SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
=========
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1994
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 0-8590
Equitable of Iowa Companies
(Exact name of registrant as specified in its charter)
Iowa 42-1083593
(State or other jurisdiction of (IRS employer identification no.)
incorporation or organization)
604 Locust Street, Des Moines, Iowa 50306
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (515) 245-6911
__________________________________________________________________________
Former name, former address and formal fiscal year, if changed since last
report
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes /X/ No / /
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all
documents and reports required to be filed by Section 12, 13 or 15(d)
of the Securities Exchange Act of 1934 subsequent to the distribution
of securities under a plan confirmed by a court. Yes / / No / /
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date: 31,640,326
shares of Common Stock as of August 1, 1994.
FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Person for whom the Financial Information is given: EQUITABLE OF IOWA
COMPANIES AND ITS
SUBSIDIARIES
Consolidated Statements of Income (Unaudited):
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
June 30, 1994 June 30, 1993
_____________ _____________
(Current Year) (Preceding Year)
(Dollars in thousands)
<S> <C> <C>
REVENUES:
Universal life and annuity
product charges $10,607 $8,245
Traditional life insurance premiums 11,403 11,785
Net investment income 125,398 106,068
Realized gains on investments 7,705 8,835
Other income 4,177 4,339
_____________ _____________
159,290 139,272
BENEFITS AND EXPENSES:
Universal life and annuity product benefits:
Interest credited to account balances 77,040 65,414
Benefit claims incurred in excess of
account balances 1,281 1,656
Traditional life insurance benefits:
Death benefits 6,462 4,730
Other benefits 8,280 8,351
Increase (decrease) in future policy benefits:
Life and annuity 43 797
Other contracts (161) 6
Distributions to participating
policyholders 6,180 6,257
Underwriting, acquisition and insurance expenses:
Commissions 43,037 25,879
General expenses 10,313 8,133
Insurance taxes 2,388 1,454
Policy acquisition costs deferred (52,221) (30,940)
Amortization of deferred policy
acquisition costs 12,308 11,580
_____________ _____________
114,950 103,317
Interest expense 1,995 2,570
Other expenses 2,295 2,036
_____________ _____________
119,240 107,923
_____________ _____________
40,050 31,349
</TABLE>
Consolidated Statements of Income (Unaudited): (CONTINUATION)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
June 30, 1994 June 30, 1993
_____________ _____________
(Current Year) (Preceding Year)
(Dollars in thousands
except per share data)
<S> <C> <C>
Income taxes (credit):
Current $13,067 $12,420
Deferred 1,153 (1,656)
_____________ _____________
14,220 10,764
_____________ _____________
25,830 20,585
Equity income, net of related tax benefit
of $108 in 1994 and $63 in 1993 183 122
_____________ _____________
NET INCOME 26,013 20,707
============= =============
NET INCOME PER COMMON SHARE (average
shares used: 1994 - 31,610,708;
1993 - 29,071,449): $0.82 $0.71
============= =============
CASH DIVIDENDS PAID PER COMMON SHARE $0.12 $0.105
</TABLE>
Consolidated Statements of Income (Unaudited):
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
June 30, 1994 June 30, 1993
_____________ _____________
(Current Year) (Preceding Year)
(Dollars in thousands)
<S> <C> <C>
REVENUES:
Universal life and annuity
product charges $21,111 $16,519
Traditional life insurance premiums 23,213 23,746
Net investment income 245,299 207,604
Realized gains on investments 13,714 16,477
Other income 8,572 7,704
_____________ _____________
311,909 272,050
BENEFITS AND EXPENSES:
Universal life and annuity product benefits:
Interest credited to account balances 149,877 128,542
Benefit claims incurred in excess of
account balances 2,796 2,668
Traditional life insurance benefits:
Death benefits 13,084 11,224
Other benefits 15,915 16,913
Increase (decrease) in future policy benefits:
Life and annuity 1,178 1,096
Other contracts 44 (568)
Distributions to participating
policyholders 12,254 12,857
Underwriting, acquisition and insurance expenses:
Commissions 73,605 51,139
General expenses 19,619 15,905
Insurance taxes 4,633 3,111
Policy acquisition costs deferred (88,650) (61,646)
Amortization of deferred policy
acquisition costs 23,328 17,625
_____________ _____________
227,683 198,866
Interest expense 4,185 5,034
Other expenses 5,125 4,409
_____________ _____________
236,993 208,309
_____________ _____________
74,916 63,741
</TABLE>
Consolidated Statements of Income (Unaudited): (CONTINUATION)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
June 30, 1994 June 30, 1993
_____________ _____________
(Current Year) (Preceding Year)
(Dollars in thousands
except per share data)
<S> <C> <C>
Income taxes:
Current $24,026 $19,428
Deferred 2,346 3,382
_____________ _____________
26,372 22,810
_____________ _____________
48,544 40,931
Equity income, net of related tax benefit
of $56 in 1994 and $42 in 1993 71 82
_____________ _____________
NET INCOME 48,615 41,013
============= =============
NET INCOME PER COMMON SHARE (average
shares used: 1994 - 31,570,348;
1993 - 29,037,045): $1.54 $1.41
============= =============
CASH DIVIDENDS PAID PER COMMON SHARE $0.225 $0.195
</TABLE>
Consolidated Balance Sheets (Unaudited):
<TABLE>
<CAPTION>
June 30, 1994 December 31, 1993
_____________ _________________
(Dollars in thousands)
<S> <C> <C>
ASSETS
Investments:
Fixed maturities:
Held for investment, at amortized cost
(market: 1994 - $4,860,457;
1993 - $5,407,358) $5,010,085 $5,078,226
Available for sale, at market
(cost: 1994 - $790,726; 1993 - $0) 774,811 --
Equity securities, at market
(cost: 1994 - $250; 1993 - $250) 83 83
Mortgage loans on real estate 436,557 346,829
Real estate, less allowances for
depreciation of $4,785 in 1994
and $4,580 in 1993 19,463 20,773
Policy loans 175,833 176,849
Short-term investments 19,164 67,619
_____________ _____________
TOTAL INVESTMENTS 6,435,996 5,690,379
Cash and cash equivalents 10,915 5,190
Securities and indebtedness of
related parties 9,123 11,791
Accrued investment income 100,743 92,473
Notes and other receivables 21,960 27,366
Deferred policy aquisition costs 522,431 451,180
Property and equipment, less
allowances for depreciation of
$5,698 in 1994 and $4,259 in 1993 7,412 7,431
Current income tax recoverable 3,499 --
Deferred income tax benefit 12,928 11,583
Intangible assets 2,689 3,346
Other assets 40,667 36,668
Separate account assets 86,367 94,028
_____________ _____________
TOTAL ASSETS $7,254,730 $6,431,435
============= =============
</TABLE>
Consolidated Balance Sheets (Unaudited):
<TABLE>
<CAPTION>
June 30, 1994 December 31, 1993
_____________ _________________
(Dollars in thousands)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Policy liabilities and accruals:
