SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ X ] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended December 31, 1994
Commission file number 0-8590
EQUITABLE OF IOWA COMPANIES
(Exact name of registrant as specified in its charter)
Iowa 42-1083593
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
604 Locust Street, P.O. Box 1635
Des Moines, Iowa 50306
(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number, including area code: (515) 245-6911
Securities Registered Pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Common Stock New York Stock Exchange
____________________________________________________________________________
Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (229.405 of this chapter) is not contained herein, and will
not be contained, to the best of registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. [ ].
The aggregate market value of voting stock (Common Stock) held by nonaffiliates
of the registrant as of February 28, 1995, was $761,911,000.
As of February 28, 1995, 31,701,035 shares of Common Stock are issued and
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information contained in registrant's proxy statement for the annual
meeting of shareholders to be held April 27, 1995, is incorporated by
reference into Part III hereof.
PART I
ITEM 1. Business
Overview
Equitable of Iowa Companies ("company"), a Des Moines, Iowa based
insurance holding company organized in 1977, is a provider of
individual annuity and life insurance products, targeting middle-
income individuals and small businesses throughout the United
States. Through its insurance subsidiaries, Equitable Life
Insurance Company of Iowa ("Equitable Life") and USG Annuity &
Life Company ("USG"), the company offers its products in 49
states and the District of Columbia. Equitable Life was founded
in 1867 and is the oldest life insurance company west of the
Mississippi River. The company began actively marketing annuity
products in 1988, principally through USG, which was acquired by
the company in 1988 as a shell organization. Both Equitable Life
and USG are rated "A+" (Superior) by A.M. Best. A.M. Best's
ratings are directed toward the protection of policyholders, not
investors.
The company has had a rapid rate of growth in assets over the
past few years, primarily as a result of increased demand for its
annuity products. The company's total assets grew 24%, 27% and
20% in 1994, 1993 and 1992, respectively. Industry-wide asset
growth averaged 11% in 1993 and 8% in 1992, based on information
compiled by A.M. Best Co. Inc. The company's total assets at December
31, 1994 were $8.0 billion, compared to $6.4 billion at December 31,
1993. The company achieved its growth in assets while generating spreads
and an overall level of profitability that met or exceeded its
objectives.
Strategy
The company's continuing strategy to achieve its growth and
profit goals is to:
- offer a diversified portfolio of annuity and life
insurance products designed to appeal to a broad range of
customers in the fast-growing retirement savings market
segment;
- expand its existing base of over 44,000 agents;
- provide superior, cost-effective service to its
policyholders and agents, brokers and other producers;
- maintain its financial strength;
- issue competitive products with protection from early
policy termination; and
- maintain high quality investments having cash flows
consistent with the characteristics of the company's
policy liabilities.
The company believes that, because of its diversified portfolio
of annuity and life insurance products, it is well-positioned to
take advantage of certain demographic and economic trends that
are expected to increase demand for these types of products.
These trends include: an aging "baby boomer" segment of the
population that is increasingly concerned about retirement and
estate planning, as well as maintaining their standard of living
in retirement; lower public confidence that government and
employer-provided benefits at retirement will be sufficient;
rising health care costs; and the 1993 increase in individual
federal income tax rates.
The company believes that financial strength and ratings also are
important in attracting customers, and give it a competitive
advantage over other companies in the annuity marketplace. The
company intends to manage its business to preserve its current
insurance ratings.
The company structures its products to contractually protect
itself from early policy termination. The majority of the
company's life insurance products currently sold incorporate a
charge for early withdrawal of the cash value of the policy. In
addition, all deferred annuity policies sold by the company
include surrender charges, which generally decline over time and
apply only during a stated period.
The company's investment strategy emphasizes current income and
low credit risk. The persistency of the company's products
enables the company to invest in longer maturity investments.
Longer maturities typically provide higher yields than shorter
maturities. These higher yields, together with the overall
quality of the investment portfolio, allow the company to
maintain competitive crediting rates on its interest-sensitive
products.
Products
The company offers, through its insurance subsidiaries, a
portfolio of life insurance and annuity products designed to meet
the needs of its customers for supplemental retirement income,
estate planning and protection from unexpected death. For all
products, the target market is middle-income individuals,
families and small businesses throughout the United States. The
company requires that each of its products be priced to earn an
adequate margin between the return to the policyholder and the
return earned by the company on its investments.
Fixed Annuities. Fixed annuities are long-term savings vehicles
that are particularly attractive to customers over the age of 50
who are planning for retirement and seeking secure, tax-deferred
savings products. The individual annuity business is a growing
segment of the savings and retirement market, and among the
fastest growing segments of the life insurance industry. Annuity
products currently enjoy an advantage over certain other
retirement savings products, because the payment of federal
income taxes on interest credited on annuity policies is deferred
during the accumulation period.
The company offers a variety of fixed annuity products. Single
premium deferred annuities ("SPDAs"), in general, are savings
vehicles in which the policyholder, or annuitant, makes a single
premium payment to an insurance company. The insurance company
credits the account of the annuitant with earnings at an interest
rate (the "crediting rate"), which is declared by the insurance
company from time to time and may exceed but may not be lower
than any contractually guaranteed minimum crediting rate. All of
the company's fixed annuities have a minimum guaranteed crediting
rate. The company also offers flexible premium deferred annuities
("FPDAs"). FPDAs are deferred annuities in which the
policyholder may elect to make more than one premium payment.
The company had 206,000 deferred annuity policies in force at
December 31, 1994, with an average account balance of $27,000.
At least once each month the company establishes an interest
crediting rate for its new annuity policies. In determining the
company's interest crediting rate on new policies, management
considers the competitive position of the company, prevailing
market rates and the profitability of the annuity product. The
company maintains the initial crediting rate for a minimum period
of one year. Thereafter, the company may adjust the crediting
rate not more frequently than once a year. In establishing
renewal crediting rates, the company primarily considers the
anticipated yield on its investment portfolio. Interest rates
credited on the company's in force annuity policies ranged from
3.5% to 11.4% at December 31, 1994. All of the company's fixed
annuity products have minimum guaranteed crediting rates ranging
from 3.0% to 4.5% for the life of the policy. At December 31,
1994, less than 1% of the company's in force annuity policies had
rates credited for a multi-year period still in effect.
Certain of the company's annuity policies have a bonus crediting
rate for the first year of the policy, which typically exceeds
the annual crediting rate by 0.5% to 2.5%. The bonus and the
base crediting rates are disclosed to the policyholders. The
expected renewal crediting rate on such policies is lower than
the expected rate on the company's comparable products that do
not have a bonus feature.
The company incorporates a number of features in its annuity
products designed to reduce the early withdrawal or surrender of
the policies and to partially compensate the company for lost
investment opportunities and costs if policies are withdrawn
early. Under the terms of the company's policies, the
policyholder is permitted to withdraw all or part of the premium
paid plus the amount credited to his or her account, less a
surrender charge for withdrawals. Certain of the company's
deferred annuity contracts provide for penalty-free partial
withdrawals, typically up to 10% of the accumulation value
annually. Surrender charge periods on annuity policies currently
range from five years to the term of the policy, with 95% of such
policies being issued with a surrender charge period of seven
years or more during 1994. The average length of the surrender
period on the company's deferred annuity policies issued during
1994 was 8.3 years. The initial surrender charge on annuity
policies generally ranges from 5% to 20% of the premium and
decreases over the surrender charge period. At December 31,
1994, 78% of the company's deferred annuity liabilities were
subject to a surrender charge of 5% or more, and only 9% carried
no surrender penalty.
In 1992, the company introduced a number of annuity products with
a Market Value Adjustment feature, in which a "market value
adjustment" is applied to adjust the applicable surrender charge
(either up or down but not below the amount of the initial
premium plus credited interest at a stated rate) during the
surrender charge period. MVA policies accounted for 52% of the
company's total annuity sales during 1994 and 27% of total
annuity liabilities at December 31, 1994. Notwithstanding policy
features, the withdrawal rates of policyholder funds may be
affected to some degree by changes in interest rates.
The company also markets tax-qualified retirement annuities that
meet the requirements of Section 403(b) of the Internal Revenue
Code of 1986 ("TSAs") to employees of public schools and certain
other tax-exempt organizations. Teachers and other school
employees purchase TSAs through automatic payroll deductions.
TSA products tend to be purchased by customers who are younger
than purchasers of the company's other annuity products.
Therefore, the company's specialty TSA products tend to
incorporate features that are attractive to customers in this
younger age bracket (early 40s to early 50s) who have a longer
period to retirement, such as combining a higher crediting
interest rate with a longer surrender charge period. The company
believes that the market for TSAs is attractive because TSAs
broaden its customer base and provide an on-going source of
premium renewals. During 1994, the company derived 6% of its
annuity premiums from TSAs and expects this percentage to
continue to grow over time. In addition to TSAs, the company
also sells other tax-qualified retirement annuities such as
individual retirement annuities and simplified employee pension
plans. Total tax-qualified retirement annuity premiums totaled
$590 million, or 37% of total 1994 annuity premiums.
Variable Annuities. Variable annuities are long-term savings
vehicles in which policyholder purchase payments are recorded and
maintained in a separate account established as a registered
investment company. Purchase payments are invested by the
separate account in an underlying series mutual fund or the
company's general account at the direction of the policyholder.
Policyholders may choose among several available fund options.
Investment risk is borne by the policyholder and the value of the
policyholder's account depends upon the performance of the funds
chosen by the policyholder. Variable annuities provide the
company with fee-based revenues in the form of management and
administration fees charged to the policyholder's account. The
company began marketing variable annuity products in October
1994, and related funds deposited in the company's variable
annuity separate account totaled $2.8 million at December 31,
1994.
Life Insurance Products. The company offers a variety of
traditional, universal and term life insurance products.
Traditional life insurance policies incorporate a fixed premium
schedule and combine guaranteed insurance protection with a
savings feature. Traditional life policies cost more than
comparable term life insurance coverage when the policyholder is
younger but less as the policyholder grows older. The
policyholder may borrow against the accumulated cash value, with
policy loans typically available at a rate of interest lower than
that available from other lending sources. The policyholder may
also choose to surrender the policy at any time and receive the
accumulated cash value, less any applicable withdrawal charge,
rather than continuing the insurance protection. The company
currently offers fixed premium current interest and other
traditional life insurance products, and its insurance in force
also includes participating policies.
Universal life insurance products provide whole life insurance
and adjustable rates of return related to current interest rates.
Policyholders may vary the frequency and size of their premium
payments, although policy benefits may also fluctuate according
to such payments.
Term life insurance policies provide insurance protection for
unexpected death during the period in which the policy is in
force, generally one, five, ten or twenty years. These products
are designed to meet customers' shorter-term needs because the
policies do not have an accumulation feature and no cash value is
built up. Term life premiums are accordingly lower than certain
of the company's other products. The company's current term life
products include annually renewable term and five-year, ten-year
and fifteen-year renewable and convertible term.
In order to discourage early policy withdrawals and to partially
compensate the company for lost investment opportunities and
costs if policies are terminated, all of the company's universal
life and interest-sensitive policies issued since 1986 have
incorporated withdrawal charges or similar provisions. At
December 31, 1994, 18% of the company's life insurance
liabilities were subject to such charges.
Reserves. In accordance with applicable insurance regulations,
the company records as liabilities in its statutory financial
statements, actuarially determined reserves that are calculated
to meet future obligations under outstanding insurance policies.
The reserves are based on statutorily recognized methods using
prescribed morbidity and mortality tables, as applicable, and
interest rates. Reserves include premium deposits, claims that
have been reported but are not yet paid, claims that have been
incurred but have not been reported, and claims in the process of
settlement. The company's reserves satisfy statutory
requirements.
The reserves reflected in the company's Consolidated Financial
Statements are calculated based on generally accepted accounting
principles ("GAAP"). These reserves are based upon the company's
best estimates of mortality, persistency, expenses and investment
income, with appropriate provisions for adverse statistical
deviation, and the use of the net level premium method for all
non- interest-sensitive products and at full account value with
no reduction for surrender penalties, for interest-sensitive
products. GAAP reserves differ from statutory reserves due to
the use of different assumptions regarding mortality and interest
rates and the introduction of lapse assumptions into the GAAP
reserve calculation.
The following table sets forth certain consolidated information
regarding the development of the company's annuity and insurance
business and its reserves calculated based on GAAP for each of
the five years in the period ended December 31, 1994. Premiums
represent premiums and deposits received (as adjusted for due and
deferred premiums), and include premiums on universal life and
investment contracts as well as premiums on traditional products.
(Table following)
PRODUCTS AND SOURCES OF BUSINESS
(Dollars in thousands)
<TABLE>
<CAPTION>
As of and for the year ended
December 31 1994 1993 1992 1991 1990
_________________________________________________________________________________
<S> <C> <C> <C> <C> <C>
First year and single premiums:
Annuities and
other investment
contracts $1,581,930 $1,104,222 $871,310 $461,805 $590,922
Universal life 15,210 11,345 8,139 10,904 12,460
Fixed premium
current interest 7,456 4,404 4,594 4,103 5,067
Participating -- -- -- 12,420 12,615
Term and other 3,135 2,826 1,977 1,698 2,160
____________ ___________ ___________ ___________ ___________
Total first-year
and single
premiums $1,607,731 $1,122,797 $886,020 $490,930 $623,224
============ =========== =========== =========== ===========
Total premiums:
Annuities and
other investment
contracts $1,615,768 $1,117,255 $883,951 $474,447 $599,334
Universal life 50,236 44,784 38,993 39,251 37,294
Fixed premium
current interest 18,227 14,821 13,178 11,462 10,239
Traditional whole
life nonpar 6,544 7,146 7,794 8,549 9,559
Participating 30,103 31,323 32,550 35,240 37,626
Term and other 9,618 8,401 2,678 7,245 12,664
____________ ___________ ___________ ___________ ___________
Total premiums $1,730,496 $1,223,730 $979,144 $576,194 $706,716
============ =========== =========== =========== ===========
New life insurance written (at face amount):
Universal life $793,711 $628,086 $510,409 $584,693 $712,387
Fixed premium
current interest 167,401 157,567 166,249 160,228 210,302
Term and other 456,270 630,923 721,369 393,327 425,441
____________ ___________ ___________ ___________ ___________
Total new life
insurance
written $1,417,382 $1,416,576 $1,398,027 $1,138,248 $1,348,130
============ =========== =========== =========== ===========
</TABLE>
PRODUCTS AND SOURCES OF BUSINESS - CONTINUED
(Dollars in thousands)
<TABLE>
<CAPTION>
As of and for the year ended
December 31 1994 1993 1992 1991 1990
_________________________________________________________________________________
<S> <C> <C> <C> <C> <C>
Life insurance in force (at face amount) 1:
Universal life $5,439,647 $4,637,995 $4,178,116 $3,955,898 $3,684,396
Fixed premium
current interest 1,082,509 891,499 805,204 721,003 639,894
Traditional whole
life nonpar 362,353 385,984 407,934 437,630 480,991
Participating 1,070,747 1,112,765 1,159,629 1,242,055 1,348,223
Term and other 2,191,684 2,589,638 2,376,443 2,035,146 1,946,654
____________ ___________ ___________ ___________ ___________
Total life
insurance
in force $10,146,940 $9,617,881 $8,927,326 $8,391,732 $8,100,158
============ =========== =========== =========== ===========
Reserves:
Annuities and
other investment
contracts $5,826,964 $4,440,259 $3,320,188 $2,443,545 $1,932,489
Universal life 329,424 296,435 264,584 240,033 212,202
Fixed premium
current interest 80,719 67,035 55,456 45,349 36,707
Traditional whole
life nonpar 155,146 154,929 153,038 158,774 158,402
Participating 580,881 581,291 575,627 580,079 587,652
Term and other 41,073 38,136 34,620 31,635 31,957
____________ ___________ ___________ ___________ ___________
Total reserves $7,014,207 $5,578,085 $4,403,513 $3,499,415 $2,959,409
============ =========== =========== =========== ===========
<FN>
1 Before reduction for ceded reinsurance of: 1994 - $1,421,608; 1993 -
$1,326,020; 1992 - $1,242,003; 1991 - $1,066,555 and 1990 - $996,939.
</TABLE>
Sales are not concentrated in any geographical area, nor are assets and
profitability separately attributed to geographical areas. The states
from which the most life and annuity premiums were received are: 1994 -
California 20.9%; 1993 - California 15.9%; 1992 - California 11.6%; 1991 -
Texas 13.6% and 1990 - Texas 14.5%.
Marketing and Distribution
The company markets its products through a variable cost distribution
network of over 43,000 insurance brokerage agents, 545 career agents, 500
other personal producers and 40 financial institutions, such as banks and
thrifts. Since 1992, the company has offered certain life insurance
products through its independent insurance brokerage agents and certain
annuity products through its career agents and other producers. The
company intends to offer a full range of products through both distribution
networks, with an emphasis on the continued development of variable cost
distribution systems.
The company, in expanding its independent insurance brokerage agent
network, relies primarily on national and regional wholesale marketing
organizations to market its products and to recruit agents and other
producers. The organizations typically recruit agents for the company by
advertising its products and commission structure through direct mail
advertising and through seminars for insurance agents and brokers. These
organizations bear most of the costs incurred in marketing the company and
its products. The company compensates the marketing organization by paying
it a percentage of the commissions earned on new annuity and insurance
policies generated by the agents recruited by the organizations. The
company generally does not enter into exclusive arrangements with these
marketing organizations.
Certain of the marketing organizations with which the company has a
relationship are specialty organizations that have a marketing expertise or
a distribution system relating to a particular product, such as TSA
policies. The company believes that use of wholesale marketing
organizations is a cost-effective means of recruiting capable agents and
brokers, and advertising its products. The company employs marketing
personnel and customer service representatives who respond by telephone to
questions from agents, brokers and other producers regarding the company
and its products. The company believes that the service it provides to the
agents, brokers and other producers who market and sell its products helps
establish a relationship between the company and its sales force, and that
such interaction also provides marketing opportunities.
The company also utilizes a career insurance agent system to sell its
individual life insurance and annuity policies. The company provides
career agents with a professional support program that includes a
competitive benefits package, ongoing training, assistance in professional
certification, and advertising and advanced sales support. In addition,
the company provides conferences and seminars designed to motivate and
train its career agents.
