortgage-backed securities not actively traded in a
liquid market are estimated using a third party pricing system,
which uses a matrix calculation assuming a spread over U.S. Treasury
bonds based upon the expected average lives of the securities.
Market values of private placement bonds are estimated using a
matrix that assumes a spread (based on interest rates and a risk
assessment of the bonds) over U.S. Treasury bonds. Estimated market
values of redeemable preferred stocks are as reported by the
National Association of Insurance Commissioners ("NAIC").
Net unrealized appreciation of fixed maturity investments of $329,132,000
was comprised of gross appreciation of $354,088,000 and gross depreciation
of $24,956,000 on the individual securities.
At December 31, 1993, below investment grade securities, using the higher
rating by Moody's or Standard & Poor's, totalled $361,869,000, or 6.6% of
the company's investment portfolio. Included in this total were
$105,374,000 of securities, rated investment grade when purchased and later
downgraded. The company estimates that the market value of its below
investment grade portfolio was $371,370,000, or 102.6% of carrying value,
at December 31, 1993.
Below investment grade securities have different characteristics than
investments in investment grade corporate debt securities. Risk of loss
upon default by the borrower is significantly greater with respect to below
investment grade securities than with other corporate debt securities
because below investment grade securities are generally unsecured and are
often subordinated to other creditors of the issuer. Also, issuers of
below investment grade securities usually have high levels of debt and are
more sensitive to adverse economic conditions, such as recession or
increasing interest rates, than are investment grade issuers. The company
attempts to reduce the overall risk in its below investment grade
portfolio, as in all of its investments, through careful credit analysis,
investment policy limitations, and diversification by company and by
industry.
During 1993, the company purchased 31 below investment grade securities at
a total cost of $187,162,000. At December 31, 1993 these securities were
rated 2 or 3 by the NAIC and had an estimated market value of $185,047,000.
The company intends to purchase additional below investment grade
securities but it does not expect the percentage of its portfolio invested
in below investment grade securities to increase significantly. During
1993, the company sold two below investment grade securities with a
combined carrying value of $5,481,000. These sales resulted from a
deterioration in the credit quality of one of the security's issuers and
due to expectations that the other security would be called. Gains of
$284,000 were realized as a result of these sales. Also during 1993,
portions of 10 other issues with a combined carrying value of $51,318,000
were called or repaid. Gains of $3,539,000 were recognized on these
disposals. At December 31, 1993, the company's total investment in below
investment grade securities consists of investments in 81 issuers totalling
$361,869,000, or 6.6% of the company's investment portfolio compared to 60
issuers totalling $236,080,000, or 5.5% of the portfolio at December 31,
1992.
The company analyzes its investment portfolio at least quarterly in order
to determine if its ability to realize its carrying value on any investment
has been impaired. If impairment in value is determined to be other than
temporary (i.e. the company has doubt about an issuer's ability to comply
on a timely basis with the payment provisions of the instrument), the
company prepares an estimate of net realizable value by estimating expected
future cash flows from the investment and, in turn, recognizes the
impairment as a charge to realized gains and losses if the estimated
nondiscounted cash flows from the investment are less than the carrying
value of the investment.
One below investment grade security with a carrying value of $699,000 and
an estimated market value of $160,000 was in default at December 31, 1993.
During the second quarter of 1993, the company determined that the decline
in value of this security was other than temporary. As a result of that
determination, the company recognized a pre-tax loss of $6,443,000 to write
the security down to its estimated net realizable value of $699,000. The
company's estimates of future cash flows from this security indicate that
the company will recover its remaining carrying value, and, consequently,
no additional writedown of carrying value is deemed necessary. The
carrying value of the fixed maturity investment considered to have an other
than temporary impairment represented 0.1% of total stockholders' equity at
December 31, 1993.
The use of nondiscounted cash flows to evaluate net realizable value may
result in lower realized losses in the current period than if the company
had elected to use discounting in its evaluation process. Additionally,
the rate of return actually realized by the company on investments whose
value suffers an impairment that is other than temporary is less than the
yield to maturity at the date of original purchase. This lower rate of
return results from a downward adjustment in expected cash flows from the
investment. The yield recognized in future periods on these investments
may also be less than yields recognized on other investments or those
yields expected when the securities were originally purchased. The company
will be required to use fair value or discounted cash flows in evaluating
net realizable value when it adopts SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" on January 1, 1994. See
Emerging Accounting and Regulatory Issues.
Below investment grade investments, as well as other investments, are
monitored on an ongoing basis and future events may occur, or additional or
updated information may be received, which may necessitate further
write-downs of securities in the company's portfolio. Significant
write-downs in the carrying value of investments could materially adversely
affect the company's net income in future periods.
At December 31, 1993, the company's below investment grade portfolio had a
yield to maturity of 9.7% compared to 8.4% for the company's corporate
investment grade portfolio. A reduction in the amount of the company's
investments in below investment grade securities could have a negative
impact on the company's operating results. The size of such impact would
depend on many factors, including the magnitude of the reduction, the yield
of alternative investments, and the interest rate credited to policyholder
account balances.
During 1993, investment grade corporate and conventional mortgage-backed
securities with a combined carrying value of $891,511,000 were called or
prepaid by their issuers. Aggregate pre-tax gains of $47,385,000 were
realized due to these disposals. These gains are treated as realized gains
on investments in the company's financial statements, and are not a part of
investment income. Aggregate pre-tax gains from sales, calls, tender
offers, prepayments and write-downs of fixed maturity investments totaled
$41,754,000 in 1993 compared to $7,001,000 in 1992.
At December 31, 1993, the company's fixed maturity investment portfolio had
a combined yield of 8.5% compared to 9.3% at December 31, 1992. Since new
investment rates are lower than the company's current portfolio yield, the
overall yield on the company's investment portfolio is declining as cash
flows from insurance and annuity sales are invested at relatively lower
rates. This decline in yield is compounded as investments in higher
yielding securities are called or repaid by their issuers and proceeds from
these early payments are invested at current rates. The impact of these
declining portfolio yields on the company's operating results will depend
upon the magnitude of the decline and the level of interest rates credited
to policyholder account balances. At December 31, 1993, the average annual
interest rate in effect for interest-sensitive products, including
annuities, universal life, and participating life policies, was 6.2%
compared to 7.1% at December 31, 1992.
Mortgage loans make up approximately 6.3% of the company's investment
portfolio, as compared to an industry average of 14.8%, as reported in the
1993 ACLI Fact Book. During 1992, the company resumed active mortgage
lending to broaden its investment alternatives and, as a result of this
increase in lending activity, mortgages outstanding increased to
$346,829,000 from $249,585,000 during 1993. The company expects this asset
category to continue to grow over the next several years. The company's
mortgage loan portfolio includes 244 loans with an average size of
$1,421,000 and average seasoning of 11 years if weighted by the number of
loans, and 5.7 years if weighted by mortgage loan carrying values. The
company's mortgage loans are typically secured by occupied buildings in
major metropolitan locations and not speculative developments, and are
diversified by type of property and geographic location. At December 31,
1993, the yield on the company's mortgage loan portfolio was 9.0%.
<PAGE>
<PAGE>
Distribution of these loans by type of collateral and geographic location
is as follows:
<TABLE>
<CAPTION>
% of
# of Carrying Mortgage
Loans Value Portfolio
_______________________________________
Collateral Breakdown (Dollars in thousands)
- ----------------------
<S> <C> <C> <C>
Farm 4 $203 0.1%
Multi-family residential 25 66,806 19.2%
Industrial 116 98,614 28.4%
Office buildings 32 53,288 15.4%
Retail 64 115,033 33.2%
Other 3 12,885 3.7%
_______________________________________
Total 244 $346,829 100.0%
=======================================
</TABLE>
<TABLE>
<CAPTION>
% of
# of Carrying Mortgage
Loans Value Portfolio
_______________________________________
Geographic Breakdown (Dollars in thousands)
- ----------------------
<S> <C> <C> <C>
New England 2 $1,157 0.3%
Middle Atlantic 24 25,593 7.4%
South Atlantic 24 34,244 9.9%
East North Central 67 92,444 26.6%
West North Central 23 45,400 13.1%
East South Central 9 13,464 3.9%
West South Central 18 30,721 8.9%
Mountain 8 17,750 5.1%
Pacific 69 86,056 24.8%
_______________________________________
Total 244 $346,829 100.0%
=======================================
</TABLE>
During 1993, the company determined that the carrying value of one of its
mortgage loans exceeded its estimated net realizable value. As a result of
that determination, the company recognized a pre-tax loss of $363,000 to
reduce the carrying value of the loan to its estimated net realizable value
of $1,300,000. At December 31, 1993, 0.5% of the commercial mortgage
portfolio, or $1,904,000, was delinquent by 90 days or more. In addition,
the company holds $15,718,000 in foreclosed real estate. The company does
not expect to incur material losses from these investments since delinquent
loans represent a small percentage of the portfolio. The company has been
able to recover 87% of the principal amount of problem mortgages that have
been resolved in the last three years.
In total, the company has experienced a relatively small number of problems
with its total investment portfolio, with less than 1/20th of 1% of the
company's investments in default at December 31, 1993. The company
estimates its total investment portfolio, excluding policy loans, had a
market value equal to 106.5% of carrying value for accounting purposes at
December 31, 1993.
Other assets
Accrued investment income increased $14,376,000 during 1993 due to an
increase in new fixed income investments and in the overall size of the
portfolio. Notes and other receivables increased $12,230,000 primarily as
a result of the "gross-up" of receivables for reserve credits on ceded
reinsurance totalling $9,931,000 as required by SFAS No. 113, "Accounting
and Reporting for Reinsurance of Short-Duration and Long-Duration
Contracts." Deferred policy acquisition costs increased $95,075,000 over
year-end 1992 levels as the deferral of current period costs (primarily
commissions) incurred to generate insurance and annuity sales and premiums
continued to exceed the amortization of costs deferred in previous periods.
At December 31, 1993, the company had total assets of $6,431,435,000, an
increase of 26.9% over total assets at December 31, 1992.
Liabilities
In conjunction with the volume of insurance and annuity sales and premiums,
and the resulting increase in business in force, the company's liability
for policy liabilities and accruals increased $1,178,579,000, or 26.7%,
during 1993. Total consolidated debt decreased $5,294,000 with the
December 1993 maturity of bonds totalling $10,500,000, partially offset by
a $5,226,000 increase in commercial paper notes payable. Total
consolidated debt amounted to $84,214,000 at December 31, 1993. Other
liabilities increased $23,438,000 from year-end 1992 levels primarily as
the result of an increase in liabilities for outstanding checks and draft
accounts payable related to the company's asset retention program.
The company's insurance subsidiaries are assessed contributions by life and
health guaranty associations in almost all states to indemnify
policyholders of failed companies. In some states, such assessments are
offset by reductions in future premium taxes. The company cannot predict
whether and to what extent legislative initiatives may affect the right to
offset. The amount of these assessments prior to 1991 was not material.
Failures of substantially larger companies since 1990, could result in
future assessments in material amounts. During 1991, the company
established a reserve of $21,049,000 to cover such assessments, which was
partially offset by $5,678,000 of expected related future premium tax
credits. The company regularly reviews information regarding known
failures and revises its estimate of future guaranty fund assessments
accordingly. During 1993, this review caused the company to accrue and
charge to expense an additional $2,109,000 to cover amounts not previously
reserved. At December 31, 1993, the company has reserved $15,211,000 to
cover estimated future assessments (net of related anticipated premium tax
credits) and has established an asset totalling $8,309,000 for amounts
expected to be recoverable through future premium tax offsets. The company
believes this reserve is sufficient to cover expected future insurance
guaranty fund assessments.
At December 31, 1993, the company had total liabilities of $5,903,473,000
compared to $4,693,073,000 at December 31, 1992, a 25.8% increase.
Equity
At December 31, 1993, stockholders' equity was $527,962,000, or $16.76 per
share, compared to $373,801,000, or $12.89 per share, on a restated basis
at year-end 1992. The ratio of consolidated debt to total capital was
13.8% at December 31, 1993, down from 19.3% at year-end 1992 as
stockholders' equity increased and consolidated debt decreased. At
December 31, 1993, there were 31,504,586 common shares outstanding compared
to a restated 28,994,640 shares at December 31, 1992. This increase is
primarily the result of the completion of an offering of 2,300,000 shares
of common stock by the company on October 21, 1993. December 31, 1992
share and per share amounts have been restated to reflect the impact of a
2-for-1 stock split on June 1, 1993.
The effects of inflation and changing prices on the company are not
material since insurance assets and liabilities are primarily monetary.
One effect of inflation, which has been low in recent years, is a decline
in purchasing power when monetary assets exceed monetary liabilities.
LIQUIDITY AND CAPITAL RESOURCES
The liquidity requirements of the company's subsidiaries are met by cash
flow from insurance and annuity premiums, investment income, and maturities
of fixed maturity investments and mortgage loans. The company primarily
uses funds for the payment of insurance and annuity benefits, operating
expenses and commissions, and the purchase of new investments. No material
capital expenditures are planned.
The company issues short-term debt, including commercial paper notes, for
working capital needs and to provide short term liquidity. At December 31,
1993 the company had $34,000,000 in commercial paper notes outstanding, an
increase of $5,226,000 from December 31, 1992 as additional commercial
paper was issued to fund short-term advances to the company's insurance
subsidiaries to smooth timing differences between cash receipts and
disbursements. On July 16, 1993, Duff & Phelps Credit Rating Co. announced
that it had assigned a commercial paper rating of Duff 1 to the company's
commercial paper. The company's commercial paper continues to be rated A1
by Standard and Poor's and P2 by Moody's. To enhance short term liquidity
and back up its outstanding commercial paper notes, the company maintains a
$100,000,000 credit agreement with five banks that terminates in May 1996.
To reduce the risk of rising short-term interest rates, the company had
entered into interest rate swap agreements with three banks wherein the
company agreed to pay a fixed rate of interest and received a floating
short-term rate of interest tied to prime commercial paper or LIBOR rates.
The total notional amount of these swap agreements was $50,000,000. The
company terminated these swaps at a cost of $3,011,000 in the third quarter
of 1993.
Since Equitable of Iowa Companies is a holding company, funds required to
meet its debt service requirements, dividend payments and other expenses
are primarily provided by its subsidiaries. The ability of the company's
insurance subsidiaries to pay dividends and other distributions to the
company is regulated by state law. Iowa law provides that an insurance
company may pay dividends, without prior regulatory approval if, together
with all dividends or distributions made during the preceding twelve month
period, the dividends would not exceed the greater of (a) 10% of the
insurer's statutory surplus as of the next preceding year-end; or (b) the
statutory net gain from operations for the twelve month period ending as
of the next preceding year-end. In addition, Iowa law provides that the
insurer may only make dividend payments to its shareholders from its earned
surplus (i.e., its surplus as regards policyholders less paid-in and
contributed surplus). Equitable Life could pay dividends to the company
without prior regulatory approval of approximately $39,335,000 during 1994.
The NAIC's risk-based capital requirements were adopted in December 1992
and require insurance companies to calculate and report information under a
risk-based capital formula. These requirements are intended to allow
insurance regulators to identify inadequately capitalized insurance
companies based upon the type and mixture of risks inherent in the
company's operations. The formula includes components for asset risk,
liability risk, interest rate exposure and other factors. The company's
insurance subsidiaries provided the required disclosures in their December
31, 1993 statutory financial statements. Amounts reported in these
statutory financial statements indicate that the company's insurance
subsidiaries have total adjusted capital (as defined in the requirements)
which is well above all required capital levels.
The terms of the $100,000,000 line of credit agreement require the company
to maintain certain consolidated tangible net worth levels. "Consolidated
tangible net worth" is defined as consolidated stockholders' equity, less
consolidated intangible assets. The most restrictive of these covenants
requires the company to maintain consolidated tangible net worth equal to
or in excess of the sum of (i) $280,000,000, plus (ii) 50% of consolidated
net income from January 1, 1993 to the end of the most recent quarter, plus
(iii) net proceeds from the issuance of stock from January 1, 1993 to the
end of the most recent quarter. At December 31, 1993, $123,913,000 of
retained earnings were free of restrictions and could be distributed to the
company's public stockholders.
Developing and writing increased volumes of insurance and annuity business
require increased amounts of capital and surplus for the company's
insurance operations including amounts in excess of those which may be
realized from operating results. The company may also expand its insurance
operations through acquisition of blocks of business from other insurance
companies, or through the acquisition of an insurance company, although no
such acquisitions are currently planned. In recent periods the company has
funded the growth of its insurance operations with the proceeds from the
April 1992 sale of the company's former retail subsidiary. On April 29,
1992, the company sold its former retail subsidiary, Younkers, through a
public stock offering and received net proceeds of approximately
$50,000,000 after taxes. The company contributed $10,000,000 of these
proceeds to its insurance subsidiaries in the fourth quarter of 1992 and
$20,000,000 in the third quarter of 1993 to fund the growth in these
operations.
On October 21, 1993, the company completed a stock offering of 3,273,200
shares to the public at a price of $35 per share. Included in this amount
were 2,300,000 shares offered by the company and 973,200 offered by certain
stockholders of the company. The company received net proceeds totaling
$76,264,000 from the sale of its 2,300,000 shares after deduction of the
underwriter's discount and expenses. The company did not receive any of
the proceeds from the sale of shares by the selling stockholders. The
company has contributed $70,000,000 of these proceeds to its insurance
subsidiaries during 1993. Over time, further growth in the company's
insurance operations may require additional capital although the company
believes it now has sufficient capital resources to support growth in these
operations for the next several years. The company's primary sources of
capital are issuance of additional common stock or issuance of additional
debt.
To improve the liquidity of the company's common stock, on April 29, 1993,
the company's Board of Directors approved a 2-for-1 stock split of the
company's common stock, payable on June 1, 1993 to holders of record as of
May 12, 1993. The company's stockholder's also approved an increase in the
number of authorized shares of its common stock from 35,000,000 to
70,000,000 and the Board adjusted the exercise price under the company's
Rights Agreement to $100 per share (post split).
The company's insurance subsidiaries operate under the regulatory scrutiny
of each of the state insurance departments supervising business activities
in the states where each company is licensed. The company is not aware of
any current recommendations by these regulatory authorities which, if they
were to be implemented, would have a material effect on the company's
liquidity, capital resources or operations.