Future policy benefits:
Traditional life insurance
products $776,368 $774,356
Universal life and annuity
products 5,500,551 4,803,729
Unearned revenue reserve 13,882 14,451
Other policy claims and benefits 5,106 5,765
_____________ _____________
6,295,907 5,598,301
Other policyholders' funds:
Supplementary contracts without
life contingencies 11,877 11,729
Advance premiums and other deposits 859 925
Accrued dividends 12,743 13,251
_____________ _____________
25,479 25,905
Current income taxes payable -- 2,293
Notes and loans payable:
Commercial paper notes 139,000 34,000
Convertible subordinated installment
notes -- 218
Long-term bonds -- 49,996
_____________ _____________
139,000 84,214
Other liabilities 143,737 98,732
Separate account liabilities 86,367 94,028
_____________ _____________
TOTAL LIABILITIES 6,690,490 5,903,473
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, issued and outstanding 31,640,326
shares in 1994 and 31,504,586 in 1993 31,640 31,505
Additional paid-in capital 78,072 75,841
Unrealized appreciation (depreciation)
on fixed maturity securities (6,480) --
Unrealized appreciation (depreciation)
on marketable equity securities (167) (167)
Retained earnings 463,578 422,093
Unearned compensation (deduction) (2,403) (1,310)
_____________ _____________
TOTAL STOCKHOLDERS' EQUITY 564,240 527,962
_____________ _____________
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $7,254,730 $6,431,435
============= =============
</TABLE>
Consolidated Statement of Cash Flows (Unaudited):
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
June 30, 1994 June 30, 1993
_____________ _____________
(Current Year) (Preceding Year)
(Dollars in thousands)
<S> <C> <C>
OPERATING ACTIVITIES
Net income $48,615 $41,013
Adjustments to reconcile net income to
net cash provided by operations:
Adjustments related to universal life
and annuity products:
Interest credited to account balances 149,877 128,542
Charges for mortality and
administration (22,048) (15,286)
Deferral of unearned revenues 8 1,088
Amortization of unearned revenue
reserve (724) (1,362)
Increase in traditional life policy
liabilities and accruals 1,407 1,434
Decrease in other policyholders' funds (426) (583)
Increase in accrued investment income (8,270) (8,285)
Policy acquisition costs deferred (88,650) (61,646)
Amortization of deferred policy
acquisition costs 23,328 17,625
Change in other assets, other
liabilities, and accrued income taxes 42,730 26,693
Provision for depreciation and
amortization 1,764 (206)
Provision for deferred income taxes 2,161 3,439
Share of (earnings) losses of related
parties 161 (124)
Realized gains on investments (13,714) (16,477)
_____________ _____________
NET CASH PROVIDED BY OPERATING
ACTIVITIES 136,219 115,865
INVESTING ACTIVITIES
Sale, maturity, or repayment of investments:
Fixed maturities - held for investment 189,312 489,900
Fixed maturities - available for sale 155,594 --
Mortgage loans on real estate 20,337 21,941
Real estate 527 31
Policy loans 15,589 13,139
Short-term investments - net 48,455 36,862
_____________ _____________
429,814 561,873
Acquisition of investments:
Fixed maturities - held for investment (947,452) (1,051,019)
Fixed maturities - available for sale (105,343) --
Mortgage loans on real estate (109,952) (45,398)
Real estate (309) (17)
Policy loans (14,573) (13,141)
_____________ _____________
(1,177,629) (1,109,575)
</TABLE>
Consolidated Statement of Cash Flows (Unaudited): (CONTINUATION)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
June 30, 1994 June 30, 1993
_____________ _____________
(Current Year) (Preceding Year)
(Dollars in thousands)
<S> <C> <C>
INVESTING ACTIVITIES - continued
Disposal of investments accounted for
by the equity method $2,795 $667
Additions to investments accounted for
by the equity method (1) (325)
Repayments of notes receivable 1 4
Issuance of notes receivable (1,287) --
Sales of property and equipment 253 233
Purchases of property and equipment (1,402) (1,840)
_____________ _____________
NET CASH USED IN INVESTING ACTIVITIES (747,456) (548,963)
FINANCING ACTIVITIES
Repayment of notes and loans payable (50,214) (7)
Issuance (repayment) of commercial
paper - net 105,000 12,176
Receipts from universal life policies
and annuity contracts credited to
policyholder account balances 793,180 531,368
Return of policyholder account balances
on universal life policies and
annuity contracts (224,187) (116,085)
Issuance of stock under employee
stock plans and upon debt
conversion 314 466
Cash dividends paid (7,131) (5,685)
_____________ _____________
NET CASH PROVIDED BY FINANCING
ACTIVITIES 616,962 422,233
_____________ _____________
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 5,725 (10,865)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 5,190 6,210
_____________ _____________
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $10,915 ($4,655)
============= =============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest $3,953 $4,859
Income taxes 35,458 17,720
</TABLE>
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for annual financial statements. In the opinion of management,
all adjustments considered necessary for a fair presentation have been
included. All adjustments were of a normal recurring nature, unless
otherwise noted in Management's Discussion and Analysis and the Notes to
Financial Statements. Operating results for the three and six months ended
June 30, 1994 are not necessarily indicative of the results that may be
expected for the year ended December 31, 1994. For further information,
refer to the consolidated financial statements and footnotes thereto
included in the company's Annual Report on Form 10-K for the year ended
December 31, 1993.
NOTE 2 -- INVESTMENT OPERATIONS
Effective January 1, 1994, the company adopted Statement of Financial
Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments
in Debt and Equity Securities". Pursuant to SFAS No. 115, fixed maturity
securities that the company has the positive intent and ability to hold to
maturity are designated as "held for investment". Held for investment
securities are reported at cost adjusted for amortization of premiums and
discounts. Changes in the market value of these securities, except for
declines that are other than temporary, are not reflected in the company's
financial statements. Fixed maturity securities which may be sold are
designated as "available for sale". Available for sale securities are
reported at market value and unrealized gains and losses on these
securities are included directly in stockholders' equity, after adjustment
for changes in deferred policy acquisition costs, policy reserves and
deferred income taxes. Transfers of securities between categories are
restricted and are recorded at fair value at the time of transfer.
Securities that are determined to have a decline in value that is other
than temporary are written down to fair value as a new cost basis by a
charge to realized losses in the company's Statement of Income. 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.
