<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 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)
(515) 245-6911
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes /X/ No / /
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: 31,589,239,
shares of Common Stock as of May 1, 1994.
<PAGE>
<PAGE>
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
March 31, 1994 March 31, 1993
_____________ _____________
(Current Year) (Preceding Year)
(Dollars in thousands)
<S> <C> <C>
REVENUES:
Universal life and investment
product charges $10,504 $8,274
Traditional life insurance benefits 11,810 11,961
Net investment income 119,901 101,536
Realized gains on investments 6,009 7,642
Other income 4,395 3,365
_____________ _____________
152,619 132,778
BENEFITS AND EXPENSES:
Universal life and investment product benefits:
Interest credited to account balances 72,837 63,128
Benefit claims incurred in excess of
account balances 1,515 1,012
Traditional life insurance benefits:
Death benefits 6,622 6,494
Other benefits 7,635 8,562
Increase (decrease) in future policy benefits:
Life and annuity 1,135 299
Other contracts 205 (574)
Distributions to participating
policyholders 6,074 6,600
Underwriting, acquisition and insurance expenses:
Commissions 30,568 25,260
General expenses 9,306 7,773
Insurance taxes 2,245 1,656
Policy acquisition costs deferred (36,429) (30,706)
Amortization of deferred policy
acquisition costs 11,020 6,045
_____________ _____________
112,733 95,549
Interest expense 2,190 2,464
Other expenses 2,830 2,373
_____________ _____________
117,753 100,386
_____________ _____________
34,866 32,392
</TABLE>
<PAGE>
<PAGE>
Consolidated Statements of Income (Unaudited): (CONTINUATION)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
March 31, 1994 March 31, 1993
_____________ _____________
(Current Year) (Preceding Year)
(Dollars in thousands
except per share data)
<S> <C> <C>
Income taxes (credit):
Current $10,959 $7,008
Deferred 1,193 5,038
_____________ _____________
12,152 12,046
_____________ _____________
22,714 20,346
Equity income, net of related tax benefit
of $52 in 1994 and $21 in 1993 (112) (40)
_____________ _____________
NET INCOME $22,602 $20,306
============= =============
NET INCOME PER COMMON SHARE (average
shares used: 1994 - 31,529,538;
1993 - 29,002,258): $0.72 $0.70
============= =============
CASH DIVIDENDS PAID PER COMMON SHARE $0.105 $0.09
</TABLE>
<PAGE>
<PAGE>
Consolidated Balance Sheets (Unaudited):
<TABLE>
<CAPTION>
March 31, 1994 December 31, 1993
_____________ _____________
(Dollars in thousands)
<S> <C> <C>
ASSETS
Investments:
Fixed maturities:
Held for investment, at amortized cost
(market: 1994 - $4,685,125;
1993 - $5,407,358) $4,638,568 $5,078,226
Available for sale, at market
(cost: 1994 - $776,524; 1993 - $0) 789,177 --
Equity securities, at market
(cost: 1994 - $250; 1993 - $250) 83 83
Mortgage loans on real estate 391,338 346,829
Real estate, less allowances for
depreciation of $4,637 in 1994
and $4,580 in 1993 19,859 20,773
Policy loans 175,848 176,849
Short-term investments 10,060 67,619
_____________ _____________
TOTAL INVESTMENTS 6,024,933 5,690,379
Cash and cash equivalents 7,566 5,190
Securities and indebtedness of
related parties 9,141 11,791
Accrued investment income 94,377 92,473
Notes and other receivables 49,905 27,366
Deferred policy aquisition costs 473,042 451,180
Property and equipment, less
allowances for depreciation of
$4,802 in 1994 and $4,259 in 1993 7,416 7,431
Deferred income tax benefit 7,311 11,583
Intangible assets 2,928 3,346
Other assets 42,123 36,668
Separate account assets 89,425 94,028
_____________ _____________
TOTAL ASSETS $6,808,167 $6,431,435
============= =============
</TABLE>
<PAGE>
<PAGE>
Consolidated Balance Sheets (Unaudited):
<TABLE>
<CAPTION>
March 31, 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 $776,204 $774,356
Universal life and investment
products 5,092,281 4,803,729
Unearned revenue reserve 13,921 14,451
Other policy claims and benefits 5,265 5,765
_____________ _____________
5,887,671 5,598,301
Other policyholders' funds:
Supplementary contracts without
life contingencies 11,990 11,729
Advance premiums and other deposits 937 924
Accrued dividends 12,544 13,251
_____________ _____________
25,471 25,904
Current income taxes payable 4,707 2,293
Notes and loans payable:
Commercial paper notes 67,500 34,000
Convertible subordinated installment
notes -- 218
Long-term bonds 49,996 49,996
_____________ _____________
117,496 84,214