RESULTS OF OPERATIONS - 1993 COMPARED TO 1992
Sales
Total life insurance and annuity sales, as measured by first year and
single premiums, increased $236,777,000, or 26.7%, to $1,122,797,000 in the
year ended December 31, 1993. Annuity sales increased $232,912,000, or
26.7%, to $1,104,222,000 in 1993. The company believes that its commitment
to customer service, the quality of its investment portfolio and its
overall financial strength attract consumers to its annuity products as
consumers continue to seek a secure return on their retirement savings.
First year and single life insurance premiums increased $3,865,000, or
26.3%, to $18,575,000 in the year ended December 31, 1993. Life insurance
sales (at face amounts) during 1993 increased $18,549,000, or 1.3%, to
$1,416,576,000 compared to 1992, as increased sales of the company's
universal life products more than offset declines in sales of term life
insurance products.
Revenues
Total revenues increased $114,594,000, or 25.0%, to $572,968,000, in 1993,
compared to 1992. Universal life insurance and annuity product charges
increased $3,869,000, or 12.7%, to $34,281,000, compared to the year ended
December 31, 1992, as the company's marketing efforts continued to focus on
the sale of deferred annuities and interest-sensitive life insurance
products. Premiums from traditional life insurance products also improved
during 1993, increasing by $3,848,000, or 8.9%, to $46,870,000, compared to
1992, as these products were made available to the company's insurance
brokerage distribution system.
Net investment income increased $71,636,000, or 19.8%, to $434,069,000 in
1993, as the increase in invested assets more than offset the decline in
portfolio yield. The average annualized yield on invested assets
supporting policy accounts for interest-sensitive products, including
annuities, universal life-type policies and participating life policies was
9.1% during 1993, compared to 9.7% during 1992. The company's total
investment portfolio, excluding policy loans, had a yield to maturity of
8.5% at December 31, 1993, compared to 9.2% at December 31, 1992,
reflecting a general decline in interest rates, and substantial principal
repayments of investments. The effect of the decline in the portfolio
yield on the company's future net income will depend on many factors,
including the level of interest rates credited to policyholder account
balances. During 1993, the company realized gains on the sale of
investments of $41,985,000, compared to $8,164,000 in 1992, primarily
resulting from calls and prepayments of fixed maturity investments.
Included in these totals were write-downs of $6,806,000 in 1993 and
$5,328,000 in 1992, to reduce the carrying value of various investments to
estimated net realizable value.
Expenses
Total insurance benefits and expenses increased $66,054,000, or 18.6%, to
$420,435,000 in 1993. Interest credited to universal life and annuity
account balances increased $37,168,000, or 16.0%, to $268,992,000, in 1993,
as a result of higher account balances associated with those products. The
average annualized interest rate credited to policy accounts for interest-
sensitive products, including annuities and universal life-type policies
and participating life policies, was 6.6% for 1993 compared to 7.5% in
1992. The average annual interest rate in effect for those policies at
December 31, 1993 was 6.2%, compared to 7.1% at December 31, 1992. The
company's practice is to reduce rates credited to policy accounts as
investment yields decline. Most of the company's interest-sensitive
policies allow for interest rate adjustments at least annually.
Death benefits on traditional life products and benefit claims incurred in
excess of account balances on universal life products increased $2,897,000,
or 11.8%, to $27,536,000, while other benefits declined $8,129,000, or
20.1%, to $32,344,000 in 1993, due to lower lapses of the company's
insurance policies. These changes were offset by a corresponding change in
the reserve for future policy benefits and, therefore, had no material
impact on net income.
The withdrawal ratio for the company's annuity products, as calculated by
dividing average aggregate surrenders and withdrawals by average aggregate
account balances, was 4.6% in 1993 compared to 6.3% in 1992. The 1992
annuity withdrawal rate included withdrawals resulting from the exercise of
a "bailout" feature by policyholders which allowed them to withdraw their
account balance without penalty as credited rates fell below predetermined
levels. This "bailout" feature can only be exercised for a limited period,
and less than 1% of remaining annuity liabilities are subject to a
"bailout" feature. Excluding these "bailout" withdrawals, the 1992
withdrawal rate was 4.2%. Most of the company's annuity products have
penalties or other features designed to discourage early withdrawals, and
to allow the company to recover a portion of the expenses incurred to
generate annuity sales in the event of early withdrawal. The company
anticipates an increase in annuity withdrawals as this block of business
matures. The company's lapse ratio for life insurance, measured in terms
of face amount and using A. M. Best's formula, was 7.2% in 1993 compared to
8.4% in 1992.
Commissions increased $29,083,000, or 34.5%, to $113,450,000 in 1993,
primarily because of increased sales of annuity products. This increase
was offset by an increase in the deferral of such policy acquisition costs
and thus had little impact on total insurance expenses. General insurance
expenses increased $5,260,000, or 16.3%, to $37,554,000 related to
increases in sales, assets and policies in force. The amortization of
deferred policy acquisition costs increased by $21,902,000, or 108.6%, to
$42,078,000 in 1993. During 1993, the estimate and timing of gross profits
from certain universal life and annuity product lines changed, which, in
accordance with SFAS No. 97, necessitated that the company recompute or
"unlock" the amortization of deferred policy acquisition costs. This
"unlocking" primarily resulted from realized investment gains leading to
higher gross profits than originally expected. As a result, 1993
amortization was increased by $13,916,000, and amortization in future
periods will be decreased.
Income
Operating income (income from continuing operations before cumulative
effect of change in accounting principles, excluding realized gains and
losses, net of related income taxes, and excluding amortization of deferred
policy acquisition costs related to realized gains and losses, net of
related income taxes) increased $19,602,000, or 39.8%, to $68,911,000 in
1993, or $2.33 per share, compared to $49,309,000, or $1.72 per share, in
1992.
The company recognized realized gains on the sale of investments and
deferred policy acquisition costs related to realized gains (net of
related income taxes) as follows:
<TABLE>
<CAPTION>
December 31 1993 1992
_______________________________________________________________
(Dollars in thousands)
<S> <C> <C>
Realized gains on investments $41,985 $ 8,164
Amortization of DPAC related to realized
gains (13,916) --
_______ _______
28,069 8,164
Income taxes (9,824) (213)
_______ _______
Total $18,245 $ 7,951
======= =======
Per share $ 0.62 $ 0.27
======= =======
</TABLE>
Income from continuing operations before the cumulative effect of change in
accounting principle for postretirement benefits improved to $87,156,000,
or $2.95 per share, in 1993, compared to $57,260,000, or $1.99 per share,
in 1992. The company's discontinued retail operations contributed income
of $1,924,000, or $0.07 per share, during 1992. During the fourth quarter
of 1992, the company implemented a new accounting standard for
postretirement benefits other than pensions and incurred a charge to
earnings of $4,678,000, or $0.16 per share, which was treated as a
cumulative effect of change in accounting principle. Net income was
$87,156,000, or $2.95 per share, in 1993, compared to $54,506,000, or $1.90
per share, in 1992. 1992 per share amounts reported above have been
restated to reflect the 2-for-1 stock split on June 1, 1993.
RESULTS OF OPERATIONS - 1992 COMPARED TO 1991
Sales
Total life insurance and annuity sales, as measured by first year and
single premiums, increased $395,090,000, or 80.5%, to $886,020,000 in the
year ended December 31, 1992. Annuity sales increased $409,505,000, or
88.7%, to $871,310,000 in 1992, compared to 1991. Annuity sales were
positively impacted by the company's financial strength, low short-term
interest rates which made annuity products more attractive than certain
other savings options and availability of capital from the sale of the
company's former retail department store subsidiary. First year and single
life insurance premiums declined $14,415,000, or 49.5%, to $14,710,000 in
the year ended December 31, 1992. Life insurance sales (at face amounts)
during 1992 increased $259,779,000, or 22.8%, to $1,398,027,000, compared
to 1991, as a result of increased sales of the company's term life
insurance products.
Revenues
Total revenues increased $58,085,000, or 14.5%, to $458,374,000, in 1992,
compared to 1991. Universal life insurance and investment product charges
increased $1,387,000, or 4.8%, to $30,412,000, compared to the year ended
December 31, 1991. Premiums from traditional life insurance products
decreased $8,012,000, or 15.7%, to $43,022,000, compared to 1991, as the
company's marketing efforts continued to focus on the sale of deferred
annuities and interest-sensitive life insurance products. Over half of the
decline in traditional insurance premiums resulted from the termination of
all reinsurance obligations with the company's former subsidiary,
Massachusetts Casualty Insurance Company, as the company refunded premiums
of $4,759,000. This refund was offset by a release of related reserves
and, therefore, had no effect on income.
Net investment income increased $50,616,000, or 16.2%, to $362,433,000 in
1992, as the increase in invested assets more than offset the decline in
portfolio yield. The company's investment portfolio, excluding policy
loans, had a yield to maturity of 9.2% at December 31, 1992, compared to
9.7% at December 31, 1991, reflecting a general decline in interest rates
and a reduction in the percentage of the portfolio invested in below
investment grade securities. During 1992, the company realized gains on
the sale of investments of $8,164,000, compared to losses of $5,220,000 in
1991. Included in these totals were writedowns of $5,328,000 in 1992 and
$3,763,000 in 1991, to reduce the carrying value of various investments to
estimated net realizable value. The gains realized in 1992 primarily
resulted from calls and prepayments of fixed maturity investments.
Expenses
Total insurance benefits and expenses increased $14,843,000, or 4.4%, to
$354,381,000 in 1992. Interest credited to universal life and investment
product account balances increased $40,414,000, or 21.1%, to $231,842,000,
in 1992, as a result of higher account balances associated with those
products. Death benefits on traditional life products and benefit claims
incurred in excess of account balances on universal life products declined
$4,819,000, or 16.4%, to $24,639,000, in 1992 as a result of favorable
mortality experience. This favorable mortality experience increased
after-tax earnings by approximately $1,600,000, or $0.11 per share,
compared to 1991. Most of the company's new policies are treated as
universal life or investment products for accounting purposes and changes
in reserves for these products do not affect net income.
The withdrawal ratio for the company's annuity products was 6.3% in 1992
compared to 4.9% in 1991. The decline in general interest rates and the
company's portfolio yield caused the company to reduce the rate of interest
credited to its annuity account balances below "bailout" levels during
1992. As a result, $57,049,000, or 21% of annuity policies with a
"bailout" feature, were surrendered during 1992, and were responsible for a
significant portion of the increase in the overall withdrawal ratio for the
company's annuity products. Excluding the surrenders on products with this
bailout feature, the company's annuity withdrawal rate would have been
4.2%. The increase in annuity withdrawals did not have a material impact
on earnings, since interest rates credited to new products sales were lower
than on the "bailout" policies surrendered. As a result of the company's
rate actions, less than 1% of annuity reserves are now subject to a
"bailout" provision. The company's lapse ratio for life insurance,
measured in terms of face amount and using A. M. Best's formula, was 8.4%
in 1992 and 1991.
Commissions increased $40,583,000, or 92.7%, to $84,367,000 in 1992,
primarily because of increased sales of annuity products. This increase
was offset by an increase in the deferral of such policy acquisition costs
and thus had little impact on total insurance expenses. General expenses
declined $10,263,000, or 24.1%, to $32,294,000 in 1992. Expenses in 1991
included a $15,371,000 pre-tax expense incurred to establish a reserve for
expected future insurance guaranty fund assessments. The amortization of
deferred policy acquisition costs increased by $1,069,000, or 5.6%, to
$20,176,000 in 1992. During the third quarter of 1992, the company
recomputed or "unlocked" the amortization of deferred policy acquisition
costs. This "unlocking" primarily resulted from higher interest margins in
the current and future periods resulting in higher gross profits than
originally expected and from a decline in the rate used to discount future
gross profits. As a result, amortization of these costs was adjusted
retrospectively and 1992 amortization was reduced by $1,570,000.
Income
Operating income (income from continuing operations before cumulative
effect of change in accounting principles, excluding realized gains and
losses, net of related income taxes and, in 1991, excluding the after-tax
effect ($10,259,000) of accrual for insurance guaranty fund assessments)
increased $9,188,000, or 22.9%, to $49,309,000 in 1992, or $1.72 per share,
compared to $40,121,000, or $1.42 per share, in 1991. The company
recognized realized gains on the sale of investments (net of related income
taxes) of $7,951,000, or $0.27 per share, in 1992, compared to realized
losses of $5,122,000, or $(0.19) per share, in 1991. As a result, income
from continuing operations before cumulative effect of change in accounting
principles improved to $57,260,000, or $1.99 per share, in 1992, compared
to $24,740,000, or $0.87 per share, in 1991. Income from discontinued
operations during 1992 amounted to $1,924,000, or $0.07 per share, which
was comprised of a $3,182,000 operating loss (to the measurement date) and
a $5,106,000 after-tax gain on disposal. The company reported income from
discontinued operations during 1991 of $6,346,000, or $0.22 per share.
Net income was $54,506,000, or $1.90 per share, in 1992, compared to
$40,530,000, or $1.43 per share, in 1991. During the fourth quarter of
1992, the company implemented SFAS No. 106, which changed the accounting
treatment for postretirement benefits other than pensions. The company
elected to recognize the cumulative effect (to December 31, 1991) of this
change in accounting principle as a one-time charge to earnings. As a
result, 1992 net income includes a loss of $4,678,000, or $(0.16) per
share, for the after-tax effect of implementing this change in accounting
principle. During the fourth quarter of 1991, the company implemented SFAS
No. 109, which changed the accounting treatment for income taxes. The
effect of implementing this change in accounting principle was to increase
1991 net income by $9,444,000, or $0.34 per share.
EMERGING ACCOUNTING AND REGULATORY ISSUES
SFAS No. 115. In May 1993, the FASB issued SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities". SFAS No. 115 changes
the accounting treatment afforded the company's fixed maturity investments
by segregating fixed maturity securities into three accounts: held to
maturity, available for sale and trading. Securities may be designated as
held to maturity only if a company has the positive intent and ability to
hold these securities to maturity. An enterprise may not classify a
security as held to maturity if the enterprise has the intent to hold the
security only for an indefinite period. Accounting for securities held to
maturity would be unchanged and these securities would continue to be
carried at amortized cost. Trading account and available for sale
securities are to be carried at fair value (i.e. market value). Unrealized
gains and losses on trading account securities are to be charged/credited
to the income statement while unrealized gains and losses on available for
sale securities (net of deferred policy acquisition costs and applicable
deferred taxes) are to be charged/credited directly to stockholders'
equity, much the same as the current accounting for equity securities.
Transfers between categories are severely restricted. In addition, the
Securities and Exchange Commission requires certain assets and liabilities,
such as minority interests and deferred policy acquisition costs, to be
adjusted at the same time unrealized gains and losses from available for
sale securities are recognized in stockholders' equity. Such adjustments
are to be made if those assets and liabilities would have been adjusted had
the unrealized holding gains and losses actually been realized.
SFAS No. 115 is effective for fiscal years beginning after December 15,
1993, although the company had the option of adopting this standard on
December 31, 1993. Retroactive application of this SFAS is not permitted.
The company will adopt this SFAS on January 1, 1994.
The company currently is studying the new standard and planning for its
implementation. Because of the severe restrictions imposed by SFAS No. 115
in defining held to maturity securities, the company may determine that it
is appropriate to designate a portion of its investment securities as
available for sale. The company currently estimates that 5%-15% of its
fixed maturity securities may be so designated, although the final
determination will depend upon estimates of factors such as interest rate
levels, cash receipts and disbursements and tax law changes. The effect
of the implementation of SFAS No. 115 on the company's financial statements
cannot be determined at this time. Specific securities must be designated
for each classification and such classifications cannot be determined until
the company completes its analysis. The company does not expect to
designate any securities as trading account securities. If all of the
company's securities were classified as available for sale at December 31,
1993, stockholders' equity would have increased by approximately
$148,217,000, or $4.70 per share, reflecting the unrealized appreciation in
the value of the company's securities portfolio, net of adjustments to
deferred policy acquisition costs and deferred taxes.
SFAS No. 114. In May 1993, the FASB also issued SFAS No. 114, "Accounting
by Creditors for Impairment of a Loan". SFAS No. 114 applies to all loans
except large groups of smaller-balance homogeneous loans that are
collectively evaluated for impairment, loans measured at fair value or at
lower of cost or fair value, leases and debt securities as defined in SFAS
No. 115. SFAS No. 114 requires that impaired loans be valued at the
present value of expected future cash flows discounted at the loan's
effective interest rate or, as a practical expedient, at the loan's
observable market price or the fair value of the collateral if the loan is
collateral dependent. This SFAS is effective for fiscal years beginning
after December 15, 1994, with earlier adoption encouraged.
SFAS No. 114 applies primarily to the company's mortgage loan portfolio.
The company actively monitors this portfolio and evaluates the net
realizable value of any loan which is deemed to be impaired. Net
realizable value is assessed based upon current appraised value of the
underlying collateral. If carrying value exceeds this estimated realizable
value, carrying value is reduced to the estimated realizable value by a
charge to earnings. As such, SFAS No. 114 does not represent a material
change from the company's current accounting practices and the company does
not expect SFAS No. 114 to have any material effect on the company's
reported financial results.
Exposure Draft. On June 30, 1993, the FASB issued an Exposure Draft
entitled "Accounting for Stock-based Compensation". If adopted as a SFAS
in its present form, this exposure draft would require that compensation
expense be recognized for all stock options in an amount equal to "fair
value" on the date of grant. Fair value is to be calculated using an
option pricing model or similar valuation technique that takes into effect:
the option's exercise price, the expected term of the option, the current
price of the underlying stock, expected dividends from the stock, the
expected volatility of the stock and the expected risk-free rate of return
during the term of the option. Recognition of compensation expense using
this methodology is expected to be required for options granted after
December 31, 1996 with pro-forma disclosure for options granted after
December 31, 1993.
During the last three years the company has granted options for
approximately 219,000 shares of common stock each year to key employees at
option prices ranging from $4.97 to $36.75 per share. These options
generally vest over a three to five year period. Option prices are equal
to market value on the date of grant and the terms of the options are
fixed. As a result, the company does not currently recognize compensation
expense on these options. Calculation of the effect of the proposed SFAS
has not been completed since the final form of such a SFAS and the
company's response to such a requirement has not been determined.