Prior to the adoption of SFAS No. 115, all of the company's fixed maturity
securities were classified as "held to maturity". Fixed maturity
securities were written down to net realizable value (the sum of the
estimated nondiscounted cash flows from the securities) if the securities
were determined to have declines in value that were "other than temporary".
Future investment income was recognized at the rate implicit in this
calculation of net realizable value.
Equity securities (common and nonredeemable 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.
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 impaired (i.e. when it is probable that
the company will be unable to collect all amounts due according to the
contractual terms of the loan agreement), the carrying value of the
mortgage loan is reduced to the present value of expected future cash flows
from the loan, discounted at the loan's effective interest rate, or to the
loan's observable market price, or the fair value of the underlying
collateral. The carrying value of impaired loans is reduced by the
establishment of a valuation allowance which is adjusted at each reporting
date for significant changes in the calculated value of the loan. Changes
in this valuation allowance are charged or credited to income.
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 as determined at or before the foreclosure date. After foreclosure,
foreclosed real estate is carried at the lower of fair value less estimated
sale costs, or cost.
Policy loans are reported at unpaid principal. Short-term investments are
reported at cost adjusted for amortization of premiums and accrual of
discounts (which approximates estimated market value for these securities).
Estimated 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
over U.S. Treasury bonds based upon interest rates and a risk assessment of
the 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.
The cumulative effect of adopting SFAS No. 115 was to increase
stockholders' equity by $22,516,000, or $0.71 per share, at January 1,
1994. The company analyzes projected cash flows from investments and
policy liabilities under a variety of economic scenarios to determine what
portion of its investment portfolio might need to be sold under these
scenarios. Based upon this analysis and other factors, the company
designates a portion of its fixed maturity securities portfolio as
"available for sale". On June 30, 1994, fixed income securities with an
amortized cost of $790,726,000 and an estimated market value of
$774,811,000 were designated as available for sale. Unrealized holding
losses on these securities, net of adjustments to deferred policy
acquisition costs, unearned revenue reserves and related deferred income
taxes, decreased stockholders' equity by $6,480,000, or $0.20 per share, at
June 30, 1994.
At June 30, 1994 and December 31, 1993, amortized cost, gross unrealized
gains and losses and estimated market values of fixed maturity securities
held for investment are as follows:
<TABLE>
<CAPTION>
HELD FOR INVESTMENT
Gross Gross Estimated
Amortized Unrealized Unrealized Market
June 30, 1994 Cost Gains Losses Value
_____________________________________________________________________
U.S. government and (Dollars in thousands)
governmental agencies
and authorities:
<S> <C> <C> <C> <C>
Mortgage-backed
securities $303,711 $6,600 ($8,913) $301,398
Other 3,989 114 (69) 4,034
States, municipalities
and political
subdivisions 15,709 75 (580) 15,204
Foreign governments 10,573 917 -- 11,490
Public utilities 1,193,816 14,826 (66,248) 1,142,394
Investment grade
corporate 1,500,552 54,963 (53,242) 1,502,273
Below investment grade
corporate 228,041 1,458 (9,120) 220,379
Mortgage-backed
securities 1,752,985 20,328 (110,474) 1,662,839
Redeemable preferred
stocks 709 -- (263) 446
___________ ___________ ___________ ___________
TOTAL HELD FOR
INVESTMENT $5,010,085 $99,281 ($248,909) $4,860,457
=========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
December 31, 1993 Cost Gains Losses Value
______________________________________________________________________
U.S. government and (Dollars in thousands)
governmental agencies
and authorities:
<S> <C> <C> <C> <C>
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 HELD FOR
INVESTMENT $5,078,226 $354,088 ($24,956) $5,407,358
=========== =========== =========== ===========
</TABLE>
At June 30, 1994, amortized cost, gross unrealized gains and losses and
estimated market values of fixed maturity securities designated as
available for sale are as follows:
<TABLE>
<CAPTION>
AVAILABLE FOR SALE
Gross Gross Estimated
Amortized Unrealized Unrealized Market
June 30, 1994 Cost Gains Losses Value
______________________________________________________________________
U.S. government and (Dollars in thousands)
governmental agencies
and authorities:
<S> <C> <C> <C> <C>
Mortgage-backed
securities $19,083 $ -- ($245) $18,838
Public utilities 78,687 1,456 (6,909) 73,234
Investment grade
corporate 345,742 12,302 (19,463) 338,581
Below investment grade
corporate 182,605 3,204 (10,024) 175,785
Mortgage-backed
securities 164,609 3,987 (223) 168,373
___________ ___________ ___________ ___________
TOTAL AVAILABLE
FOR SALE $790,726 $20,949 ($36,864) $774,811
=========== =========== =========== ===========
</TABLE>
No fixed maturity securities were designated as available for sale on December
31, 1993. Amortized cost and estimated market value of debt securities at
June 30, 1994, 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>
Amortized Estimated
HELD FOR INVESTMENT Cost Market Value
_____________________________________________________________________
(Dollars in thousands)
<S> <C> <C>
Due in one year or less $651 $651
Due after one year through five years 39,322 40,472
Due after five years through ten years 512,495 507,091
Due after ten years 2,400,921 2,348,006
_____________ _____________
2,953,389 2,896,220
Mortgage-backed securities 2,056,696 1,964,237
_____________ _____________
TOTAL HELD FOR INVESTMENT $5,010,085 $4,860,457
============= =============
</TABLE>
<TABLE>
<CAPTION>
Amortized Estimated
AVAILABLE FOR SALE Cost Market Value
_____________________________________________________________________
(Dollars in thousands)
<S> <C> <C>
Due after one year through five years $11,000 $10,968
Due after five years through ten years 108,100 106,312
Due after ten years 487,934 470,320
_____________ _____________
607,034 587,600
Mortgage-backed securities 183,692 187,211
_____________ _____________
TOTAL AVAILABLE FOR SALE $790,726 $774,811
============= =============
</TABLE>
Short-term investments with maturities of 30 days or less have been excluded
from the above schedules, since amortized cost approximates market value for
those securities.