Other liabilities 129,578 98,733
Separate account liabilities 89,425 94,028
_____________ _____________
TOTAL LIABILITIES 6,254,348 5,903,473
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, issued and outstanding 31,558,249
shares in 1994 and 31,504,586 in 1993 31,558 31,505
Additional paid-in capital 76,604 75,841
Unrealized appreciation (depreciation)
on fixed maturity securities 6,067 --
Unrealized appreciation (depreciation)
on marketable equity securities (167) (167)
Retained earnings 441,373 422,093
Unearned compensation (deduction) (1,616) (1,310)
_____________ _____________
TOTAL STOCKHOLDERS' EQUITY 553,819 527,962
_____________ _____________
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $6,808,167 $6,431,435
============= =============
</TABLE>
<PAGE>
<PAGE>
Consolidated Statement of Cash Flows (Unaudited):
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
March 31, 1994 March 31, 1993
RESTATED
_____________ _____________
(Current Year) (Preceding Year)
(Dollars in thousands)
<S> <C> <C>
OPERATING ACTIVITIES
Continuing operations:
Net income $22,602 $20,306
Adjustments to reconcile net income to
net cash provided by continuing operations:
Adjustments related to universal life
and investment products:
Interest credited to account balances 72,837 63,128
Charges for mortality and
administration (9,170) (7,555)
Deferral of unearned revenues 14 49
Amortization of unearned revenue rese (358) (664)
Increase in traditional life policy
liabilities and accruals 1,406 1,093
Decrease in other policyholders' funds (433) (726)
Increase in accrued investment income (1,904) (6,601)
Policy acquisition costs deferred (36,430) (30,705)
Amortization of deferred policy
acquisition costs 11,021 6,045
Change in other assets, other
liabilities, and accrued income taxes 6,592 52,440
Provision for depreciation and
amortization 1,077 281
Provision for deferred income taxes 1,026 5,043
Share of losses of related parties 148 61
Realized gains on investments (6,009) (7,642)
_____________ _____________
NET CASH PROVIDED BY OPERATING
ACTIVITIES 62,419 94,552
INVESTING ACTIVITIES
Sale, maturity, or repayment of investments:
Fixed maturities - held for investment 92,723 180,085
Fixed maturities - available for sale 80,405 --
Mortgage loans on real estate 8,316 7,393
Policy loans 8,162 5,935
Short-term investments - net 57,559 36,142
_____________ _____________
247,165 229,555
Acquisition of investments:
Fixed maturities - held for investment (483,930) (523,652)
Fixed maturities - available for sale (19,151) --
Mortgage loans on real estate (52,812) (15,185)
Real estate (249) (16)
Policy loans (7,161) (6,326)
_____________ _____________
(563,303) (545,179)
</TABLE>
<PAGE>
<PAGE>
Consolidated Statement of Cash Flows (Unaudited): (CONTINUATION)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
March 31, 1994 March 31, 1993
RESTATED
_____________ _____________
(Current Year) (Preceding Year)
(Dollars in thousands)
<S> <C> <C>
INVESTING ACTIVITIES - continued
Disposal of investments accounted for
by the equity method $2,790 $536
Additions to investments accounted for
by the equity method -- (200)
Repayments of notes receivable 1 2
Issuance of notes receivable (1,287) --
Sales of property and equipment 184 148
Purchases of property and equipment (715) (1,247)
_____________ _____________
NET CASH USED IN INVESTING ACTIVITIES (315,165) (316,385)
FINANCING ACTIVITIES
Proceeds from notes and loans payable --
Repayment of notes and loans payable (218) (2)
Issuance (repayment) of commercial
paper - net 33,500 8,876
Receipts from universal life policies
and investment contracts credited to
policyholder account balances 323,047 267,579
Return of policyholder account balances
on universal life policies and
investment contracts (98,162) (49,372)
Issuance of stock under employee
stock plans and upon debt conversion 277 374
Cash dividends paid (3,322) (2,620)
_____________ _____________
NET CASH PROVIDED BY FINANCING
ACTIVITIES 255,122 224,835
_____________ _____________
INCREASE IN CASH AND CASH
EQUIVALENTS 2,376 3,002
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 5,190 6,210
_____________ _____________
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $7,566 $9,212
============= =============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest $1,696 $2,550
Income taxes 8,142 3,474
</TABLE>
<PAGE>
<PAGE>
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 months ended March
31, 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.