Ratings
A. M. Best, an independent insurance industry rating organization, assigns
fifteen letter ratings to insurance companies. A. M. Best's ratings
currently range from "A++" to "F" and some insurance companies are not
rated. A. M. Best performs a quantitative and qualitative evaluation for
each company it rates. The quantitative evaluation compares a company's
performance to industry standards established by A. M. Best in three areas:
profitability, leverage or capitalization, and liquidity. The qualitative
evaluation examines nine factors for each company: spread of risk, quality
and appropriateness of the reinsurance program, quality and diversification
of assets, adequacy of policy or loss reserves, adequacy of surplus, capital
structure, management's experience and objectives, market presence, and
policyholders' confidence. A. M. Best also may review other qualitative
factors. Publications of A. M. Best indicate that "A+" and "A++" ratings are
assigned to those companies which, in A. M. Best's opinion, have demonstrated
superior overall performance when compared to the standards established by
A. M. Best and generally have a very strong ability to meet their policyholder
obligations over a long period of time. A. M. Best's ratings are directed
toward the protection of policyholders, not investors.
Equitable Life has received A. M. Best's quality rating of "A+" (Superior)
(or comparable rating) since the ratings were established in 1905. USG has
also received A. M. Best's rating of "A+" (Superior), which was based on
the consolidated financial condition and operating performance of USG and
its parent, Equitable Life.
Underwriting
Substantially all of the life insurance policies written by the company's
insurance subsidiaries are individually underwritten, although standardized
underwriting procedures have been adopted for certain coverages. The
company uses information from a prospective policyholder's application, and
in some cases, inspection reports, doctors' statements or medical
examinations, to determine whether a policy should be issued as applied
for, issued at a higher premium because of unfavorable factors, or
rejected. In addition, the company may request medical examinations from
any applicant, regardless of age and amount of insurance, if information
obtained from the application or other sources indicates an examination is
advisable before determining to underwrite the risk. The company requires
medical examinations for applicants for insurance in excess of prescribed
amounts. Underwriting with respect to annuities is minimal.
The increasing incidence of Acquired Immune Deficiency Syndrome ("AIDS") is
expected to adversely affect mortality rates for the life insurance
industry. The company regularly requires applicants for insurance in
excess of $100,000 to submit to blood screening for AIDS, drug and alcohol
abuse and other factors.
Investments
The company's investment philosophy emphasizes the careful underwriting of
credit risk, identifying relative values within a range of investment
choices, providing liquidity to meet operating needs and maximizing current
income. As part of its objective of effective asset-liability management,
the company conducts computer simulations which model its assets and
liabilities under commonly used stress-test interest rate scenarios. Based
on the results of these computer simulations, the company's investment
portfolio has been structured with a view to maintaining a desired
investment spread between the yield on portfolio assets and the rate
credited on its reserves and to match the cash flows of the investments
with the policy liabilities.
Competition
The insurance and annuity business is highly competitive with numerous
companies offering similar products through comparable marketing and
distribution systems. Companies typically compete for policyholders on the
basis of benefit rates, financial strength and customer service and compete
for agents and brokers on the basis of commissions, financial strength and
customer service. The company maintains competitive policy benefit rates.
However, the company believes that it competes primarily on the basis of
its customer service and financial strength. See Item 7, Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Recent Developments.
Regulation
The company's life insurance operations are conducted in a highly regulated
environment. Each aspect of the company's insurance operations may be
affected by regulatory authorities to some degree. Each of the company's
insurance subsidiaries is subject to the insurance laws of the state in
which it is organized and of the other jurisdictions in which it transacts
business. Such laws and regulations and the level of supervisory authority
that may be exercised by the state insurance agencies vary from
jurisdiction to jurisdiction. The primary regulators of the company's
insurance operations are the Commissioner of Insurance for the State of
Iowa for Equitable Life and the Commissioner of Insurance for the State of
Oklahoma for USG.
State insurance laws generally provide regulators with broad administrative
and supervisory powers related to the grant and revocation of licenses to
transact business, the establishment of guaranty fund associations, the
licensing of agents, market conduct, the approval of policy forms, the
establishment of reserve requirements, the prescription of the form and
content of required financial statements and reports, the determination of
the reasonableness and adequacy of statutory capital and surplus, and the
regulation of the type and amount of investments permitted.
Although the federal government does not directly regulate the insurance
industry, federal initiatives often have an impact on the insurance
business. Federal legislation has been proposed from time to time relating
in general to the solvency of insurers and other subjects.
Recently, the insurance regulatory framework has been placed under
increased scrutiny by various states and the National Association of
Insurance Commissioners ("NAIC"). Various states have considered or
enacted legislation that changes, and in many cases increases, the state's
authority to regulate insurance companies. The NAIC, in conjunction with
state regulators, also has been reviewing existing insurance laws and
regulations. See Item 7, Management's Discussion and Analysis of Financial
Condition and Results of Operations - Insurance Regulation.
Other Operations
Equitable Investment Services, Inc. ("EISI"), a wholly-owned subsidiary of
the company, manages the company's $6.9 billion investment portfolio and
serves as investment advisor to the Equi-Select Series Trust mutual fund
portfolios underlying the company's variable annuity product. EISI is a
registered investment advisor under the Investment Company Act of 1940.
Equitable of Iowa Securities Network, Inc. ("EISN"), a wholly-owned
subsidiary of the company, is a broker dealer registered under the
Securities Exchange Act of 1934. EISN serves as the principal distributor
of the company's variable annuity product.
Locust Street Securities, Inc. ("LSSI"), a wholly-owned subsidiary of the
company, markets mutual funds, variable annuities, tax-exempt bond funds
and investment-oriented products of other companies primarily through
Equitable Life career agents. Founded in 1968, LSSI also contracts with
agents of other companies to be a wholesaler of broker/dealer products.
LSSI has a distribution network of approximately 700 representatives in 45
states. LSSI is a broker dealer registered under the Securities Exchange
Act of 1934.
Employees
At December 31, 1994, the company had 469 full-time and 25 part-time
employees. The company provides its employees with a comprehensive range
of benefit programs. The company believes that its employee relations are
excellent.
ITEM 2. Properties
Substantially all of the company's business is carried on in leased
facilities located at 604 Locust Street, 699 Walnut Street, 700 Locust
Street and 312 Eighth Street in Des Moines, Iowa. All owned properties
consist of real estate held for investment purposes or acquired through
foreclosure. Property and equipment primarily represent leasehold
improvements at the company's headquarters and at various agency offices
and office furniture and equipment, and are not considered to be
significant to the company's overall operations. Property and equipment
are reported at cost less allowances for depreciation. The company
believes that its present facilities are adequate for its current needs.
The company is in the process of developing a long-range facilities plan
which will address future space and service needs, and has requested
proposals for office space leases commencing in 1997.
ITEM 3. Legal Proceedings
From time to time, in the ordinary course of business, the company is
involved in litigation. Management believes it is unlikely that the
outcome of any pending litigation will have a material adverse effect on
the company's financial condition.
ITEM 4. Submission of Matters to a Vote of Security Holders
None.
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder
Matters.
Stock Symbols
The company's common stock is quoted on the New York Stock Exchange with a
stock symbol of EIC.
Quarterly Stock Quotations
The following table shows the range of high and low closing sales prices
per share of Common Stock of the company for the periods indicated as
reported on the NASDAQ National Market System prior to September 13, 1993.
Over-the-counter market quotations may reflect inter-dealer prices, without
retail mark-up, mark-down, or commissions and may not necessarily represent
actual transactions. Prices on or after September 13, 1993 are as reported
on the New York Stock Exchange. Prices prior to June 1, 1993 have been
adjusted to give effect to a two-for-one stock split payable to
stockholders of record as of May 12, 1993.
<TABLE>
<CAPTION>
High Low Close
__________________________________
<S> <C> <C> <C>
1993
____
First Quarter 28 20-7/8 24-3/4
Second Quarter 28-1/2 23 24
Third Quarter 39 24 38-1/2
Fourth Quarter 38-5/8 30-1/4 33-7/8
1994
____
First Quarter 35 29-1/8 33-3/4
Second Quarter 35-3/4 31-1/4 31-5/8
Third Quarter 39-1/8 32 36
Fourth Quarter 36-3/4 26-7/8 28-1/4
1995
____
First Quarter (as of
February 23, 1995) 32-7/8 27-3/4 32-7/8
</TABLE>
Number of Holders of Record
The number of holders of record of common stock was 959 at February 23,
1995, the dividend record date.
Dividends
Cash dividends are paid quarterly, at an amount determined by the Board of
Directors. The company's bank credit arrangements restrict the amount of
dividends paid annually on its common stock. Also, insurance regulations
restrict the amount of dividends that can be paid to the company by
Equitable Life. See Note 1 to the consolidated financial statements and
Item 7, Management's Discussion and Analysis - Liquidity and Capital
Resources.
Dividends paid per share of common stock, after giving effect to the 2-for-
1 stock split as of May 12, 1993 were $0.465 in 1994 and $0.405 in 1993.
Transfer Agent and Registrar
Boatmen's Trust Company, 510 Locust, P.O. Box 14768, St. Louis, Missouri
63178.
ITEM 6. Selected Financial Data
The following table sets forth a consolidated summary of selected financial
data for the company and its subsidiaries (all significant intercompany
accounts have been eliminated) for each of the last ten years. In this
table the years ended December 31, 1985 through 1987 have been restated to
reflect the implementation of SFAS No. 97 in 1988. In addition, the years
ended December 31, 1985 through 1991 have been restated to reflect the sale
of Younkers, Inc. in 1992 and treatment of that entity as a discontinued
operation. This summary should be read in conjunction with the related
consolidated financial statements and notes thereto.
(Table following)
SELECTED FINANCIAL DATA
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
As of and for the year ended
December 31 1994 1993 1992 1991 1990
_________________________________________________________________________________
<S> <C> <C> <C> <C> <C>
Consolidated results:
Revenues $651,660 $572,968 $458,374 $400,289 $340,750
Operating income 1 88,212 68,911 49,309 40,121 35,636
Income from continuing
operations 2 98,284 87,156 57,260 24,740 20,772
Net income 3 98,284 87,156 54,506 40,530 23,204
Per share data: 4
Operating income 1 $2.79 $2.33 $1.72 $1.42 $1.26
Income from continuing
operations 2 3.11 2.95 1.99 0.87 0.74
Net income 3 3.11 2.95 1.90 1.43 0.82
Consolidated financial position:
Assets $7,965,593 $6,431,435 $5,066,874 $4,231,361 $3,652,687
Debt and redeemable
preferred stock 90,450 84,214 89,508 95,602 107,920
Stockholders'
equity 587,330 527,962 373,801 322,780 285,026
Common stock data: 4
Dividends per share $0.465 $0.405 $0.35 $0.32 $0.29
Book value per share 18.54 16.76 12.89 11.35 10.05
Price
range 26.88-39.13 20.88-39.00 9.63-22.50 4.25-10.88 3.38-8.00
Closing price 28.25 33.88 22.50 10.50 4.25
Shares outstanding
at year
end 31,677,891 31,504,586 28,994,640 28,428,176 28,366,588
Average shares
outstanding
during year 31,612,675 29,540,274 28,688,660 28,392,860 28,349,760
</TABLE>
SELECTED FINANCIAL DATA - CONTINUED
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
As of and for the year ended
December 31 1994 1993 1992 1991 1990
_________________________________________________________________________________
<S> <C> <C> <C> <C> <C>
Ratios and other data:
Return on assets -
net income 1.4% 1.5% 1.2% 1.0% 0.7%
Return on equity -
operating income
(continuing
operations) 15.8% 15.3% 15.2% 15.4% 16.1%
Return on equity -
net income 17.6% 19.3% 15.6% 13.3% 8.4%
Year-end debt to
total capital 13.3% 13.8% 19.3% 22.8% 27.5%
Year-end price to
earnings 9.1x 11.5x 11.8x 7.3x 5.2x
Year-end price to
book value 1.5x 2.0x 1.7x 0.9x 0.4x
Year-end total market
capital-
ization $894,900 $1,067,218 $652,379 $298,496 $120,558
Pro forma amounts assuming change in accounting
for par business had been applied retroactively:
Income from continuing
operations $98,284 $87,156 $57,260 $24,740 $20,772
Net income 3 98,284 87,156 54,506 40,530 23,204
Income from continuing
operations
per share 3.11 2.95 1.99 0.87 0.74
Net income
per share 3 3.11 2.95 1.90 1.43 0.82
<FN>
1 Operating income equals income from continuing operations before
cumulative effect of change in accounting principles, excluding, net of
related income taxes, prepayment gains on mortgage-backed securities,
realized gains or losses and amortization of related deferred policy acqui-
sition costs. Operating income in 1991 excludes the after-tax income
effect ($10,259,000) ($(0.36) per share), of accrual for insurance guaranty
fund assessments.
2 Excludes the cumulative effect of changes in the method of accounting for
postretirement benefits (1992) and deferred income taxes (1991).
3 Includes the cumulative effect of changes in the method of accounting for
postretirement benefits of $(4,678,000) ($(0.16) per share) in 1992 and
deferred income taxes of $9,444,000 ($0.34 per share) in 1991.
4 Share and per share amounts have been restated to reflect the 2-for-1
stock splits as of May 12, 1993 and May 14, 1992 and the reversion of Class
A and Class B stock to one class of common stock as of May 1, 1992.
</TABLE>
SELECTED FINANCIAL DATA - CONTINUED
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
As of and for the year ended
December 31 1989 1988 1987 1986 1985
_________________________________________________________________________________
<S> <C> <C> <C> <C> <C>
Consolidated results:
Revenues $273,230 $198,008 $202,282 $203,721 $217,897
Operating income 1 24,399 16,410 14,303 11,737 9,366
Income from continuing
operations 2 26,083 16,819 21,233 17,557 22,979
Net income 3 20,609 36,668 26,071 29,600 27,840
Per share data: 4
Operating income 1 $0.85 $0.49 $0.40 $0.32 $0.21
Income from continuing
operations 2 0.91 0.50 0.60 0.48 0.58
Net income 3 0.72 1.10 0.73 0.81 0.72
Consolidated financial position:
Assets $2,896,253 $1,969,674 $1,688,091 $1,633,867 $1,664,333
Debt and redeemable
preferred stock 103,926 54,231 25,500 41,889 38,540
Stockholders'
equity 270,106 276,610 248,046 257,217 239,717
Common stock data: 4
Dividends per share $0.27 $0.25 $0.23 $0.21 $0.21
Book value per share 9.67 8.37 7.35 7.09 6.61
Price
range 5.50-9.06 4.69-5.63 4.00-6.75 4.00-5.94 3.04-4.33
Closing price 7.81 5.50 4.25 5.75 4.21
Shares outstanding
at year
end 27,937,600 33,061,656 33,765,720 36,265,476 36,249,072
Average shares
outstanding
during year 28,777,192 33,259,548 35,495,744 36,258,786 36,249,072
</TABLE>
SELECTED FINANCIAL DATA - CONTINUED
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
As of and for the year ended
December 31 1989 1988 1987 1986 1985
_________________________________________________________________________________
<S> <C> <C> <C> <C> <C>
Ratios and other data:
Return on assets -
net income 0.8% 2.0% 1.6% 1.8% 1.7%
Return on equity -
operating income
(continuing
operations) 12.5% 9.1% 8.2% 7.4% 7.6%
Return on equity -
net income 7.5% 14.0% 10.3% 11.9% 12.1%
Year-end debt to
total capital 27.8% 16.4% 9.3% 14.0% 13.9%
Year-end price to
earnings 10.9x 5.0x 5.8x 7.1x 5.8x
Year-end price to
book value 0.8x 0.7x 0.6x 0.8x 0.6x
Year-end total market
capital-
ization $218,263 $181,839 $143,504 $208,526 $152,548
Pro forma amounts assuming change in accounting
for par business had been applied retroactively:
Income from continuing
operations $26,083 $16,819 $25,594 $22,628 $24,852
Net income 3 20,609 25,113 30,432 34,671 29,713
Income from continuing
operations
per share 0.91 0.50 0.72 0.62 0.64
Net income
per share 3 0.72 0.76 0.86 0.95 0.77
<FN>
1 Operating income equals income from continuing operations before cumulative
effect of change in accounting principles, excluding realized gains or
losses (net of related income taxes).
2 Excludes the cumulative effect of the change in the method of accounting
for the participating line of business in 1988.
3 Includes the cumulative effect of change in the method of accounting for
the participating line of business of $11,555,000 ($0.35 per share) in 1988.
4 Share and per share data amounts have been restated to reflect the 2-for-1
stock splits as of May 12, 1993 and May 14, 1992 and the reversion of Class
A and Class B stock to one class of common stock as of May 1, 1992.
Additionally, 1985 has been restated to reflect the 50% stock dividend in
December 1986.
</TABLE>
ITEM 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The purpose of this section is to discuss and analyze the company's
consolidated financial condition, liquidity and capital resources and
results of operations. This analysis should be read in conjunction with
the consolidated financial statements and related notes which appear
elsewhere in this report. The company reports financial results on a
consolidated basis. The consolidated financial statements include the
accounts of the company and its subsidiaries, all of which are wholly owned
at December 31, 1994. The company's retail subsidiary, Younkers, Inc. was
sold through a public stock offering on April 29, 1992 and has been
classified as a discontinued operation. The company's primary subsidiaries
are Equitable Life Insurance Company of Iowa ("Equitable Life") and USG
Annuity & Life Company ("USG").
FINANCIAL CONDITION
Investments
The company's total investments grew 24% in 1994. This growth in the
company's investment portfolio resulted from record sales of the company's
insurance and annuity products. The company manages the growth of its
insurance operations in order to maintain adequate capital ratios and has
established a goal of growing assets at least 20% annually.
To support the company's annuities and life insurance products, cash flow
was invested primarily in fixed income investments. At December 31, 1994,
the company's investment portfolio was comprised of the following:
<TABLE>
<CAPTION>
Yield at
Carrying % of Estimated % of Carrying
Value Total Market Value Total Value
___________________________________________________
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Investment cash and
short-term investments $33,969 0.5% $33,969 0.5% 3.7%
Governments and agency
mortgage-backed
securities 365,557 5.3% 354,132 5.4% 8.5%
Conventional mortgage-
backed securities 2,160,874 31.5% 1,995,172 30.7% 7.9%
Investment grade
corporate securities 3,245,176 47.3% 3,106,192 47.8% 8.5%
Below-investment grade
corporate securities 400,677 5.9% 382,080 5.9% 10.3%
Mortgage loans 613,208 9.0% 589,333 9.1% 8.8%
___________________________________________________
Total cash and fixed 6,819,461 99.5% 6,460,878 99.4% 8.4%
income investments
Equity securities 22,978 0.3% 22,978 0.4% 3.9%
Real estate 15,668 0.2% 15,668 0.2% 2.9%
___________________________________________________
Total investments $6,858,107 100.0% $6,499,524 100.0% 8.4%
===================================================
<FN>
Note: Estimated market values of publicly traded securities are as reported
by an independent pricing service. Market values of conventional
mortgage-backed securities not actively traded in a liquid market are
estimated using a third party pricing system, which uses a matrix
calculation assuming a spread over U.S. Treasury bonds based upon the
expected average lives of the securities. Market values of private
placement bonds are estimated using a matrix that assumes a spread
(based on interest rates and a risk assessment of the bonds) over U.S.