Carrying value and estimated market value of mortgage-backed securities,
which comprise 38.8% of the company's investment in fixed maturity
securities as of June 30, 1994, are as follows:
<TABLE>
<CAPTION>
Carrying Estimated
Value Market Value
_____________________________
(Dollars in thousands)
<S> <C> <C>
Mortgage-backed securities:
Government and agency guaranteed pools:
Pass through $179,780 $183,875
Sequential pay 142,769 136,361
Private mortgage pools 28,651 25,748
Mezzanines 40,567 38,704
CMO's and REMIC's:
Sequential pay 1,493,934 1,439,160
Planned amortization class 17,596 18,000
Targeted amortization class 340,610 309,600
_____________ _____________
TOTAL MORTGAGE-BACKED SECURITIES $2,243,907 $2,151,448
============= =============
</TABLE>
During periods of significant interest rate volatility, the mortgages
underlying mortgage-backed securities may prepay more quickly or more
slowly than anticipated. If the principal amount of such mortgages are
prepaid earlier than anticipated during periods of declining interest
rates, investment income may decline due to reinvestment of these funds at
lower current market rates. If principal repayments are slower than
anticipated during periods of rising interest rates, increases in investment
yield may lag behind increases in interest rates because funds will remain
invested at lower historical rates rather than reinvested at higher current
rates. To mitigate this prepayment volatility, the company invests primarily
in intermediate tranche collateralized mortgage obligations ("CMOs"). CMOs
are pools of mortgages that are segregated into sections, or tranches, which
provide sequential retirement of bonds rather than pro-rata share of principal
return in the pass-through structure. The company does not hold any "interest
only" or "principal only" mortgage-backed securities. Further, the company
has not purchased obligations at significant premiums, thereby limiting
exposure to loss during periods of accelerated prepayments. At June 30,
1994, unamortized premiums on mortgage-backed securities totalled $5,301,000
and unaccrued discounts on mortgage-backed securities totalled $61,117,000.
An analysis of sales, maturities and principal repayments of the company's
fixed maturities portfolio for the six months ended June 30, 1994 and 1993
is as follows:
<TABLE>
<CAPTION>
Gross Gross Proceeds
Amortized Realized Realized from
Cost Gains Losses Sale
_______________________________________________
<S> <C> <C> <C> <C>
Six months ended June 30, 1994
- - ------------------------------
Scheduled principal
repayments, calls and
tenders
Held for investment $181,832 $7,480 $-- $189,312
Available for sale 123,246 4,333 -- 127,579
Sales - available for
sale 24,913 3,102 -- 28,015
___________ ___________ ___________ ___________
TOTAL $329,991 $14,915 $-- $344,906
=========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
Gross Gross Proceeds
Amortized Realized Realized from
Cost Gains Losses Sale
_______________________________________________
<S> <C> <C> <C> <C>
Six months ended June 30, 1993
- - ------------------------------
Scheduled principal
repayments, calls and
tenders $465,518 $22,362 $-- $487,880
Sales 1,933 87 -- 2,020
___________ ___________ ___________ ___________
TOTAL $467,451 $22,449 $-- $489,900
=========== =========== =========== ===========
</TABLE>
No held for investment securities were sold and there were no transfers
between the held for investment and available for sale portfolios during
the six months ended June 30, 1994. During the six months ended June 30,
1994, the change in the net unrealized gain or loss on available for sale
securities included in stockholders' equity, net of adjustments, amounted
to $28,996,000 of net depreciation.
At June 30, 1994, the company owned one equity security with a book value
of $250,000 and an estimated market value of $83,000, resulting in gross
unrealized depreciation of $167,000.
Effective January 1, 1994, the company adopted SFAS No. 114, "Accounting by
Creditors for Impairment of a Loan". The adoption of SFAS No. 114 had no
impact the on company's financial statements at January 1, 1994. During the
six months ended June 30, 1994, one mortgage loan with a carrying value of
$3,645,000 was restructured. As a result of this restructuring, a
valuation allowance of $66,000 was established on the loan. In addition,
the company received a new appraisal on one of its real estate properties
during the quarter ended March 31, 1994. This appraisal indicated that the
fair value of this property had declined below its carrying value. As a
result of this determination, the company established a valuation allowance
totalling $1,019,000 to reduce the value of this property to its estimated
fair value, less costs to sell the property.
The carrying value of investments which have been non-income producing for
the twelve months preceding June 30, 1994 includes: fixed maturities -
$80,000; mortgage loans on real estate - $250,000; and real estate -
$239,000.
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 June 30, 1994.
NOTE 3 -- 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 surplus relief
reinsurance.
Reinsurance contracts do not relieve the company from 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 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 June
30, 1994, 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 $11,183,000 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 $10,130,000 at June 30, 1994
for reserve credits on reinsured policies. Insurance premiums and product
charges have been reduced by $3,020,000 in the first six months and
$1,287,000 in the second quarter of 1994 compared to $2,726,000 and
$1,264,000, respectively, in the same periods of 1993, as a result of the
cession agreements. Insurance benefits and expenses have been reduced by
$1,738,000 in the first six months and $1,225,000 in the second quarter of
1994 compared to $1,495,000 and $463,000, respectively, in the same periods
of 1993. The amount of reinsurance assumed is not significant.
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 to cover such assessments and regularly reviews
information regarding known failures and revises its estimate of future
guaranty fund assessments accordingly. No additional amounts have been
accrued during the first six months of 1994 and at June 30, 1994, the
remaining reserve for insurance guaranty fund assessments, net of expected
future premium tax credits, totalled $14,555,000. The company believes
this reserve is sufficient to cover expected future insurance guaranty fund
assessments related to known insolvencies at this time.
At June 30, 1994, outstanding commitments to fund mortgage loans on real
estate totalled $32,024,000. In addition, outstanding commitments to
purchase mortgage-backed securities totalled $98,774,000 at June 30, 1994.
ITEM 2.
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 the company's
significant subsidiaries are wholly-owned. 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 $745,617,000, or 13.1%, in the first
six months of 1994 compared to growth of $565,258,000, or 12.7%, for the
same period of 1993, as $810,410,000 of annuity and life insurance premiums
were received during the period. The company manages the growth of its
insurance operations in order to maintain adequate capital ratios. The
company has established a goal of growing assets 20% in 1994.
To support the company's annuities and life insurance products, cash flow
was invested primarily in fixed income investments. At June 30, 1994,
99.7% of the company's investments, excluding policy loans, were in cash
and short-term investments (0.3%) or fixed income investments which consist
of governments and agency mortgage-backed securities (5.6%); investment
grade corporate bonds, as determined by either Standard & Poor's
Corporation ("Standard & Poor's" or "S&P") or Moody's Investors Service
("Moody's") (49.6%); conventional investment grade mortgage-backed
securities (30.7%); below investment grade securities (6.5%); and mortgage
loans on real estate (7.0%).
Effective January 1, 1994, the company adopted Statement of Financial
Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments
in Debt and Equity Securities". The cumulative effect of this change in
accounting method was to increase stockholders' equity by $22,516,000, or
$0.71 per share, at January 1, 1994. The company analyzes projected cash
flows from investments and policy liabilities under a variety of economic
scenarios to determine what portion of its investment portfolio might need
to be sold under these scenarios. Based upon this analysis and other
factors, the company designates a portion of its fixed maturity securities
portfolio as "available for sale". On June 30, 1994, fixed income
securities with an amortized cost of $790,726,000 and an estimated market
value of $774,811,000 were designated as available for sale. Unrealized
holding losses on these securities, net of adjustments to deferred policy
acquisition costs, unearned revenue reserves and related deferred income
taxes, decreased stockholders' equity by $6,480,000, or $0.20 per share, at
June 30, 1994.