Insurance Regulation. Currently, the company's insurance subsidiaries are
subject to regulation and supervision by the states in which they are
admitted to transact business. State insurance laws generally establish
supervisory agencies with broad administrative and supervisory powers
related to granting and revoking licenses to transact business,
establishing guaranty fund associations, licensing agents, approving policy
forms, regulating premium rates for some lines of business, establishing
reserve requirements, prescribing the form and content of required
financial statements and reports, determining the reasonableness and
adequacy of statutory capital and surplus and regulating the type and
amount of investments permitted.
Recently, the insurance regulatory framework has been placed under
increased scrutiny by various states, the federal government and the NAIC.
Various states have considered or enacted legislation which changes, and in
many cases increases, the states' authority to regulate insurance
companies. Legislation is under consideration in Congress which could
result in the federal government assuming some role in the regulation of
insurance companies. The NAIC, in conjunction with state regulators, has
been reviewing existing insurance laws and regulations. The NAIC recently
approved and recommended to the states for adoption and implementation
several regulatory initiatives designed to reduce the risk of insurance
company insolvencies. These initiatives include new investment reserve
requirements, risk-based capital standards and restrictions on an insurance
company's ability to pay dividends to its stockholders.
A committee of the NAIC is developing proposals to govern insurance company
investments scheduled for adoption as a model law by the end of 1994.
While the specific provisions of such a model law are not known at this
time, and current proposals are still being debated, the company is
monitoring developments in this area and the effects any change would have
on the company.
Federal Income Tax Legislation. In early August, the Omnibus Budget
Reconciliation Act of 1993 was enacted. This law increases the marginal
tax rate for all corporations from 34% to 35% retroactive to January 1,
1993. As a result of this legislation, the company's marginal tax rate has
increased from 34% to 35%. This increase has been reflected in the
company's financial statements for the year ended December 31, 1993 and was
not material. Other than the increase in the marginal tax rate, the
company does not believe that this law will have a material adverse effect
on its business or financial condition.
Currently, under the Internal Revenue Code, income tax payable by
policyholders on investment earnings is deferred during the accumulation
period of certain life insurance and annuity products. This favorable
federal income tax treatment may enhance the competitiveness of certain of
the company's products as compared with other retirement savings products
that do not offer such benefits. If the Code were to be revised to
eliminate or reduce the tax deferred status of life insurance and annuity
products, including the products offered by the company, market demand for
some or all of the company's products could be adversely affected. The
Omnibus Budget Reconciliation Act of 1993 did not affect the federal income
tax treatment of life insurance and annuity products.<PAGE>
<PAGE>
ITEM 8. Financial Statements and Supplementary Data
<TABLE>
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
<CAPTION>
December 31 1993 1992
_________________________________________________________________
<S> <C> <C>
ASSETS
Investments:
Fixed maturities, at amortized cost
(market: 1993 - $5,407,358;
1992 - $4,151,833) $5,078,226 $3,967,110
Equity securities, at market
(cost: 1993 - $250; 1992 - $250) 83 116
Mortgage loans on real estate 346,829 249,585
Real estate, less allowances for
depreciation of $4,580 in 1993
and $4,045 in 1992 20,773 14,570
Policy loans 176,849 176,729
Short-term investments 67,619 54,902
___________ ___________
Total investments 5,690,379 4,463,012
Cash and cash equivalents 5,190 6,210
Securities and indebtedness of
related parties 11,791 11,488
Accrued investment income 92,473 78,097
Notes and other receivables 27,366 15,136
Deferred policy aquisition costs 451,180 356,105
Property and equipment, less
allowances for depreciation of
$4,259 in 1993 and $2,749 in 1992 7,431 5,378
Current income taxes recoverable -- 5,441
Deferred income tax benefit 11,583 10,278
Intangible assets, less accumulated
amortization of $1,625 in 1993
and $888 in 1992 3,346 4,090
Other assets 36,668 29,189
Separate account assets 94,028 82,450
___________ ___________
Total assets $6,431,435 $5,066,874
=========== ===========
</TABLE>
<PAGE>
<PAGE>
<TABLE>
CONSOLIDATED BALANCE SHEETS - CONTINUED
(Dollars in thousands, except per share data)
<CAPTION>
December 31 1993 1992
_________________________________________________________________
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Policy liabilities and accruals:
Future policy benefits:
Traditional life insurance
products $774,356 $763,285
Universal life and annuity
products 4,803,729 3,640,228
Unearned revenue reserve 14,451 12,899
Other policy claims and benefits 5,765 3,310
___________ ___________
5,598,301 4,419,722
Other policyholders' funds:
Supplementary contracts without
life contingencies 11,729 11,542
Advance premiums and other deposits 925 1,273
Accrued dividends 13,251 13,284
___________ ___________
25,905 26,099
Current income taxes payable 2,293 --
Long-term debt 50,214 60,734
Commercial paper notes 34,000 28,774
Other liabilities 98,732 75,294
Separate account liabilities 94,028 82,450
___________ ___________
Total liabilities 5,903,473 4,693,073
Commitments and contingencies
Stockholders' equity:
Serial peferred stock, without par value -
authorized 2,500,000 shares -- --
Common stock, without par value (stated
value $1.00 per share) - authorized
70,000,000 shares in 1993 and
35,000,000 in 1992, issued and
outstanding 31,504,586 shares in 1993
and 14,497,320 shares in 1992 31,505 14,497
Additional paid-in capital 75,841 4,186
Unrealized appreciation (depreciation)
of equity securities (167) (134)
Retained earnings 422,093 356,202
Unearned compensation (deduction) (1,310) (950)
___________ ___________
Total stockholders' equity 527,962 373,801
___________ ___________
Total liabilities and stockholders'
equity $6,431,435 $5,066,874
=========== ===========
</TABLE>
<PAGE>
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share data)
<CAPTION>
Year ended December 31 1993 1992 1991
_______________________________________________________________________________
<S> <C> <C> <C>
Revenues:
Universal life and annuity
product charges $34,281 $30,412 $29,025
Traditional life insurance premiums 46,870 43,022 51,034
Net investment income 434,069 362,433 311,817
Realized gains (losses) on investments 41,985 8,164 (5,220)
Other income 15,763 14,343 13,633
___________ ___________ ___________
572,968 458,374 400,289
Benefits and expenses:
Universal life and annuity benefits 274,610 236,543 196,946
Traditional life insurance benefits 54,262 60,393 68,822
Increase (decrease) in future
traditional policy benefits 3,439 (6,969) (7,437)
Distributions to participating
policyholders 25,861 26,059 27,413
Underwriting, acquisition and
insurance expenses 62,263 38,355 53,794
___________ ___________ ___________
420,435 354,381 339,538
Interest expense 9,522 9,761 9,631
Other expenses 8,016 10,488 7,991
___________ ___________ ___________
437,973 374,630 357,160
___________ ___________ ___________
134,995 83,744 43,129
Income taxes 47,965 26,488 18,080
___________ ___________ ___________
87,030 57,256 25,049
Equity income (loss), net of related
income taxes 126 4 (309)
___________ ___________ ___________
Income from continuing operations before
cumulative effect of change in
accounting principles 87,156 57,260 24,740
Discontinued operations:
Income (loss) from retail operations,
net of related income taxes -- (3,182) 6,346
Gain on disposal of retail operations,
net of related income taxes -- 5,106 --
___________ ___________ ___________
-- 1,924 6,346
___________ ___________ ___________
Income before cumulative effect of
change in accounting principles 87,156 59,184 31,086
</TABLE>
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
Year ended December 31 1993 1992 1991
_______________________________________________________________________________
<S> <C> <C> <C>
Cumulative effect on prior years (to
December 31, 1991) of change in
method of accounting for post-
retirement benefits, net of related
income tax benefit -- (4,678) --
Cumulative effect on prior years (to
December 31, 1990) of change in
method of accounting for deferred
income taxes -- -- 9,444
___________ ___________ ___________
Net income $87,156 $54,506 $40,530
=========== =========== ===========
Net income per common share:
Income before cumulative effect of
change in accounting principles:
Continuing operations $2.95 $1.99 $0.87
Discontinued operations -- 0.07 0.22
___________ ___________ ___________
2.95 2.06 1.09
Cumulative effect on prior years (to
December 31, 1991) of change in
method of accounting for post-
retirement benefits, net of related
income tax benefit -- (0.16) --
Cumulative effect on prior years (to
December 31, 1990) of change in
method of accounting for deferred
income taxes -- -- 0.34
___________ ___________ ___________
Net income per common share $2.95 $1.90 $1.43
=========== =========== ===========
</TABLE>
<PAGE>
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Dollars in thousands, except per share data)
<CAPTION>
Unreal-
ized
Appre
ciation
(Depre Unearned
Class Class Addi- ciation) Compen- Total
A B tional of Equity sation Stock-
Common Common Common Paid-In Secur- Retained (Deduc- holders'
Stock Stock Stock Capital ities Earnings tion) Equity
_______ _______ ________ ________ _________ _________ ________ _________
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
January 1,
1991 $1,207 $5,885 $5,258 ($6,119) $280,672 ($1,877) $285,026
Net income for
1991 -- -- -- -- 40,530 -- 40,530
Unrealized
appreciation
of equity
secur-
ities -- -- -- 5,221 -- -- 5,221
Issuance of 15,340
shares of Class B
common stock
under stock in-
centive plans,
including related
income tax
bene-
fit -- 15 359 -- -- -- 374
Cash
divi-
dends -- -- -- -- (8,973) -- (8,973)
Amortization of
unearned
compen-
sation -- -- -- -- -- 602 602
_______ _______ ________ ________ _________ _________ ________ _________
Balance at
December 31,
1991 1,207 5,900 5,617 (898) 312,229 (1,275) 322,780
</TABLE>
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
Unreal-
ized
Appre
ciation
(Depre Unearned
Class Class Addi- ciation) Compen- Total
A B tional of Equity sation Stock-
Common Common Common Paid-In Secur- Retained (Deduc- holders'
Stock Stock Stock Capital ities Earnings tion) Equity
_______ _______ ________ ________ _________ _________ ________ _________
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Reversion of
common
stock (1,207) (5,900) $7,107 -- -- -- -- --
Issuance of shares in
connection with
2-for-1 stock
split -- -- 7,107 (6,666) -- (441) -- --
Net income for
1992 -- -- -- -- -- 54,506 -- 54,506
Unrealized
appreciation
of equity
secur-
ities -- -- -- -- 764 -- -- 764
Issuance of 280,542
shares (including
8,000 restricted
shares) of common
stock (less 32,228
shares received as
consideration and
2,706 shares for-
feited) under stock
incentive plans, net
of amortization,
including related
income tax
bene-
fit -- -- 280 5,206 -- -- 325 5,811
Conversion of
installment
notes -- -- 3 29 -- -- -- 32
Cash
divi-
dends -- -- -- -- -- (10,092) -- (10,092)
_______ _______ ________ ________ _________ _________ ________ _________
Balance at
December 31,
1992 -- -- 14,497 4,186 (134) 356,202 (950) 373,801
</TABLE>
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
Unreal-
ized
Appre
ciation
(Depre Unearned
Class Class Addi- ciation) Compen- Total
A B tional of Equity sation Stock-
Common Common Common Paid-In Secur- Retained (Deduc- holders'
Stock Stock Stock Capital ities Earnings tion) Equity
_______ _______ ________ ________ _________ _________ ________ _________
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of shares in
connection with
2-for-1 stock
split -- -- 14,497 (5,303) -- (9,194) -- --
Issuance of 2,300,000
shares under
primary stock
offer-
ing -- -- 2,300 73,964 -- -- -- 76,264
Net income for
1993 -- -- -- -- -- 87,156 -- 87,156
Unrealized
depreciation
of equity
secur-
ities -- -- -- -- (33) -- -- (33)
Issuance of 207,304
shares (including
35,770 restricted
shares) of common
stock (less 18,888
shares received as
consideration and
5,628 shares for-
feited) under stock
incentive plans, net
of amortization,
including related
income tax
bene-
fit -- -- 207 2,981 -- -- (360) 2,828
Conversion of
installment
notes -- -- 4 13 -- -- -- 17
Cash
divi-
dends -- -- -- -- -- (12,071) -- (12,071)
_______ _______ ________ ________ _________ _________ ________ _________
Balance at
December 31,
1993 -- -- $31,505 $75,841 ($167) $422,093 ($1,310) $527,962
======= ======= ======== ======== ========= ========= ======== =========
</TABLE>
Note: Amounts set forth in the above statement for the year ended December
31, 1991 have not been restated to reflect the 2-for-1 stock split
payable June 2, 1992 to holders of record on May 14, 1992. Also,
amounts set forth in the above statement for the years ended
December 31, 1992 and 1991 have not been restated to reflect the
2-for-1 stock split payable June 1, 1993 to holders of record on May
12, 1993.
<PAGE>
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<CAPTION>
Year ended December 31 1993 1992 1991
_______________________________________________________________________________
<S> <C> <C> <C>
OPERATING ACTIVITIES
Continuing operations:
Net income $87,156 $52,582 $34,184
Adjustments to reconcile net income to
net cash provided by continuing operations:
Adjustments related to universal life
and annuity products:
Interest credited to account balances 268,992 231,824 191,410
Charges for mortality and
administration (31,151) (29,068) (26,346)
Deferral of unearned revenues 1,472 379 427
Amortization of unearned revenue
reserve (2,312) (873) (2,043)
Increase (decrease) in traditional life
policy liabilities and accruals 5,987 (7,937) (7,778)
Decrease in other policyholders' funds (194) (339) (981)
Increase in accrued investment income (14,376) (11,813) (13,230)
Policy acquisition costs deferred (137,153) (104,105) (56,246)
Amortization of deferred policy
acquisition costs 42,078 20,176 19,107
Change in other assets, other
liabilities, and accrued income taxes 23,450 5,329 (21,166)
Provision for depreciation and
amortization 509 1,539 1,612
Provision for deferred income taxes (1,305) 1,458 (9,105)
Share of losses (equity in earnings)
of related parties (194) 27 527
Realized (gains) losses on investments (41,985) (8,164) 5,220
___________ ___________ ___________
200,974 151,015 115,592
Discontinued operations:
Net income -- 1,924 6,346
Adjustments to reconcile net income to
net cash provided by (used in)
discontinued operations -- (170) 15,574
___________ ___________ ___________
-- 1,754 21,920
___________ ___________ ___________
Net cash provided by operating
activities 200,974 152,769 137,512
</TABLE>
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
Year ended December 31 1993 1992 1991
_______________________________________________________________________________
<S> <C> <C> <C>
INVESTING ACTIVITIES
Sale, maturity, or repayment of investments:
Fixed maturities 1,056,544 752,624 367,778
Equity securities -- 11,988 9,714
Mortgage loans on real estate 49,081 34,527 25,771
Real estate 289 2,363 7,751
Policy loans 25,963 31,202 27,839
Short-term investments - net -- -- 85,624
___________ ___________ ___________
1,131,877 832,704 524,477
Acquisition of investments:
Fixed maturities (2,124,615) (1,606,055) (978,564)
Mortgage loans on real estate (152,274) (63,145) (12,416)
Real estate (346) (388) (166)
Policy loans (26,083) (26,093) (29,287)
Short-term investments - net (12,717) (37,511)
___________ ___________ ___________
(2,316,035) (1,733,192) (1,020,433)
Disposal of investments accounted for
by the equity method $939 $1,304 $19
Additions to investments accounted for
by the equity method (467) (3,862) (1,321)
Proceeds from sale of subsidiary -- 54,938 --
Repayments of notes receivable 38 8 5
Issuance of notes receivable -- (34) (8)
Sales of property and equipment 107 836 113
Purchases of property and equipment (3,873) (1,938) (593)
___________ ___________ ___________
Net cash used in investing activities (1,187,414) (849,236) (497,741)
</TABLE>
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
Year ended December 31 1993 1992 1991
_______________________________________________________________________________
<S> <C> <C> <C>
FINANCING ACTIVITIES
Proceeds from line of credit borrowings -- -- 100,000
Repayment of line of credit borrowings -- -- (188,000)
___________ ___________ ___________
-- -- (88,000)
Issuance (repayment) of commercial
paper - net 5,226 (6,026) 27,800
Proceeds from other debt -- -- 50,000
Repayment of other debt (10,520) (68) (2,383)
Receipts from universal life and
annuity policies credited to
policyholder account balances 1,190,024 951,309 550,212
Return of policyholder account balances
on universal life policies and
annuity policies (264,364) (242,764) (167,747)
Issuance of common stock under
primary stock offering 76,264 -- --
Issuance of stock under stock
incentive plans and upon debt 861 3,158 374
conversion
Cash dividends paid (12,071) (10,092) (8,973)
___________ ___________ ___________
Net cash provided by financing
activities 985,420 695,517 361,283
Increase (decrease) in cash and cash
equivalents (1,020) (950) 1,054
Cash and cash equivalents at beginning
of year 6,210 7,160 6,106
___________ ___________ ___________
Cash and cash equivalents at end of year $5,190 $6,210 $7,160
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest $10,404 $8,654 $9,093
Income taxes 42,367 29,433 33,936
Noncash investing and financing activities:
Foreclosure of mortgage loans and notes
receivable, including taxes and costs
capitalized (1993 - $106; 1991 - $423)
and operating funds retained ($283)
in 1993 6,577 1,100 1,624
Restructure of fixed maturity investment,
including fixed maturity ($897) and
equity security ($353) received -- 1,250 --
Conversion of equity security carried at
cost to equity security carried at
market -- -- 7,812
</TABLE>
<PAGE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1993
1. SIGNIFICANT ACCOUNTING POLICIES
Consolidation: The consolidated financial statements include the company
and its subsidiaries. The principal subsidiaries are Equitable Life
Insurance Company of Iowa ("Equitable Life") and USG Annuity & Life Company
("USG"). Equitable Life and USG operate predominantly in the individual
life and annuity area of the life insurance business. At December 31, 1993
and 1992, all subsidiaries are wholly-owned. See Note 9 to consolidated
financial statements which discusses the sale of the company's retail
subsidiary, Younkers, Inc. in 1992. All significant intercompany accounts
and transactions have been eliminated.