Treasury bonds. Estimated market values of redeemable preferred
stocks are as reported by the National Association of Insurance
Commissioners ("NAIC"). Market values of mortgage loans on real
estate are estimated by discounting expected cash flows, using interest
rates currently being offered for similar loans. Market value of
owned real estate is estimated to be equal to, or in excess of,
carrying value based upon appraised values.
</TABLE>
At December 31, 1994, the ratings assigned by Standard & Poor's Corporation
("Standard & Poor's") and Moody's Investors Service ("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 $2,466,838 40.0% $2,293,279 39.3%
AA+ to AA- 272,640 4.4% 257,950 4.4%
A+ to A- 1,888,987 30.6% 1,814,458 31.1%
BBB+ to BBB- 1,035,401 16.8% 987,682 16.9%
BB+ to BB- 324,386 5.2% 314,064 5.4%
B+ to B- 66,571 1.1% 63,498 1.1%
D 3,570 0.1% 3,570 0.1%
Issues not rated by S&P
(by NAIC rating):
Rated 1 (AAA to A-) 22,234 0.4% 20,438 0.3%
Rated 2 (BBB+ to BBB-) 26,817 0.4% 24,684 0.4%
Rated 3 (BB+ to BB-) 62,018 1.0% 55,819 1.0%
Rated 4 (B+ to B-) 2,131 0.0% 1,700 0.0%
Redeemable preferred stock 691 0.0% 434 0.0%
_______________________________________________
Total fixed maturities $6,172,284 100.0% $5,837,576 100.0%
===============================================
</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 $2,337,123 37.9% $2,178,804 37.3%
Aa1 to Aa3 355,940 5.8% 326,274 5.6%
A1 to A3 2,005,938 32.5% 1,923,425 32.9%
Baa1 to Baa3 942,622 15.3% 902,089 15.5%
Ba1 to Ba3 346,385 5.5% 336,649 5.8%
B1 to B3 65,255 1.1% 62,128 1.1%
Caa1 to Caa3 1,560 0.0% 1,560 0.0%
Ca 3,570 0.1% 3,570 0.1%
Issues not rated by Moody's
(by NAIC rating):
Rated 1 (Aaa to A3) 22,234 0.4% 20,438 0.3%
Rated 2 (Baa1 to Baa3) 26,817 0.4% 24,685 0.4%
Rated 3 (Ba1 to Ba3) 62,018 1.0% 55,820 1.0%
Rated 4 (B1 to B3) 2,131 0.0% 1,700 0.0%
Redeemable preferred stock 691 0.0% 434 0.0%
_______________________________________________
Total fixed maturities $6,172,284 100.0% $5,837,576 100.0%
===============================================
</TABLE>
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 December 31, 1994, fixed income
securities with an amortized cost of $819,083,000 and an estimated market
value of $778,486,000 were designated as available for sale. Unrealized
holding losses on these securities, net of adjustments to deferred policy
acquisition costs, decreased stockholders' equity by $26,493,000, or $0.84
per share at December 31, 1994.
Net unrealized depreciation of fixed maturity investments of $375,305,000
was comprised of gross appreciation of $62,027,000 and gross depreciation
of $437,332,000.
The percentage of the company's portfolio invested in below investment
grade securities declined slightly during 1994. At December 31, 1994 the
carrying value of the company's total investment in below investment grade
securities consisted of investments in 80 issuers totaling $400,677,000, or
5.9% of the company's investment portfolio compared to 81 issuers totaling
$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 December 31, 1994, the yield on
the company's below investment grade portfolio was 10.3% 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
$382,080,000, or 95.4% of carrying value, at December 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.
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.
During 1994, the company recognized a pre-tax loss of $619,000 to write the
value of one fixed maturity security down to its estimated fair value of
$80,000 pursuant to the requirements of SFAS No 115. This security had
been previously written down to its estimated net realizable value of
$699,000 by a charge to realized losses of $6,443,000 during the year ended
December 31, 1993. This security was sold in the fourth quarter of 1994 at
a nominal gain. At December 31, 1994, no fixed maturity investments are
considered to have other than temporary impairments.
During 1994, fixed maturity securities designated as held for investment
with a combined amortized cost value of $275,480,000 were called or repaid
by their issuers generating net realized gains totaling $11,364,000. Also
during 1994, fixed maturity securities designated as available for sale
with a combined amortized cost value of $196,811,000 were sold, called,
repaid or tendered generating net realized gains totaling $8,036,000. In
total, pre-tax gains from sales, calls, repayments and tenders of fixed
maturity investments amounted to $19,400,000 during 1994.
At December 31, 1994, the company's fixed maturity investment portfolio had
a combined yield of 8.4% compared to 8.5% at December 31, 1993. New money
rates rose in 1994 and the company expects its portfolio yield to stabilize
as new funds are invested at current rates. At December 31, 1994, the
average annual interest rate in effect for interest sensitive policy
liabilities, including annuities and universal life-type policies, and
participating life policies, was 5.7%, compared to 6.1% at December 31,
1993.
Mortgage loans make up approximately 9.0% of the company's investment
portfolio, as compared to an industry average of 12.5%, as reported in the
1994 ACLI Fact Book. During 1992, the company resumed active mortgage
lending to broaden its investment alternatives and, as a result of this
increase in lending activity, mortgages outstanding increased to
$613,208,000 from $346,829,000 during 1994. The company expects this asset
category to continue to grow over the next several years. The company's
mortgage loan portfolio includes 286 loans with an average size of
$2,144,000 and average seasoning of 8 years if weighted by the number of
loans, and 2.6 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 December 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
_______________________________________
COLLATERAL BREAKDOWN (Dollars in thousands)
____________________
<S> <C> <C> <C>
Farm 4 $171 0.0%
Multi-family residential 48 155,829 25.4%
Industrial 117 152,918 24.9%
Office buildings 39 89,836 14.7%
Retail 75 201,720 32.9%
Other 3 12,734 2.1%
_______________________________________
Total 286 $613,208 100.0%
=======================================
</TABLE>
<TABLE>
<CAPTION>
% of
# of Carrying Mortgage
Loans Value Portfolio
_______________________________________
GEOGRAPHIC BREAKDOWN (Dollars in thousands)
____________________
<S> <C> <C> <C>
New England 1 $247 0.0%
Middle Atlantic 30 77,359 12.6%
South Atlantic 30 56,874 9.3%
East North Central 72 170,700 27.8%
West North Central 37 91,901 15.0%
East South Central 9 19,937 3.3%
West South Central 15 27,653 4.5%
Mountain 19 47,240 7.7%
Pacific 73 121,297 19.8%
_______________________________________
Total 286 $613,208 100.0%
=======================================
</TABLE>
At December 31, 1994, no mortgage loans were delinquent by 90 days or more.
The company does not expect to incur material losses from its mortgage loan
portfolio since mortgage loans represent a small percentage of the
company's investment portfolio. The company has been able to recover 98% of
the principal amount of problem mortgages that have been resolved in the
last three years.
At December 31, 1994, the company owned real estate totaling $15,668,000,
including properties acquired through foreclosure valued at $11,764,000.
During 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 totaling $959,000 on this property.
In total, the company has experienced a relatively small number of problems
with its total investment portfolio, with none of the company's investments
in default at December 31, 1994. The company estimates its total
investment portfolio, excluding policy loans, had a market value equal to
94.8% of carrying value for accounting purposes at December 31, 1994.
Other assets
Accrued investment income increased $13,486,000 during 1994 due to an
increase in new fixed income investments and in the overall size of the
portfolio. Deferred policy acquisition costs increased $156,446,000 over
year-end 1993 levels as the deferral of current period costs (primarily
commissions) incurred to generate insurance and annuity sales totaled
$193,263,000. Amortization of costs deferred totaled $50,921,000. In
addition, deferred acquisition costs were increased by $14,104,000 as a
result of adjustments related to the valuation of fixed maturity securities
designated as available for sale under SFAS No. 115. At December 31, 1994,
the company had total assets of $7,965,593,000, an increase of 23.9% 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 $1,438,008,000, or 25.7%, during 1994
and totaled $7,036,309,000 at December 31, 1994. Reserves for the
company's annuity policies increased $1,386,705,000, or 31.2%, during this
period and totaled $5,826,964,000 at December 31, 1994. Life insurance
reserves increased $49,417,000, or 4.3%, during 1994 and totaled
$1,187,243,000 at December 31, 1994.
The company incorporates a number of features in its annuity products
designed to reduce the early withdrawal or surrender of the policies and to
partially compensate the company for its costs if policies are withdrawn
early. Surrender charge periods on annuity policies currently range from
five years to the term of the policy, with 95% of such policies being
issued with a surrender charge period of seven years or more during 1994.
The initial surrender charge on annuity policies ranges from 5% to 20% of
the premium and decreases over the surrender charge period. The following
table summarizes the company's non-par deferred annuity liabilities and
sales at and for the year ended December 31, 1994 by surrender charge range
category. Notwithstanding policy features, the withdrawal rates of
policyholder funds may be affected to some degree by changes in interest
rates.
<TABLE>
<CAPTION>
Deferred Deferred
Surrender Charge % Annuity % of Annuity % of
Sales Total Liabilities Total
____________________________________________________________________________
(Dollars in thousands)
<S> <C> <C> <C> <C>
No surrender charge $468,455 8.5%
1 to 4 percent 774,971 14.0%
5 to 6 percent $76,286 5.0% 656,655 11.9%
7 to 9 percent 1,183,864 76.9% 2,609,179 47.2%
10 percent and greater 278,223 18.1% 1,021,579 18.4%
____________________________________________
$1,538,373 100.0% $5,530,839 100.0%
============================================
</TABLE>
Total consolidated debt increased $6,236,000 during 1994 as commercial
paper was issued for working capital needs and amounted to $90,450,000 at
December 31, 1994. Other liabilities increased $40,592,000 from year-end
1993 levels due to increases in liabilities for outstanding checks,
securities purchased but not yet paid for and draft accounts payable
related to the company's asset retention program.
At December 31, 1994, the company had total liabilities of $7,378,263,000
compared to $5,903,473,000 at December 31, 1993, a 25.0% increase.
Equity
At December 31, 1994, stockholders' equity was $587,330,000, or $18.54 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 $26,493,000, or $0.84 per share,
after adjustments to deferred acquisition costs at December 31, 1994. The
ratio of consolidated debt to total capital was 13.3% at December 31, 1994,
down from 13.8% at year-end 1993 as a result of the increase in
stockholders' equity. At December 31, 1994, there were 31,677,891 common
shares outstanding compared to 31,504,586 shares at December 31, 1993.
At its August 11, 1994 board meeting the company's Board of Directors
approved a Dividend Reinvestment and Stock Purchase Plan, which became
available to shareholders in September 1994. This voluntary plan allows
common stock dividends to be automatically reinvested in the company's
common stock, with no brokerage commissions. During 1994, 7,853 shares of
common stock were purchased under this plan.
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 December 31,
1994 the company had $90,450,000 in commercial paper notes outstanding, an
increase of $56,450,000 from December 31, 1993 as additional commercial
paper was issued 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 totaling $249,000,000. A credit line totaling
$166,000,000 expires on March 31, 1997 and a credit line totaling
$83,000,000 expires on March 30, 1995. The company is currently
negotiating to revise and extend its credit lines.
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 $63,906,000 during 1995. 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 totaling $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 December 31, 1994,
$142,009,000 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
$76,264,000 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. In February 1995, the company issued $100 million
of 8.5% notes, maturing on February 15, 2005, receiving net proceeds
totaling approximately $98,826,000, after expenses. The company has
contributed $50 million of the proceeds to its insurance subsidiaries and
has applied the remaining net proceeds to the repayment of outstanding
commercial paper notes. Over time, further growth in the company's
insurance operations may require additional equity capital, although the
company believes it now has sufficient 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 totaling $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 - 1994 COMPARED TO 1993
Sales
Total annuity and life insurance sales, as measured by first year and
single premiums, increased $484,934,000, or 43.2%, to $1,607,731,000 during
1994. For the third consecutive year, the company established a new record
for annuity sales with an increase of $477,708,000, or 43.3%, to
$1,581,930,000 during 1994. The company believes that its commitment to
customer service, the quality of its investment portfolio, competitive
pricing and its overall financial strength continue to attract consumers to
its annuity products as consumers seek a secure return on their retirement
savings. Insurance agents are attracted to sell the company's products for
the same reasons, as well as a diversified product portfolio, competitive
commissions, rapid policy issuance and weekly commission payments. First
year and single life insurance premiums increased $7,226,000, or 38.9%, to
$25,801,000 in 1994 due to increases in sales of the company's universal
life and current interest products.
Revenues
Total revenues increased $78,692,000, or 13.7%, to $651,660,000 in 1994.
Universal life insurance and annuity product charges increased $9,486,000,
or 27.7%, to $43,767,000 in 1994, as increased withdrawals from the
company's annuity products generated higher surrender charge revenues. In
addition to increased withdrawal levels, withdrawals and surrenders of the
company's annuity products which contain a "market value adjustment"
feature generate greater surrender charge income as interest rates
increase. Surrender charge income, which allows the company to recover a
portion of the expenses incurred to generate policy sales, was offset by
greater amortization of deferred policy acquisition costs. Premiums from
traditional life insurance products decreased $605,000, or 1.3%, to
$46,265,000 during 1994 as decreases in traditional life insurance renewal
premiums were only partially offset by increases in first year and single
premiums during 1994.
Net investment income increased $90,342,000, or 20.8%, to $524,411,000 in
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 1994 compared to 9.1% in 1993. The company's investment
portfolio, excluding policy loans, had a yield to maturity of 8.4% at
December 31, 1994, compared to 8.5% at December 31, 1993. New money rates
rose in 1994 and the company expects its portfolio yield to stabilize as
new funds are invested at current rates. During 1994, the company had
realized gains on the sale of investments of $19,697,000 compared to gains
of $41,985,000 in 1993. The level of realized gains has decreased as calls
and repayments of fixed maturity securities have slowed due to higher
interest rates.
Expenses
Total insurance benefits and expenses increased $62,064,000, or 14.8%, to
$482,499,000 in 1994. Interest credited to universal life and investment
product account balances increased $51,320,000, or 19.1%, to $320,312,000
in 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% in 1994 compared to
6.6% in 1993. The average annual interest rate in effect for those
policies at December 31, 1994 was 5.7%, compared to 6.1% at December 31,
1993. The company's policy is to change rates credited to policy accounts
as the company's investment portfolio yield changes. 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 $5,484,000, or 19.9%, to $33,020,000
in 1994. Other benefits increased $436,000, or 1.4%, to $32,780,000 in
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 9.0%, during 1994 compared to 4.6% in 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
primarily by stockbrokers contained a five-year surrender charge and a
portion also contained a five-year interest guarantee. The company planned
for, and has experienced, higher surrenders related to this block of
business. Excluding surrenders of the five-year guarantee business, the
company's annuity withdrawal ratio would have been 7.6%. Excluding the
total block of business, the company's annuity withdrawal ratio would have
been 6.1%. The company currently does not market annuity policies with
multi-year guarantees although it may in the future. Also, the company has
not actively solicited fixed annuity sales through stockbrokers since 1989.
At December 31, 1994, policies originally issued with a 5 year interest
guarantee represent approximately 2.7% ($160 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 lapse ratio for life insurance measured in terms of face amount
and using A.M. Best's formula, was 7.4% in 1994 compared to 7.2% in 1993.
Commissions increased $43,578,000, or 38.4%, to $157,028,000 in 1994.
General expenses increased $5,848,000, or 15.6%, to $43,402,000 in 1994.
Insurance taxes also increased $3,627,000, or 57.2%, to $9,961,000 in 1994.
Increases in commissions and insurance taxes are directly related to life
insurance and annuity sales during these periods. General expenses grew
more slowly as they relate more directly to policyholder base and total
assets. Most costs incurred as the result of new sales have been deferred,
thus having very little impact on current earnings.
The amortization of deferred policy acquisition costs increased by
$8,843,000, or 21.0%, to $50,921,000 in 1994. Amortization of deferred
acquisition costs related to operating earnings increased $16,549,000, or
58.8%, to $44,711,000 in 1994 as the result of a 34.7% increase in the
deferred policy acquisition cost asset since December 31, 1993 as costs of
generating sales of the company's products are deferred and amortized in
later periods. Also, higher withdrawals and surrenders of the company's
products have accelerated the amortization of deferred acquisition costs
related to those products although surrender charges assessed on certain
withdrawals offset some of this accelerated amortization. Amortization
related to realized gains declined to $6,210,000 in 1994 compared to
$13,916,000 in 1993 as a result of the decrease in realized and prepayment
gains in 1994.
Income
Operating income (income from continuing operations before cumulative
effect of change in accounting principles, excluding realized gains and
losses, mortgage-backed securities prepayment gains and related
amortization of deferred policy acquisition costs, net of related income
taxes) increased $19,301,000, or 28.0%, in 1994. Net income increased
$11,128,000, or 12.8%, in 1994. A breakdown of income is as follows:
<TABLE>
<CAPTION>
Year ended December 31 1994 1993
_____________________________________________________________________________
$ Per Share $ Per Share
_________ _________ _________ _________
(Dollars in thousands,
except per share data)
<S> <C> <C> <C> <C>
Operating income $88,212 $2.79 $68,911 $2.33
Realized gains (net of tax):
Gains realized on disposal
of investments 12,953 0.41 27,290 0.92
Mortgage-backed securities
prepayment gains 1,156 0.04 -- --
Realized gains related
amortization of DPAC (4,037) (0.13) (9,045) (0.30)
_________ _________ _________ _________
10,072 0.32 18,245 0.62
_________ _________ _________ _________
Net Income $98,284 $3.11 $87,156 $2.95
========= ========= ========= =========
</TABLE>
Average shares outstanding totaled 31,612,675 in 1994 up from 29,540,274 in
1993.