At June 30, 1994, 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 $2,192,717 37.9% $2,103,629 37.3%
AA+ to AA- 238,969 4.1% 231,675 4.1%
A+ to A- 1,786,167 30.9% 1,770,877 31.4%
BBB+ to BBB- 980,946 16.9% 956,279 17.0%
BB+ to BB- 324,904 5.6% 318,270 5.6%
B+ to B- 56,899 1.0% 56,899 1.0%
D 5,040 0.1% 5,040 0.1%
Issues not rated by S&P
(by NAIC rating):
Rated 1 (AAA to A-) 78,716 1.4% 77,790 1.4%
Rated 2 (BBB+ to BBB-) 51,302 0.9% 47,603 0.9%
Rated 3 (BB+ to BB-) 63,914 1.1% 61,871 1.1%
Rated 4 (B+ to B-) 4,533 0.1% 4,809 0.1%
Rated 6 (CI, D) 80 0.0% 80 0.0%
Redeemable preferred stock 709 0.0% 446 0.0%
____________ _______ ____________ _______
TOTAL FIXED MATURITIES $5,784,896 100.0% $5,635,268 100.0%
============ ======= ============ =======
</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 $2,151,420 37.1% $2,062,783 36.6%
Aa1 to Aa3 230,724 4.0% 222,890 4.0%
A1 to A3 1,825,827 31.6% 1,805,758 32.0%
Baa1 to Baa3 952,718 16.5% 932,193 16.5%
Ba1 to Ba3 316,057 5.5% 310,105 5.5%
B1 to B3 54,425 0.9% 54,425 1.0%
Ca 5,040 0.1% 5,040 0.1%
Issues not rated by Moody's
(by NAIC rating):
Rated 1 (Aaa to A3) 125,140 2.2% 124,373 2.2%
Rated 2 (Baa1 to Baa3) 54,309 0.9% 50,495 0.9%
Rated 3 (Ba1 to Ba3) 63,914 1.1% 61,871 1.1%
Rated 4 (B1 to B3) 4,533 0.1% 4,809 0.1%
Rated 6 (Ca, C) 80 0.0% 80 0.0%
Redeemable preferred stock 709 0.0% 446 0.0%
____________ _______ ____________ _______
TOTAL FIXED MATURITIES $5,784,896 100.0% $5,635,268 100.0%
============ ======= ============ =======
<FN>
Note: Estimated market values of publicly traded securities are as reported by
an independent pricing service. Estimated 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. Estimated 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").
</TABLE>
Net unrealized depreciation of fixed maturity investments of $165,543,000
was comprised of gross appreciation of $120,230,000 and gross depreciation
of $285,773,000.
The percentage of the company's portfolio invested in below investment
grade securities has remained relatively unchanged during the first six
months of 1994. At June 30, 1994 the carrying value of the company's total
investment in below investment grade securities consisted of investments in
82 issuers totalling $403,826,000, or 6.5% of the company's investment
portfolio compared to 81 issuers totalling $361,869,000, or 6.6%, at
December 31, 1993. 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. At June 30, 1994, the yield on the company's below
investment grade portfolio was 9.8% compared to 8.5% for the company's
investment grade corporate bond portfolio. The company estimates that the
market value of its below investment grade portfolio was $396,164,000, or
98.1% of carrying value, at June 30, 1994.
Below investment grade securities have different characteristics than
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. 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 higher 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, strict investment
policy guidelines, and diversification by company and by industry.
The company analyzes its investment portfolio, including below investment
grade securities, at least quarterly in order to determine if its ability
to realize its carrying value on any investment has been impaired. For
debt and equity securities, if impairment in value is determined to be
other than temporary (i.e. if it is probable that the company will be
unable to collect all amounts due according to the contractual terms of the
security), the cost basis of the impaired security is written down to fair
value, which becomes the security's new cost basis. The amount of the
writedown is included in earnings as a realized loss. Future events may
occur, or additional or updated information may be received, which may
necessitate future 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 June 30, 1994, one below investment grade security was in default. This
security had an original cost of $7,959,000 and had been written down to
$699,000 prior to the adoption of SFAS No. 115. Effective January 1, 1994,
the cost basis of this security was written down to its estimated fair
value of $80,000 and a $619,000 realized loss was charged to earnings. The
carrying value of fixed maturity investments considered to have other than
temporary impairments represent a negligible portion of total investments,
total assets, or total stockholders' equity at June 30, 1994.
During the first six months of 1994, fixed maturity securities designated
as held for investment with a combined amortized cost value of $181,832,000
were called or repaid by their issuers generating realized gains totalling
$7,480,000. Also during the first six months of 1994, fixed maturity
securities designated as available for sale with a combined amortized cost
value of $123,246,000 were called or repaid generating realized gains
totalling $4,333,000. In addition, one investment grade security
designated as available for sale with an amortized cost of $24,913,000 was
sold by the company generating a realized gain of $3,102,000. In total,
pre-tax gains from sales, calls and prepayments of fixed maturity
investments amounted to $14,915,000 in the first six months of 1994.
At June 30, 1994, the company's fixed maturity investment portfolio had a
combined yield of 8.4% compared to 8.4% at March 31, 1994 and 8.5% at
December 31, 1993. Interest rates have risen in recent months and as new
investment rates have begun to rise the decline in the overall yield on the
company's fixed maturity investment portfolio has begun to slow. At June
30, 1994, the average annual interest rate in effect for interest sensitive
products, including annuities and universal life-type policies, and
participating life policies, was 5.9%, compared to 6.1% at December 31,
1993.
Mortgage loans make up approximately 7.0% of the company's investment
portfolio, as compared to an industry average of 14.8%, as reported in the
1993 ACLI Fact Book. The company has resumed active mortgage lending to
broaden its investment alternatives and, as a result of this increase in
lending activity, mortgages outstanding increased to $436,557,000 from
$346,829,000 during the first six months of 1994. The company expects the
carrying value of this asset category to continue to grow over the next
several years. The company's mortgage loan portfolio includes 254 loans
with an average size of $1,719,000. Average seasoning of the company's
mortgage loan portfolio is 9.7 years if weighted by the number of loans, or
3.6 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 June 30, 1994,
the yield on the company's mortgage loan portfolio was 8.7%.