Investments: Fixed maturity investments (bonds and redeemable preferred
stocks) are reported at cost adjusted for amortization of premiums and
accrual of discounts. Premiums and discounts are amortized/accrued
utilizing the scientific interest method which results in a constant yield
over the securities' expected life. Amortization/accrual of premiums and
discounts on mortgage-backed securities incorporates a prepayment
assumption to estimate the securities' expected life. The company has the
ability and intent to hold fixed maturity investment securities to maturity
and, therefore, reports such investments at amortized cost. Changes in the
market value of fixed maturity investments, except for declines which are
other than temporary, are not reflected in the company's financial
statements. The company's liabilities are long-term in nature, so the
company does not expect to be required to sell such securities.
Accordingly, there are no fixed maturity securities which are currently
segregated in "assets held for sale" accounts.
Equity securities (common and non-redeemable preferred stocks) are
reported at market if readily marketable, or at cost if not readily
marketable. The change in unrealized appreciation and depreciation of
marketable equity securities (net of related deferred income taxes, if any)
is included directly in stockholders' equity.
The carrying value of the company's fixed maturity and equity securities
are reviewed on an ongoing basis. If this review indicates a decline in
value which is other than temporary for any security, the company's
carrying value in the security is reduced to its estimated realizable
value. Such reductions in carrying value are recognized as realized losses
in the determination of net income.
The company attempts to identify declines in value that are other than
temporary through a formal quarterly review of reports prepared by the
company's investment research analysts. This review process includes an
analysis of debt service coverages, cash flow and earnings projections,
debt to equity ratios, the overall business and industry environment, the
company's forecast of the issuer's business opportunities and challenges,
the relative position of the company's investment within the issuer's
capital structure and, if appropriate and available, an analysis of the
assets of the issuer. Based upon these reviews, the company makes a
judgment as to whether the combination of these and other factors indicate
that it is likely that the company will be unable to realize its carrying
value, because future nondiscounted cash payments received will not be
equal to or in excess of carrying value in the case of fixed maturities, or
because of depressed market values that are not expected to recover in the
case of equity securities. These judgments serve as the primary criteria
for the determination as to whether declines in value are other than
temporary.
For each fixed maturity investment where the decline in value is judged to
be other than temporary, the company estimates the expected cash flows from
the investment under the scenario for the issuer's future performance
judged most likely, based upon the facts and circumstances known to the
company at the time. The scenario may involve anticipated restructuring of
the issuer's debt to adjust interest, principal and other terms, complete
liquidation of the issuer to satisfy creditors, or other possible means of
satisfying the issuer's obligations. If the estimated nondiscounted cash
flows are less than the carrying value of the company's investment in the
issuer, the company recognizes a loss and reduces the carrying value of the
investment to the net realizable value based upon estimated nondiscounted
cash flows.
Further, for each fixed maturity investment where a decline in value is
judged to be other than temporary, the company reverses any accrued
interest income, and records future interest income only when cash is
received (at the rate implicit in the calculation of net realizable
value). Because the company has elected to utilize nondiscounted cash
flows in its net realizable value calculations, the yield recognized in
future periods on such investments may be less than yields recognized on
other investments or those yields expected when the security was originally
purchased.
The accounting treatment for debt and equity securities will change on
January 1, 1994, when the company adopts Statement of Financial Accounting
Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and
Equity Securities". See the Emerging Accounting and Regulatory Issues
section of Management's Discussion and Analysis for a discussion of SFAS
No. 115.
Mortgage loans on real estate are reported at cost adjusted for
amortization of premiums and accrual of discounts. If the value of any
mortgage loan is determined to be uncollectible, the carrying value of the
mortgage loan is reduced to the amount estimated as collectible by a charge
to realized gains and losses. This accounting treatment will be modified
on January 1, 1994 when the company adopts SFAS No. 114, "Accounting by
Creditors for Impairment of a Loan". See the Emerging Accounting and
Regulatory Issues section of Management's Discussion and Analysis for a
discussion of SFAS No. 114.
Real estate, which includes real estate acquired through foreclosure, is
reported at cost less allowances for depreciation. Real estate acquired
through foreclosure, or in-substance foreclosure, is recorded at the lower
of cost (which includes the balance of the mortgage loan, any accrued
interest and any costs incurred to obtain title to the property) or fair
value at the foreclosure date. The carrying value of these assets is
subject to regular review. If the fair value of real estate acquired
through foreclosure decreases to an amount lower than its carrying value, a
valuation allowance is established for the difference. This valuation
allowance can be restored should the fair value of the property increase.
To date, the company's analysis has shown that significant valuation
allowances are not needed.
Policy loans are reported at unpaid principal. Short-term investments are
reported at cost adjusted for amortization of premiums and accrual of
discounts. Investments accounted for by the equity method include
investments in, and advances to, various joint ventures and partnerships.
Market values, as reported herein, of publicly traded fixed maturity
securities are as reported by an independent pricing service. Market
values of conventional mortgage-backed securities not actively traded in a
liquid market are estimated using a third party pricing system, which uses
a matrix calculation assuming a spread over U.S. Treasury bonds based upon
the expected average lives of the securities. Market values of private
placement bonds are estimated using a matrix that assumes a spread (based
on interest rates and a risk assessment of the bonds) over U.S. Treasury
bonds. Market values of redeemable preferred stocks are as reported by the
National Association of Insurance Commissioners ("NAIC"). Market values of
equity securities are based on the latest quoted market prices, or where
not readily marketable, at values which are representative of the market
values of issues of comparable yield and quality. Realized gains and
losses are determined on the basis of specific identification of
investments.
Cash and Cash Equivalents: For purposes of the consolidated statement of
cash flows, the company considers all demand deposits and interest-bearing
accounts not related to the investment function to be cash equivalents.
All interest-bearing accounts classified as cash equivalents have original
maturities of three months or less.
Deferred Policy Acquisition Costs: Certain costs of acquiring new
insurance business, principally commissions and other expenses related to
the production of new business, have been deferred. For universal life and
annuity products, such costs are being amortized generally in proportion to
the present value (using the assumed crediting rate) of expected gross
profits. This amortization is adjusted retrospectively, or "unlocked",
when the company revises its estimate of current or future gross profits to
be realized from a group of products. For traditional life insurance
products, such costs are being amortized over the premium-paying period of
the related policies in proportion to premium revenues recognized, using
principally the same assumptions for interest, mortality and withdrawals
that are used for computing liabilities for future policy benefits subject
to traditional "lock-in" concepts.
Property and Equipment: Property and equipment primarily represent
leasehold improvements at the company's headquarters and at various agency
offices and office furniture and equipment and are not considered to be
significant to the company's overall operations. Property and equipment
are reported at cost less allowances for depreciation. Depreciation
expense is computed primarily on the basis of the straight-line method over
the estimated useful lives of the assets.
Intangible Assets: Intangible assets include the value of various licenses
acquired in conjunction with the purchase of USG and capitalized costs
related to the company's debt issues. Intangible assets related to
insurance licenses are being amortized over forty years using the
straight-line method. Capitalized debt issuance costs are being amortized
over the life of the underlying debt issues using the straight-line method.
Future Policy Benefits: The liability for future policy benefits for
traditional life insurance products has been calculated on a net-level
premium basis. Interest assumptions range from 2.75% for 1956 and prior
issues to a 9.00% level, graded to 6.00% after twenty years for current
issues. Mortality, morbidity and withdrawal assumptions generally are
based on actual experience. These assumptions have been modified to
provide for possible unfavorable deviation from the assumptions. Future
dividends for participating business (which accounted for 2.6% of premiums
in 1993) are provided for in the liability for future policy benefits.
With respect to universal life and annuity products, the company utilizes
the retrospective deposit accounting method. Policy reserves represent the
premiums received plus accumulated interest, less mortality and
administration charges. Interest credited to these policies ranged from
4.50% to 10.00% during 1993, 4.50% to 9.00% during 1992 and 6.35% to 9.20%
during 1991.
The unearned revenue reserve reflects the unamortized balance of the
excess of first year administration charges over renewal period
administration charges (policy initiation fees) on universal life and
annuity products. These excess charges have been deferred and are being
recognized in income over the period benefitted using the same assumptions
and factors used to amortize deferred policy acquisition costs.
Recognition of Premium Revenues and Costs: Traditional life insurance
premiums are recognized as revenues over the premium-paying period. Future
policy benefits and policy acquisition costs are associated with the
premiums as earned by means of the provision for future policy benefits and
amortization of deferred policy acquisition costs.
Revenues for universal life and annuity products consist of policy charges
for the cost of insurance, renewal period administration charges,
amortization of policy initiation fees and surrender charges assessed
against policyholder account balances during the period. Expenses related
to these products include interest credited to policyholder account
balances and benefit claims incurred in excess of policyholder account
balances.
Deferred Income Taxes: As discussed in Note 6, effective January 1, 1991,
the company adopted SFAS No. 109, "Accounting for Income Taxes". Under
SFAS No. 109, deferred tax assets or liabilities are computed based on the
difference between the financial statement and income tax bases of assets
and liabilities using the enacted marginal tax rate. Deferred income tax
expenses or credits are based on the changes in the asset or liability from
period to period.
Interest Rate Swaps: The company had interest rate swap agreements
outstanding during 1993, whereby any interest rate differential to be
received/paid was recognized as an adjustment to interest expense. All of
these swap agreements expired or were terminated in August 1993.
Separate Accounts: The transactions in the separate accounts (which are
charged or credited directly to the accounts) are excluded from the
consolidated statements of income.
Capital Stock: On April 30, 1992, the company's shareholders approved a
plan to consolidate the company's Class A and Class B common stock into a
single class of common stock on a one-to-one basis. The plan was effective
as of May 1, 1992. On April 30, 1992 the company's Board of Directors
approved a 2-for-1 stock split payable June 2, 1992, to holders of record
on May 14, 1992. On April 29, 1993 the company's Board of Directors
approved an additional 2-for-1 stock split payable June 1, 1993, to holders
of record on May 12, 1993. With respect to the balance sheet and statement
of changes in stockholders' equity, share and per share amounts prior to
January 1, 1992, have not been restated to reflect the 1992 and 1993 stock
splits and share and per share amounts prior to January 1, 1993, have not
been restated to reflect the 1993 stock split. All other share and per
share data presented in the consolidated financial statements and notes
thereto have been restated to reflect the stock splits.
Net Income per Share of Common Stock: Net income per share is based on the
weighted average number of shares of common stock outstanding during each
year (1993 - 29,540,274; 1992 - 28,688,660 and 1991 - 28,392,860).
Installment notes convertible into shares of common stock and employee
stock options have not been included in the net income per share
computations because their effect is not material.
Dividends per Share of Common Stock: For the years ended December 31,
1993, 1992 and 1991, the company paid dividends per share of $0.405, $0.35
and $0.32, respectively, after giving effect for the 2-for-1 stock splits
as of May 14, 1992 and May 12, 1993.
Dividend Restrictions: The company's ability to pay dividends to its
stockholders is restricted by certain debt covenants. The most restrictive
covenant requires the company to maintain tangible net worth equal to the
sum of $280,000,000 plus proceeds from any issuance of common stock plus
one-half of net income recognized subsequent to January 1, 1993. At
December 31, 1993, retained earnings available for dividends aggregated
$123,913,000.
The ability of Equitable Life to pay dividends to the parent company is
restricted because prior approval of insurance regulatory authorities is
required for payment of dividends to the stockholder which exceed an annual
limitation. During 1994, Equitable Life could pay dividends to the parent
company of approximately $39,335,000 without prior approval of statutory
authorities. Also, the amount ($206,901,000 at December 31, 1993) by which
the stockholder's equity stated in conformity with generally accepted
accounting principles exceeds statutory capital and surplus as reported is
restricted and cannot be distributed.
Emerging Accounting Issues: The Financial Accounting Standards Board
("FASB") issued SFAS No. 114, "Accounting by Creditors for Impairment of a
Loan", SFAS No. 115, "Accounting for Certain Investments in Debt and
Equity Securities" and an Exposure Draft entitled "Accounting for
Stock-based Compensation". See the Emerging Accounting and Regulatory
Issues section of Management's Discussion and Analysis for discussions of
these and other items.
<PAGE>
<PAGE>
2. BASIS OF FINANCIAL REPORTING - LIFE INSURANCE OPERATIONS
The financial statements of the life insurance subsidiaries differ from
related statutory financial statements principally as follows: (1)
acquisition costs of acquiring new business are deferred and amortized over
the life of the policies rather than charged to operations as incurred, (2)
future policy benefit reserves on traditional life insurance products are
based on reasonable assumptions of expected mortality, interest and
withdrawals which include a provision for possible unfavorable deviation
from such assumptions, which may differ from reserves based upon statutory
mortality rates and interest, (3) future policy benefit reserves for
universal life and annuity products are based on full account values,
rather than the greater of cash surrender value or amounts derived from
discounting methodologies utilizing statutory interest rates, (4) reserves
are reported before reduction for reserve credits related to reinsurance
ceded and a receivable is established, net of an allowance for
uncollectible amounts, for these credits rather than presented net of these
credits, (5) deferred income taxes are provided for the difference between
the financial statement and income tax bases of assets and liabilities, (6)
net realized gains or losses subsequent to January 1, 1992 attributed to
changes in the level of interest rates in the market are recognized when
the sale is completed rather than deferred and amortized over the remaining
life of the fixed maturity security or mortgage loan, (7) declines in the
estimated realizable value of investments are recognized through reductions
in the carrying values of the related investment, and recognition of
realized losses in the statements of income, when such declines are judged
to be other than temporary, rather than through the establishment of a
formula-determined statutory investment reserve (carried as a liability),
changes in which are charged directly to surplus, (8) gains arising from
sale lease-back transactions are deferred and amortized over the life of
the lease rather than recognized in the period of sale, (9) a liability is
established for anticipated guaranty fund assessments, net of estimated
premium tax credits, rather than capitalized when assessed and amortized in
accordance with procedures permitted by insurance regulatory authorities,
(10) agents' balances and certain other assets designated as "non-admitted
assets" for statutory purposes are reported as assets rather than being
charged to surplus, (11) revenues for universal life and annuity products
consist of policy charges for the cost of insurance, policy administration
charges, amortization of policy initiation fees and surrender charges
assessed rather than premiums received, (12) pension income or expense is
recognized in accordance with SFAS No. 87, "Employers' Accounting for
Pensions" rather than by the rules and regulations permitted by the
Employee Retirement Income Security Act of 1974, (13) expenses for
postretirement benefits other than pensions are recognized for all
qualified employees rather than for only vested and fully-eligible
employees, and the accumulated postretirement benefit obligation for years
prior to adoption of SFAS No. 106, "Employers' Accounting for
Postretirement Benefits Other than Pensions" was recognized as a cumulative
effect of change in accounting method rather than deferred and amortized
over twenty years, and (14) assets and liabilities are restated to fair
values when a change in ownership occurs, with provisions for goodwill and
other intangible assets, rather than continuing to be presented at
historical cost.
Net income for Equitable Life, USG and Equitable American Insurance
Company (formed in 1993) as determined in accordance with statutory
accounting practices was $42,182,000 in 1993, $36,281,000 in 1992 and
$51,659,000 in 1991. Total statutory capital and surplus was $393,351,000
at December 31, 1993 and $275,978,000 at December 31, 1992.
<PAGE>
<PAGE>
3. INVESTMENT OPERATIONS
Realized gains (losses) and unrealized appreciation (depreciation) on
investments are summarized below:
<TABLE>
<CAPTION>
Realized*
Year ended December 31 1993 1992 1991
______________________________________________________________________________
(Dollars in thousands)
<S> <C> <C> <C>
Fixed maturities $41,754 $7,001 ($76)
Equity securities -- 2,174 (5,810)
Mortgage loans on real estate (363) -- (1,108)
Real estate 14 (254) 1,802
Equity investments 580 (757) 3
Other -- -- (31)
___________ ___________ ___________
Realized gains (losses) on
investments $41,985 $8,164 ($5,220)
=========== =========== ===========
</TABLE>
*See Note 6 for the income tax effects attributable to realized gains
and losses on investments.
<TABLE>
<CAPTION>
Unrealized
Year ended December 31 1993 1992 1991
______________________________________________________________________________
(Dollars in thousands)
<S> <C> <C> <C>
Fixed maturities $144,409 $59,116 $269,370
Equity securities (33) 764 5,221
___________ ___________ ___________
Unrealized appreciation
of investments $144,376 $59,880 $274,591
=========== =========== ===========
</TABLE>
Major categories of net investment income are summarized below:
<TABLE>
<CAPTION>
Year ended December 31 1993 1992 1991
______________________________________________________________________________
(Dollars in thousands)
<S> <C> <C> <C>
Fixed maturities $397,912 $330,590 $279,675
Equity securities 45 156 439
Mortgage loans on real estate 28,408 22,615 22,624
Real estate 2,696 2,300 2,559
Policy loans 9,838 9,944 9,892
Short-term investments 933 1,597 1,784
Other - net 425 1,187 418
___________ ___________ ___________
440,257 368,389 317,391
Less investment expenses (6,188) (5,956) (5,574)
___________ ___________ ___________
Net investment income $434,069 $362,433 $311,817
=========== =========== ===========
<PAGE>
<PAGE>
At December 31, 1993 and 1992, the carrying value and estimated market
value of the company's fixed maturity investments, which comprise its
portfolio of debt securities, are as follows:
</TABLE>
<TABLE>
<CAPTION>
Gross Gross Estimated
Carrying Unrealized Unrealized Market
December 31, 1993 Value Gains Losses Value
________________________________________________________________________________
(Dollars in thousands)
<S> <C> <C> <C> <C>
U.S. government and
governmental agencies
and authorities:
Mortgage-backed
securities $327,195 $22,121 $349,316
Other 3,493 380 3,873
States, municipalities
and political
subdivisions 15,854 700 ($28) 16,526
Foreign governments 10,573 2,580 -- 13,153
Public utilities 1,198,523 75,309 (6,399) 1,267,433
Investment grade
corporate 1,724,879 187,348 (4,529) 1,907,698
Below investment grade
corporate 361,869 14,266 (4,765) 371,370
Mortgage-backed
securities 1,435,129 51,384 (8,971) 1,477,542
Redeemable preferred
stocks 711 -- (264) 447
___________ ___________ ___________ ___________
Total fixed maturities $5,078,226 $354,088 ($24,956) $5,407,358
=========== =========== =========== ===========
</TABLE>
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
Gross Gross Estimated
Carrying Unrealized Unrealized Market
December 31, 1992 Value Gains Losses Value
________________________________________________________________________________
(Dollars in thousands)
<S> <C> <C> <C> <C>
U.S. government and
governmental agencies
and authorities:
Mortgage-backed
securities $353,525 $21,524 $375,049
Other 3,750 256 ($2) 4,004
States, municipalities
and political
subdivisions 10,030 500 -- 10,530
Foreign governments 11,111 1,303 (10) 12,404
Public utilities 959,193 45,362 (1,039) 1,003,516
Investment grade
corporate 1,486,785 103,425 (2,936) 1,587,274
Below investment grade
corporate 236,080 7,563 (12,171) 231,472
Mortgage-backed
securities 905,904 26,218 (4,974) 927,148
Redeemable preferred
stocks 732 -- (296) 436
___________ ___________ ___________ ___________
Total Fixed Maturities $3,967,110 $206,151 ($21,428) $4,151,833
=========== =========== =========== ===========
</TABLE>
Short-term investments, all with maturities of 30 days or less, have been
excluded from the above schedules. Amortized cost approximates market
value for these securities. The carrying value and estimated market value
of debt securities at December 31, 1993, by contractual maturity, are shown
below. Expected maturities will differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without
call or prepayment penalties.