Operating earnings increased primarily as a result of the growth in average
assets in 1994. Realized gains were lower in 1994 due to fewer
prepayments and calls during the year compared to 1993. Earnings per
share, operating and net income, grew less than operating earnings and net
income due to the additional shares outstanding as a result of the common
stock offering in October 1993.
RESULTS OF OPERATIONS - 1993 COMPARED TO 1992
Sales
Total life insurance and annuity sales, as measured by first year and
single premiums, increased $236,777,000, or 26.7%, to $1,122,797,000 in the
year ended December 31, 1993. Annuity sales increased $232,912,000, or
26.7%, to $1,104,222,000 in 1993. The company attributes this sales growth
to its commitment to customer service, the quality of its investment
portfolio and its overall financial strength which attract consumers to its
annuity products as consumers continue to seek a secure return on their
retirement savings. First year and single life insurance premiums
increased $3,865,000, or 26.3%, to $18,575,000 in the year ended December
31, 1993 due to increased sales of the company's universal life and current
interest products.
Revenues
Total revenues increased $114,594,000, or 25.0%, to $572,968,000, in 1993,
compared to 1992. Universal life insurance and annuity product charges
increased $3,869,000, or 12.7%, to $34,281,000, compared to the year ended
December 31, 1992, as the company's marketing efforts focused on the sale
of deferred annuities and interest-sensitive life insurance products.
Premiums from traditional life insurance products also improved during
1993, increasing by $3,848,000, or 8.9%, to $46,870,000, compared to 1992,
as these products were made available to the company's insurance brokerage
distribution system.
Net investment income increased $71,636,000, or 19.8%, to $434,069,000 in
1993, as the increase in invested assets more than offset the decline in
portfolio yield. The average annualized yield on invested assets
supporting policy accounts for interest-sensitive products, including
annuities, universal life-type policies and participating life policies was
9.1% during 1993, compared to 9.7% during 1992. The company's total
investment portfolio, excluding policy loans, had a yield to maturity of
8.5% at December 31, 1993, compared to 9.2% at December 31, 1992,
reflecting a general decline in interest rates, and substantial principal
repayments of investments. During 1993, the company realized gains on the
sale of investments of $41,985,000, compared to $8,164,000 in 1992,
primarily resulting from calls and prepayments of fixed maturity
investments. Included in these totals were writedowns of $6,806,000 in 1993
and $5,328,000 in 1992, to reduce the carrying value of various investments
to estimated net realizable value.
Expenses
Total insurance benefits and expenses increased $66,054,000, or 18.6%, to
$420,435,000 in 1993. Interest credited to universal life and annuity
account balances increased $37,168,000, or 16.0%, to $268,992,000, in 1993,
as a result of higher account balances associated with those products. The
average annualized interest rate credited to policy accounts for interest-
sensitive products, including annuities and universal life-type policies
and participating life policies, was 6.6% for 1993 compared to 7.5% in
1992. The average annual interest rate in effect for those policies at
December 31, 1993 was 6.1%, compared to 7.1% at December 31, 1992. The
company's practice is to reduce rates credited to policy accounts as
investment yields decline. Most of the company's interest-sensitive
policies allow for interest rate adjustments at least annually.
Death benefits on traditional life products and benefit claims incurred in
excess of account balances on universal life products increased $2,897,000,
or 11.8%, to $27,536,000, while other benefits declined $8,129,000, or
20.1%, to $32,344,000 in 1993, due to lower lapses of the company's
insurance policies. These changes were offset by a corresponding change in
the reserve for future policy benefits and, therefore, had no material
impact on net income.
The withdrawal ratio for the company's annuity products, as calculated by
dividing average aggregate surrenders and withdrawals by average aggregate
account balances, was 4.6% in 1993 compared to 6.3% in 1992. The 1992
annuity withdrawal rate included withdrawals resulting from the exercise of
a "bailout" feature by policyholders which allowed them to withdraw their
account balance without penalty as credited rates fell below predetermined
levels. This "bailout" feature can only be exercised for a limited period,
and less than 1% of remaining annuity liabilities are subject to a
"bailout" feature. Excluding these "bailout" withdrawals, the 1992
withdrawal rate was 4.2%. The company's lapse ratio for life insurance,
measured in terms of face amount and using A. M. Best's formula, was 7.2%
in 1993 compared to 8.4% in 1992.
Commissions increased $29,083,000, or 34.5%, to $113,450,000 in 1993,
primarily because of increased sales of annuity products. This increase was
offset by an increase in the deferral of such policy acquisition costs and
thus had little impact on total insurance expenses. General insurance
expenses increased $5,260,000, or 16.3%, to $37,554,000 related to
increases in sales, assets and policies in force. The amortization of
deferred policy acquisition costs increased by $21,902,000, or 108.6%, to
$42,078,000 in 1993. During 1993, the estimate and timing of gross profits
from certain universal life and annuity product lines changed, which, in
accordance with SFAS No. 97, necessitated that the company recompute or
"unlock" the amortization of deferred policy acquisition costs. This
"unlocking" primarily resulted from realized investment gains leading to
higher gross profits than originally expected. As a result, 1993
amortization was increased by $13,916,000.
Income
Operating income increased $19,602,000, or 39.8%, to $68,911,000 in 1993.
Net income increased $32,650,000, or 59.9%, in 1993. A breakdown of income
is as follows:
<TABLE>
<CAPTION>
Year ended December 31 1993 1992
_____________________________________________________________________________
$ Per Share $ Per Share
_________ _________ _________ _________
(Dollars in thousands,
except per share data)
<S> <C> <C> <C> <C>
Operating income $68,911 $2.33 $49,309 $1.72
Realized gains (net of tax):
Gains realized on disposal
of investments 27,290 0.92 7,951 0.27
Realized gains related
amortization of DPAC (9,045) (0.30) -- --
Discontinued operations -- -- 1,924 0.07
Cumulative effect on prior
prior years (to December
31, 1991) of change in
method of accounting -- -- (4,678) (0.16)
_________ _________ _________ _________
18,245 0.62 5,197 0.18
_________ _________ _________ _________
Net Income $87,156 $2.95 $54,506 $1.90
========= ========= ========= =========
</TABLE>
1992 per share amounts reported above have been restated to reflect the 2-
for-1 stock split on June 1, 1993.
Average shares outstanding totaled 29,540,274 in 1993 up from 28,688,660 in
1992.
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, market conduct, 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.
The NAIC, in conjunction with state regulators, has been reviewing existing
insurance laws and regulations. A committee of the NAIC is developing
proposals to govern insurance company investments and holding company
investments in subsidiaries and affiliates presently anticipated to be
considered for adoption as model laws in 1995. While the specific
provisions of such model laws 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. A task
force of the NAIC is currently undertaking a project to codify a
comprehensive set of statutory insurance accounting rules and regulations.
This project is not expected to be completed until at least 1996 and
specific recommendations have not been published. The company is
monitoring and, through an industry trade association, actively
participating in this process, but the potential impact of any changes in
insurance accounting standards is not yet known.
In addition, a committee of the NAIC has approved and submitted to the full
NAIC a proposal which may affect the company's annuity policy reserves.
This proposed regulation, entitled Guideline GGG, if approved by the NAIC,
would require the company to increase annuity reserves in its statutory
financial statements by approximately $25 to $50 million. The proposal
would allow this increase to be phased in over a three year period if
approved by the insurance department in the state of domicile. The
proposed guideline would have no effect on financial statements prepared in
accordance with GAAP.
Over the past year the insurance industry generally, and a few individual
companies, specifically, have been criticized for inadequate training and
supervision of agents. As a result, new state regulations and industry
self-regulatory standards have been proposed. Although the company has
received relatively few policyholder or regulatory complaints or concerns,
the company initiated a thorough review of its entire approach to the
selection, training and supervision of its salespeople and the sales
process and has re-emphasized its commitment to clear, up-front disclosure
of the nature of its products and the reasonable expectations of their
future performance.
RECENT DEVELOPMENTS
Legislation is currently under discussion in Congress and the Clinton
Administration which would repeal the Glass-Steagall Act thereby permitting
banks and bank holding companies the increased ability to enter the
insurance and securities businesses. This could result in increased
competition for the company's products. A recent United States Supreme
Court decision permits national banks to broker annuities. The Supreme
Court decision may afford the company the opportunity to expand its sales
through banks, but could also result in increased competition for annuity
sales. Future changes, if any, in the ability of banks to underwrite as
well as broker annuities could also increase competition for annuity sales.
The banking industry can be expected to continue to seek expanded powers at
the federal and state level to sell insurance and annuities through changes
in the law or interpretation of existing law. The outcome and timing of
any such changes cannot be anticipated at this time, but the company will
continue to monitor developments in order to respond to any opportunities
or increased competition that may occur.
ITEM 8. Financial Statements and Supplementary Data
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
December 31 1994 1993
______________________________________________________________________________
<S> <C> <C>
ASSETS
Investments:
Fixed maturities:
Held for investment, at amortized cost (market:
1994 - $5,059,090; 1993 - $5,407,358) $5,393,798 $5,078,226
Available for sale, at market (cost: 1994 -
$819,083) 778,486 --
Equity securities, at market (cost: 1994 -
$23,351; 1993 - $250) 22,978 83
Mortgage loans on real estate 613,208 346,829
Real estate, less allowances for depreciation
of $4,659 in 1994 and $4,580 in 1993 15,668 20,773
Policy loans 176,448 176,849
Short-term investments 50,975 67,619
___________ ___________
Total investments 7,051,561 5,690,379
Cash and cash equivalents 12,674 5,190
Securities and indebtedness of related parties 11,034 11,791
Accrued investment income 105,959 92,473
Notes and other receivables 23,173 27,366
Deferred policy acquisition costs 607,626 451,180
Property and equipment, less allowances for
depreciation of $6,795 in 1994 and $4,259 in 1993 7,843 7,431
Current income taxes recoverable 14,491 --
Deferred income tax benefit -- 11,583
Intangible assets, less accumulated amortization
of $559 in 1994 and $1,625 in 1993 2,605 3,346
Other assets 43,664 36,668
Separate account assets 84,963 94,028
___________ ___________
Total assets $7,965,593 $6,431,435
=========== ===========
</TABLE>
See accompanying notes.
CONSOLIDATED BALANCE SHEETS - CONTINUED
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
December 31 1994 1993
______________________________________________________________________________
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Policy liabilities and accruals:
Future policy benefits:
Universal life and annuity products $6,237,107 $4,803,729
Traditional life insurance products 777,100 774,356
Unearned revenue reserve 14,317 14,451
Other policy claims and benefits 7,785 5,765
___________ ___________
7,036,309 5,598,301
Other policyholders' funds:
Supplementary contracts without life contingencies 12,224 11,729
Advance premiums and other deposits 790 925
Accrued dividends 12,761 13,251
___________ ___________
25,775 25,905
Current income taxes payable -- 2,293
Deferred income taxes 1,442 --
Long-term debt -- 50,214
Commercial paper notes 90,450 34,000
Other liabilities 139,324 98,732
Separate account liabilities 84,963 94,028
___________ ___________
Total liabilities 7,378,263 5,903,473
Commitments and contingencies
Stockholders' equity:
Serial preferred stock, without par value -
authorized 2,500,000 shares -- --
Common stock, without par value (stated value
$1.00 per share) - authorized 70,000,000 shares
in 1994 and 1993, issued and outstanding 31,677,891
shares in 1994 and 31,504,586 shares in 1993 31,678 31,505
Additional paid-in capital 78,661 75,841
Unrealized appreciation (depreciation) of fixed
maturities (26,493) --
Unrealized appreciation (depreciation) of equity
securities (373) (167)
Retained earnings 505,622 422,093
Unearned compensation (deduction) (1,765) (1,310)
___________ ___________
Total stockholders' equity 587,330 527,962
___________ ___________
Total liabilities and stockholders' equity $7,965,593 $6,431,435
=========== ===========
</TABLE>
See accompanying notes.
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Year ended December 31 1994 1993 1992
_______________________________________________________________________________
<S> <C> <C> <C>
Revenues:
Universal life and annuity
product charges $43,767 $34,281 $30,412
Traditional life insurance premiums 46,265 46,870 43,022
Net investment income 524,411 434,069 362,433
Realized gains on investments 19,697 41,985 8,164
Other income 17,520 15,763 14,343
___________ ___________ ___________
651,660 572,968 458,374
Benefits and expenses:
Universal life and annuity benefits 329,189 274,610 236,543
Traditional life insurance benefits 56,923 54,262 60,393
Increase (decrease) in future
traditional policy benefits 3,350 3,439 (6,969)
Distributions to participating
policyholders 24,988 25,861 26,059
Underwriting, acquisition and
insurance expenses 68,049 62,263 38,355
___________ ___________ ___________
482,499 420,435 354,381
Interest expense 7,882 9,522 9,761
Other expenses 10,035 8,016 10,488
___________ ___________ ___________
500,416 437,973 374,630
___________ ___________ ___________
151,244 134,995 83,744
Income taxes 52,921 47,965 26,488
___________ ___________ ___________
98,323 87,030 57,256
Equity income (loss), net of related
income taxes (39) 126 4
___________ ___________ ___________
Income from continuing operations before
cumulative effect of change in
accounting principles 98,284 87,156 57,260
Discontinued operations:
Loss from retail operations, net
of related income taxes -- -- (3,182)
Gain on disposal of retail operations,
net of related income taxes -- -- 5,106
___________ ___________ ___________
-- -- 1,924
___________ ___________ ___________
Income before cumulative effect of
change in accounting principles 98,284 87,156 59,184
Cumulative effect on prior years (to
December 31, 1991) of change in
method of accounting for post-
retirement benefits, net of related
income tax benefit -- -- (4,678)
___________ ___________ ___________
Net income $98,284 $87,156 $54,506
=========== =========== ===========
</TABLE>
CONSOLIDATED STATEMENTS OF INCOME - CONTINUED
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Year ended December 31 1994 1993 1992
_______________________________________________________________________________
<S> <C> <C> <C>
Net income per common share:
Income before cumulative effect of
change in accounting principles:
Continuing operations $3.11 $2.95 $1.99
Discontinued operations -- -- 0.07
___________ ___________ ___________
3.11 2.95 2.06
Cumulative effect on prior years (to
December 31, 1991) of change in
method of accounting for post-
retirement benefits, net of related
income tax benefit -- -- (0.16)
___________ ___________ ___________
Net income per common share $3.11 $2.95 $1.90
=========== =========== ===========
</TABLE>
See accompanying notes.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Dollars in thousands)
<TABLE>
<CAPTION>
Unreal- Unreal-
ized ized
Appre Appre
ciation ciation
(Depre (Depre
ciation) ciation) Unearned
Addi- of of Compen- Total
tional Fixed Equity sation Stock-
Common Paid-In Matur- Secur- Retained (Deduc- holders'
Stock Capital ities ities Earnings tion) Equity
________ ________ _________ _______ _________ ________ _________
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at
January 1, 1992 $7,107 $5,617 ($898) $312,229 ($1,275) $322,780
Issuance of shares
in connection
with 2-for-1
stock split 7,107 (6,666) -- (441) -- --
Net income for
1992 -- -- -- 54,506 -- 54,506
Unrealized
appreciation
of equity
securities -- -- 764 -- -- 764
Issuance of 280,542
shares of common
stock under stock
incentive plans, net
of amortization and
related income tax
benefit 280 5,206 -- -- 325 5,811
Conversion of
installment
notes 3 29 -- -- -- 32
Cash dividends -- -- -- (10,092) -- (10,092)
________ ________ _________ _______ _________ ________ _________
Balance at Decem-
ber 31, 1992 14,497 4,186 (134) 356,202 (950) 373,801
</TABLE>
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY - CONTINUED
(Dollars in thousands)
<TABLE>
<CAPTION>
Unreal- Unreal-
ized ized
Appre Appre
ciation ciation
(Depre (Depre
ciation) ciation) Unearned
Addi- of of Compen- Total
tional Fixed Equity sation Stock-
Common Paid-In Matur- Secur- Retained (Deduc- holders'
Stock Capital ities ities Earnings tion) Equity
________ ________ _________ _______ _________ ________ _________
<S> <C> <C> <C> <C> <C> <C> <C>
Issuance of shares
in connection
with 2-for-1
stock split 14,497 (5,303) -- (9,194) -- --
Issuance of 2,300,000
shares under
primary stock
offering 2,300 73,964 -- -- -- 76,264
Net income for
1993 -- -- -- 87,156 -- 87,156
Unrealized
depreciation
of equity
securities -- -- (33) -- -- (33)
Issuance of 207,304
shares of common
stock under stock
incentive plans, net
of amortization and
related income tax
benefit 207 2,981 -- -- (360) 2,828
Conversion of
installment
notes 4 13 -- -- -- 17
Cash
dividends -- -- -- (12,071) -- (12,071)
________ ________ _________ _______ _________ ________ _________
Balance at Decem-
ber 31, 1993 31,505 75,841 (167) 422,093 (1,310) 527,962
</TABLE>
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY - CONTINUED
(Dollars in thousands)
<TABLE>
<CAPTION>
Unreal- Unreal-
ized ized
Appre Appre
ciation ciation
(Depre (Depre
ciation) ciation) Unearned
Addi- of of Compen- Total
tional Fixed Equity sation Stock-
Common Paid-In Matur- Secur- Retained (Deduc- holders'
Stock Capital ities ities Earnings tion) Equity
________ ________ _________ _______ _________ ________ _________
<S> <C> <C> <C> <C> <C> <C> <C>
Cumulative effect
of change in
accounting prin-
ciple regarding
fixed maturity
securities -- -- $22,516 -- -- -- 22,516
Net income for
1994 -- -- -- -- 98,284 -- 98,284
Unrealized
depreciation
of fixed
maturities -- -- (49,009) -- -- -- (49,009)
Unrealized
depreciation
of equity
securities -- -- -- (206) -- -- (206)
Issuance of 165,452
shares of common
stock under stock
incentive plans, net
of amortization and
related income tax
benefit 165 2,623 -- -- -- (455) 2,333
Issuance of shares
of common stock
under dividend
reinvestment
plan 8 219 -- -- -- -- 227
Other -- (22) -- -- -- -- (22)
Cash
dividends -- -- -- -- (14,755) -- (14,755)
________ ________ _________ _______ _________ ________ _________
Balance at
December 31,
1994 $31,678 $78,661 ($26,493) ($373) $505,622 ($1,765) $587,330
======== ======== ========= ======= ========= ======== =========
<FN>
Note: Share amounts set forth in the above statement for the year ended
December 31, 1992 have not been restated to reflect the 2-for-1 stock
split payable June 1, 1993 to holders of record on May 12, 1993.