1993 per share amounts have been restated to reflect a 2-for-1 stock split
on June 1, 1993.
NOTE 2 -- INVESTMENT OPERATIONS
Prior to January 1, 1994, all 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.
Effective January 1, 1994, 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.
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.
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.
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 March 31, 1994, fixed income
securities with an amortized cost of $776,524,000 and an estimated market
value of $789,177,000 were designated as available for sale. Unrealized
holding gains on these securities, net of adjustments to deferred policy
acquisition costs, unearned revenue reserves and related deferred income
taxes, increased stockholders' equity by $6,067,000, or $0.19 per share, at
March 31, 1994.
<PAGE>
<PAGE>
At March 31, 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
March 31, 1994 Cost Gains Losses Value
______________________________________________________________________
(Dollars in thousands)
<S> <C> <C> <C> <C>
U.S. government and
governmental agencies
and authorities:
Mortgage-backed
securities $306,066 $13,097 ($1,752) $317,411
Other 3,992 201 (24) 4,169
States, municipalities
and political
subdivisions 10,000 300 -- 10,300
Foreign governments 10,573 1,680 -- 12,253
Public utilities 1,127,236 32,130 (35,222) 1,124,144
Investment grade
corporate 1,434,155 89,360 (29,195) 1,494,320
Below investment grade
corporate 185,324 2,282 (5,033) 182,573
Mortgage-backed
securities 1,560,511 28,819 (49,822) 1,539,508
Redeemable preferred
stocks 711 -- (264) 447
___________ ___________ ___________ ___________
TOTAL HELD FOR
INVESTMENT $4,638,568 $167,869 ($121,312) $4,685,125
=========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
December 31, 1993 Cost 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 HELD FOR
INVESTMENT $5,078,226 $354,088 ($24,956) $5,407,358
=========== =========== =========== ===========
</TABLE>
<PAGE>
At March 31, 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
March 31, 1994 Cost Gains Losses Value
______________________________________________________________________
(Dollars in thousands)
<S> <C> <C> <C> <C>
Public utilities $78,701 $2,189 ($3,521) $77,369
Investment grade
corporate 345,519 19,329 (11,079) 353,769
Below investment grade
corporate 186,668 5,995 (6,583) 186,080
Mortgage-backed
securities 165,636 6,323 -- 171,959
___________ ___________ ___________ ___________
TOTAL AVAILABLE FOR
SALE $776,524 $33,836 ($21,183) $789,177
=========== =========== =========== ===========
</TABLE>
Amortized cost and estimated market value of debt securities at March 31,
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>
Estimated
Amortized Market
HELD FOR INVESTMENT Cost Value
____________________________________________________________________
(Dollars in thousands)
<S> <C> <C>
Due in one year or less $618 $635
Due after one year through five years 42,301 44,285
Due after five years through ten years 369,178 374,001
Due after ten years 2,359,894 2,409,285
_____________ _____________
2,771,991 2,828,206
Mortgage-backed securities 1,866,577 1,856,919
_____________ _____________
TOTAL HELD FOR INVESTMENT $4,638,568 $4,685,125
============= =============
</TABLE>
<TABLE>
<CAPTION>
Estimated
Amortized Market
AVAILABLE FOR SALE Cost Value
_____________________________________________________________________
(Dollars in thousands)
<S> <C> <C>
Due after one year through five years $6,087 $5,904
Due after five years through ten years 117,078 117,883
Due after ten years 487,723 493,431
_____________ _____________
610,888 617,218
Mortgage-backed securities 165,636 171,959
_____________ _____________
TOTAL AVAILABLE FOR SALE $776,524 $789,177
============= =============
</TABLE>
No fixed maturity securities were designated as available for sale on
December 31, 1993. 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.