Distribution of these loans by type of collateral and geographic location
is as follows:
<TABLE>
<CAPTION>
% of
# of Carrying Mortgage
Loans Value Portfolio
_____________________________
(Dollars in thousands)
<S> <C> <C> <C>
Collateral Breakdown
- - -------------------------
Farm 4 $188 0.1%
Multi-family residential 38 123,974 28.4%
Industrial 114 119,694 27.4%
Office buildings 31 54,010 12.4%
Retail 64 125,876 28.8%
Other 3 12,815 2.9%
______ ____________ _______
TOTAL 254 $436,557 100.0%
====== ============ =======
</TABLE>
<TABLE>
<CAPTION>
% of
# of Carrying Mortgage
Loans Value Portfolio
_____________________________
(Dollars in thousands)
<S> <C> <C> <C>
Geographic Breakdown
- - -------------------------
New England 2 $1,120 0.3%
Middle Atlantic 26 47,582 10.9%
South Atlantic 25 40,930 9.4%
East North Central 68 119,709 27.4%
West North Central 29 58,728 13.5%
East South Central 9 17,198 3.9%
West South Central 14 26,374 6.0%
Mountain 12 28,642 6.6%
Pacific 69 96,274 22.0%
______ ____________ _______
TOTAL 254 $436,557 100.0%
====== ============ =======
</TABLE>
At June 30, 1994, 0.3% of the commercial mortgage portfolio, or $1,426,000,
was delinquent by 90 days or more. In addition, the company holds
$14,771,000 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 83% of the principal amount of problem mortgages that have been
resolved in the last three years.
During the first six months of 1994, the company determined that the
carrying value of one of its real estate properties exceeded its estimated
fair value, less costs of sale. As a result of this determination the
company established a valuation allowance totalling $1,019,000 on this
property.
In total, the company has experienced a relatively small number of problems
with its total investment portfolio, with only 0.02% of the company's
investments in default at June 30, 1994. The company estimates its total
investment portfolio, excluding policy loans, had a market value equal to
97.6% of carrying value at June 30, 1994.
Other assets
Accrued investment income increased $8,270,000 primarily due to growth of
the company's investment portfolio. Deferred policy acquisition costs
increased $71,251,000 over year-end 1993 levels as the deferral of current
period costs (primarily commissions) incurred to generate insurance and
annuity sales totalled $88,650,000. Amortization of costs deferred in
prior periods totalled $23,328,000. In addition, deferred acquisition
costs were increased by $5,929,000 as a result of adjustments related to the
valuation of fixed maturity securities designated as available for sale under
SFAS No. 115. At June 30, 1994, the company had total assets of
$7,254,730,000, an increase of 12.8% over total assets at December 31, 1993.
Liabilities
In conjunction with the volume of insurance and annuity sales, and the
resulting increase in business in force, the company's liability for policy
liabilities and accruals increased $697,606,000, or 12.5%, during the first
six months of 1994 and totalled $6,295,907,000 at June 30, 1994. Reserves for
the company's annuity policies increased $675,052,000, or 15.2%, during this
period and totalled $5,115,312,000 at June 30, 1994. Life insurance reserves
increased $23,782,000, or 2.1%, during the first half of 1994 and totalled
$1,161,607,000 at June 30, 1994.
Total consolidated debt increased $54,786,000 during the first six months
of 1994 as commercial paper totalling $50,069,000 was issued to offset
timing differences in investment related cash receipts and disbursements,
and amounted to $139,000,000 at June 30, 1994. Other liabilities increased
$45,005,000 from year-end 1993 levels due to increases in liabilities for
premiums received but not yet applied, outstanding checks, securities
purchased but not yet paid for and draft accounts payable related to the
company's asset retention program.
At June 30, 1994, the company had total liabilities of $6,690,490,000
compared to $5,903,473,000 at December 31, 1993, a 13.3% increase.
Equity
At June 30, 1994, stockholders' equity was $564,240,000, or $17.83 per
share, compared to $527,962,000 or $16.76 per common share at year end
1993. Unrealized depreciation of available for sale fixed maturity
securities reduced stockholders' equity by $6,480,000, or $0.20 per share,
after adjustments to accounts such as deferred acquisition costs and
deferred income taxes. The ratio of consolidated debt to total capital was
19.8% at June 30, 1994, up from 13.8% at year-end 1993 as a result of the
increase in short-term borrowings. At June 30, 1994, there were 31,640,326
common shares outstanding compared to 31,504,586 shares at December 31, 1993.
The effects of inflation and changing prices on the company are not
material since insurance assets and liabilities are both primarily monetary
and remain in balance. An 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 June 30,
1994 the company had $139,000,000 in commercial paper notes outstanding, an
increase of $105,000,000 from December 31, 1993 as additional commercial
paper was issued to fund short-term advances to the company's insurance
subsidiaries to smooth timing differences between investment related cash
receipts and disbursements and to provide for short-term operating needs.
The company's commercial paper is rated A1 by Standard and Poor's, P2 by
Moody's and D1 by Duff & Phelps Credit Rating Co.
To enhance short term liquidity and back up its outstanding commercial
paper notes, the company maintains line of credit agreements with several
banks. On March 31, 1994, the company entered into new agreements which
provide for lines of credit totalling $249,000,000. A credit line
totalling $166,000,000 expires on March 31, 1997 and a credit line
totalling $83,000,000 expires on March 30, 1995.
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 approval of the Commissioner of
Insurance 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 December 31st next
preceding; or (b) the statutory net gain from operations for the twelve
month period ending as of the next preceding December 31st. In addition,
the 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 approval of the Iowa
Commissioner of Insurance of approximately $39,335,000 during the remainder
of 1994. The company's insurance subsidiaries have maintained adequate
statutory capital and surplus and have not used surplus relief or financial
reinsurance, which have come under scrutiny by many state insurance
departments.
The NAIC's risk-based capital requirements 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 have complied with
the NAIC's risk-based capital reporting requirements. Amounts reported
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 line of credit agreements totalling $249,000,000 require
the company to maintain certain adjusted consolidated tangible net worth
levels. "Adjusted consolidated tangible net worth" is defined as
consolidated stockholders' equity, adjusted to exclude the effects of SFAS
No. 115, less intangible assets. The most restrictive of these covenants
requires the company to maintain adjusted consolidated tangible net worth
equal to or in excess of the sum of (i) $420,000,000, plus (ii) 50% of
consolidated net income from January 1, 1994 to the end of the most recent
quarter, plus (iii) net proceeds from the issuance of stock from January 1,
1994 to the end of the most recent quarter. At June 30, 1994, $123,411,000
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. On October 21, 1993, the company
completed a primary stock offering of 2,300,000 shares to the public at a
price of $35 per share and received net proceeds of approximately
$76,473,000 from the sale after deduction of the underwriter's discount and
expenses. The company has contributed $70,000,000 of these proceeds to its
insurance subsidiaries. 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 its
operations for the next few years. The company's primary sources of
capital are retained earnings and the issuance of additional common stock
or debt.