</TABLE>
See accompanying notes.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
Year ended December 31 1994 1993 1992
_______________________________________________________________________________
<S> <C> <C> <C>
OPERATING ACTIVITIES
Continuing operations:
Net income $98,284 $87,156 $52,582
Adjustments to reconcile net income to
net cash provided by continuing operations:
Adjustments related to universal life
and annuity products:
Interest credited to account balances 320,312 268,992 231,824
Charges for mortality and
administration (46,280) (31,151) (29,068)
Deferral of unearned revenues 981 1,472 379
Amortization of unearned revenue
reserve (1,430) (2,312) (873)
Increase (decrease) in traditional life
policy liabilities and accruals 3,750 5,987 (7,937)
Decrease in other policyholders' funds (130) (194) (339)
Increase in accrued investment income (13,486) (14,376) (11,813)
Policy acquisition costs deferred (193,263) (137,153) (104,105)
Amortization of deferred policy
acquisition costs 50,921 42,078 20,176
Change in other assets, other
liabilities, and accrued income taxes 28,564 23,450 5,329
Provision for depreciation and
amortization 260 509 1,539
Provision for deferred income taxes 13,211 (1,305) 1,458
Share of losses (equity in earnings)
of related parties 51 (194) 27
Realized gains on investments (19,697) (41,985) (8,164)
___________ ___________ ___________
242,048 200,974 151,015
Discontinued operations:
Net income -- -- 1,924
Adjustments to reconcile net income to
net cash used in discontinued
operations -- -- (170)
___________ ___________ ___________
-- -- 1,754
___________ ___________ ___________
Net cash provided by operating
activities 242,048 200,974 152,769
</TABLE>
See accompanying notes.
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
(Dollars in thousands)
<TABLE>
<CAPTION>
Year ended December 31 1994 1993 1992
_______________________________________________________________________________
<S> <C> <C> <C>
INVESTING ACTIVITIES
Sale, maturity, or repayment of investments:
Fixed maturities-held for investment 286,844 1,056,544 752,624
Fixed maturities-available for sale 204,847 -- --
Equity securities -- -- 11,988
Mortgage loans on real estate 47,960 49,081 34,527
Real estate 5,662 289 2,363
Policy loans 30,397 25,963 31,202
Short-term investments - net 16,644 -- --
___________ ___________ ___________
592,354 1,131,877 832,704
Acquisition of investments:
Fixed maturities-held for investment (1,422,409) (2,124,615) (1,606,055)
Fixed maturities-available for sale (181,303) -- --
Equity securities (23,101) -- --
Mortgage loans on real estate (314,255) (152,274) (63,145)
Real estate (876) (346) (388)
Policy loans (29,996) (26,083) (26,093)
Short-term investments - net -- (12,717) (37,511)
___________ ___________ ___________
(1,971,940) (2,316,035) (1,733,192)
Disposal of investments accounted for
by the equity method $489 $939 $1,304
Additions to investments accounted for
by the equity method (1,376) (467) (3,862)
Proceeds from sale of subsidiary -- -- 54,938
Repayments of notes receivable 223 38 8
Issuance of notes receivable (2,438) -- (34)
Sales of property and equipment 282 107 836
Purchases of property and equipment (3,052) (3,873) (1,938)
___________ ___________ ___________
Net cash used in investing activities (1,385,458) (1,187,414) (849,236)
</TABLE>
See accompanying notes.
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
(Dollars in thousands)
<TABLE>
<CAPTION>
Year ended December 31 1994 1993 1992
_______________________________________________________________________________
<S> <C> <C> <C>
FINANCING ACTIVITIES
Issuance (repayment) of commercial
paper - net 56,450 5,226 (6,026)
Repayment of other debt (50,214) (10,520) (68)
Receipts from universal life and
annuity policies credited to
policyholder account balances 1,746,108 1,190,024 951,309
Return of policyholder account balances
on universal life policies and
annuity policies (586,762) (264,364) (242,764)
Issuance of common stock under
primary stock offering -- 76,264 --
Issuance of stock under stock
plans and upon debt conversion 67 861 3,158
Cash dividends paid (14,755) (12,071) (10,092)
___________ ___________ ___________
Net cash provided by financing
activities 1,150,894 985,420 695,517
Increase (decrease) in cash and cash
equivalents 7,484 (1,020) (950)
Cash and cash equivalents at beginning
of year 5,190 6,210 7,160
___________ ___________ ___________
Cash and cash equivalents at end of year $12,674 $5,190 $6,210
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest $7,650 $10,404 $8,654
Income taxes 61,834 42,367 29,433
Noncash investing and financing activities:
Foreclosure of mortgage loans and notes
receivable, including taxes and costs
capitalized ($106) and operating funds
retained ($283) in 1993 250 6,577 1,100
Restructure of fixed maturity investment,
including fixed maturity ($897) and
equity security ($353) received -- -- 1,250
</TABLE>
See accompanying notes.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1994
1. SIGNIFICANT ACCOUNTING POLICIES
Consolidation: The consolidated financial statements include the company
and its subsidiaries. The principal subsidiaries are Equitable Life
Insurance Company of Iowa ("Equitable Life") and USG Annuity & Life Company
("USG"). Equitable Life and USG operate predominantly in the individual
life and annuity area of the life insurance business. At December 31, 1994
and 1993, all subsidiaries are wholly-owned. See Note 9 to consolidated
financial statements which discusses the sale of the company's retail
subsidiary, Younkers, Inc. in 1992. All significant intercompany accounts
and transactions have been eliminated.
Investments: 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 related 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 estimated fair value which becomes the
security's 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 non-redeemable preferred stocks) are
reported at market if readily marketable, or at cost if not readily
marketable. The change in unrealized appreciation and depreciation of
marketable equity securities (net of related deferred income taxes, if any)
is included directly in stockholders' equity. Equity securities that are
determined to have a decline in value that is other than temporary are
written down to estimated fair value which becomes the security's new cost
basis by a charge to realized losses in the company's Statement of Income.
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. The carrying value
of these assets is subject to regular review. If the fair value, less
estimated sale cost, of real estate owned decreases to an amount lower
than its carrying value, a valuation allowance is established for the
difference. This valuation allowance can be restored should the fair value
of the property increase. Changes in this valuation allowance are charged
or credited to income.
Policy loans are reported at unpaid principal. Short-term investments are
reported at cost adjusted for amortization of premiums and accrual of
discounts. Investments accounted for by the equity method include
investments in, and advances to, various joint ventures and partnerships.
Market values, as reported herein, of publicly traded fixed maturity
securities are as reported by an independent pricing service. Market values
of conventional mortgage-backed securities not actively traded in a liquid
market are estimated using a third party pricing system, which uses a
matrix calculation assuming a spread over U.S. Treasury bonds based upon
the expected average lives of the securities. Market values of private
placement bonds are estimated using a matrix that assumes a spread (based
on interest rates and a risk assessment of the bonds) over U.S. Treasury
bonds. Market values of redeemable preferred stocks are as reported by the
National Association of Insurance Commissioners ("NAIC"). Market values of
equity securities are based on the latest quoted market prices, or where
not readily marketable, at values which are representative of the market
values of issues of comparable yield and quality. Realized gains and
losses are determined on the basis of specific identification of
investments.
Cash and Cash Equivalents: For purposes of the consolidated statement of
cash flows, the company considers all demand deposits and interest-bearing
accounts not related to the investment function to be cash equivalents.
All interest-bearing accounts classified as cash equivalents have original
maturities of three months or less.
Deferred Policy Acquisition Costs: Certain costs of acquiring new
insurance business, principally commissions and other expenses related to
the production of new business, have been deferred. For universal life and
annuity products, such costs are being amortized generally in proportion to
the present value (using the assumed crediting rate) of expected gross
profits. This amortization is adjusted retrospectively, or "unlocked",
when the company revises its estimate of current or future gross profits to
be realized from a group of products. For traditional life insurance
products, such costs are being amortized over the premium-paying period of
the related policies in proportion to premium revenues recognized, using
principally the same assumptions for interest, mortality and withdrawals
that are used for computing liabilities for future policy benefits subject
to traditional "lock-in" concepts. Deferred policy acquisition costs are
adjusted to reflect the pro-forma impact of unrealized gains and losses on
fixed maturity securities the company has designated as "available for
sale" under SFAS No. 115.
Property and Equipment: Property and equipment primarily represent
leasehold improvements at the company's headquarters and at various agency
offices and office furniture and equipment and are not considered to be
significant to the company's overall operations. Property and equipment
are reported at cost less allowances for depreciation. Depreciation
expense is computed primarily on the basis of the straight-line method over
the estimated useful lives of the assets.
Intangible Assets: Intangible assets include the value of various licenses
acquired in conjunction with the purchase of USG and capitalized costs
related to the company's lines of credit. Intangible assets related to
insurance licenses are being amortized over forty years using the straight-
line method. Capitalized line of credit costs are being amortized over the
term of the underlying line of credit agreement.
Future Policy Benefits: The liability for future policy benefits for
traditional life insurance products has been calculated on a net-level
premium basis. Interest assumptions range from 2.75% for 1956 and prior
issues to a 9.00% level, graded to 6.00% after twenty years for current
issues. Mortality, morbidity and withdrawal assumptions generally are
based on actual experience. These assumptions have been modified to
provide for possible unfavorable deviation from the assumptions. Future
dividends for participating business (which accounted for 1.7% of premiums
and 10.6% of inforce in 1994) are provided for in the liability for future
policy benefits.
With respect to universal life and annuity products, the company utilizes
the retrospective deposit accounting method. Policy reserves represent the
premiums received plus accumulated interest, less mortality and
administration charges. Interest credited to these policies ranged from
3.50% to 11.35% during 1994, 4.50% to 10.00% during 1993 and 4.50% to 9.00%
during 1992.
The unearned revenue reserve reflects the unamortized balance of the
excess of first year administration charges over renewal period
administration charges (policy initiation fees) on universal life and
annuity products. These excess charges have been deferred and are being
recognized in income over the period benefited using the same assumptions
and factors used to amortize deferred policy acquisition costs.
Recognition of Premium Revenues and Costs: Traditional life insurance
premiums are recognized as revenues over the premium-paying period. Future
policy benefits and policy acquisition costs are associated with the
premiums as earned by means of the provision for future policy benefits and
amortization of deferred policy acquisition costs.
Revenues for universal life and annuity products consist of policy charges
for the cost of insurance, renewal period administration charges,
amortization of policy initiation fees and surrender charges assessed
against policyholder account balances during the period. Expenses related
to these products include interest credited to policyholder account
balances and benefit claims incurred in excess of policyholder account
balances.
Deferred Income Taxes: Deferred tax assets or liabilities are computed
based on the difference between the financial statement and income tax
bases of assets and liabilities using the enacted marginal tax rate.
Deferred income tax expenses or credits are based on the changes in the
asset or liability from period to period.
Interest Rate Swaps: The company had interest rate swap agreements
outstanding during 1993, whereby any interest rate differential to be
received/paid was recognized as an adjustment to interest expense. All of
these swap agreements expired or were terminated in August 1993.
Separate Accounts: The transactions in the separate accounts (which are
charged or credited directly to the accounts) are excluded from the
consolidated statements of income.
Capital Stock: On April 30, 1992, the company's shareholders approved a
plan to consolidate the company's Class A and Class B common stock into a
single class of common stock on a one-to-one basis, accordingly, 7,107,044
shares of Class A and Class B common stock were converted to a single class
of common stock. The plan was effective as of May 1, 1992. On April 30,
1992 the company's Board of Directors approved a 2-for-1 stock split
payable June 2, 1992, to holders of record on May 14, 1992. On April 29,
1993 the company's Board of Directors approved an additional 2-for-1 stock
split payable June 1, 1993, to holders of record on May 12, 1993. With
respect to the statement of changes in stockholders' equity, share and per
share amounts prior to January 1, 1993, have not been restated to reflect
the 1993 stock split. All other share and per share data presented in the
consolidated financial statements and notes thereto have been restated to
reflect the stock splits.
Net Income per Share of Common Stock: Net income per share is based on the
weighted average number of shares of common stock outstanding during each
year (1994 - 31,612,675; 1993 - 29,540,274 and 1992 - 28,688,660).
Employee stock options and installment notes convertible into shares of
common stock have not been included in the net income per share
computations because their effect is not material.
Dividends per Share of Common Stock: For the years ended December 31,
1994, 1993 and 1992, the company paid dividends per share of $0.465, $0.405
and $0.35 respectively, after giving effect for the 2-for-1 stock splits as
of May 14, 1992 and May 12, 1993.
Dividend Restrictions: The company's ability to pay dividends to its
stockholders is restricted by certain debt covenants. The most restrictive
covenant requires the company to maintain tangible net worth equal to the
sum of $420,000,000 plus proceeds from any issuance of common stock plus
one-half of net income recognized subsequent to January 1, 1994. At
December 31, 1994, retained earnings available for dividends aggregated
$142,009,000.
The ability of Equitable Life to pay dividends to the parent company is
restricted because prior approval of insurance regulatory authorities is
required for payment of dividends to the stockholder which exceed an annual
limitation. During 1995, Equitable Life could pay dividends to the parent
company of approximately $63,906,000 without prior approval of statutory
authorities. Also, the amount ($241,260,000 at December 31, 1994) by which
the stockholder's equity stated in conformity with generally accepted
accounting principles exceeds statutory capital and surplus as reported is
restricted and cannot be distributed.
2. BASIS OF FINANCIAL REPORTING - LIFE INSURANCE OPERATIONS
The financial statements of the life insurance subsidiaries differ from
related statutory financial statements principally as follows: (1)
acquisition costs of acquiring new business are deferred and amortized over
the life of the policies rather than charged to operations as incurred, (2)
future policy benefit reserves on traditional life insurance products are
based on reasonable assumptions of expected mortality, interest and
withdrawals which include a provision for possible unfavorable deviation
from such assumptions, which may differ from reserves based upon statutory
mortality rates and interest, (3) future policy benefit reserves for
universal life and annuity products are based on full account values,
rather than the greater of cash surrender value or amounts derived from
discounting methodologies utilizing statutory interest rates, (4) reserves
are reported before reduction for reserve credits related to reinsurance
ceded and a receivable is established, net of an allowance for
uncollectible amounts, for these credits rather than presented net of these
credits, (5) a portion of fixed maturity investments is designated as
"available for sale" and valued at fair value with unrealized
appreciation/depreciation, net of adjustments to deferred income taxes (if
applicable) and deferred policy acquisition costs, credited/charged
directly to stockholders' equity rather than valued at amortized cost, (6)
the carrying value of fixed maturity securities is reduced to fair value by
a charge to realized losses in the statements of income when declines in
carrying value are judged to be other than temporary, rather than through
the establishment of a formula-determined statutory investment reserve
(carried as a liability), changes in which are charged directly to surplus,
(7) deferred income taxes are provided for the difference between the
financial statement and income tax bases of assets and liabilities, (8) net
realized gains or losses attributed to changes in the level of interest
rates in the market are recognized when the sale is completed rather than
deferred and amortized over the remaining life of the fixed maturity
security or mortgage loan, (9) gains arising from sale lease-back
transactions are deferred and amortized over the life of the lease rather
than recognized in the period of sale, (10) a liability is established for
anticipated guaranty fund assessments, net of estimated premium tax
credits, rather than capitalized when assessed and amortized in accordance
with procedures permitted by insurance regulatory authorities, (11) a
prepaid pension cost asset established in accordance with SFAS No. 87,
"Employers' Accounting for Pensions", agents' balances and certain other
assets designated as "non-admitted assets" for statutory purposes are
reported as assets rather than being charged to surplus, (12) revenues for
universal life and annuity products consist of policy charges for the cost
of insurance, policy administration charges, amortization of policy
initiation fees and surrender charges assessed rather than premiums
received, (13) expenses for postretirement benefits other than pensions are
recognized for all qualified employees rather than for only vested and
fully-eligible employees, and the accumulated postretirement benefit
obligation for years prior to adoption of SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other than Pensions" was recognized
as a cumulative effect of change in accounting method rather than deferred
and amortized over twenty years, and (14) assets and liabilities are
restated to fair values when a change in ownership occurs, with provisions
for goodwill and other intangible assets, rather than continuing to be
presented at historical cost.
Net income for Equitable Life, USG and Equitable American Insurance
Company (formed in 1993) as determined in accordance with statutory
accounting practices was $61,421,000 in 1994, $42,182,000 in 1993 and
$36,281,000 in 1992. Total statutory capital and surplus was $431,585,000
at December 31, 1994 and $393,351,000 at December 31, 1993.
3. INVESTMENT OPERATIONS
Realized gains (losses) and unrealized appreciation (depreciation) on
investments are summarized below:
<TABLE>
<CAPTION>
Realized*
Year ended December 31 1994 1993 1992
______________________________________________________________________________
(Dollars in thousands)
<S> <C> <C> <C>
Fixed maturities:
Held for investment $11,364 $41,754 $7,001
Available for sale 7,417 -- --
Equity securities -- -- 2,174
Mortgage loans on real estate (62) (363) --
Real estate 7 14 (254)
Equity investments 971 580 (757)
___________ ___________ ___________
Realized gains on investments $19,697 $41,985 $8,164
=========== =========== ===========
<FN>
*See Note 6 for the income tax effects attributable to realized gains and
losses on investments.