<PAGE>
Amortized cost and estimated market value of mortgage-backed securities,
which comprise 37.5% of the company's investment in fixed maturity
securities as of March 31, 1994, are as follows:
<TABLE>
<CAPTION>
Estimated
Amortized Market
Cost Value
_____________________________
(Dollars in thousands)
<S> <C> <C>
Mortgage-backed securities:
Government guaranteed pools $306,066 $317,411
Private mortgage pools 29,821 27,779
Mezzanines 40,639 40,037
CMO's and REMIC's:
Sequential pay 1,343,005 1,344,300
Targeted amortization class 312,682 299,351
_____________ _____________
TOTAL MORTGAGE-BACKED SECURITIES $2,032,213 $2,028,878
============= =============
</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. 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 March 31, 1994, unamortized
premiums on mortgage-backed securities totalled $5,567,000 and unaccrued
discounts on mortgage-backed securities totalled $48,598,000.
<PAGE>
<PAGE>
An analysis of sales, maturities and principal repayments of the company's
fixed maturities portfolio for the three months ended March 31, 1994 and
1993 is as follows:
<TABLE>
<CAPTION>
Gross Gross Proceeds
Amortized Realized Realized from
Cost Gains Losses Sale
_______________________________________________
<S> <C> <C> <C> <C>
Three months ended March 31, 1994
- - ------------------------------
Scheduled principal
repayments, calls and
tenders
Held for investment $89,497 $3,226 $-- $92,723
Available for sale 51,293 1,097 -- 52,390
Sales - available for
sale 24,913 3,102 -- 28,015
___________ ___________ ___________ ___________
TOTAL $165,703 $7,425 $-- $173,128
=========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
Gross Gross Proceeds
Amortized Realized Realized from
Cost Gains Losses Sale
_______________________________________________
<S> <C> <C> <C> <C>
Three months ended March 31, 1993
- - ------------------------------
Scheduled principal
repayments, calls and
tenders $170,960 $7,105 $-- $178,065
Sales 1,933 87 -- 2,020
___________ ___________ ___________ ___________
TOTAL $172,893 $7,192 $-- $180,085
=========== =========== =========== ===========
</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 three months ended March 31, 1994. During the three months ended March
31, 1994, the change in the net unrealized gain or loss on available for
sale securities included in stockholders's equity, net of adjustments,
amounted to $16,449,000 of net depreciation.
At March 31, 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 on company's financial statements at January 1, 1994. During the
three months ended March 31, 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 March 31, 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 March 31, 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 March
31, 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 $11,246,000 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 $10,504,000 at March 31, 1994
for reserve credits on reinsured policies. Insurance premiums and product
charges have been reduced by $1,733,000 in the first quarter of 1994
compared to $1,462,000 in the same period of 1993, as a result of the
cession agreements. Insurance benefits and expenses have been reduced by
$513,000 in the first quarter of 1994 compared to $1,032,000 in the same
period 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 of $21,049,000 to cover such assessments, which was
partially offset by $5,678,000 of expected future premium tax credits. The
company regularly reviews information regarding known failures and revises
its estimate of future guaranty fund assessments accordingly. In 1993,
this review caused the company to accrue an additional $2,109,000 to cover
amounts not previously reserved for. No additional amounts have been
accrued during the first three months of 1994 and at March 31, 1994, the
remaining reserve for insurance guaranty fund assessments, net of expected
future premium tax credits, totalled $15,088,000. The company believes
this reserve is sufficient to cover expected future insurance guaranty fund
assessments.