On June 1, 1994, the company redeemed notes payable totalling $49,996,000.
Operating cash flows were used to redeem these notes.
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
Sales
Total annuity and life insurance sales, as measured by first year and
single premiums, increased $204,589,000, or 82.7%, to $451,986,000 in the
second quarter and $259,378,000, or 52.1%, to $757,390,000 in the first six
months of 1994. Annuity sales remained strong and increased $202,644,000,
or 83.6%, to $445,137,000 in the second quarter and $256,225,000, or 52.4%,
to $745,478,000 in the first six months of 1994. The company believes that
its commitment to customer service, the quality of its investment portfolio
and its overall financial strength continue to 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 $1,945,000, or 39.6%, to $6,850,000 in the second quarter and
$3,153,000, or 36.0%, to $11,912,000 in the first six months of 1994 due to
increases in sales of the company's universal life and current interest
products.
Revenues
Total revenues increased $20,018,000, or 14.4%, to $159,290,000 in the
second quarter and $39,859,000, or 14.7%, to $311,909,000 in the first six
months of 1994. Universal life insurance and investment product charges
increased $2,362,000, or 28.7%, to $10,607,000 in the second quarter and
$4,592,000, or 27.8%, to $21,111,000 in the first six months of 1994, as
increased surrenders of the company's annuity products generated higher
surrender charge revenues. Surrender charge income, which allows the
company to recover a portion of the expenses incurred to generate policy
sales, was partially offset by greater amortization of deferred policy
acquisition costs. Premiums from traditional life insurance products
decreased $382,000, or 3.2%, to $11,403,000 in the second quarter and
$533,000, or 2.2%, to $23,213,000 in the first six months of 1994. These
traditional product premium decreases primarily resulted from lower renewal
premiums although new sales also declined in the second quarter of 1994
offsetting a small sales gain in the first quarter.
Net investment income increased $19,328,000, or 18.2%, to $125,398,000 in
the second quarter and $37,695,000, or 18.2%, or $245,299,000 in the first
six months of 1994 as the increase in invested assets more than offset a
decline in portfolio yield. The effective average annual yield on assets
invested to support policy accounts for interest-sensitive products,
including annuities, universal life-type policies and participating life
policies, was 8.6% in the second quarter and first six months of 1994
compared to 9.2% in the second quarter and 9.3% in the first six months of
1993. The company's investment portfolio, excluding policy loans, had a
yield to maturity of 8.3% at June 30, 1994, compared to 8.9% at June 30,
1993, reflecting a general decline in interest rates, and substantial
principal repayments, calls and tenders of investments. The effect of this
decline in portfolio yield on the company's future net income will depend
on many factors, including future new investment yields and the level of
interest rates credited to policyholder account balances. During the
second quarter and first six months of 1994, the company had realized gains
on the sale of investments of $7,705,000 and $13,714,000, respectively,
compared to gains of $8,835,000 and $16,477,000 in the same periods of
1993. The level of realized gains has decreased as calls and repayments of
fixed maturity securities have slowed due to rising interest rates.
Expenses
Total insurance benefits and expenses increased $11,633,000, or 11.3%, to
$114,950,000 in the second quarter and $28,817,000, or 14.5%, to
$227,683,000 in the first six months of 1994. Interest credited to
universal life and investment product account balances increased
$11,626,000, or 17.8%, to $77,040,000 in the second quarter and
$21,335,000, or 16.6%, to $149,877,000 in the first six months of 1994 as a
result of higher account balances associated with those products. The
average annual interest rate credited to policy accounts for interest
sensitive products, including annuities and universal life-type policies,
and participating life policies, was 5.8% for the second quarter and 5.9%
for the first six months of 1994 compared to 6.6% and 6.8% in the same
periods of 1993. The average annual interest rate in effect for those
policies at June 30, 1994 was 5.7%, compared to 6.6% at June 30, 1993. The
company's policy is to change rates credited to policy accounts as
investment yields increase or 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 increased $1,357,000, or 21.3%, to $7,743,000 in
the second quarter and $1,988,000, or 17.1%, to $15,880,000 in the first
six months of 1994. Other benefits declined $71,000, or 0.9%, to
$8,280,000 in the second quarter and $998,000, or 5.9%, to $15,915,000 in
the first six months of 1994. These changes were offset by a corresponding
change in the reserve for future policy benefits and, therefore, had a
smaller impact on net income.
The withdrawal ratio for the company's annuity products, as calculated by
dividing aggregate surrenders and withdrawals by average aggregate account
balances, was 7.9%, on an annualized basis, for the six months ended June
30, 1994 compared to 4.2% in the first six months of 1993. Most of the
company's annuity products have surrender charges which are 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 withdrawal rate has been impacted by several factors. (1)
The company had anticipated an increase in annuity surrenders as this block
of business ages. (2) A block of annuity policies sold in 1988 and 1989
contained a 5 year interest guarantee which is currently expiring. The
company has planned for, and experienced, higher surrenders related to this
block of business. Excluding these surrenders, the company's annuity
withdrawal ratio would have been 6.2%. The company currently does not
market annuity policies with multi-year guarantees. At June 30, 1994,
policies issued with a 5 year interest guarantee represent approximately 4%
($205 million) of the company's annuity liabilities. (3) Withdrawals tend
to increase in periods of rising interest rates as policyholders seek higher
returns on their savings. The company's annualized lapse ratio for life
insurance measured in terms of face amount and using A.M. Best's formula, was
7.4% in the first six months of 1994 compared to 7.0% in the first six months
of 1993.
Commissions increased $17,158,000, or 66.3%, to $43,037,000 in the second
quarter and $22,466,000, or 43.9%, to $73,605,000 in the first six months
of 1994. General expenses increased $2,180,000, or 26.8%, to $10,313,000
in the second quarter and $3,714,000, or 23.3%, to $19,619,152 in the first
six months of 1994. Insurance taxes also increased $934,000, or 64.2%, to
$2,388,000 in the second quarter and $1,522,000, or 48.9%, to $4,633,000 in
the first six months of 1994. Increases in commissions and insurance taxes
and a portion of the increase in general expenses are the result of the
large increase in life insurance and annuity sales during these periods.