</TABLE>
<TABLE>
<CAPTION>
Unrealized
Year ended December 31 1994 1993 1992
______________________________________________________________________________
(Dollars in thousands)
<S> <C> <C> <C>
Fixed maturities
Held for investment ($663,840) $144,409 $59,116
Available for sale (40,597) -- --
Equity securities (206) (33) 764
___________ ___________ ___________
Unrealized appreciation (depre-
ciation) of investments ($704,643) $144,376 $59,880
=========== =========== ===========
</TABLE>
Major categories of net investment income are summarized below:
<TABLE>
<CAPTION>
Year ended December 31 1994 1993 1992
______________________________________________________________________________
(Dollars in thousands)
<S> <C> <C> <C>
Fixed maturities
Held for investment $406,975 $397,912 $330,590
Available for sale 71,461 -- --
Equity securities 303 45 156
Mortgage loans on real estate 39,117 28,408 22,615
Real estate 3,696 2,696 2,300
Policy loans 9,788 9,838 9,944
Short-term investments 886 933 1,597
Other - net 801 425 1,187
___________ ___________ ___________
533,027 440,257 368,389
Less investment expenses (8,616) (6,188) (5,956)
___________ ___________ ___________
Net investment income $524,411 $434,069 $362,433
=========== =========== ===========
</TABLE>
At December 31, 1994 and 1993, the amortized cost, gross unrealized gains
and losses, and estimated market value of the company's fixed maturity
securities designated as held for investment are as follows:
<TABLE>
<CAPTION>
HELD FOR INVESTMENT
Gross Gross Estimated
Amortized Unrealized Unrealized Market
December 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 $288,914 $2,971 ($13,949) $277,936
Other 3,980 66 (104) 3,942
States, municipalities
and political
subdivisions 15,557 -- (1,128) 14,429
Foreign governments 10,573 719 -- 11,292
Public utilities 1,231,799 7,148 (99,517) 1,139,430
Investment grade
corporate 1,594,095 33,750 (80,108) 1,547,737
Below investment grade
corporate 223,908 477 (19,074) 205,311
Mortgage-backed
securities 2,024,281 4,389 (170,091) 1,858,579
Redeemable preferred
stocks 691 -- (257) 434
___________ ___________ ___________ ___________
Total held for investment $5,393,798 $49,520 ($384,228) $5,059,090
=========== =========== =========== ===========
</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>
At December 31, 1994, amortized cost, gross unrealized gains and losses and
estimated market value of the company's fixed maturity securities
designated as available for sale are as follows:
<TABLE>
<CAPTION>
AVAILABLE FOR SALE
Gross Gross Estimated
Amortized Unrealized Unrealized Market
December 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 $17,817 ($730) $17,087
Other 30,624 (1,178) 29,446
Public utilities 70,184 $704 (7,173) 63,715
Investment grade
corporate 365,162 9,288 (19,574) 354,876
Below investment grade
corporate 199,597 589 (23,417) 176,769
Mortgage-backed
securities 135,699 1,926 (1,032) 136,593
___________ ___________ ___________ ___________
Total available for sale $819,083 $12,507 ($53,104) $778,486
=========== =========== =========== ===========
</TABLE>
No fixed maturity securities were designated as available for sale on
December 31, 1993. Short-term investments, all with maturities of 30 days
or less, have been excluded from the above schedules. Amortized cost
approximates market value for these securities.
The amortized cost and estimated market value of fixed maturity securities
at December 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>
HELD FOR INVESTMENT
Estimated
Amortized Market
December 31, 1994 Cost Value
_____________________________________________________________________
(Dollars in thousands)
<S> <C> <C>
Due in one year or less $974 $975
Due after one year through five years 50,130 50,321
Due after five years through ten years 584,859 553,373
Due after ten years 2,444,640 2,317,906
___________ ___________
3,080,603 2,922,575
Mortgage-backed securities 2,313,195 2,136,515
___________ ___________
Total held for investment $5,393,798 $5,059,090
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
AVAILABLE FOR SALE
Estimated
Amortized Market
December 31, 1994 Cost Value
_____________________________________________________________________
(Dollars in thousands)
<S> <C> <C>
Due after one year through five years $45,252 $43,509
Due after five years through ten years 149,091 140,687
Due after ten years 471,224 440,610
___________ ___________
665,567 624,806
Mortgage-backed securities 153,516 153,680
___________ ___________
Total available for sale $819,083 $778,486
=========== ===========
</TABLE>
The carrying value and market value of mortgage-backed securities, which
comprise 40% of the company's investment in fixed maturity securities at
December 31, 1994, by type, are as follows:
<TABLE>
<CAPTION>
Estimated
Carrying Market
December 31, 1994 Value Value
___________________________________________________________________________
(Dollars in thousands)
<S> <C> <C>
Mortgage-backed securities:
Government and agency guaranteed pools:
Very accurately defined maturities $17,178 $16,167
Planned amortization class 79,510 75,774
Targeted amortization class 29,258 25,406
Sequential pay 74,006 69,301
Pass through 106,049 108,375
Private Label CMOs and REMICs:
Very accurately defined maturities 30,386 29,275
Planned amortization class 17,606 17,055
Targeted amortization class 451,412 404,187
Sequential pay 1,593,798 1,482,757
Mezzanines 38,326 35,103
Private placements and subordinate issues 29,346 26,795
___________ ___________
Total mortgage-backed securities $2,466,875 $2,290,195
=========== ===========
</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 December 31, 1994, unamortized premiums on
mortgage-backed securities totaled $4,775,000 and unaccrued discounts on
mortgage-backed securities totaled $70,447,000.
An analysis of sales, maturities and principal repayments of the company's
fixed maturities portfolio for the years ended December 31, 1994, 1993 and
1992 is as follows:
<TABLE>
<CAPTION>
Gross Gross Proceeds
Amortized Realized Realized from
Cost Gains Losses Sale
_____________________________________________________________________________
(Dollars in thousands)
<S> <C> <C> <C> <C>
Year ended December 31, 1994:
Scheduled principal repayments
calls and tenders (available
for sale only):
Held for investment $275,480 $11,389 ($25) $286,844
Available for sale 167,285 4,877 (11) 172,151
Sales:
Available for sale 29,526 3,184 (14) 32,696
___________ _________ _________ ___________
Total $472,291 $19,450 ($50) $491,691
=========== ========= ========= ===========
Year ended December 31, 1993:
Scheduled principal
repayments, calls and
tenders $999,855 $50,924 $1,050,779
Sales 5,481 284 5,765
___________ _________ _________ ___________
Total $1,005,336 $51,208 $-- $1,056,544
=========== ========= ========= ===========
Year ended December 31, 1992:
Scheduled principal
repayments, calls and
tenders $537,118 $22,332 $559,450
Sales 204,942 5,567 ($17,335) 193,174
___________ _________ _________ ___________
Total $742,060 $27,899 ($17,335) $752,624
=========== ========= ========= ===========
</TABLE>
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 change in unrealized gain or loss
included in stockholders' equity, net of adjustments from January 1, 1994
(date of adoption of SFAS No. 115) to December 31, 1994 amounted to
$49,009,000 of net depreciation.
At December 31, 1994, unrealized depreciation of equity securities of
$373,000 is comprised solely of gross unrealized depreciation of $198,000
on the company's investment in its registered separate account established
in the fourth quarter of 1994 and $175,000 on the company's other equity
security.
The carrying value of investments which have been non-income producing for
the twelve months preceding December 31, 1994, totaled $239,000 related to
one real estate property.
The company analyzes its investment portfolio at least quarterly in order
to determine if the carrying value of any of its investments has been
impaired. The carrying value of debt and equity securities is written down
to fair value by a charge to realized losses when an impairment in value
appears to be other than temporary. Effective January 1, 1994, the company
recognized a pre-tax loss of $619,000 to write the value of one fixed
maturity security down to its estimated fair value of $80,000 pursuant to
the requirements of SFAS No. 115. During the year ended December 31, 1993,
this security was written down to its estimated net realizable value of
$699,000 by a charge to realized losses of $6,443,000. This security was
sold in the fourth quarter of 1994 at a nominal gain. During the year ended
December 31, 1992, a pre-tax loss of $3,563,000 was recognized to write the
carrying value of one fixed maturity investment down to its estimated net
realizable value.
During the year ended December 31, 1994, the company established valuation
allowances of $57,000 on one mortgage loan and $959,000 on one real estate
property to reduce the carrying value of these investments to their
estimated fair value, less costs to sell. During the year ended December
31, 1993, the company recognized a pre-tax loss of $363,000 to reduce the
carrying value of one mortgage loan (sold in 1994) and established a
valuation allowance of $86,000 on one real estate property to reduce the
carrying value of these investments to their estimated fair value, less
costs to sell. During the year ended December 31, 1992, the company
recognized pre-tax losses of $418,000 on two real estate properties and
$1,347,000 on two equity method investments, prior to the investments'
actual disposal.
At December 31, 1994, affidavits of deposits covering bonds with a par
value of $1,519,564,000 (1993 - $1,388,913,000), mortgage loans with an
unpaid principal balance of $225,404,000 (1993 - $188,464,000) and policy
loans with an unpaid balance of $168,653,000 (1993 - $173,097,000) were on
deposit with state agencies to meet regulatory requirements. In addition,
at December 31, 1994, pursuant to a reinsurance agreement, the company had
investments with a carrying value of $84,156,000 (market value of
$72,637,000) deposited in a trust for the benefit of the ceding company.
The company's investment policies related to its investment portfolio
require diversification by asset type, company and industry and set limits
on the amount which can be invested in an individual issuer. Such policies
are at least as restrictive as those set forth by regulatory authorities.
Fixed maturity investments included investments in various non-governmental
mortgage-backed securities (35% in 1994, 28% in 1993), public utilities
(22% in 1994, 24% in 1993), basic industrials (18% in 1994, 20% in 1993)
and consumer products (13% in 1994, 14% in 1993). Mortgage loans on real
estate have been analyzed by geographical locations. Concentrations of
mortgage loans are in Pennsylvania (10% in 1994, 7% in 1993), Illinois (9%
in 1994, 10% in 1993) and California (8% in 1994, 10% in 1993). There are
no significant concentrations of mortgage loans in any other state or
region. Mortgage loans on real estate have also been analyzed by collateral
type with significant concentrations identified in retail facilities (33%
in 1994 and 1993), industrial buildings (25% in 1994, 28% in 1993), multi-
family residential buildings (25% in 1994, 19% in 1993) and office
buildings (15% in 1994 and 1993). Equity securities, real estate and
investments accounted for by the equity method are not significant to the
company's overall investment portfolio.
No investment in any person or its affiliates (other than bonds issued by
agencies of the United States government) exceeded ten percent of
stockholders' equity at December 31, 1994.
4. FAIR VALUES OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments"
requires disclosure of estimated fair value of all financial instruments,
including both assets and liabilities recognized and not recognized in a
company's balance sheet, unless specifically exempted. SFAS No. 119,
"Disclosure about Derivative Financial Instruments and Fair Value of
Financial Instruments" requires additional disclosures about derivative
financial instruments. Most of the company's investments, insurance
liabilities and debt, as well as off-balance-sheet items such as loan
guarantees, fall within the standards' definition of a financial
instrument. Although the company's life insurance liabilities, are
specifically exempted from this disclosure requirement, estimated fair
value disclosure of these liabilities is also provided in order to make the
disclosures more meaningful. Accounting, actuarial and regulatory bodies
are continuing to study the methodologies to be used in developing fair
value information, particularly as it relates to such things as liabilities
for insurance contracts. Accordingly, care should be exercised in deriving
conclusions about the company's business or financial condition based on
the information presented herein.
The company closely monitors the level of its insurance liabilities, the
level of interest rates credited to its interest-sensitive products and the
assumed interest margin provided for within the pricing structure of its
other products. These amounts are taken into consideration in the
company's overall management of interest rate risk, which attempts to
minimize exposure to changing interest rates through the matching of
investment cash flows with amounts expected to be due under insurance
contracts. In addition, the company is not currently a party to any
financial instruments such as futures, forward, swap or option contracts,
or other financial instruments with similar characteristics. As such, the
company believes that it has reduced the volatility inherent in its "fair
value" adjusted stockholders' equity, although such volatility will not be
reduced completely. As discussed below, the company has used discount
rates in its determination of fair values for its liabilities which are
consistent with market yields for related assets. The use of the asset
market yield is consistent with management's opinion that the risks
inherent in its asset and liability portfolios are similar. This
assumption, however, might not result in values that are consistent with
those obtained through an actuarial appraisal of the company's business or
values that might arise in a negotiated transaction.
The following compares carrying values as shown for financial reporting
purposes with estimated fair values.
<TABLE>
<CAPTION>
December 31 1994 1993
_________________________________________________________________________________
(Dollars in thousands)
Estimated Estimated
Carrying Fair Carrying Fair
Value Value Value Value
___________ ___________ ___________ ___________
<S> <C> <C> <C> <C>
ASSETS
Balance sheet financial assets:
Fixed maturities
Held for investment $5,393,798 $5,059,090 $5,078,226 $5,407,358
Available for sale 778,486 778,486 -- --
Equity securities 22,978 22,978 83 83
Mortgage loans on real
estate 613,208 589,333 346,829 376,967
Short-term investments 50,975 50,975 67,619 67,619
Cash and cash equivalents 12,674 12,674 5,190 5,190
Notes and other
receivables 119,261 119,261 109,908 109,908
Separate account assets 84,963 84,963 94,028 94,028
___________ ___________ ___________ ___________
7,076,343 6,717,760 5,701,883 6,061,153
Off-balance-sheet financial asset:
Unrecognized pension
asset -- -- -- 9,700
Deferred policy acquisition
costs and intangible
assets 610,231 -- 454,526 --
Non-financial assets 92,700 92,700 88,246 88,246
___________ ___________ ___________ ___________
Total assets $7,779,274 $6,810,460 $6,244,655 $6,159,099
=========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
December 31 1994 1993
_________________________________________________________________________________
(Dollars in thousands)
Estimated Estimated
Carrying Fair Carrying Fair
Value Value Value Value
___________ ___________ ___________ ___________
<S> <C> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Balance sheet financial liabilities:
Future policy benefits (net of related policy loans):
Universal life and
current interest
products $390,061 $258,852 $345,592 $207,364
Annuity products 5,718,888 4,312,559 4,337,968 3,676,263
Participating life insur-
ance and dividend
accumulations 580,043 377,577 572,597 452,010
Traditional life insurance
- nonpar 166,227 114,193 162,253 135,900
___________ ___________ ___________ ___________
6,855,219 5,063,181 5,418,410 4,471,537
Long-term debt -- -- 50,214 50,714
Commercial paper notes 90,450 90,450 34,000 34,000
Separate account
liabilities 84,963 84,963 94,028 94,028
___________ ___________ ___________ ___________
7,030,632 5,238,594 5,596,652 4,650,279
Off-balance-sheet financial liability:
Unrecognized pension
obligation -- 2,330 -- --
Deferred income taxes on fair
value adjustments -- 288,185 -- 302,184
Non-financial liabilities 161,312 161,312 120,041 120,041
___________ ___________ ___________ ___________
Total liabilities 7,191,944 5,690,421 5,716,693 5,072,504
Stockholders' equity 587,330 1,120,039 527,962 1,086,595
___________ ___________ ___________ ___________
Total liabilities and
stockholders' equity $7,779,274 $6,810,460 $6,244,655 $6,159,099
=========== =========== =========== ===========
</TABLE>
The following methods and assumptions were used by the company in
estimating fair values.
Fixed maturities: Estimated market values of publicly traded securities
are 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. Market values of private
placement bonds are estimated using a matrix that assumes a spread (based
on interest rates and a risk assessment of the bonds) over U.S. Treasury
bonds. Estimated market values of redeemable preferred stocks are as
reported by the NAIC.
Equity securities: Estimated fair values are based upon the latest quoted
market prices, where available. For equity securities not actively traded,
estimated fair values are based upon values of issues of comparable yield
and quality.
Mortgage loans on real estate: Fair values are estimated by discounting
expected cash flows, using interest rates currently being offered for
similar loans.
Short-term investments, cash and cash equivalents, notes and other
receivables, commercial paper notes: Carrying values reported in the
company's historical cost basis balance sheet approximate estimated fair
value for these instruments, due to their short-term nature.
Separate account assets and liabilities: Separate account assets and
liabilities are reported at estimated fair value in the company's
historical cost basis balance sheet.
Future policy benefits: Estimated fair values of the company's
liabilities for future policy benefits for universal life and current
interest products, annuity products, participating life insurance and
dividend accumulations and non-par traditional life insurance products are
based upon discounted cash flow calculations. Cash flows of future policy
benefits are discounted using the market yield rate of the assets
supporting these liabilities. Estimated fair values are presented net of
the estimated fair value of corresponding policy loans due to the
interdependent nature of the cash flows associated with these items.
Deferred policy acquisition costs and intangible assets: For historical
cost purposes, the recovery of policy acquisition costs is based on the
realization, among other things, of future interest spreads and gross
premiums on in-force business. Because these cash flows are considered in
the computation of the future policy benefit cash flows, the deferred
policy acquisition cost balance does not appear on the estimated fair value
balance sheet. Intangible assets do not appear in the estimated fair value
balance sheet because there are no cash flows related to these assets.
Long-term debt: Estimated fair value of the company's publicly-traded
debt issue was based upon quoted market prices at December 31, 1993. These
notes were repaid on June 1, 1994. Estimated fair value of the company's
subordinated convertible installment notes was assumed to be equal to
carrying value at December 31, 1993 since these notes were repaid on
January 3, 1994.
Off-balance-sheet instruments: Estimated fair values of the company's
unrecognized pension assets are based upon amounts not recognized in the
financial statement pension accruals. The company also has made guarantees
on behalf of certain borrowers in the event the borrower is not able to
make its principal or interest payments. The company has not provided a
fair value liability for these obligations as management believes the value
of the collateral underlying the commitments is sufficient.
Derivative financial instruments: SFAS No. 119 requires disclosures
about derivative financial instruments such as futures, forward, swap or
option contracts, or other financial instruments with similar
characteristics. The company was not a party to such derivative financial
instruments at any time during 1994.
Deferred income taxes on fair value adjustments: Deferred income taxes
have been reported at the statutory rate for the differences (except for
those attributed to permanent differences) between the carrying value and
estimated fair value of assets and liabilities set forth herein.
Non-financial assets and liabilities: Values are presented at historical
cost.
SFAS No. 107 and SFAS No. 119 require disclosure of estimated fair value
information about financial instruments, whether or not recognized in the
consolidated balance sheet, for which it is practicable to estimate that
value. In cases where quoted market prices are not available, estimated
fair values are based on estimates using present value or other valuation
techniques. Those techniques are significantly affected by the assumptions
used, including the discount rate and estimates of future cash flows. In
that regard, the derived fair value estimates cannot be substantiated by
comparison to independent markets and, in many cases, could not be realized
in immediate settlement of the instrument. The above presentation should
not be viewed as an appraisal as there are several factors, such as the
fair value associated with customer or agent relationships and other
intangible items, which have not been considered. In addition, interest
rates and other assumptions might be modified if an actual appraisal were
to be performed. Accordingly, the aggregate estimated fair value amounts
presented herein are limited by each of these factors and do not purport to
represent the underlying value of the company.