At March 31, 1994, outstanding commitments to fund mortgage loans on real
estate totalled $38,986,000.
<PAGE>
<PAGE>
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 $334,554,000, or 5.9%, in the first
three months of 1994 compared to growth of $323,497,000, or 7.2%, for the
same period of 1993, as $331,483,000 of annuity and life insurance premiums
were invested. The company monitors 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 March 31, 1994,
99.7% of the company's investments, excluding policy loans, were in cash or
fixed income investments which consist of government and agency
mortgage-backed securities (5.6% of the total investment portfolio);
investment grade corporate and conventional mortgage- backed securities, as
determined by either Standard & Poor's Corporation ("Standard & Poor's" or
"S&P") or Moody's Investors Service ("Moody's") (80.8%); below investment
grade corporate securities (6.4%); and mortgage loans on real estate
(6.7%).
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 March 31, 1994, fixed income
securities with an amortized cost of $776,524,000 and an estimated market
value of $789,177,000 were designated as available for sale. Unrealized
holding gains on these securities, net of adjustments to deferred policy
acquisition costs, unearned revenue reserves and related deferred income
taxes, increased stockholders' equity by $6,067,000, or $0.19 per share, at
March 31, 1994.
<PAGE>
<PAGE>
At March 31, 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 $1,973,745 36.4% $1,966,340 35.9%
AA+ to AA- 226,903 4.2% 228,025 4.2%
A+ to A- 1,755,291 32.3% 1,804,911 33.0%
BBB+ to BBB- 910,709 16.8% 916,999 16.7%
BB+ to BB- 301,599 5.6% 298,714 5.5%
B+ to B- 62,094 1.1% 62,094 1.1%
D 5,775 0.1% 5,775 0.1%
Issues not rated by S & P
(by NAIC rating):
Rated 1 (AAA to A-) 85,161 1.6% 86,691 1.6%
Rated 2 (BBB+ to BBB-) 50,167 0.9% 48,628 0.9%
Rated 3 (BB+ to BB-) 50,947 0.9% 50,632 0.9%
Rated 4 (B+ to B-) 4,563 0.1% 4,966 0.1%
Rated 6 (CI, D) 80 0.0% 80 0.0%
Redeemable preferred stock 711 0.0% 447 0.0%
____________ _______ ____________ _______
TOTAL FIXED MATURITIES $5,427,745 100.0% $5,474,302 100.0%
============ ======= ============ =======
</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 $1,923,027 35.4% $1,915,727 35.0%
Aa1 to Aa3 209,512 3.9% 210,068 3.8%
A1 to A3 1,782,717 32.9% 1,828,325 33.4%
Baa1 to Baa3 905,005 16.7% 915,143 16.7%
Ba1 to Ba3 291,664 5.4% 288,950 5.3%
B1 to B3 56,074 1.0% 59,074 1.1%
Ca 5,775 0.1% 5,775 0.1%
Issues not rated by Moody's
(by NAIC rating):
Rated 1 (Aaa to A3) 141,497 2.6% 143,446 2.6%
Rated 2 (Baa1 to Baa3) 53,174 1.0% 51,669 1.0%
Rated 3 (Ba1 to Ba3) 50,946 0.9% 50,632 0.9%
Rated 4 (B1 to B3) 4,563 0.1% 4,966 0.1%
Rated 6 (Ca, C) 80 0.0% 80 0.0%
Redeemable preferred stock 711 0.0% 447 0.0%
____________ _______ ____________ _______
TOTAL FIXED MATURITIES $5,424,745 100.0% $5,474,302 100.0%
============ ======= ============ =======
<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 appreciation of fixed maturity investments of $59,210,000
was comprised of gross appreciation of $201,705,000 and gross depreciation
of $142,495,000.