<TABLE>
<CAPTION>
Estimated
Carrying Market
December 31, 1993 Value Value
_________________________________________________________________
(Dollars in thousands)
<S> <C> <C>
Due in one year or less $1,698 $1,708
Due after one year through five years 35,044 37,261
Due after five years through ten years 425,033 451,908
Due after ten years 2,854,127 3,089,623
___________ ___________
3,315,902 3,580,500
Mortgage-backed securities 1,762,324 1,826,858
___________ ___________
Total fixed maturities $5,078,226 $5,407,358
=========== ===========
</TABLE>
<PAGE>
<PAGE>
The carrying value and market value of mortgage-backed securities, which
comprise 34.7% of the company's investment in fixed maturity securities at
December 31, 1993, by type, are as follows:
<TABLE>
<CAPTION>
Estimated
Carrying Market
December 31, 1993 Value Value
_________________________________________________________________
(Dollars in thousands)
<S> <C> <C>
Mortgage-backed securities:
Government guaranteed pools $327,195 $349,316
Private mortgage pools 32,278 32,464
Mezzanines 40,683 42,051
CMO's and REMIC's:
Sequential pay 1,097,333 1,139,998
Targeted amortization class 264,835 263,029
___________ ___________
Total mortgage-backed securities $1,762,324 $1,826,858
=========== ===========
</TABLE>
The company has limited its investments in mortgage-backed securities
(including CMO's and REMIC's) to securities where principal payments are
securitized as senior positions within the mortgage loan pool. The company
holds no derivative-type mortgage-backed securities. Further, the company
has not purchased obligations at significant premiums, thereby limiting
exposure to loss during periods of accelerated prepayments. At December
31, 1993, unamortized premiums on mortgage-backed securities totalled
$6,161,000 and unaccrued discounts on mortgage-backed securities totalled
$48,863,000.
<PAGE>
<PAGE>
An analysis of sales, maturities and principal repayments of the company's
fixed maturities portfolio for the years ended December 31, 1993, 1992 and
1991 is as follows:
<TABLE>
<CAPTION>
Gross Gross Proceeds
Carrying Realized Realized from
Value Gains Losses Sale
_________________________________________________________________________________
(Dollars in thousands)
<S> <C> <C> <C> <C>
Year ended December 31, 1993:
Scheduled principal
repayments, calls and
tenders $999,855 $50,924 $1,050,779
Sales 5,481 284 5,765
___________ ___________ ___________ ___________
Total $1,005,336 $51,208 $-- $1,056,544
=========== =========== =========== ===========
Year ended December 31, 1992:
Scheduled principal
repayments, calls and
tenders $537,118 $22,332 $559,450
Sales 204,942 5,567 ($17,335) 193,174
___________ ___________ ___________ ___________
Total $742,060 $27,899 ($17,335) $752,624
=========== =========== =========== ===========
Year ended December 31, 1991:
Scheduled principal
repayments, calls and
tenders $133,299 $2,601 $135,900
Sales 233,103 7,963 ($9,188) 231,878
___________ ___________ ___________ ___________
Total $366,402 $10,564 ($9,188) $367,778
=========== =========== =========== ===========
</TABLE>
At December 31, 1993, unrealized depreciation of equity securities of
$167,000 is comprised solely of gross unrealized depreciation on the
individual security.
The carrying value of investments which have been non-income producing for
the twelve months preceding December 31, 1993, includes: mortgage loans on
real estate - $250,000 and real estate - $239,000.
The company analyzes its investment portfolio at least quarterly in order
to determine if its ability to realize its carrying value has been
impaired. If an impairment in value appears to be other than temporary,
the company recognizes the impairment as a charge to realized gains and
losses. During the year ended December 31, 1993, the company recognized
pre-tax losses on one fixed maturity investment of $6,443,000 and one
mortgage loan investment of $363,000. The company also established a
valuation allowance of $86,000 on one of its foreclosed real estate
properties. Of these amounts, losses of $449,000 were recorded in the
fourth quarter of 1993. During the year ended December 31, 1992, the
company recognized pre-tax losses on one fixed maturity investment of
$3,563,000, two real estate investments of $418,000 and two equity method
investments of $1,347,000, prior to the investments' actual disposal. Of
these amounts, losses of $1,347,000 were recorded in the fourth quarter of
1992. During the year ended December 31, 1991, the company recognized
pre-tax losses on one fixed maturity investment of $1,452,000, one equity
security investment of $954,000, two mortgage loans of $1,197,000 and
three real estate investments of $160,000, prior to the investments' actual
disposal.
At December 31, 1993, affidavits of deposits covering bonds with a par
value of $1,388,913,000 (1992 - $1,304,573,000), mortgage loans with an
unpaid principal balance of $188,464,000 (1992 - $189,916,000) and policy
loans with an unpaid balance of $173,097,000 (1992 - $174,787,000) were on
deposit with state agencies to meet regulatory requirements. In addition,
at December 31, 1993, pursuant to a reinsurance agreement, the company had
investments with a carrying value of $93,472,000 (market value of
$94,964,000) deposited in a trust for the benefit of the ceding company.
The company's investment policies related to its investment portfolio
require diversification by asset type, company and industry and set limits
on the amount which can be invested in an individual issuer. Such policies
are at least as restrictive as those set forth by regulatory authorities.
Fixed maturity investments included investments in various non-governmental
mortgage-backed securities (28% in 1993, 23% in 1992), public utilities
(24% in 1993, 27% in 1992), basic industrials (20% in 1993, 23% in 1992)
and consumer products (14% in 1993, 13% in 1992). Mortgage loans on real
estate have been analyzed by geographical locations. Concentrations of
mortgage loans are in California (10% in 1993, 16% in 1992) and Illinois
(10% in 1993, 18% in 1992). There are no significant concentrations of
mortgage loans in any other state or region. Mortgage loans on real estate
have also been analyzed by collateral type with significant concentrations
identified in retail facilities (33% in 1993, 23% in 1992), industrial
buildings (28% in 1993, 36% in 1992), multi-family residential buildings
(19% in 1993, 17% in 1992) and office buildings (15% in 1993, 20% in 1992).
Equity securities, real estate and investments accounted for by the equity
method are not significant to the company's overall investment portfolio.
No investment in any person or its affiliates (other than bonds issued by
agencies of the United States government) exceeded ten percent of
stockholders' equity at December 31, 1993.
<PAGE>
<PAGE>
4. FAIR VALUES OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments"
requires disclosure of estimated fair value of all financial instruments,
including both assets and liabilities recognized and not recognized in a
company's balance sheet, unless specifically exempted. Most of the
company's investments, insurance liabilities and debt, as well as
off-balance-sheet items such as interest rate swaps and loan guarantees,
fall within the standard's definition of a financial instrument. Although
the company's life insurance liabilities, are specifically exempted from
this disclosure requirement, estimated fair value disclosure of these
liabilities is also provided in order to make the disclosures more
meaningful. The accounting, actuarial and regulatory bodies are continuing
to study the methodologies to be used in developing fair value information,
particularly as it relates to such things as liabilities for insurance
contracts. Accordingly, care should be exercised in deriving conclusions
about the company's business or financial condition based on the
information presented herein.
The company closely monitors the level of its insurance liabilities, the
level of interest rates credited to its interest-sensitive products and the
assumed interest margin provided for within the pricing structure of its
other products. These amounts are taken into consideration in the
company's overall management of interest rate risk, which attempts to
minimize exposure to changing interest rates through the matching of
investment maturities with amounts expected to be due under insurance
contracts. As such, the company believes that it has reduced the
volatility inherent in its "fair value" adjusted stockholders' equity,
although such volatility will not be reduced completely. As discussed
below, the company has used discount rates in its determination of fair
values for its liabilities which are consistent with market yields for
related assets. The use of the asset market yield is consistent with
management's opinion that the risks inherent in its asset and liability
portfolios are similar. This assumption, however, might not result in
values that are consistent with those obtained through an actuarial
appraisal of the company's business or values that might arise in a
negotiated transaction.
<PAGE>
<PAGE>
The following compares carrying values as shown for financial reporting
purposes with estimated fair values.
<TABLE>
<CAPTION>
December 31 1993 1992
_________________________________________________________________________________
(Dollars in thousands)
Estimated Estimated
Carrying Fair Carrying Fair
Value Value Value Value
___________ ___________ ___________ ___________
<S> <C> <C> <C> <C>
ASSETS
Balance sheet financial assets:
Fixed maturities $5,078,226 $5,407,358 $3,967,110 $4,151,833
Equity securities 83 83 116 116
Mortgage loans on real
estate 346,829 376,967 249,585 269,036
Short-term investments 67,619 67,619 54,902 54,902
Cash and cash equivalents 5,190 5,190 6,210 6,210
Notes and other
receivables 109,908 109,908 93,233 93,233
Separate account assets 94,028 94,028 82,450 82,450
___________ ___________ ___________ ___________
5,701,883 6,061,153 4,453,606 4,657,780
Off-balance-sheet financial asset:
Unrecognized pension
asset -- 9,700 -- 6,471
Deferred policy acquisition
costs and intangible
assets 454,526 -- 360,195 --
Non-financial assets 88,246 88,246 76,344 76,344
___________ ___________ ___________ ___________
Total assets $6,244,655 $6,159,099 $4,890,145 $4,740,595
=========== =========== =========== ===========
</TABLE>
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
December 31 1993 1992
_________________________________________________________________________________
(Dollars in thousands)
Estimated Estimated
Carrying Fair Carrying Fair
Value Value Value Value
___________ ___________ ___________ ___________
<S> <C> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Balance sheet financial liabilities:
Future policy benefits (net of related policy loans):
Universal life and
current interest
products 345,592 207,364 308,041 172,330
Annuity products 4,337,968 3,676,263 3,217,310 2,709,659
Participating life insur-
ance and dividend
accumulations 572,597 452,010 561,587 408,449
Traditional life insurance
- nonpar 162,253 135,900 165,560 141,114
___________ ___________ ___________ ___________
5,418,410 4,471,537 4,252,498 3,431,552
Long-term debt 50,214 50,714 60,734 63,860
Commercial paper notes 34,000 34,000 28,774 28,774
Separate account
liabilities 94,028 94,028 82,450 82,450
___________ ___________ ___________ ___________
5,596,652 4,650,279 4,424,456 3,606,636
Off-balance-sheet financial liability:
Interest rate swap
agreements -- -- -- 4,388
Deferred income taxes on fair
value adjustments -- 302,184 -- 226,142
Non-financial liabilities 120,041 120,041 91,888 91,888
___________ ___________ ___________ ___________
Total liabilities 5,716,693 5,072,504 4,516,344 3,929,054
Stockholders' equity 527,962 1,086,595 373,801 811,541
___________ ___________ ___________ ___________
Total liabilities and
stockholders' equity $6,244,655 $6,159,099 $4,890,145 $4,740,595
=========== =========== =========== ===========
</TABLE>
The following methods and assumptions were used by the company in
estimating fair values.
Fixed maturities: Estimated market values of publicly traded securities
are based on the latest quoted market prices as reported by an independent
pricing service. Market values of conventional mortgage-backed securities
not actively traded in a liquid market are estimated using a third party
matrix calculation assuming a spread over U.S. Treasury bonds based upon
the expected average lives of the securities. Market values of private
placement bonds are estimated using a matrix that assumes a spread (based
on interest rates and a risk assessment of the bonds) over U.S. Treasury
bonds. Estimated market values of redeemable preferred stocks are as
reported by the NAIC.
Equity securities: Estimated fair values are based upon the latest quoted
market prices, where available. For equity securites not actively traded,
estimated fair values are based upon values of issues of comparable yield
and quality.
Mortgage loans on real estate: Fair values are estimated by discounting
expected cash flows, using interest rates currently being offered for
similar loans.
Short-term investments, cash and cash equivalents, notes and other
receivables, commercial paper notes: Carrying values reported in the
company's historical cost basis balance sheet approximate estimated fair
value for these instruments, due to their short-term nature.
Separate account assets and liabilities: Separate account assets and
liabilities are reported at estimated fair value in the company's
historical cost basis balance sheet.
Future policy benefits: Estimated fair values of the company's
liabilities for future policy benefits for universal life and current
interest products, annuity products, participating life insurance and
dividend accumulations and non-par traditional life insurance products are
based upon discounted cash flow calculations. Cash flows of future policy
benefits are discounted using the market yield rate of the assets
supporting these liabilities. Estimated fair values are presented net of
the estimated fair value of corresponding policy loans due to the
interdependent nature of the cash flows associated with these items.
Deferred policy acquisition costs and intangible assets: For historical
cost purposes, the recovery of policy acquisition costs is based on the
realization, among other things, of future interest spreads and gross
premiums on in-force business. Because these cash flows are considered in
the computation of the future policy benefit cash flows, the deferred
policy acquisition cost balance does not appear on the estimated fair
value balance sheet. Intangible assets do not appear in the estimated
fair value balance sheet because there are no cash flows related to these
assets.
Long-term debt: Estimated fair value of the company's publicly-traded
debt issue is based upon quoted market prices. Estimated fair value of
the company's non-public industrial revenue bonds in 1992 was based upon
the value which would have been required to defease the issue. Estimated
fair value of the company's subordinated convertible installment notes is
assumed to be equal to carrying value at December 31, 1993 since these
notes were repaid on January 3, 1994, and was based upon conversion value
at December 31, 1992.
Off-balance-sheet instruments: Estimated fair values of the company's
unrecognized pension assets are based upon amounts not recognized in the
financial statement pension accruals. Estimated fair values of interest
rate swaps in 1992 were based upon settlement values reported to the
company by the instruments' counterparties. The company also has made
guarantees on behalf of certain borrowers in the event the borrower is not
able to make its principal or interest payments. The company has not
provided a fair value liability for these obligations as management
believes the value of the collateral underlying the commitments is
sufficient.
Deferred income taxes on fair value adjustments: Deferred income taxes
have been reported at the statutory rate for the differences (except for
those attributed to permanent differences) between the carrying value and
estimated fair value of assets and liabilities set forth herein.
Non-financial assets and liabilities: Values are presented at historical
cost.
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments",
requires disclosure of estimated fair value information about financial
instruments, whether or not recognized in the consolidated balance sheet,
for which it is practicable to estimate that value. In cases where quoted
market prices are not available, estimated fair values are based on
estimates using present value or other valuation techniques. Those
techniques are significantly affected by the assumptions used, including
the discount rate and estimates of future cash flows. In that regard, the
derived fair value estimates cannot be substantiated by comparison to
independent markets and, in many cases, could not be realized in immediate
settlement of the instrument. The above presentation should not be viewed
as an appraisal as there are several factors, such as the fair value
associated with customer or agent relationships and other intangible items,
which have not been considered. In addition, interest rates and other
assumptions might be modified if an actual appraisal were to be performed.
ACCORDINGLY, THE AGGREGATE ESTIMATED FAIR VALUE AMOUNTS PRESENTED HEREIN
ARE LIMITED BY EACH OF THESE FACTORS AND DO NOT PURPORT TO REPRESENT THE
UNDERLYING VALUE OF THE COMPANY.<PAGE>
<PAGE>
5. CREDIT ARRANGEMENTS
Long-term debt: At December 31, 1993, the company's long-term debt
consisted of: notes payable bearing interest at 9.3% totalling $49,996,000
($50,000,000 at December 31, 1992) maturing June 1, 1998 and subordinated
installment notes bearing interest at 9% totalling $218,000 ($234,000 at
December 31, 1992) which were repaid on January 3, 1994.
The subordinated installment notes were convertible, at the option of the
lender, into the company's common stock at the rate of 7.44 shares of
common stock for each $44 principal amount of installment notes, subject to
adjustment in certain circumstances. The installment notes were
subordinated to senior indebtedness. During the years ended December 31,
1993 and 1992, respectively, 2,642 and 5,380 shares of common stock were
issued pursuant to this conversion feature.
The Industrial Development Revenue Refunding Bonds Series 1983 bearing
interest at 9.16% totalling $10,500,000 at December 31, 1992, were repaid
on December 1, 1993.
Guarantees of Indebtedness of Others: At December 31, 1993 and 1992, the
company had unconditionally guaranteed $26,310,000 and $26,663,000,
respectively, in remaining principal amount of notes payable issued by the
Walnut Mall Limited Partnership ("WMLP"). The company receives an annual
fee of $148,000 for its guarantee. The final payment on this note is due
in 1996, although earlier redemption is allowed. The proceeds of the notes
were used to partially finance the construction of an office/retail
facility in Des Moines, Iowa. The company received a first mortgage on the
property, together with guarantees from the partners, to secure its
guarantee. In the event of a default on the notes payable by WMLP, the
company would be required to make payments to note holders and seek
recourse from the partners and/or through exercise of its rights as a
mortgagee.
The company had also unconditionally guaranteed Industrial Development
Revenue Bonds Series 1984 of Lerac Limited Partnership, a joint venture
partially owned by a subsidiary of Equitable Life. The final payment on
these bonds is due in 1999. The proceeds were used to finance the
construction of a retail facility including a store leased by Younkers.
The outstanding balance at December 31, 1993 and 1992, was $3,090,000 and
$3,160,000, respectively.