Most of these increased expenses were incurred as the result of new sales
and these acquisition costs have been deferred and thus had very little
impact on total insurance expenses. The amortization of deferred policy
acquisition costs increased by $728,000, or 6.3%, to $12,308,000 in the
second quarter and $5,703,000, or 32.4%, to $23,328,000 in the first six
months of 1994. Amortization of deferred acquisition costs related to
operating earnings has increased 50.8% to $10,231,000 in the second quarter
and 48.3% to $19,025,000 in the first six months of 1994 as the result of a
30.6% increase in the deferred policy acquisition cost asset since June 30,
1993 as costs of acquiring continued increases in sales of the company's
products are deferred and amortized in later periods. Also, higher lapses
and surrenders of the company's products have accelerated the amortization of
deferred acquisition costs related to those products although surrender
charges assessed on many of these lapses and surrenders offset much of this
accelerated amortization. Amortization related to realized gains totalled
$2,077,000 in the second quarter and $4,303,000 in the first six months of
1994 compared to $4,798,000 in the second quarter and first six months of
1993.
Income
Operating income (income 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 $4,312,000, or 23.9%, in the second quarter and
$9,096,000, or 27.3%, in the first six months of 1994. Net income increased
$5,306,000, or 25.6%, in the second quarter and $7,602,000, or 18.5%, in the
first six months of 1994. A breakdown of income is as follows:
<TABLE>
<CAPTION>
1994 1993
-------------------------------------------
$ Per Share $ Per Share
-------------------------------------------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C>
Quarter ended June 30:
Operating income $22,355 $0.70 $18,043 $0.62
Realized gains (net of tax)
Gains realized on disposal
of investments 5,008 0.16 5,831 0.20
Realized gains related
amortization of DPAC (1,350) (0.04) (3,167) (0.11)
--------- --------- --------- ---------
3,658 0.12 2,664 0.09
--------- --------- --------- ---------
Net Income $26,013 $0.82 $20,707 $0.71
========= ========= ========= =========
Six months ended June 30:
Operating income $42,401 $1.34 $33,305 $1.15
Realized gains (net of tax)
Gains realized on disposal
of investments 9,011 0.29 10,875 0.37
Realized gains related
amortization of DPAC (2,797) (0.09) (3,167) (0.11)
--------- --------- --------- ---------
6,214 0.20 7,708 0.26
--------- --------- --------- ---------
Net Income $48,615 $1.54 $41,013 $1.41
========= ========= ========= =========
</TABLE>
Average shares outstanding totaled 31,610,708 in the second quarter and
31,570,348 in the first six months of 1994 up from 29,071,449 and 29,037,045,
respectively, in the same periods of 1993 reflecting the issuance of 2,300,000
shares of common stock in October 1993.
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.
The insurance regulatory framework continues to be 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 presently anticipated to be considered for adoption as a model law
in 1995. 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 Taxes
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.
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
In the ordinary course of business, the company and its subsidiaries
are engaged 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
(a) The annual meeting of the company was held on April 28, 1994.
(c)(i) Election of four directors to the company's Board of Directors
with the following voting results:
<TABLE>
<CAPTION>
Against or Broker
For Withheld Non-Votes
__________ __________ _________
<S> <C> <C> <C>
Doris M. Drury 28,272,156 14,813 0
Fred S. Hubbell 28,272,546 14,813 0
Richard S. Ingham, Jr. 28,272,019 14,813 0
Thomas N. Urban 28,272,360 14,813 0
</TABLE>
(ii) Approval of the appointment of Ernst & Young as auditors for
the company for the year 1994.
<TABLE>
<CAPTION>
Against or Broker
For Withheld Absentions Non-Votes
__________ __________ __________ _________
<C> <C> <C> <C>
28,248,495 7,221 31,369 0
</TABLE>
Item 5. OTHER INFORMATION
None
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
4(a) Letter agreement to furnish Commission upon request copies
of other long-term debt instruments
11 Statement re: Computation of per share earnings
21 Subsidiary list
(b) No reports on Form 8-K were filed for the quarter ended June 30,
1994.
SIGNATURES
Pursuant to the requirements 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.
DATE: August 4, 1994 EQUITABLE OF IOWA COMPANIES
By/s/ P. E. Larson
________________________________
Executive Vice President and CFO
(Principal Financial Officer)
By/s/ D. A. Terwilliger
_________________________________
Vice President and Controller
(Principal Accounting Officer)
INDEX
Exhibits to Form 10-Q
Six Months ended June 30, 1994
EQUITABLE OF IOWA COMPANIES
Page Number
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 --
INDEX
Exhibits to Form 10-Q
Six Months ended June 30, 1994
EQUITABLE OF IOWA COMPANIES
Page Number
(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 --
(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 (not required) --
(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 --
Exhibit 4(a)
August 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. 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 March
31, 1994, re: line of credit in amount of $166,000,000.
2. 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 March
31, 1994, re: line of credit in amount of $83,000,000.
3. 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 $26,122,088
due through August 19, 1996.
4. 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 a
mounts 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
Exhibit 11
EQUITABLE OF IOWA COMPANIES
Consolidated Net Income Per Share Computation
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
1994 1993 1994 1993
___________ ___________ ___________ ___________
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C>
Primary:
Net income $26,013 $20,707 $48,615 $41,013
=========== =========== =========== ===========
Average shares
outstanding 31,610,708 29,071,449 31,570,348 29,037,045
=========== =========== =========== ===========
Net income per share $0.82 $0.71 $1.54 $1.41
=========== =========== =========== ===========
Fully diluted:
Net income $26,013 $20,707 $48,615 $41,013
Add: Interest on 9%
convertible installment
notes -- 5 -- 10
___________ ___________ ___________ ___________
Total $26,013 $20,712 $48,615 $41,023
=========== =========== =========== ===========
Average shares
outstanding 31,610,708 29,071,449 31,570,348 29,037,045
Add: Net effect of dilutive
stock options - based on
the treasury stock method
using period-end market
price, if higher than
average market
price 639,507 619,434 629,253 677,231
Assumed conversion of
9% convertible installment
notes -- 39,070 -- 39,070
___________ ___________ ___________ ___________
Total 32,250,215 29,729,953 32,199,601 29,753,346
=========== =========== =========== ===========
Net income per share $0.81 $0.70 $1.51 $1.38
=========== =========== =========== ===========
<FN>
NOTE: This computation is required by Regulation S-K Item 601 and is filed
as an Exhibit under Item 6(a) of Form 10-Q. 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.
</TABLE>
Exhibit 21
The company's subsidiaries are:
Name State of Incorporation
----------------------------------------- ----------------------
Equitable Life Insurance Company of Iowa Iowa
Equitable Investment Services, Inc. Iowa
Equitable of Iowa Securities Network, Inc. Iowa
Locust Street Securities, Inc. Iowa
Shiloh Farming Company Louisiana
Tower Locust, Ltd. Iowa
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.