At March 31, 1994, the carrying value of below investment grade securities,
using the higher rating by Moody's or Standard & Poor's, totalled
$371,404,000, or 6.4% of the company's investment portfolio. Included in
this total were $104,665,000 of securities, rated investment grade when
purchased and later downgraded. The company estimates that the market
value of its below investment grade portfolio was $368,653,000, or 99.1% of
amortized cost and 99.3% of carrying value, at March 31, 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.
During the first three months of 1994, the company purchased below
investment grade securities at a total cost of $22,396,000. At March 31,
1994 these securities had an estimated market value of $21,680,000. 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. Also during the
first three months of 1994, below investment grade securities with carrying
values of $7,086,000 were called or repaid and below investment grade
securities with carrying values of $4,147,000 were upgraded to investment
grade. Primarily as a result of these transactions, at March 31, 1994, the
carrying value of the company's total investment in below investment grade
securities consists of investments in 80 issuers totalling $371,404,000, or
6.4% of the company's investment portfolio compared to 81 issuers totalling
$361,869,000, or 6.6%, at December 31, 1993. At March 31, 1994, the yield
on the company's below investment grade portfolio was 9.7% compared to
8.2% for the company's corporate investment grade portfolio.
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. 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.
Of the 80 below investment grade issuers in the company's investment
portfolio at March 31, 1994, one issue was in default at March 31, 1994.
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 March 31,
1994.
Below investment grade investments, as well as other investments, are being
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.
During the first three months of 1994, corporate investment grade
securities with a combined amortized cost value of $133,704,000 were called
or repaid by their issuers. In addition, one investment grade security
with an amortized cost of $24,913,000 was sold by the company. This
security was designated as available for sale. Aggregate pre-tax gains
from sales, calls and prepayments of fixed maturity investments totaled
$7,425,000 in the first three months of 1994.
At March 31, 1994, the company's fixed maturity investment portfolio had a
combined yield of 8.4% compared to 8.5% at December 31, 1993. Although
interest rates have risen in recent months, new investment rates continue
to be lower than the company's current portfolio yield and, as a result,
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 prepaid by their issuers and proceeds
from these early payments are invested at current rates. The impact of
further declines in portfolio yields on the company's operating results
will depend upon the magnitude of the decline and the interest rates
credited to policyholder account balances. At March 31, 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 6.7% 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 $391,338,000 from
$346,829,000 during the first three 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 $1,541,000. Average seasoning of the company's
mortgage loan portfolio is 10.6 years if weighted by the number of loans,
or 4.1 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 March 31,
1994, the yield on the company's mortgage loan portfolio was 8.8%.
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 $193 0.1%
Multi-family residential 29 80,749 20.6%
Industrial 119 113,033 28.9%
Office buildings 32 54,577 13.9%
Retail 67 129,933 33.2%
Other 3 12,853 3.3%
______ ____________ _______
TOTAL 254 $391,338 100.0%
====== ============ =======
</TABLE>
<TABLE>
<CAPTION>
% of
# of Carrying Mortgage
Loans Value Portfolio
_____________________________
(Dollars in thousands)
<S> <C> <C> <C>
Geographic Breakdown
- - -------------------------
New England 2 $1,138 0.3%
Middle Atlantic 26 38,099 9.8%
South Atlantic 26 40,033 10.2%
East North Central 67 96,729 24.7%
West North Central 26 50,918 13.0%
East South Central 8 13,076 3.4%
West South Central 18 30,655 7.8%
Mountain 11 27,418 7.0%
Pacific 70 93,272 23.8%
______ ____________ _______
TOTAL 254 $391,338 100.0%
====== ============ =======
</TABLE>
At March 31, 1994, 0.2% of the commercial mortgage portfolio, or $604,000,
was delinquent by 90 days or more. In addition, the company holds
$14,823,000 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 three 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 0.01% of the company's
investments in default at March 31, 1994. The company estimates its total
investment portfolio, excluding policy loans, had a market value equal to
101.2% of amortized cost and 101.1% of carrying value at March 31, 1994.