Commercial Paper Notes: The company issues commercial paper notes to
provide for working capital needs and to provide short term liquidity.
This commercial paper program is supported by the company's line of credit
discussed below. Commercial paper notes are issued for periods not
exceeding 270 days. At December 31, 1993 and 1992, commercial paper notes
of $34,000,000 and $28,774,000, respectively, were outstanding under this
arrangement at a weighted average interest rate of 3.4% and 4.3%,
respectively. At December 31, 1993, the company's commercial paper was
rated A1 by Standard and Poor's Corporation, P2 by Moody's Investors
Service and Duff 1 by Duff & Phelps Credit Rating Company.
Line of Credit: The company maintains a line of credit arrangement with
five banks to support its commercial paper notes payable and to provide
short-term liquidity. The maximum borrowing allowed under this facility is
$100,000,000 (no amounts outstanding at December 31, 1993). This credit
arrangement has an annual commitment fee of 1/4% on the unused portion of
the line and terminates on May 4, 1996. The terms of the credit
arrangement set limits on debt of the company and its insurance
subsidiaries, require maintenance of a minimum level of consolidated
tangible net worth and insurance subsidiary statutory capital and surplus
and risk-based capital and restrict certain investments.
Interest Rate Swaps: The company had entered into interest rate swap
agreements with several banks with a combined notional principal amount of
$50,000,000. During August 1993, swap agreements with a combined notional
principal amount of $20,000,000 expired and the remaining swap agreements
($30,000,000) were terminated by the company at a cost of $3,011,000.
<PAGE>
<PAGE>
6. INCOME TAXES
During 1991, the company adopted SFAS No. 109, "Accounting for Income
Taxes", which requires the use of the liability method in accounting for
income taxes. The cumulative effect of adopting this change as of January
1, 1991 has been reflected in the statements of income included herein.
This change is net of non-tax expenses of $239,000 directly related to the
increase in net income of discontinued operations caused by the change.
The company and all of its subsidiaries file a consolidated federal income
tax return. The parent company and its subsidiaries each report current
income tax expense as allocated under a consolidated tax allocation
agreement. Generally, this allocation results in profitable companies
recognizing a tax provision as if the individual company filed a separate
return and loss companies recognizing benefits to the extent their losses
contribute to reduce consolidated taxes. Deferred income taxes have been
established by each member of the consolidated group based upon the
temporary differences, the reversal of which will result in taxable or
deductible amounts in future years when the related asset or liability is
recovered or settled, within each entity.
Income tax expenses (credits) are included in the consolidated financial
statements as follows:
<TABLE>
<CAPTION>
Year ended December 31 1993 1992 1991
______________________________________________________________________________
(Dollars in thousands)
<S> <C> <C> <C>
Taxes provided in consolidated statements of income on:
Income from continuing operations
before equity income (loss) and
cumulative effect of change in
accounting principles:
Current $49,313 $22,590 $23,777
Deferred (1,348) 3,898 (5,697)
___________ ___________ ___________
47,965 26,488 18,080
Equity income (loss):
Current 25 (45) (28)
Deferred 43 14 (190)
___________ ___________ ___________
68 (31) (218)
Discontinued operations:
Current -- 1,651 8,856
Deferred -- (92) (3,539)
___________ ___________ ___________
-- 1,559 5,317
Cumulative effect of change in
accounting principles - deferred -- (2,454) (9,683)
Taxes provided in consolidated statement
of changes in stockholders' equity on
expenses for stock incentive
plans - current (1,377) (2,190) (96)
___________ ___________ ___________
$46,656 $23,372 $13,400
=========== =========== ===========
</TABLE>
<PAGE>
<PAGE>
Income tax expense (credits) attributed to realized gains and losses on
investments amounted to $14,695,000, $213,000 and $(98,000) for the years
ended December 31, 1993, 1992 and 1991, respectively. The effective tax
rate on income from continuing operations before income taxes, equity
income (loss) and cumulative effect of change in accounting principles is
different from the prevailing federal income tax rate as follows:
<TABLE>
<CAPTION>
Year ended December 31 1993 1992 1991
______________________________________________________________________________
(Dollars in thousands)
<S> <C> <C> <C>
Income from continuing operations before
income taxes, equity income (loss) and
cumulative effect of change in accounting
principles $134,995 $83,744 $43,129
Income tax at federal statutory rate 47,248 28,473 14,664
Tax effect (decrease) of:
Taxes provided for IRS examinations 200 1,200 2,400
State income taxes, net of federal
effect 87 (1,327) (776)
Change in valuation allowance on
deferred income tax assets,
excluding impact on unrealized
depreciation on equity securities -- (2,544) 1,692
Other items 430 686 100
___________ ___________ ___________
Income tax expense $47,965 $26,488 $18,080
=========== =========== ===========
</TABLE>
The Internal Revenue Service ("IRS") is currently examining the company's
consolidated income tax returns for 1990 and 1991. The 1992 consolidated
income tax return remains open to examination. During the years ended
December 31, 1993, 1992 and 1991, the company provided $200,000, $1,200,000
and $2,800,000 (including $400,000 allocated to discontinued operations),
respectively, for issues raised by the IRS. Management believes these
amounts are adequate to settle any adjustments raised by the IRS.
The Deficit Reduction Act of 1984 required life insurance companies to
recompute future policy benefits for tax purposes as of January 1, 1984.
Prior to adoption of SFAS No. 109, the portion of the fresh-start
adjustment not recognized in 1984 was treated as a permanent difference in
the tax computation over the life of the applicable business in force or
upon utilization of net operating losses. At January 1, 1991, the company
had $734,000 of the original fresh-start adjustment which had yet to be
recognized for financial reporting purposes. This amount was included in
the cumulative effect adjustment recorded as a result of the adoption of
SFAS No. 109.
<PAGE>
<PAGE>
The tax effect of temporary differences giving rise to the company's
deferred income tax assets at December 31, 1993 and 1992, are as follows:
<TABLE>
<CAPTION>
December 31 1993 1992
________________________________________________________________
(Dollars in thousands)
<S> <C> <C>
Deferred tax assets:
Writedowns of investments not
currently deductible for tax $2,255 $219
Future policy benefits 149,193 116,824
Accrued dividends 4,515 4,437
Guaranty fund assessment accruals 5,258 4,837
Other 14,538 14,478
___________ ___________
175,759 140,795
Deferred tax liabilities:
Deferred policy acquisition costs (143,809) (112,298)
Prepaid pension costs (9,306) (7,863)
Other (11,061) (10,356)
___________ ___________
(164,176) (130,517)
___________ ___________
Deferred income tax asset $11,583 $10,278
=========== ===========
</TABLE>
At December 31, 1993, the company has net operating loss carryforwards of
approximately $11.4 million which expire in 2007. These losses relate to
the operations of the non-life consolidated group and are only available
initially to offset future income generated by the non-life group. The
company is subject to limitations with respect to the availability of any
remaining amounts that can be utilized to offset income generated by the
life insurance subsidiaries. A deferred tax asset has been established for
the tax effect of these losses. Management has not established a valuation
allowance for this asset or other net deferred tax assets reported by the
members of the non-life consolidated group (aggregating in total
$1,173,000) as the company anticipates future taxable income which will
exceed this amount.
The life insurance subsidiaries have also established a deferred tax asset
which aggregates $10,410,000 at December 31, 1993. The life insurance
subsidiaries have paid income taxes during the last three preceding years
(the carryback period) which greatly exceed this amount.
Prior to 1984, a portion of Equitable Life's current income was not
subject to current income taxation, but was accumulated, for tax purposes,
in a memorandum account designated as "policyholders' surplus account".
The aggregate accumulation in this account at December 31, 1993, was
$14,388,000. Should the policyholders' surplus account of Equitable Life
exceed the limitation prescribed by federal income tax law, or should
distributions be made by Equitable Life to the parent company in excess of
$244,434,000 such excess would be subject to federal income taxes at rates
then effective. Deferred income taxes of $5,036,000 have not been provided
on amounts included in this memorandum account since the company
contemplates no action and can foresee no events that would create such a
tax.
Deferred income taxes (credits) were also reported on equity income and on
the loss from discontinued operations during these periods. These taxes
arise from the recognition of income and losses differently for purposes of
filing federal income tax returns than for financial reporting purposes.
<PAGE>
<PAGE>
7. EMPLOYEE STOCK AND INCENTIVE COMPENSATION PLANS
On April 30, 1992, the company's stockholders approved the 1992 Stock
Incentive Plan as a successor to the 1982 Stock Incentive Plan. These
plans provide for the award of stock options or shares of the company's
common stock to key employees through three means: qualified incentive
stock options (as defined in the Internal Revenue Code), non-qualified
stock options and restricted shares. Shares of common stock may be awarded
under the 1982 plan for outstanding stock options granted prior to adoption
of the 1992 plan. Under the 1992 plan an initial base of 2,240,000 shares
of common stock may be awarded with automatic increases of 7.5% for shares
issued after April 30, 1992. At December 31, 1993, the company has
reserved 3,292,125 shares (3,348,148 shares at January 1, 1993) of its
common stock for future issuances under these plans.
After giving effect for the 2-for-1 stock splits as of May 12, 1993 and
May 14, 1992, stock option transactions under these plans are summarized as
follows:
<TABLE>
<CAPTION>
Option Price
Number _____________________________
Of Shares Per Share Total
____________________________________________________________________________
(Dollars in thousands, except per share data)
<S> <C> <C> <C>
Balance at January 1, 1991 $1,361,892 $3.71 - $7.56 $7,754
Granted during 1991 203,000 4.97 1,009
Exercised during 1991 (58,800) 3.75 - 5.31 (258)
Terminated during 1991 (27,600) 5.31 - 7.06 (160)
___________ ___________
Balance at December 31, 1991 1,478,492 3.71 - 7.56 8,345
Granted during 1992 216,800 11.88 - 12.00 2,575
Exercised during 1992 (613,932) 3.71 - 7.06 (3,228)
Terminated during 1992 (12,760) 4.97 - 11.88 (98)
___________ ___________
Balance at December 31, 1992 1,068,600 4.97 - 12.00 7,594
Granted during 1993 238,000 25.75 - 36.75 6,304
Exercised during 1993 (195,300) 5.22 - 12.00 (1,141)
Terminated during 1993 (21,400) 4.97 - 25.75 (325)
___________ ___________
Balance at December 31, 1993 $1,089,900 $4.97 - $36.75 $12,432
=========== ===========
Exercisable at December 31:
1992 $162,900 $5.22 - $12.00 $966
1993 191,340 5.22 - 7.56 1,166
Became exercisable during:
1991 $128,960 $5.22 - $6.00 $707
1992 328,100 4.97 - 12.00 1,887
1993 223,740 5.31 - 7.56 1,341
</TABLE>
The non-qualified stock options are compensatory, and require the accrual
of compensation expense over the period of service from the date the
options are granted until they become fully exercisable if market values
exceed the option price on the measurement date. During the years ended
December 31, 1993, 1992 and 1991, compensation expense of $89,000, $188,000
and $239,000, respectively, was recognized related to these options.
During 1993 and 1992, respectively, the company awarded 35,770 and 16,000
shares of restricted common stock to certain key employees and directors.
These shares are subject to forfeiture to the company should the
individuals terminate their relationship with the company for reasons other
than death, permanent disability or change in company control prior to full
vesting. Shares granted to key employees generally vest on the fifth
anniversary of grant. Shares granted to directors vest equally on the
first, second and third anniversaries of grant. Directors and officers who
retired or resigned forfeited 5,628 and 5,412 shares of unvested restricted
common stock during 1993 and 1992, respectively. The company amortizes as
compensation expense the market value on date of grant ($997,000 in 1993
and $190,000 in 1992) of the restricted stock using the straight-line
method over the vesting periods. Compensation expense recognized during
the years ended December 31, 1993, 1992 and 1991 aggregated $607,000,
$495,000 and $602,000, respectively.
The company has a discretionary stock award plan under which employees are
awarded shares of stock for superior performance. During the years ended
December 31, 1993, 1992 and 1991, awards of 750, 1,020 and 2,560 shares of
the company's common stock resulted in charges to income of $19,000,
$11,000 and $13,000, respectively.
Equitable Life sponsors a long-term incentive compensation plan which
allows certain agents to earn units equal to shares of the company's common
stock based on personal production and the maintenance of specific levels
of assets under management. This program resulted in charges to income of
$926,000, $855,000 and $308,000 in the years ended December 31, 1993, 1992
and 1991, respectively.
<PAGE>
<PAGE>
8. RETIREMENT PLANS
Substantially all full-time employees of the company are covered by a
non-contributory self-insured defined benefit pension plan. The benefits
are based on years of service and the employee's compensation during the
last five years of employment. Further, the company sponsors a
supplemental defined benefit plan to provide benefits in excess of amounts
allowed pursuant to Internal Revenue Code Section 401(a) (17) and those
allowed due to integration rules. The company's funding policy with
respect to these plans is consistent with the funding requirements of
federal law and regulations.
The following table sets forth the plans' funded status and amounts
recognized in the company's consolidated balance sheet:
<TABLE>
<CAPTION>
December 31 1993 1992
__________________________________________________________________
(Dollars in thousands)
<S> <C> <C>
Accumulated benefit obligation, including
vested benefits of $49,726 in 1993 and
$47,832 in 1992 $50,691 $48,809
=========== ===========
Plan assets at fair value, primarily bonds,
common stocks (including 600,000
shares in 1993 and 800,000 shares in
1992 of the company's common stock),
mortgage loans and short-term
investments $94,028 $82,450
Projected benefit obligation for service
rendered to date 57,771 54,254
___________ ___________
Plan assets in excess of projected benefit
obligation 36,257 28,196
Unrecognized net (gain) loss from past
experience different from that assumed
and effects of changes in assumptions (5,867) 1,589
Prior service cost not yet recognized 675 797
Unrecognized net asset at the transition
date, net of amortization (4,498) (8,250)
___________ ___________
Prepaid pension cost $26,567 $22,332
=========== ===========
</TABLE>
<PAGE>
<PAGE>
Net periodic pension benefit included the following components:
<TABLE>
<CAPTION>
Year ended December 31 1993 1992 1991
_______________________________________________________________________________
(Dollars in thousands)
<S> <C> <C> <C>
Actual return on plan assets $14,626 $13,595 $12,795
Service cost-benefits earned
during the period (1,092) (993) (1,012)
Interest cost on projected
benefit obligation (3,831) (3,480) (3,494)
Net amortization and deferral (5,525) (5,404) (5,070)
___________ ___________ ___________
Net periodic pension benefit $4,178 $3,718 $3,219
=========== =========== ===========
</TABLE>
The weighted-average discount rate and rate of increase in future
compensation levels used in determining the actuarial present value of the
projected benefit obligation were 7.0% and 5.0%, respectively, at December
31, 1993, and 6.8% and 4.0%, respectively, at December 31, 1992. The
average expected long term rate of return on plan assets was 8.5% in 1993,
8.5% in 1992 and 9.5% in 1991.
In addition to the company's defined benefit pension plan, the company
sponsors plans that provide postretirement medical and group term life
insurance benefits to full-time employees and agents who have worked five
years and attained age 55 while in service with the company. The medical
plans are contributory, with retiree contributions adjusted annually, and
contain other cost-sharing features such as deductibles and coinsurance.
The accounting for these plans anticipates that the company's contributions
will increase annually by the lesser of the health care inflation rate or
3%, with increases in excess of these amounts borne by the employee or
agent. All costs for group term life insurance benefits are funded on a
pay-as-you-go (cash) basis by the company.
In 1992, the company adopted SFAS No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions". The company elected to
recognize the accumulated postretirement benefit obligation as of January
1, 1992, as a one-time charge to earnings which has been treated as a
cumulative effect of change in accounting principle. The cumulative effect
adjustment aggregated $4,678,000, or $(0.16) per share, after a deferred
tax benefit of $2,454,000 and is reflected in the 1992 consolidated
statement of income. Postretirement benefit costs for 1991 have not been
restated.
<PAGE>
<PAGE>
The company has chosen not to fund any amounts in excess of current
benefits. The following table sets forth the amounts recognized in the
company's consolidated balance sheet:
<TABLE>
<CAPTION>
December 31 1993
__________________________________________________________________
(Dollars in thousands)
Life
Medical Insurance
Plans Plans Total
_____________________________
<S> <C> <C> <C>
Accumulated postretirement benefit obligation:
Retirees $3,369 $2,052 $5,421
Fully eligible active plan
participants 1,022 227 1,249
Other active plan
participants 1,768 231 1,999
_________ _________ _________
Accumulated postretirement benefit obligation in
excess of plan assets 6,159 2,510 8,669
Unrecognized net (gain) or loss (433) (205) (638)
_________ _________ _________
Accrued postretirement benefit
cost $5,726 $2,305 $8,031
========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
December 31 1992
__________________________________________________________________
(Dollars in thousands)
Life
Medical Insurance
Plans Plans Total
_____________________________
<S> <C> <C> <C>
Accumulated postretirement benefit obligation:
Retirees $3,403 $1,912 $5,315
Fully eligible active plan
participants 863 179 1,042
Other active plan
participants 1,560 233 1,793
_________ _________ _________
Accumulated postretirement benefit obligation in
excess of plan assets 5,826 2,324 8,150
Unrecognized net (gain) or loss (461) (146) (607)
_________ _________ _________
Accrued postretirement benefit
cost $5,365 $2,178 $7,543
========= ========= =========
</TABLE>
<PAGE>
<PAGE>
Net periodic postretirement benefit costs include the following components:
<TABLE>
<CAPTION>
Year ended December 31 1993
__________________________________________________________________
(Dollars in thousands)
Life
Medical Insurance
Plans Plans Total
_____________________________
<S> <C> <C> <C>
Service cost $249 $27 $276
Interest cost 390 169 559
_________ _________ _________
Net periodic postretirement benefit
cost $639 $196 $835
========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
Year ended December 31 1992
__________________________________________________________________
(Dollars in thousands)
Life
Medical Insurance
Plans Plans Total
_____________________________
<S> <C> <C> <C>
Service cost $196 $23 $219
Interest cost 382 150 532
_________ _________ _________
Net periodic postretirement benefit
cost $578 $173 $751
========= ========= =========
</TABLE>
The weighted-average annual assumed rate of increase in the per capita
cost of health care benefits (i.e. health care cost trend rate) used in
determining the actuarial present value of the accummulated postretirement
benefit obligation was 14.5% at December 31, 1993 and 12.0% at December 31,
1992 for employees under 65 and 9.5% for employees over 65 in both years,
with the rates for both groups to be graded down to 5.5% for 2005 and
thereafter. The health care cost trend rate assumption has a significant
effect on the amounts reported. For example, increasing the assumed health
care trend rates by one percent would increase the accumulated
postretirement benefit obligation as of December 31, 1993 by $800,000 and
net periodic postretirement benefit costs for the year ended December 31,
1993 by $102,000. The weighted-average discount rate used in determining
the accumulated postretirement benefit obligation was 7.0% at December 31,
1993 and 6.8% at December 31, 1992.