5. CREDIT ARRANGEMENTS
Long-term debt: In February 1995, the company issued $100 million of 8.5%
notes, maturing on February 15, 2005, receiving net proceeds totaling
approximately $98,826,000, after expenses. The company has contributed
$50 million of the proceeds to its insurance subsidiaries and has applied
the remaining net proceeds to the repayment of outstanding commercial paper
notes.
Notes payable bearing interest at 9.3% totaling $49,996,000 at December
31, 1993 were repaid on June 1, 1994. Subordinated installment notes
bearing interest at 9% totaling $218,000 at December 31, 1993 were repaid
on January 3, 1994. Prior to repayment, the subordinated installment notes
were convertible, at the option of the holder, into the company's common
stock. During the years ended December 31, 1993 and 1992, respectively,
2,642 and 5,380 shares of common stock were issued pursuant to this
conversion feature.
The Industrial Development Revenue Refunding Bonds Series 1983 bearing
interest at 9.16% totaling $10,500,000 at December 31, 1992, were repaid
on December 1, 1993.
Guarantees of Indebtedness of Others: At December 31, 1994 and 1993, the
company had unconditionally guaranteed $25,926,000 and $26,310,000,
respectively, in remaining principal amount of notes payable issued by the
Walnut Mall Limited Partnership ("WMLP"). Through December 31, 1994, the
company received an annual fee of $148,000 for its guarantee. The final
payment on this note is due in 1996, although earlier redemption is
allowed. The proceeds of the notes were used to partially finance the
construction of an office/retail facility in Des Moines, Iowa. Under the
original guarantee, the company received a first mortgage on the property,
together with guarantees from the partners, to secure its guarantee.
Effective January 1, 1995, the partnership was dissolved and the company
received a guarantee in full from Midwest Resources Inc., a Des Moines,
Iowa based public utility holding company, a former partner, in addition
to a first mortgage on a 284,000 square foot office tower, to secure its
guarantee. In the event of a default on the notes payable by WMLP, the
company would be required to make payments to note holders and seek
recourse from Midwest Resources and/or through exercise of its rights as a
mortgagee.
Commercial Paper Notes: The company issues commercial paper notes to
provide for working capital needs and to provide short term liquidity.
This commercial paper program is supported by the company's line of credit
discussed below. Commercial paper notes are issued for periods not
exceeding 270 days. At December 31, 1994 and 1993, commercial paper notes
of $90,450,000 and $34,000,000, respectively, were outstanding under this
arrangement at a weighted average interest rate of 6.2% and 3.4%,
respectively. At December 31, 1994, the company's commercial paper was
rated A1 by Standard and Poor's Corporation, P2 by Moody's Investors
Service and D1 by Duff & Phelps Credit Rating Company.
Line of Credit: The company maintains line of credit arrangements with
several banks to support its commercial paper notes payable and to provide
short-term liquidity. The maximum borrowing allowed under this facility is
$249,000,000 (no amounts outstanding at December 31, 1994). A credit line
totaling $166,000,000 expires on March 31, 1997 and a credit line totaling
$83,000,000 expires on March 30, 1995. The terms of the credit arrangement
set limits on debt of the company and its insurance subsidiaries, require
maintenance of a minimum level of consolidated tangible net worth and
insurance subsidiary statutory capital and surplus and risk-based capital
and restrict certain investments.
Interest Rate Swaps: The company had entered into interest rate swap
agreements with several banks with a combined notional principal amount of
$50,000,000. During August 1993, swap agreements with a combined notional
principal amount of $20,000,000 expired and the remaining swap agreements
($30,000,000) were terminated by the company at a cost of $3,011,000.
6. INCOME TAXES
The company and all of its subsidiaries file a consolidated federal income
tax return. The parent company and its subsidiaries each report current
income tax expense as allocated under a consolidated tax allocation
agreement. Generally, this allocation results in profitable companies
recognizing a tax provision as if the individual company filed a separate
return and loss companies recognizing benefits to the extent their losses
contribute to reduce consolidated taxes. Deferred income taxes have been
established by each member of the consolidated group based upon the
temporary differences, the reversal of which will result in taxable or
deductible amounts in future years when the related asset or liability is
recovered or settled, within each entity.
Income tax expenses (credits) are included in the consolidated financial
statements as follows:
<TABLE>
<CAPTION>
Year ended December 31 1994 1993 1992
______________________________________________________________________________
(Dollars in thousands)
<S> <C> <C> <C>
Taxes provided in consolidated statements of income on:
Income from continuing operations
before equity income (loss) and
cumulative effect of change in
accounting principles:
Current $39,762 $49,313 $22,590
Deferred 13,159 (1,348) 3,898
___________ ___________ ___________
52,921 47,965 26,488
Equity income (loss):
Current (65) 25 (45)
Deferred 52 43 14
___________ ___________ ___________
(13) 68 (31)
Discontinued operations:
Current -- -- 1,651
Deferred -- -- (92)
___________ ___________ ___________
-- -- 1,559
Cumulative effect of change in
accounting principles - deferred -- -- (2,454)
Taxes provided in consolidated statement
of changes in stockholders' equity:
Amounts attributable to stock
incentive plans - current (1,309) (1,377) (2,190)
Amounts attributable to unrealized
gains and losses, less valuation
allowance of $9,403 in 1994 -
deferred -- -- --
___________ ___________ ___________
$51,599 $46,656 $23,372
=========== =========== ===========
</TABLE>
Income tax expense (credits) attributed to realized gains and losses on
investments amounted to $6,744,000, $14,695,000 and $213,000 for the years
ended December 31, 1994, 1993 and 1992, respectively. The effective tax
rate on income from continuing operations before income taxes, equity
income (loss) and cumulative effect of change in accounting principles is
different from the prevailing federal income tax rate as follows:
<TABLE>
<CAPTION>
Year ended December 31 1994 1993 1992
______________________________________________________________________________
(Dollars in thousands)
<S> <C> <C> <C>
Income from continuing operations before
income taxes, equity income (loss) and
cumulative effect of change in
accounting principles $151,244 $134,995 $83,744
Income tax at federal statutory rate 52,935 47,248 28,473
Tax effect (decrease) of:
Taxes provided for IRS examinations -- 200 1,200
State income taxes, net of federal
effect 79 87 (1,327)
Change in valuation allowance on
deferred income tax assets,
excluding impact on unrealized
depreciation on equity securities -- -- (2,544)
Other items (93) 430 686
___________ ___________ ___________
Income tax expense $52,921 $47,965 $26,488
=========== =========== ===========
</TABLE>
The Internal Revenue Service ("IRS") is currently examining the company's
consolidated income tax returns for 1990 and 1991. The 1992 and 1993
consolidated income tax returns remain open to examination. Management
believes amounts provided for IRS examinations are adequate to settle any
adjustments raised by the IRS.
The tax effect of temporary differences giving rise to the company's
deferred income tax assets at December 31, 1994 and 1993, is as follows:
<TABLE>
<CAPTION>
December 31 1994 1993
____________________________________________________________________________
(Dollars in thousands)
<S> <C> <C>
Deferred tax assets:
Writedowns of investments not
currently deductible for tax $2,255
Net unrealized depreciation of available for sale
fixed maturity securities $14,339 --
Future policy benefits 187,609 149,193
Accrued dividends 4,397 4,515
Guaranty fund assessment accruals 5,557 5,258
Other 10,110 14,538
___________ ___________
222,012 175,759
Deferred tax liabilities:
Deferred policy acquisition costs (192,061) (143,809)
Prepaid pension costs (10,434) (9,306)
Other (11,556) (11,061)
___________ ___________
(214,051) (164,176)
Valuation allowance, for amounts attributable
to net unrealized depreciation for assets
available for sale (9,403) --
___________ ___________
Deferred income tax asset (liability) ($1,442) $11,583
=========== ===========
</TABLE>
At December 31, 1994, the company has net operating loss carryforwards of
approximately $2.4 million which expire in 2007. These losses relate to
the operations of the non-life consolidated group and are only available
initially to offset future income generated by the non-life group. The
company is subject to limitations with respect to the availability of any
remaining amounts that can be utilized to offset income generated by the
life insurance subsidiaries. A deferred tax asset has been established for
the tax effect of these losses.
A valuation allowance of $9,403,000 has been established to offset the
deferred tax asset related to the unrealized depreciation of assets held in
the available for sale account at December 31, 1994.
Prior to 1984, a portion of Equitable Life's current income was not
subject to current income taxation, but was accumulated, for tax purposes,
in a memorandum account designated as "policyholders' surplus account".
The aggregate accumulation in this account at December 31, 1994, was
$14,388,000. Should the policyholders' surplus account of Equitable Life
exceed the limitation prescribed by federal income tax law, or should
distributions be made by Equitable Life to the parent company in excess of
$292,045,000 such excess would be subject to federal income taxes at rates
then effective. Deferred income taxes of $5,036,000 have not been provided
on amounts included in this memorandum account since the company
contemplates no action and can foresee no events that would create such a
tax.
Deferred income taxes (credits) were also reported on equity income and on
the loss from discontinued operations during these periods. These taxes
arise from the recognition of income and losses differently for purposes of
filing federal income tax returns than for financial reporting purposes.
7. EMPLOYEE STOCK AND INCENTIVE COMPENSATION PLANS
On April 30, 1992, the company's stockholders approved the 1992 Stock
Incentive Plan as a successor to the 1982 Stock Incentive Plan. These
plans provide for the award of stock options or shares of the company's
common stock to key employees through three means: qualified incentive
stock options (as defined in the Internal Revenue Code), non-qualified
stock options and restricted shares. Shares of common stock may be awarded
under the 1982 plan for outstanding stock options granted prior to adoption
of the 1992 plan. Under the 1992 plan an initial base of 2,240,000 shares
of common stock may be awarded with automatic increases of 7.5% for shares
issued after April 30, 1992. At December 31, 1994, the company has
reserved 3,094,135 shares (3,292,125 shares at January 1, 1994) of its
common stock for future issuances under these plans.
After giving effect for the 2-for-1 stock splits as of May 12, 1993 and
May 14, 1992, stock option transactions under these plans are summarized as
follows:
<TABLE>
<CAPTION>
Option Price
Number _____________________________
of Shares Per Share Total
____________________________________________________________________________
(Dollars in thousands, except per share data)
<S> <C> <C> <C>
Balance at January 1, 1992 1,478,492 $3.71 - $7.56 $8,345
Granted during 1992 216,800 11.88 - 12.00 2,575
Exercised during 1992 (613,932) 3.71 - 7.06 (3,228)
Terminated during 1992 (12,760) 4.97 - 11.88 (98)
___________ ___________
Balance at December 31, 1992 1,068,600 4.97 - 12.00 7,594
Granted during 1993 238,000 25.75 - 36.75 6,304
Exercised during 1993 (195,300) 5.22 - 12.00 (1,141)
Terminated during 1993 (21,400) 4.97 - 25.75 (325)
___________ ___________
Balance at December 31, 1993 1,089,900 4.97 - 36.75 12,432
Granted during 1994 202,500 32.50 - 34.50 6,588
Exercised during 1994 (154,705) 4.97 - 25.75 (938)
Terminated during 1994 (20,420) 4.97 - 32.50 (369)
___________ ___________
Balance at December 31, 1994 1,117,275 $4.97 - $36.75 $17,713
=========== ===========
Exercisable at December 31:
1993 191,340 $5.22 - $7.56 $1,166
1994 252,515 4.97 - 7.56 1,562
Became exercisable during:
1992 328,100 $4.97 - $12.00 $1,887
1993 223,740 5.31 - 7.56 1,341
1994 215,880 4.97 - 25.75 1,334
</TABLE>
The non-qualified stock options are compensatory, and require the accrual
of compensation expense over the period of service from the date the
options are granted until they become fully exercisable if market values
exceed the option price on the measurement date. During the years ended
December 31, 1994, 1993 and 1992, compensation expense of $16,000, $89,000
and $188,000, respectively, was recognized related to these options.
Shares of common stock issued under the company's stock incentive plans
are set forth in the following table:
<TABLE>
<CAPTION>
Year ended December 31 1994 1993 1992
_______________________________________________________________________
<S> <C> <C> <C>
Issued:
Exercise of stock options 154,705 195,300 613,932
Restricted stock grants 47,752 35,770 16,000
Discretionary stock awards 570 750 1,020
__________ __________ __________
203,027 231,820 630,952
Restricted shares forfeited (1,323) (5,628) (5,412)
Shares received as consideration (36,252) (18,888) (64,456)
__________ __________ __________
Net issuance of common stock 165,452 207,304 561,084
========== ========== ==========
<FN>
Note: 1992 adjusted for 2-for-1 stock split payable June 1, 1993 to
holders of record on May 12, 1993.
</TABLE>
Shares of restricted common stock awarded (see table) to certain key
employees and directors are subject to forfeiture to the company should the
individuals terminate their relationship with the company for reasons other
than death, permanent disability or change in company control prior to full
vesting. Shares granted to key employees generally vest by the fifth
anniversary of grant. Shares granted to directors vest equally on the
first, second and third anniversaries of grant. The company amortizes as
compensation expense the market value on date of grant ($1,661,000 in 1994,
$997,000 in 1993 and $190,000 in 1992) of the restricted stock using the
straight-line method over the vesting periods. Compensation expense
recognized during the years ended December 31, 1994, 1993 and 1992
aggregated $1,161,000, $607,000 and $495,000, respectively.
The company has a discretionary stock award plan under which employees are
awarded shares of stock for superior performance. During the years ended
December 31, 1994, 1993 and 1992, awards of shares of the company's common
stock under this plan (see table) resulted in charges to income of $19,000,
$19,000 and $11,000, respectively.
Equitable Life sponsors a long-term incentive compensation plan which
allows certain agents to earn units equal to shares of the company's common
stock based on personal production and the maintenance of specific levels
of assets under management. This program resulted in (income)/expense of
$(129,000), $926,000 and $855,000 in the years ended December 31, 1994,
1993 and 1992, respectively.
8. RETIREMENT PLANS
Substantially all full-time employees of the company are covered by a non-
contributory self-insured defined benefit pension plan. The benefits are
based on years of service and the employee's compensation during the last
five years of employment. Further, the company sponsors a supplemental
defined benefit plan to provide benefits in excess of amounts allowed
pursuant to Internal Revenue Code Section 401(a) (17) and those allowed due
to integration rules. The company's funding policy with respect to these
plans is consistent with the funding requirements of federal law and
regulations.
The following table sets forth the plans' funded status and amounts
recognized in the company's consolidated balance sheet:
<TABLE>
<CAPTION>
December 31 1994 1993
______________________________________________________________________________
(Dollars in thousands)
<S> <C> <C>
Accumulated benefit obligation, including vested
benefits of $48,232 in 1994 and $49,726 in 1993 $49,033 $50,691
=========== ===========
Plan assets at fair value, primarily bonds, common
stocks (including 600,000 shares in 1994 and 1993
of the company's common stock), mortgage loans
and short-term investments $82,161 $94,028
Projected benefit obligation for service rendered
to date 54,909 57,771
___________ ___________
Plan assets in excess of projected benefit obligation 27,252 36,257
Unrecognized net (gain) loss from past experience
different from that assumed and effects of
changes in assumptions 6,053 (5,867)
Prior service cost not yet recognized 797 675
Unrecognized net asset at the transition date, net
of amortization (3,484) (4,498)
___________ ___________
Prepaid pension cost $30,618 $26,567
=========== ===========
</TABLE>
Net periodic pension benefit included the following components:
<TABLE>
<CAPTION>
Year ended December 31 1994 1993 1992
_______________________________________________________________________________
(Dollars in thousands)
<S> <C> <C> <C>
Actual return on plan assets ($8,581) $14,626 $13,595
Service cost-benefits earned during
the period (1,411) (1,092) (993)
Interest cost on projected benefit
obligation (4,097) (3,831) (3,480)
Net amortization and deferral 18,068 (5,525) (5,404)
___________ ___________ ___________
Net periodic pension benefit $3,979 $4,178 $3,718
=========== =========== ===========
</TABLE>
The weighted-average discount rate and rate of increase in future
compensation levels used in determining the actuarial present value of the
projected benefit obligation were 8.0% and 5.0%, respectively, at December
31, 1994, and 7.0% and 5.0%, respectively, at December 31, 1993. The
average expected long term rate of return on plan assets was 8.0% in 1994
and 8.5% in 1993 and 1992.
In addition to the company's defined benefit pension plan, the company
sponsors plans that provide postretirement medical and group term life
insurance benefits to full-time employees and agents who had worked for the
company for five years and attained age 55 as of January 1, 1992. The
medical plans are contributory, with retiree contributions adjusted
annually, and contain other cost-sharing features such as deductibles and
coinsurance. The accounting for these plans anticipates that the company's
contributions will increase annually by the lesser of the health care
inflation rate or 3%, with increases in excess of these amounts borne by
the employee or agent. All costs for group term life insurance benefits
are funded on a pay-as-you-go (cash) basis by the company.
In 1992, the company adopted SFAS No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions". The company elected to
recognize the accumulated postretirement benefit obligation as of January
1, 1992, as a one-time charge to earnings which has been treated as a
cumulative effect of change in accounting principle. The cumulative effect
adjustment aggregated $4,678,000, or $(0.16) per share, after a deferred
tax benefit of $2,454,000 and is reflected in the 1992 consolidated
statement of income.