Other assets
Notes and other receivables increased $22,539,000 primarily as a result of
an increase in funds in transit related to investment repayments. Deferred
policy acquisition costs increased $21,862,000 over year-end 1993 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 March 31, 1994, the
company had total assets of $6,808,167,000, an increase of 5.9% over total
assets at December 31, 1993.
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 $289,370,000, or 5.2%, during
the first three months of 1994. Total consolidated debt increased
$33,282,000 during this period as commercial paper was issued to offset
timing differences in investment related cash receipts and disbursements,
and amounted to $117,496,000 at March 31, 1994. Other liabilities
increased $30,846,000 from year-end 1993 levels primarily as the result of
an increase in the liability for securities purchased but not yet paid for.
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 future premium tax credits. The
company regularly reviews information regarding known failures and revises
its estimate of future guaranty fund assessments accordingly. In 1993,
this review caused the company to accrue an additional $2,109,000 to cover
amounts not previously reserved for. No additional amounts have been
accrued during the first three months of 1994 and at March 31, 1994, the
remaining reserve for insurance guaranty fund assessments, net of expected
future premium tax credits, totalled $15,088,000. The company believes
this reserve is sufficient to cover expected future insurance guaranty fund
assessments.
At March 31, 1994, the company had total liabilities of $6,254,348,000
compared to $5,903,473,000 at December 31, 1993, a 5.9% increase.
Equity
At March 31, 1994, stockholders' equity was $553,819,000, or $17.55 per
share, compared to $527,962,000 or $16.76 per common share at year end
1993. The ratio of consolidated debt to total capital was 17.5% at March
31, 1994, 1993, up from 13.8% at year-end 1993 as a result of the increase
in short-term borrowings. At March 31, 1994, there were 31,558,249 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 March 31,
1994 the company had $67,500,000 in commercial paper notes outstanding, an
increase of $33,500,000 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. 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 a line of credit agreement 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 March 31, 1994,
$113,246,000 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 several years. The company's primary sources of
capital are retained earnings and the issuance of additional common stock
or debt.
On April 15, 1994, the company notified bondholders and the trustee of the
9.30% Notes due 1998 totalling $49,996,000 that it intended to redeem these
notes at par on June 1, 1994. Operating cash flows will be used to redeem
the 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 $54,789,000, or 21.9%, to $305,404,000 in the
first quarter of 1994 compared to the same period in 1993. Annuity sales
remained strong and increased $53,581,000, or 21.7%, to $300,342,000 in the
first quarter 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
consumer's continue to seek a secure return on their retirement savings.
First year and single life insurance premiums increased $1,208,000, or
31.4%, to $5,062,000 in the first quarter of 1994 due to increases in sales
of the company's universal life and current interest products.
Revenues
Total revenues increased $19,841,000, or 14.9%, to $152,619,000 in the
first quarter of 1994. Universal life insurance and investment product
charges increased $2,230,000, or 27.0%, to $10,504,000 in the first quarter
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 $151,000, or 1.3%, to $11,810,000 in the first
quarter of 1994. These traditional product premium decreases resulted from
lower renewal premiums although premiums from new sales increased slightly.
Net investment income increased $18,365,000, or 18.1%, to $119,901,000 in
the first quarter of 1994 as the increase in invested assets more than
offset a decline in portfolio yield. The effective average annual yield on
invested assets was 8.7% in the first quarter of 1994 compared to 9.4% for
the comparable period of 1993. The company's investment portfolio,
excluding policy loans, had a yield to maturity of 8.4% at March 31, 1994,
compared to 9.0% at March 31, 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 the
level of interest rates credited to policyholder account balances. During
the first quarter of 1994, the company had realized gains on the sale of
investments of $6,009,000 compared to gains of $7,642,000 in 1993.