As previously noted, the costs associated with these plans for the year
ended December 31, 1991 were reported on the pay-as-you-go (cash basis)
method. For the year ended December 31, 1991, costs recognized by the
company related to these benefits were $238,000. Had the company continued
using the pay-as-you-go method, the cost of these plans would have
aggregated $347,000 and $340,000 for the years ended December 31, 1993 and
1992, respectively.
The company also sponsors an unfunded deferred compensation plan providing
benefits to certain former employees. The company recognized benefits of
$44,000, $24,000 and $30,000 during the years ended December 31, 1993,
1992 and 1991, respectively, in connection with this plan.
The company sponsors pension plans for its employees which are qualified
under Internal Revenue Code Section 401(k). Employees may contribute a
portion of their annual salary, subject to limitation, to the plans. The
company contributes an additional amount, subject to limitation, based on
the voluntary contribution of the employee. Company contributions charged
to expense with respect to these plans during the years ended December 31,
1993, 1992 and 1991 were $287,000, $234,000 and $217,000, respectively.
Equitable Life has non-contributory self-insured defined contribution
pension plans for its agents. Contributions charged to expense under these
plans during the years ended December 31, 1993, 1992 and 1991 amounted to
$566,000, $596,000 and $525,000, respectively.
Certain assets related to these plans are on deposit with Equitable Life
and amounts relating to these plans are included in these consolidated
financial statements.
<PAGE>
<PAGE>
9. DISCONTINUED OPERATIONS
On April 29, 1992, the company and its former retail subsidiary, Younkers,
Inc. completed a public offering by selling 6,170,000 shares of Younkers'
common stock. Prior to the offering, the company owned 4,703,555 shares of
Younkers' common stock, all of which were sold in the public offering. The
consolidated financial statements of the company have been restated to
report the operating results of retail operations as discontinued
operations.
Income from discontinued operations for 1992 includes retail sales to the
measurement date of $83,815,000 and $330,013,000 in 1991. The loss from
discontinued operations in 1992 prior to the measurement date is due to the
seasonal nature of the retail business. The sale of the company's retail
operations resulted in a pre-tax gain of $8,897,000 ($5,106,000, or $0.18
per share, after tax). Proceeds to the company from the sale, net of
commissions and expenses, were $54,938,000.<PAGE>
<PAGE>
10. COMMITMENTS AND CONTINGENCIES
In the normal course of business, the company seeks to limit its exposure
to loss on any single insured and to recover a portion of benefits paid by
ceding reinsurance to other insurance enterprises or reinsurers.
Reinsurance coverages for life insurance vary according to the age and risk
classification of the insured with retention limits ranging up to $500,000
of coverage per individual life. The company does not use financial or
surplus relief reinsurance. At December 31, 1993, life insurance in force
ceded on a consolidated basis amounted to $1,326,020,000, or approximately
13.8% of total life insurance in force.
Reinsurance contracts do not relieve the company of its obligations to its
policyholders. To the extent that reinsuring companies are later unable to
meet obligations under reinsurance agreements, the company's life insurance
subsidiaries would be liable for these obligations, and payment of these
obligations could result in losses to the company. To limit the
possibility of such losses the company evaluates the financial condition of
its reinsurers, monitors concentrations of credit risk arising from factors
such as similar geographic regions and limits its exposure to any one
reinsurer. At December 31, 1993, the company had reinsurance treaties with
18 reinsurers, all of which are deemed to be long-duration, retroactive
contracts, and has established a receivable totalling $11,239,000 for
reserve credits, reinsurance claims and other receivables from these
reinsurers. No allowance for uncollectible amounts has been established
since none of the receivables are deemed to be uncollectible, and because
such receivables, either individually or in the aggregate, are not material
to the company's operations. The company's liability for future policy
benefits and notes and other receivables have been increased by $9,931,000
at December 31, 1993 for reserve credits on reinsured policies. Prior
period liabilities for future policy benefits have not been restated
because such reserve credits were not material. This "gross-up" of assets
and liabilities for reserve credits on reinsurance had no impact on the
company's net income. Insurance premiums and product charges have been
reduced by $5,653,000, $5,845,000 and $4,599,000 and insurance benefits
have been reduced by $3,498,000, $3,554,000 and $1,280,000 in 1993, 1992
and 1991, respectively, as a result of the cession agreements. The amount
of reinsurance assumed is not significant.
Assessments are, from time to time, levied on the company's life insurance
subsidiaries by life and health guaranty associations in most states in
which these subsidiaries are licensed to cover losses of policyholders of
insolvent or rehabilitated insurers. In some states, these assessments can
be partially recovered through a reduction in future premium taxes. Based
upon information currently available, the company believes that it is
probable that these failures will result in future assessments which will
be material to the company's financial statements. During 1991, the
company accrued and charged to expense $15,544,000 to cover estimated
future assessments (net of related anticipated premium tax credits)
resulting from these failures. Consolidated net income for 1991 was
reduced by $10,259,000, or $0.36 per share, for the after-tax impact of
insurance guaranty fund assessment accruals. Based upon information
received during 1993, the company determined that expected future
assessments (net of related anticipated premium tax credits) were greater
than amounts previously reserved. As a result, the company accrued and
charged to expense an additional $2,109,000 during 1993. At December 31,
1993, the company has reserved $15,211,000 to cover estimated future
assessments (net of related anticipated premium tax credits) and has
established an asset totalling $8,309,000 for items expected to be
recoverable through future premium tax offsets. The company cannot predict
whether and to what extent legislative initiatives may affect the right to
offset.
The company leases its home office space and certain other equipment under
operating leases which expire through 1999. During the years ended
December 31, 1993, 1992 and 1991, rent expense totalled $1,831,000,
$2,294,000 and $2,220,000, respectively. At December 31, 1993, minimum
rental payments due under all non-cancelable operating leases with initial
terms of one year or more are: 1994 - $2,145,000; 1995 - $2,170,000; 1996
- - $1,907,000; 1997 - $1,431,000; 1998 - $1,405,000 and thereafter -
$234,000.
At December 31, 1993, outstanding commitments to fund mortgage loans on
real estate totalled $37,111,000.
<PAGE>
<PAGE>
11. SUMMARY OF QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) AND DIVIDENDS
PAID
<TABLE>
<CAPTION>
Quarter ended March 31 June 30 September 30 December 31
_____________________________________________________________________________
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C>
1993:
Premiums and other revenue $31,242 $33,204 $32,164 $42,289
Investment income - net 101,536 106,068 109,594 116,871
Income from continuing
operations 20,306 20,707 20,352 25,791
Net income 20,306 20,707 20,352 25,791
Income from continuing
operations per share 0.70 0.71 0.70 0.84
Net income per share 0.70 0.71 0.70 0.84
Dividends per common share 0.09 0.105 0.105 0.105
1992:
Premiums and other revenue $23,206 $27,286 $25,676 $19,773
Investment income - net 84,371 88,041 92,864 97,157
Income (loss) from continuing
operations before cumulative
effect adjustment for change
in accounting principle 11,069 17,186 15,428 13,037
Income (loss) from discontinued
operations (3,474) 5,398 -- --
Net income 3,457 22,584 15,428 13,037
Income (loss) from continuing
operations before cumulative
effect adjustment for change
in accounting principle per
share 0.40 0.60 0.54 0.45
Income (loss) from discontinued
operations per share (0.12) 0.19 -- --
Net income per share 0.12 0.79 0.54 0.45
Dividends per common share 0.08 0.09 0.09 0.09
</TABLE>
Per share amounts have been restated to reflect the 2-for-1 stock splits
as of May 12, 1993 and May 14, 1992.
Insurance revenues and profitability are typically not seasonal in nature.
However, the recognition of realized gains and losses on investments may
vary from quarter to quarter. During 1993, the company recognized pre-tax
realized gains of: first quarter - $7,642,000; second quarter -
$8,835,000; third quarter - $8,229,000 and fourth quarter - $17,279,000.
During 1992, the company recognized pre-tax realized gains of: first
quarter - $763,000; second quarter - $4,573,000; third quarter - $2,575,000
and fourth quarter - $253,000.
<PAGE>
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Equitable of Iowa Companies
We have audited the accompanying consolidated balance sheets of Equitable
of Iowa Companies and subsidiaries as of December 31, 1993 and 1992, and
the related consolidated statements of income, changes in stockholders'
equity, and cash flows for each of the three years in the period ended
December 31, 1993. Our audits also included the financial statement
schedules listed in the Index at Item 14(a). These financial statements
and schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial
position of Equitable of Iowa Companies and subsidiaries at December 31,
1993 and 1992, and the consolidated results of their operations and their
cash flows for each of the three years in the period ended December 31,
1993, in conformity with generally accepted accounting principles. Also,
in our opinion, the related financial statement schedules, when considered
in relation to the basic financial statements taken as a whole, present
fairly in all material respects the information set forth therein.
As discussed in Notes 6 and 8 to the consolidated financial statements, in
1992 the Company changed its method of accounting for postretirement
benefits other than pensions and, in 1991 the Company changed its method of
accounting for income taxes.
\s\ Ernst & Young
Des Moines, Iowa
February 10, 1994
<PAGE>
<PAGE>
MANAGEMENT REPORT ON RESPONSIBILITY FOR FINANCIAL REPORTING
The accompanying financial statements of Equitable of Iowa Companies have
been prepared by management, which is responsible for their integrity and
objectivity. The statements have been prepared in conformity with
generally accepted accounting principles appropriate in the circumstances
and are not misstated due to material error or fraud. These statements
include some amounts that are based upon management's best estimates and
judgements. Financial information contained elsewhere in this annual
report is consistent with that contained in the financial statements.
In meeting its responsibility for the integrity of the financial
statements, management relies on the company's system of internal control.
This system is designed to provide reasonable assurance that assets are
safeguarded and that transactions are properly recorded and executed in
accordance with management's authorization. The company maintains a strong
internal auditing program that independently assesses the effectiveness of
the internal controls and recommends possible improvements thereto.
The company's financial statements have been audited by Ernst & Young,
independent auditors. In connection with this audit, Ernst & Young
performed examinations in accordance with generally accepted auditing
standards, which include a review of the system of internal control and
assurance that the financial statements are fairly presented. Management
has made pertinent records available to Ernst & Young and, furthermore,
believes that all representations made to Ernst & Young during its audit
were valid and appropriate.
\s\ Fred S. Hubbell
FRED S. HUBBELL
Chief Executive Officer
\s\ Paul E. Larson
PAUL E. LARSON
Chief Financial Officer
\s\ David A. Terwilliger
DAVID A. TERWILLIGER
Chief Accounting Officer
<PAGE>
<PAGE>
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None
PART III
ITEM 10. Directors and Executive Officers of the Registrant
Information regarding directors and executive officers on pages 3 through 7
and on page 17 of the Proxy Statement for the annual meeting of
shareholders to be held April 28, 1994 ("Proxy Statement") is incorporated
herein by reference.
ITEM 11. Executive Compensation
Executive compensation information on pages 8 through 17 of the Proxy
Statement is incorporated herein by reference.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
Security ownership information on pages 2, 6 and 7 of the Proxy Statement
is incorporated herein by reference.
ITEM 13. Certain Relationships and Related Transactions
Information regarding certain relationships and related transactions on
page 17 of the Proxy Statement is incorporated herein by reference.
<PAGE>
<PAGE>
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a)(1) and (a)(2) Financial statements and schedules
The following consolidated financial statements of Equitable of Iowa
Companies and subsidiaries are included in Item 8:
Consolidated balance sheets - December 31, 1993 and 1992
Consolidated statements of income - Years ended December 31, 1993, 1992
and 1991
Consolidated statements of changes in stockholders' equity - Years ended
December 31, 1993, 1992 and 1991
Consolidated statements of cash flows - Years ended December 31, 1993,
1992 and 1991
Notes to consolidated financial statements
The following consolidated financial statement schedules of Equitable of
Iowa Companies and Subsidiaries are included in Item 14 (d):
Schedule I - Summary of investments - other than investments in related
parties
Schedule III - Condensed financial information of registrant
Schedule V - Supplementary insurance information
Schedule VI - Reinsurance
Schedule IX - Short-term borrowings
All other schedules to the consolidated financial statements pursuant to
Article 7 of Regulation S-X are not required under the related instructions
or are inapplicable and therefore have been omitted.
Financial statements and summarized financial information of unconsolidated
subsidiaries or 50% or less owned persons accounted for by the equity
method have been omitted because they do not, considered individually or in
the aggregate, constitute a significant subsidiary.
(a)(3), and (c) Exhibits
Exhibits filed are listed in the attached exhibit index.
(b) No reports on Form 8-K were filed for the quarter ended December 31,
1993.
<PAGE>
<PAGE>
ITEM 14(d). Schedules
<TABLE>
SCHEDULE I
SUMMARY OF INVESTMENTS
OTHER THAN INVESTMENTS IN RELATED PARTIES
(Dollars in thousands)
<CAPTION>
Balance
Sheet
December 31, 1993 Cost 1 Value Amount
_______________________________________________________________________________
<S> <C> <C> <C>
TYPE OF INVESTMENT
Fixed maturities:
Bonds:
United States Government and governmental
agencies and authorities $330,688 $353,189 $330,688
States, municipalities and
political subdivisions 15,854 16,526 15,854
Foreign governments 10,573 13,153 10,573
Public utilities 1,198,523 1,267,433 1,198,523
Investment grade corporate 1,724,879 1,907,698 1,724,879
Below investment grade corporate 361,869 371,370 361,869
Mortgage-backed securities 1,435,129 1,477,542 1,435,129
Redeemable preferred stocks 711 447 711
___________ ___________ ___________
Total fixed maturities 5,078,226 5,407,358 5,078,226
Equity securities:
Common stocks: industrial, miscel-
laneous and all other 250 83 83
Mortgage loans on real estate 346,829 346,829
Real estate:
Investment properties 5,055 5,055
Acquired in satisfaction of debt 15,718 15,718
___________ ___________
Total real estate 20,773 20,773
Policy loans 176,849 176,849
Short-term investments 67,619 67,619
___________ ___________
Total investments $5,690,546 $5,690,379
=========== ===========
</TABLE>
Note 1: Except as stated in Note 2 below, cost is defined as original cost
for stocks and other invested assets, amortized cost for bonds and
unpaid principal for policy loans and mortgage loans on real
estate, adjusted for amortization of premiums, accrual of
discounts and cost less allowances for depreciation for real
estate.
Note 2: Original cost and amortized cost of investments have been adjusted
to reflect other than temporary declines in value by charges to
income as follows. Corporate bonds: 1993 - $6,443,000. Mortgage
loans on real estate: 1993 - $363,000. Real estate: 1993 -
$86,000; 1992 - $258,000; 1991 - $123,000 and 1990 - $992,000.<PAGE>
<PAGE>
SCHEDULE III
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
EQUITABLE OF IOWA COMPANIES (PARENT COMPANY)
(Dollars in thousands, except per share data)
NOTES TO CONDENSED FINANCIAL STATEMENTS
The accompanying condensed financial statements should be read in
conjunction with the consolidated financial statements and notes thereto of
Equitable of Iowa Companies and subsidiaries.
The company has guaranteed certain indebtedness of subsidiaries.
Additionally, the company has issued commercial paper and also maintains a
line of credit with various banks. See Note 5 to notes to consolidated
financial statements.
<TABLE>
<CAPTION>
BALANCE SHEETS
December 31 1993 1992
_______________________________________________________________________________
<S> <C> <C>
ASSETS
Cash and cash equivalents $162 $281
Investments, principally short-term investments 7,145 44,577
Due from subsidiaries* 9,128 12
Notes and other receivables 1 40
Property and equipment, less allowances for depreciation
of $19 in 1993 and $475 in 1992 2 466
Current income taxes recoverable -- 5,441
Deferred income tax benefit -- 1,639
Other assets 870 3,252
___________ ___________
17,308 55,708
Investments in subsidiaries* 601,714 417,866
___________ ___________
Total assets $619,022 $473,574
=========== ===========
</TABLE>
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
December 31 1993 1992
_______________________________________________________________________________
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Current income taxes payable $2,293
Deferred income taxes payable 182
Long-term debt 50,214 $60,734
Commercial paper notes 34,000 28,774
Other liabilities 3,230 7,681
Due to subsidiaries* 1,141 2,584
___________ ___________
Total liabilities 91,060 99,773
Commitments and contingencies
Stockholders' equity:
Serial preferred stock, without par value -
authorized 2,500,000 shares -- --
Common stock, without par value (stated
value $1.00 per share) - authorized
70,000,000 shares in 1993 and 35,000,000
shares in 1992, issued and outstanding
30,504,586 shares in 1993 and 14,497,320
shares in 1992 31,505 14,497
Additional paid-in capital 75,841 4,186
Unrealized appreciation (depreciation) of
equity securities (167) (134)
Retained earnings 422,093 356,202
Unearned compensation (deduction) (1,310) (950)
___________ ___________
Total stockholders' equity 527,962 373,801
___________ ___________
Total liabilities and stockholders' equity $619,022 $473,574
=========== ===========
</TABLE>
*Eliminated in consolidation.
<PAGE>
<PAGE>
<TABLE>
SCHEDULE III
CONDENSED FINANCIAL INFORMATION OF REGISTRANT - CONTINUED
EQUITABLE OF IOWA COMPANIES (PARENT COMPANY)
(Dollars in thousands, except per share data)
<CAPTION>
STATEMENTS OF INCOME
Year ended December 31 1993 1992 1991
_______________________________________________________________________________
<S> <C> <C> <C>
Revenues:
Investment income (including interest
and fees received from subsidiaries*
of ($456 in 1993, $994 in 1992 and
$795 in 1991) $1,462 $2,472 $3,662
Realized gains (losses) on
investments (3,011) 115 (1)
___________ ___________ ___________
(1,549) 2,587 3,661
Expenses:
Interest 9,502 9,761 8,453
General and administrative 935 4,809 4,827
___________ ___________ ___________
10,437 14,570 13,280
___________ ___________ ___________
Loss from continuing operations before
intercompany tax benefit, equity income,
equity in income of subsidiaries and
cumulative effect of change in
accounting principles (11,986) (11,983) (9,619)
Intercompany income tax benefit (3,646) (3,900) (2,687)
___________ ___________ ___________
(8,340) (8,083) (6,932)
Equity in income of subsidiaries' continuing
operations before cumulative effect of
change in accounting principles* 95,496 65,343 31,672
___________ ___________ ___________
Income from continuing operations before
cumulative effect of change in
accounting principles 87,156 57,260 24,740
Discontinued operations:
Income (loss) from retail operations,
net of related income taxes -- (3,182) 6,346
Gain on disposal of retail operations,
net of related income taxes -- 5,106 --
___________ ___________ ___________
-- 1,924 6,346
___________ ___________ ___________
Income before cumulative effect of change
in accounting principles 87,156 59,184 31,086
</TABLE>
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
Year ended December 31 1993 1992 1991
_______________________________________________________________________________
<S> <C> <C> <C>
Cumulative effect on prior years (to
December 31, 1991) of change in
method of accounting for postre-
tirement benefits, net of related
income tax benefit -- (4,678) --
Cumulative effect on prior years (to
December 31, 1990) of change in
method of accounting for deferred
income taxes -- -- 9,444
___________ ___________ ___________
Net income $87,156 $54,506 $40,530
=========== =========== ===========
</TABLE>
*Eliminated in consolidation.
<PAGE>
<PAGE>
<TABLE>
SCHEDULE III
CONDENSED FINANCIAL INFORMATION OF REGISTRANT - CONTINUED
EQUITABLE OF IOWA COMPANIES (PARENT COMPANY)
(Dollars in thousands)
<CAPTION>
STATEMENTS OF CASH FLOWS
Year ended December 31 1993 1992 1991
_______________________________________________________________________________
<S> <C> <C> <C>
OPERATING ACTIVITIES
Income from continuing operations $87,156 $52,582 $34,184
Adjustments to reconcile net income to net
cash used in operating activities:
Changes in other assets, other lia-
bilities and accrued income taxes (3,690) 6,675 (1,626)
Provision for depreciation and
amortization 785 793 820
Provision for deferred income taxes 1,821 (1,519) 11,769
Equity in earnings of subsidiaries (95,496) (57,640) (58,714)
Realized (gains) losses on 3,011 (5,221) 1
investments
Discontinued operations - Net income -- 1,924 6,346
Adjustment to reconcile net income
to net cash provided by (used in)
discontinued operations -- (3,792) 1,842
___________ ___________ ___________
Net cash used in operating activities (6,413) (6,198) (5,378)
INVESTING ACTIVITIES
Sale of equity securities -- 469 550
Sale of real estate -- 360 --
Sale of short-term investments - net 37,432 -- --
Acquisition of fixed maturity invest-
ments (3,011) -- --
Acquisition of short-term investments
- net -- (44,577) --
Proceeds from sale of subsidiary -- 54,938 196
Capital contribution to subsidiary (90,000) (10,000) (22,897)
Cash dividends received from sub- 1,616 17,865 9,518
sidiaries
Repayments of notes receivable 38 8 32,655
Issuance of notes receivable -- (34) (6,658)
Sales of property and equipment 459 201 8
Purchases of property and equipment -- (80) (197)
___________ ___________ ___________
Net cash provided by (used in)
investing activities (53,466) 19,150 13,175
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Year ended December 31 1993 1992 1991
_______________________________________________________________________________
<S> <C> <C> <C>
FINANCING ACTIVITIES
Proceeds from line of credit borrowings -- -- 100,000
Repayment of line of credit borrowings -- -- (188,000)
___________ ___________ ___________
-- -- (88,000)
Proceeds from long-term debt -- 266 60,500
Repayments of long-term debt (10,520) (68) (44)
Issuance (repayment) of commercial
paper - net 5,226 (6,026) 27,800
Issuance of common stock under primary
stock offering 76,264 -- --
Issuance of common stock under stock
incentive plans and upon debt
conversion 861 3,158 374
Cash dividends paid (12,071) (10,092) (8,973)
___________ ___________ ___________
Net cash provided by (used in)
financing activities 59,760 (12,762) (8,343)
___________ ___________ ___________
Increase (decrease) in cash and cash
equivalents (119) 190 (546)
Cash and cash equivalents at beginning
of year 281 91 637
___________ ___________ ___________
Cash and cash equivalents at end of year $162 $281 $91
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash (paid) received during the year for:
Interest ($10,403) ($8,570) ($7,914)
Income taxes, net of amounts received
from subsidiaries (1,862) (6,540) 6,207
</TABLE>
<PAGE>
<PAGE>
<TABLE>
SCHEDULE V
SUPPLEMENTARY INSURANCE INFORMATION
(Dollars in thousands)
<CAPTION>
Column Column Column Column Column Column
A B C D E F
______________________________________________________________________
Future
Policy Other
De- Benefits, Policy
ferred Losses, Claims Insur-
Policy Claims Un- and ance
Acqui- and earned Bene- Premiums
sition Loss Revenue fits and
Segment Costs Expenses Reserve Payable Charges
______________________________________________________________________
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1993:
Life
insurance $451,180 $5,578,085 $14,451 $5,765 $81,151
Year ended December 31, 1992:
Life
insurance 356,105 4,403,513 12,899 3,310 73,434
Year ended December 31, 1991:
Life
insurance 272,176 3,499,415 13,393 4,044 80,059
</TABLE>
<TABLE>
<CAPTION>
Column Column Column Column Column Column
A G H I J K
______________________________________________________________________
Amorti-
Benefits zation
Claims, of
Losses Deferred
Net and Policy Other
Invest- Settle- Acqui- Opera-
ment ment sitions ting Premiums
Segment Income Expenses Costs Expenses Written
______________________________________________________________________
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1993:
Life
insurance $434,069 $358,172 $42,078 $20,185 --
Year ended December 31, 1992:
Life
insurance 362,433 316,026 20,176 18,179 --
Year ended December 31, 1991:
Life
insurance 311,817 285,744 19,107 34,687 --
</TABLE>
<PAGE>
<PAGE>
<TABLE>
SCHEDULE VI
REINSURANCE
EQUITABLE OF IOWA COMPANIES AND SUBSIDIARIES
(Dollars in thousands, except per share data)
<CAPTION>
Column A Column B Column C Column D Column E Column F
________________________________________________________________________________
Percentage
Ceded to Assumed of Amount
Gross Other from Other Net Assumed
Amount Companies Companies Amount to Net
________________________________________________________________________________
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1993:
Life insurance in
force $9,617,881 $1,326,020 $ * $8,291,861 --
============ ============ ========= =========== ==========
Insurance premiums
and charges $86,615 $5,653 $189 $81,151 --
============ ============ ========= =========== ==========
Year ended December 31, 1992:
Life insurance in
force $8,927,326 $1,242,003 $ * $7,685,323 --
============ ============ ========= =========== ==========
Insurance premiums
and charges $78,639 $5,845 $640 $73,434 1%
============ ============ ========= =========== ==========
Year ended December 31, 1991:
Life insurance in
force $8,391,732 $1,066,555 $ * $7,325,177 --
============ ============ ========= =========== ==========
Insurance premiums
and charges $84,452 $4,599 $206 $80,059 --
============ ============ ========= =========== ==========
</TABLE>
<PAGE>
<PAGE>
<TABLE>
SCHEDULE IX
SHORT-TERM BORROWINGS
EQUITABLE OF IOWA COMPANIES AND SUBSIDIARIES
(Dollars in thousands, except per share data)
<CAPTION>
Maximum Average Weighted
Amount Amount Average
Outstand- Outstand- Interest
Weighted ing ing Rate
Balance Average During During During
Category of Aggregate at End of Interest the the the
Short-Term Borrowings Period Rate Period Period 1 Period 2
________________________________________________________________________________
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1993:
Commercial paper
notes $34,000 3.41% $57,000 $36,876 3.45%
Year ended December 31, 1992:
Commercial paper
notes $28,774 4.28% $35,900 $29,942 4.23%
Year ended December 31, 1991:
Commercial paper
notes $34,800 5.28% $101,465 $53,049 6.57%
Other short-term
borrowings -- -- $88,000 $10,405 7.82%
</TABLE>
1 The average amount outstanding during the period was computed on a daily
average basis.
2 The weighted average interest rate during the period was computed by
dividing the actual interest expense by average short-term debt
outstanding.<PAGE>
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned thereunto duly authorized.
EQUITABLE OF IOWA COMPANIES
(Registrant)
Dated March 4, 1994 By \s\Frederick S. Hubbell
__________________________
Frederick S. Hubbell
President
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.
Signatures Title
________________________ ___________________
\s\Frederick S. Hubbell Chairman of the Board,
________________________ President, Chief
Frederick S. Hubbell Executive Officer
(principal executive officer) and Director
\s\Paul E. Larson Executive Vice President
________________________ and Chief Financial
Paul E. Larson Officer
(principal financial officer)
\s\David A. Terwilliger Vice President and
________________________ Controller
David A. Terwilliger
(principal accounting officer)
\s\Richard B. Covey Director
________________________
Richard B. Covey
\s\Doris M. Drury Director
________________________
Doris M. Drury
<PAGE>
<PAGE>
Signatures Title
________________________ ___________________
\s\James L. Heskett Director
________________________
James L. Heskett
\s\Richard S. Ingham Director
________________________
Richard S. Ingham
\s\Robert E. Lee Director
________________________
Robert E. Lee
\s\James E. Luhrs Director
________________________
James E. Luhrs
\s\Jack D. Rehm Director
________________________
Jack D. Rehm
\s\Thomas N. Urban Director
________________________
Thomas N. Urban
\s\Hans F.E. Wachtmeister Director
________________________
Hans F.E. Wachtmeister
\s\Richard S. White Director
________________________
Richard S. White
Signature date: March 4, 1994
<PAGE>
<PAGE>
INDEX
Exhibits to Annual Report on Form 10-K
Year ended December 31, 1993
EQUITABLE OF IOWA COMPANIES
3 Articles of Incorporation and By-Laws
(a) Restated Articles of Incorporation as amended through April 29,
1993, filed as Exhibit 3(a) to Form 10-Q for the period ended
June 30, 1993, is incorporated by reference
(b) Amended and restated By-Laws filed as Exhibit 2 to Form 8-K dated
November 11, 1991, is incorporated by reference
4 Instruments Defining the Rights of Security Holders, Including
Indentures
(a) Letter Agreement to furnish Commission upon request copies of
other long-term debt instruments
(b)(i) Rights Agreement filed as Exhibit 1 to Form 8-K dated April 30,
1992, is incorporated by reference
(ii) First amendment to Rights Agreement changing Rights Agent filed
as Exhibit 4(b)(ii) to Form 10-Q for the period ended September
30, 1992, is incorporated by reference
(iii) Second amendment to Rights Agreement dated April 29, 1993,
adjusting Purchase Price filed as Exhibit 2.2 to Form 8-A/A dated
May 13, 1993, is incorporated by reference
10 Material Contracts
(a) Executive compensation plans and arrangements *
(i) Restated Executive Severance Pay Plan filed as Exhibit 10(a) to
Form 10-K for the year ended December 31, 1992, is incorporated
by reference
(ii) Directors' Deferred Compensation Plan filed as Exhibit 10(b) to
Form 10-K for the year ended December 31, 1989, is incorporated
by reference
(iii) 1982 Stock Incentive Plan filed as Exhibit 10(c) to Form 10-K for
the year ended December 31, 1989, is incorporated by reference
(iv) Excess Benefit Plan filed as Exhibit 10(d) to Form 10-K for the
year ended December 31, 1989, is incorporated by reference
(v) Supplemental Employee Retirement Plan filed as Exhibit 10(e) to
Form 10-K for the year ended December 31, 1989, is incorporated
by reference
(vi) Executive Flexible Perquisite Program filed as Exhibit 10(f) to
Form 10-K for the year ended December 31, 1992, is incorporated
by reference
(vii) Key Employee Incentive Plan filed as Exhibit 10(g) to Form 10-K
for the year ended December 31, 1992, is incorporated by
reference
<PAGE>
<PAGE>
INDEX
Exhibits to Annual Report on Form 10-K
Year ended December 31, 1993
EQUITABLE OF IOWA COMPANIES
(viii) 1992 Stock Incentive Plan, as amended, Registration Statement No.
33-57492 filed as Exhibit 10(i) to Form 10-Q for the period ended
March 31, 1993, is incorporated by reference
(ix) James E. Luhrs Consulting Agreement filed as Exhibit 10(j) to
Form 10-Q for the period ended June 30, 1992, is incorporated by
reference
* Management contracts or compensation plans required to be
filed as an Exhibit pursuant to Item 14(c) of Form 10(K).
11 Statement re: Computation of Per Share Earnings
21 Subsidiaries List
23 Consent of Experts and Counsel
(a) Consent of independent auditors
(b) Consent of counsel (not required)
27 Financial Data Schedule (not required)
99 Additional Exhibits
Independence Policy filed as an Exhibit to Form 8-K dated
November 11, 1991, is incorporated by reference
<PAGE>
Exhibit 4
AGREEMENT TO FURNISH
DEBT INSTRUMENTS
March 4, 1994
Securities and Exchange Commission
450 5th Street NW
Washington, DC 20549
Ladies/Gentlemen:
The company agrees to furnish the Commission upon request copies of the
following long-term debt instruments:
1. Notes payable dated June 17, 1991, bearing interest at 9.3%,
maturing June 1, 1998 in remaining principal amount of
$49,996,000.
2. Trust Indenture, dated January 5, 1979, with Iowa-Des Moines
National Bank, as Trustee, re: Installment Notes in remaining
principal amount of $218,020 which matured and were paid on
January 3, 1994.
3. Credit Agreement between Equitable of Iowa Companies and Morgan
Guaranty Trust Company of New York, as Agent, and the Bank of New
York, as Administrative Agent, and participating banks, dated May
4, 1993, re: line of credit in amount of $100,000,000.
4. Note Purchase Agreement dated August 19, 1986, between Walnut Mall
Limited Partnership ("Issuer") and Teacher Retirement System of
Texas ("Purchaser") in the remaining principal amount of
$26,310,013 due through August 19, 1996.
5. Trust Indenture dated December 1, 1984, with Security National
Bank of Sioux City, Iowa, as Trustee, re: industrial development
revenue bonds in remaining principal amount of $3,090,000 due in
various amounts on December 1, 1986 and each anniversary thereof
through December 1, 1999.
Very truly yours,
\s\ John A. Merriman
John A. Merriman
General Counsel/Secretary
Equitable of Iowa Companies
<PAGE>
<TABLE>
Exhibit 11
EQUITABLE OF IOWA COMPANIES
Consolidated Net Income Per Share Computation
<CAPTION>
Year ended December 31 1993 1992 1991
_______________________________________________________________________________
(Dollars in thousands, except per share data)
<S> <C> <C> <C>
Primary:
Net income $87,156 $54,506 $40,530
=========== =========== ===========
Average shares
outstanding 29,540,274 28,688,660 28,392,860
=========== =========== ===========
Net income per share $2.95 $1.90 $1.43
=========== =========== ===========
Fully diluted:
Net income $87,156 $54,506 $40,530
Add: Interest on 9%
convertible installment
notes 20 14 28
___________ ___________ ___________
Total $87,176 $54,520 $40,558
=========== =========== ===========
Average shares
outstanding 29,540,274 28,688,660 28,392,860
Add: Net effect of dilutive
stock options - based on
the treasury stock method
using year-end market price,
if higher than average
market price 724,264 731,092 683,704
Assumed conversion of
9% convertible installment
notes 36,865 39,510 44,896
___________ ___________ ___________
Total 30,301,403 29,459,262 29,121,460
=========== =========== ===========
Net income per share $2.88 $1.85 $1.39
=========== =========== ===========
</TABLE>
NOTE: This computation is required by Regulation S-K Item 601 and is
filed as an exhibit under Item 14a(3) of Form 10-K. Fully diluted
earnings per share calculated above has not been presented on the
face of the company's Consolidated Statements of Income because
dilution is less than three percent and, therefore, presentation is
not required by Accounting Principles Board Opinion No. 15.
<PAGE>
Exhibit 21
The company's subsidiaries are:
Name State of Incorporation
Equitable Life Insurance Company of Iowa Iowa
Locust Street Securities, Inc. Iowa
Equitable Investment Services, Inc. Iowa
Tower Locust, Ltd. Iowa
Shiloh Farming Company Louisiana
Walnut Investments, Ltd. Iowa
All are wholly-owned.
USG Annuity & Life Company, an Oklahoma corporation, is a wholly-owned
subsidiary of Equitable Life Insurance Company of Iowa. Equitable American
Insurance Company, an Iowa corporation, is a wholly-owned subsidiary of
Equitable Life Insurance Company of Iowa. In addition, these entities own
other subsidiaries which are not considered in the aggregate to be a
significant subsidiary as defined in Securities and Exchange Commission
rules.
All subsidiaries do business only under their corporate names.
<PAGE>
Exhibit 23(a)
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 33-27838) pertaining to the Equitable of Iowa Companies
(1982) Stock Incentive Plan in the Registration Statement (Form S-8 No.
33-57492), pertaining to the Equitable of Iowa Companies 1992 Stock
Incentive Plan, in the Registration Statement (Form S-8 No. 33-57484),
pertaining to the Equitable of Iowa Companies Deferred Profit Sharing and
Retirement Savings Plan and Trust, and in the Registration Statement (Form
S-8 No. 33-51091) pertaining to the Equitable of Iowa Companies Employee
Stock Purchase Plan and the respective related Prospectuses, of our report
dated February 10, 1994, with respect to the financial statements and
schedules of Equitable of Iowa Companies and subsidiaries included in the
Annual Report (Form 10-K) for the year ended December 31, 1993.
\s\ Ernst & Young
Des Moines, Iowa
March 2, 1994