Expenses
Total insurance benefits and expenses increased $17,184,000, or 18.0%, to
$112,733,000 in the first quarter of 1994. Interest credited to universal
life and investment product account balances increased $9,709,000, or
15.4%, to $72,837,000 in the first quarter 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 6.0% for the first quarter of 1994 compared to 6.9% in
the first quarter of 1993. The average annual interest rate in effect for
those policies at March 31, 1994 was 5.9%, compared to 6.8% at March 31,
1993. The company's policy 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 increased $631,000, or 8.4%, to $8,137,000 in
the first quarter of 1994 while other benefits declined $927,000, or 10.8%,
to $7,635,000. 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 6.3%, on an annualized basis, for the three months
ended March 31, 1994 compared to 3.8% in the first three 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 company anticipates an increase in annuity
surrenders as this block of business matures. 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 5.3%. The company
currently does not market annuity policies with 5 year guarantees.
Approximately 5% ($230 million) of its annuity liabilities contain this
feature. The company's annualized lapse ratio for life insurance measured
in terms of face amount and using A.M. Best's formula, was 7.1% in the
first three months of 1994 compared to 7.3% in the first three months of
1993.
Commissions increased $5,308,000, or 21.0%, to $30,568,000 in the first
quarter of 1994 as sales of annuity products continued to increase. This
increase was offset by an increase in the deferral of such policy
acquisition costs, and thus had very little impact on total insurance
expenses. The amortization of deferred policy acquisition costs increased
by $4,975,000, or 82.3%, to $11,020,000 in the first quarter of 1994.
This increase in amortization of deferred policy acquisition costs was due
to the $2,226,000 amortization related to realized gains, the 25.4% growth
in policy liabilities since March 31, 1993 and the higher lapses and
surrender charge income incurred in this quarter.
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 31.3% in the first quarter of 1994, to $20,046,000,
or $0.64 per share, from $15,262,000, or $0.53 per share, in 1993. The
company recognized realized gains on the sale of investments (net of
related income taxes) of $4,003,000, or $0.13 per share, in the first
quarter of 1994 compared to realized gains of $5,044,000, or $0.17 per
share in 1993. In addition, increased levels of realized gains above gains
originally assumed caused the company to accelerate the amortization of
deferred policy acquisition costs. During the first three months of 1994,
the company reduced net income by $1,447,000, or $0.05 per share, as a
result of this amortization. Net income was $22,602,000, or $0.72 per
share in the first three months of 1994, compared to $20,306,000, or $0.70
per share in 1993. 1993 per share amounts reported above have been
restated to reflect the two-for-one stock split on June 1, 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.
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 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.
<PAGE>
<PAGE>
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 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 8K were filed for the quarter ended March
31, 1994.
<PAGE>
<PAGE>
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: May 9, 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)
<PAGE>
<PAGE>
INDEX
Exhibits to Form 10-Q
Three Months ended March 31, 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 29
(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 --
<PAGE>
INDEX
Exhibits to Form 10-Q
Three Months ended March 31, 1994
EQUITABLE OF IOWA COMPANIES
Page Number
(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 --
(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 30
21 Subsidiaries List 31
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 --
<PAGE>
Exhibit 4(a)
May 9, 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. 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.
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
March 31, 1994, re: line of credit in amount of $83,000,000.
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 $26,122,088 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>
Exhibit 11
EQUITABLE OF IOWA COMPANIES
Consolidated Net Income Per Share Computation
<TABLE>
<CAPTION>
Three Months Ended
March 31
1994 1993
____________ ____________
(Dollars in thousands
except per share data)
<S> <C> <C>
Primary:
Net income $ 20,602 $ 20,306
============ ============
Average shares outstanding 31,529,538 29,002,258
============ ============
Net income per share $ 0.72 $ 0.70
============ ============
Fully diluted:
Net income $ 20,602 $ 20,306
Add: Interest on 9% convertible
installment notes -- 5
____________ ____________
Total $ 20,602 $ 20,311
============ ============
Average shares outstanding 31,529,538 29,002,258
Add: Net effect of dilutive
stock options - based
on the treasury stock
method using period-end
market price, if higher
than average market price 683,182 735,028
Assumed conversion of 9%
convertible installment notes -- 39,070
____________ ___________
Total 32,212,720 29,776,356
============ ===========
Net income per share $ 0.70 $ 0.68
============ ===========
<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>
<PAGE>
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.