The company has chosen not to fund any amounts in excess of current
benefits. The following table sets forth the amounts recognized in the
company's consolidated balance sheet:
<TABLE>
<CAPTION>
December 31 1994
_____________________________________________________________________________
(Dollars in thousands)
Life
Medical Insurance
Plans Plans Total
_____________________________
<S> <C> <C> <C>
Accumulated postretirement benefit obligation:
Retirees $3,430 $1,962 $5,392
Fully eligible active plan participants 1,026 160 1,186
Other active plan participants 1,247 85 1,332
_________ _________ _________
Accumulated postretirement benefit obligation
in excess of plan assets 5,703 2,207 7,910
Prior service cost not yet recognized in net
post-retirement benefit cost 417 113 530
Unrecognized net gain (81) (37) (118)
_________ _________ _________
Accrued postretirement benefit cost $6,039 $2,283 $8,322
========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
December 31 1993
_____________________________________________________________________________
(Dollars in thousands)
Life
Medical Insurance
Plans Plans Total
_____________________________
<S> <C> <C> <C>
Accumulated postretirement benefit obligation:
Retirees $3,369 $2,052 $5,421
Fully eligible active plan participants 1,022 227 1,249
Other active plan participants 1,768 231 1,999
_________ _________ _________
Accumulated postretirement benefit obligation
in excess of plan assets 6,159 2,510 8,669
Prior service cost not yet recognized in net
post-retirement benefit cost -- -- --
Unrecognized net gain (433) (205) (638)
_________ _________ _________
Accrued postretirement benefit cost $5,726 $2,305 $8,031
========= ========= =========
</TABLE>
Net periodic postretirement benefit costs include the following components:
<TABLE>
<CAPTION>
Year ended December 31, 1994
_____________________________________________________________________________
(Dollars in thousands)
Life
Medical Insurance
Plans Plans Total
_____________________________
<S> <C> <C> <C>
Service cost $280 $12 $292
Interest cost 410 167 577
Net amortization of prior service cost and
amortization of unrecognized loss (28) (8) (36)
_________ _________ _________
Net periodic postretirement benefit cost $662 $171 $833
========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
Year ended December 31, 1993
_____________________________________________________________________________
(Dollars in thousands)
Life
Medical Insurance
Plans Plans Total
_____________________________
<S> <C> <C> <C>
Service cost $249 $27 $276
Interest cost 390 169 559
_________ _________ _________
Net periodic postretirement benefit cost $639 $196 $835
========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
Year ended December 31, 1992
_____________________________________________________________________________
(Dollars in thousands)
Life
Medical Insurance
Plans Plans Total
_____________________________
<S> <C> <C> <C>
Service cost $196 $23 $219
Interest cost 382 150 532
_________ _________ _________
Net periodic postretirement benefit cost $578 $173 $751
========= ========= =========
</TABLE>
The weighted-average annual assumed rate of increase in the per capita
cost of health care benefits (i.e. health care cost trend rate) used in
determining the actuarial present value of the accumulated postretirement
benefit obligation was 13.5% at December 31, 1994 and 14.5% at December 31,
1993 for employees under 65 and 9.0% at December 31, 1994 and 9.5% at
December 31, 1993 for employees over 65, with the rates for both groups to
be graded down to 5.5% for 2005 and thereafter. The health care cost trend
rate assumption has a significant effect on the amounts reported. For
example, increasing the assumed health care trend rates by one percent
would increase the accumulated postretirement benefit obligation as of
December 31, 1994 by $671,000 and net periodic postretirement benefit costs
for the year ended December 31, 1994 by $109,000. The weighted-average
discount rate used in determining the accumulated postretirement benefit
obligation was 8.0% at December 31, 1994 and 7.0% at December 31, 1993.
The company also sponsors an unfunded deferred compensation plan providing
benefits to certain former employees. The company recognized benefits of
$38,000, $44,000 and $24,000 during the years ended December 31, 1994, 1993
and 1992, respectively, in connection with this plan.
The company sponsors pension plans for its employees which are qualified
under Internal Revenue Code Section 401(k). Employees may contribute a
portion of their annual salary, subject to limitation, to the plans. The
company contributes an additional amount, subject to limitation, based on
the voluntary contribution of the employee. Company contributions charged
to expense with respect to these plans during the years ended December 31,
1994, 1993 and 1992 were $333,000, $287,000 and $234,000, respectively.
Equitable Life has non-contributory self-insured defined contribution
pension plans for its agents. Contributions charged to expense under these
plans during the years ended December 31, 1994, 1993 and 1992 amounted to
$389,000, $566,000 and $596,000, respectively.
Certain assets related to these plans are on deposit with Equitable Life
and amounts relating to these plans are included in these consolidated
financial statements.
9. DISCONTINUED OPERATIONS
On April 29, 1992, the company and its former retail subsidiary, Younkers,
Inc. completed a public offering in which the company sold all of its
4,703,555 shares of Younkers' common stock. The consolidated financial
statements of the company have been restated to report the operating results
of retail operations as discontinued operations.
Income from discontinued operations for 1992 includes retail sales to the
measurement date of $83,815,000. The loss from discontinued operations in
1992 prior to the measurement date is due to the seasonal nature of the
retail business. The sale of the company's retail operations resulted in a
pre-tax gain of $8,897,000 ($5,106,000, or $0.18 per share, after tax).
Proceeds to the company from the sale, net of commissions and expenses,
were $54,938,000.
10. COMMITMENTS AND CONTINGENCIES
In the normal course of business, the company seeks to limit its exposure
to loss on any single insured and to recover a portion of benefits paid by
ceding reinsurance to other insurance enterprises or reinsurers.
Reinsurance coverages for life insurance vary according to the age and risk
classification of the insured with retention limits ranging up to $500,000
of coverage per individual life. The company does not use financial or
surplus relief reinsurance. At December 31, 1994, life insurance in force
ceded on a consolidated basis amounted to $1,421,608,000, or approximately
14.0% of total life insurance in force.
Reinsurance contracts do not relieve the company of its obligations to its
policyholders. To the extent that reinsuring companies are later unable to
meet obligations under reinsurance agreements, the company's life insurance
subsidiaries would be liable for these obligations, and payment of these
obligations could result in losses to the company. To limit the
possibility of such losses the company evaluates the financial condition of
its reinsurers, monitors concentrations of credit risk arising from factors
such as similar geographic regions and limits its exposure to any one
reinsurer. At December 31, 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 totaling $11,986,000 for
reserve credits, reinsurance claims and other receivables from these
reinsurers. No allowance for uncollectible amounts has been established
since none of the receivables are deemed to be uncollectible, and because
such receivables, either individually or in the aggregate, are not material
to the company's operations. The company's liability for future policy
benefits and notes and other receivables have been increased by $9,871,000
at December 31, 1994 for reserve credits on reinsured policies. This
"gross-up" of assets and liabilities for reserve credits on reinsurance had
no impact on the company's net income. Insurance premiums and product charges
have been reduced by $5,916,000, $5,653,000 and $5,845,000 and insurance
benefits have been reduced by $5,310,000, $3,498,000 and $3,554,000 in 1994,
1993 and 1992, respectively, as a result of the cession agreements. The
amount of reinsurance assumed is not significant.
Assessments are, from time to time, levied on the company's life insurance
subsidiaries by life and health guaranty associations in most states in
which these subsidiaries are licensed to cover losses of policyholders of
insolvent or rehabilitated insurers. In some states, these assessments can
be partially recovered through a reduction in future premium taxes. Based
upon information currently available, the company believes that it is
probable that these insolvencies will result in future assessments which will
be material to the company's financial statements. The company regularly
reviews its reserve for these insolvencies and updates its reserve based on
new information or as new insolvencies occur. Accordingly, the company accrued
and charged to expense an additional $1,763,000 and $2,109,000 during 1994 and
1993, respectively. At December 31, 1994, the company has reserved
$15,597,000 to cover estimated future assessments (net of related anticipated
premium tax credits) and has established an asset totaling $11,096,000 for
items expected to be recoverable through future premium tax offsets. The
company cannot predict whether and to what extent legislative initiatives may
affect the right to offset.
The company leases its home office space and certain other equipment under
operating leases which expire through 1999. During the years ended December
31, 1994, 1993 and 1992, rent expense totaled $1,998,000, $1,831,000 and
$2,294,000, respectively. At December 31, 1994, minimum rental payments
due under all non-cancelable operating leases with initial terms of one
year or more are: 1995- $2,437,000; 1996 - $2,173,000; 1997 - $1,485,000;
1998 - $1,408,000 and 1999 - $231,000.
At December 31, 1994, outstanding commitments to fund mortgage loans on
real estate totaled $49,304,000. In addition, outstanding commitments to
purchase mortgage-backed securities totaled $16,572,000 at December 31, 1994.
11. SUMMARY OF QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) AND DIVIDENDS
PAID
<TABLE>
<CAPTION>
Quarter ended March 31 June 30 September 30 December 31
______________________________________________________________________________
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C>
1994:
Premiums and other revenue $32,718 $33,892 $31,118 $29,521
Investment income - net 119,901 125,398 137,263 141,849
Net income 22,602 26,013 24,721 24,948
Net income per share 0.72 0.82 0.78 0.79
Dividends per common share 0.105 0.12 0.12 0.12
1993:
Premiums and other revenue $31,242 $33,204 $32,164 $42,289
Investment income - net 101,536 106,068 109,594 116,871
Net income 20,306 20,707 20,352 25,791
Net income per share 0.70 0.71 0.70 0.84
Dividends per common share 0.09 0.105 0.105 0.105
</TABLE>
Per share amounts for the quarter ended March 31, 1993 have been restated
to reflect the 2-for-1 stock splits as of May 12, 1993.
Insurance revenues and profitability are typically not seasonal in nature.
However, the recognition of realized gains and losses on investments may
vary from quarter to quarter. During 1994, the company recognized pre-tax
realized gains of: first quarter - $6,009,000; second quarter -
$7,705,000; third quarter - $3,343,000 and fourth quarter - $2,640,000.
During 1993, the company recognized pre-tax realized gains of: first
quarter - $7,642,000; second quarter - $8,835,000; third quarter -
$8,229,000 and fourth quarter - $17,279,000.
REPORT OF INDEPENDENT AUDITORS
_____________________________________________________________________________
The Board of Directors and Stockholders
Equitable of Iowa Companies
We have audited the accompanying consolidated balance sheets of Equitable
of Iowa Companies and subsidiaries as of December 31, 1994 and 1993, and the
related consolidated statements of income, changes in stockholders' equity, and
cash flows for each of the three years in the period ended December 31, 1994.
Our audits also included the financial statement schedules listed in the Index
at Item 14(a). These financial statements and schedules are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements and schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Equitable of Iowa Companies and subsidiaries at December 31, 1994 and 1993,
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended December 31, 1994, in conformity with
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedules, when considered in relation to the basic
financial statements taken as a whole, present fairly in all material respects
the information set forth therein.
As discussed in Notes 3 and 8 to the consolidated financial statements,
in 1994 the Company changed its method of accounting for certain investments in
debt and equity securities and, in 1992 the Company changed its method of
accounting for postretirement benefits other than pensions.
s/Ernst & Young LLP
Des Moines, Iowa
February 7, 1995
MANAGEMENT REPORT ON RESPONSIBILITY FOR FINANCIAL REPORTING
_____________________________________________________________________________
The accompanying financial statements of Equitable of Iowa Companies have
been prepared by management, which is responsible for their integrity and
objectivity. The statements have been prepared in conformity with generally
accepted accounting principles appropriate in the circumstances and are not
misstated due to material error or fraud. These statements include some
amounts that are based upon management's best estimates and judgements.
Financial information contained elsewhere in this annual report is consistent
with that contained in the financial statements.
In meeting its responsibility for the integrity of the financial statements,
management relies on the company's system of internal control. This system is
designed to provide reasonable assurance that assets are safeguarded and that
transactions are properly recorded and executed in accordance with management's
authorization. The company maintains a strong internal auditing program that
independently assesses the effectiveness of the internal controls and
recommends possible improvements thereto.
The company's financial statements have been audited by Ernst & Young LLP,
independent auditors. In connection with this audit, Ernst & Young LLP
performed examinations in accordance with generally accepted auditing
standards, which include a review of the system of internal control and
assurance that the financial statements are fairly presented. Management has
made pertinent records available to Ernst & Young LLP and, furthermore,
believes that all representations made to Ernst & Young LLP during its audit
were valid and appropriate.
s/ Fred S. Hubbell
FRED S. HUBBELL
Chief Executive Officer
s/ Paul E. Larson
PAUL E. LARSON
Chief Financial Officer
s/ David A. Terwilliger
DAVID A. TERWILLIGER
Chief Accounting Officer
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None
PART III
ITEM 10. Directors and Executive Officers of the Registrant
Information regarding directors and executive officers on pages 3 through 6
and on page 19 of the Proxy Statement for the annual meeting of shareholders
to be held April 27, 1995 ("Proxy Statement") is incorporated herein by
reference.
ITEM 11. Executive Compensation
Executive compensation information on pages 8 through 19 of the Proxy
Statement is incorporated herein by reference.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
Security ownership information on pages 2 and 7 of the Proxy Statement is
incorporated herein by reference.
ITEM 13. Certain Relationships and Related Transactions
Information regarding certain relationships and related transactions on page
18 of the Proxy Statement is incorporated herein by reference.
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a)(1) and (a)(2) Financial statements and schedules
The following consolidated financial statements of Equitable of Iowa Companies
and subsidiaries are included in Item 8:
Consolidated balance sheets - December 31, 1994 and 1993
Consolidated statements of income - Years ended December 31, 1994, 1993 and
1992
Consolidated statements of changes in stockholders' equity - Years ended
December 31, 1994, 1993 and 1992
Consolidated statements of cash flows - Years ended December 31, 1994, 1993
and 1992
Notes to consolidated financial statements
The following consolidated financial statement schedules of Equitable of Iowa
Companies and Subsidiaries are included in Item 14(d):
Schedule I - Summary of investments - other than investments in related
parties
Schedule III - Condensed financial information of registrant
Schedule V - Supplementary insurance information
Schedule VI - Reinsurance
All other schedules to the consolidated financial statements pursuant to
Article 7 of Regulation S-X are not required under the related instructions or
are inapplicable and therefore have been omitted.
Financial statements and summarized financial information of unconsolidated
subsidiaries or 50% or less owned persons accounted for by the equity method
have been omitted because they do not, considered individually or in the
aggregate, constitute a significant subsidiary.
(a)(3), and (c) Exhibits
Exhibits filed are listed in the attached exhibit index.
(b) No reports on Form 8-K were filed for the quarter ended December 31, 1994.
ITEM 14(d). Schedules
SCHEDULE I
SUMMARY OF INVESTMENTS
OTHER THAN INVESTMENTS IN RELATED PARTIES
(Dollars in thousands)
<TABLE>
<CAPTION>
Balance
Sheet
December 31, 1994 Cost 1 Value Amount
_______________________________________________________________________________
<S> <C> <C> <C>
TYPE OF INVESTMENT
Fixed maturities, held for investment:
Bonds:
United States Government and governmental
agencies and authorities $292,894 $281,878 $292,894
States, municipalities and
political subdivisions 15,557 14,429 15,557
Foreign governments 10,573 11,292 10,573
Public utilities 1,231,799 1,139,430 1,231,799
Investment grade corporate 1,594,095 1,547,737 1,594,095
Below investment grade corporate 223,908 205,311 223,908
Mortgage-backed securities 2,024,281 1,858,579 2,024,281
Redeemable preferred stocks 691 434 691
___________ ___________ ___________
Total fixed maturities, held for
investment 5,393,798 5,059,090 5,393,798
Fixed maturities, available for sale:
Bonds:
United States Government and governmental
agencies and authorities 48,441 46,533 46,533
Public utilities 70,184 63,715 63,715
Investment grade corporate 365,162 354,876 354,876
Below investment grade corporate 199,597 176,769 176,769
Mortgage-backed securities 135,699 136,593 136,593
___________ ___________ ___________
Total fixed maturities, available
for sale 819,083 778,486 778,486
Equity securities:
Common stocks: industrial, miscel-
laneous and all other 23,351 22,978 22,978
Mortgage loans on real estate 613,208 613,208
Real estate:
Investment properties 3,904 3,904
Acquired in satisfaction of debt 11,764 11,764
___________ ___________
Total real estate 15,668 15,668
Policy loans 176,448 176,448
Short-term investments 50,975 50,975
___________ ___________
Total investments $7,092,531 $7,051,561
=========== ===========
<FN>
Note 1: Except as stated in Note 2 below, cost is defined as original cost
for stocks and other invested assets, amortized cost for bonds and
unpaid principal for policy loans and mortgage loans on real estate,
adjusted for amortization of premiums, accrual of discounts and cost
less allowances for depreciation for real estate.
Note 2: Original cost and amortized cost of investments have been adjusted to
reflect other than temporary declines in value by charges to income
as follows. Mortgage loans on real estate: 1994 - $57,000. Real
estate: 1994 - $959,000; 1991 - $123,000 and 1990 - $992,000.
</TABLE>
SCHEDULE III
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
EQUITABLE OF IOWA COMPANIES (PARENT COMPANY)
(Dollars in thousands, except per share data)
NOTES TO CONDENSED FINANCIAL STATEMENTS
The accompanying condensed financial The company has guaranteed certain
statements should be read in indebtedness of subsidiaries.
conjunction with the consolidated Additionally, the company has
financial statements and notes issued commercial paper and also
thereto of Equitable of Iowa Companies maintains lines of credit with
and subsidiaries. various banks. See Note 5 to notes
to consolidated financial
statements.
<TABLE>
<CAPTION>
BALANCE SHEETS
December 31 1994 1993
_______________________________________________________________________________
<S> <C> <C>
ASSETS
Cash and cash equivalents $53 $162
Investments, principally short-term investments 2,086 7,145
Due from subsidiaries* -- 9,128
Notes and other receivables -- 1
Property and equipment, less allowances for depreciation
of $20 in 1994 and $19 in 1993 -- 2
Current income taxes recoverable 14,491 --
Other assets 444 870
___________ ___________
17,074 17,308
Investments in subsidiaries* 675,696 601,714
___________ ___________
Total assets $692,770 $619,022
=========== ===========
</TABLE>
SCHEDULE III
CONDENSED FINANCIAL INFORMATION OF REGISTRANT - CONTINUED
EQUITABLE OF IOWA COMPANIES (PARENT COMPANY)
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
BALANCE SHEETS - CONTINUED
December 31 1994 1993
_______________________________________________________________________________
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Current income taxes payable $2,293
Deferred income taxes $3,527 182
Long-term debt -- 50,214
Commercial paper notes 90,450 34,000
Other liabilities 2,460 3,230
Due to subsidiaries* 9,003 1,141
___________ ___________
Total liabilities 105,440 91,060
Commitments and contingencies
Stockholders' equity:
Serial preferred stock, without par value -
authorized 2,500,000 shares -- --
Common stock, without par value (stated
value $1.00 per share) - authorized
70,000,000 shares in 1994 and 1993,
issued and outstanding 31,677,891
shares in 1994 and 31,504,586 shares
in 1993 31,678 31,505
Additional paid-in capital 78,661 75,841
Unrealized appreciation (depreciation) of
fixed maturities (26,493) --
Unrealized appreciation (depreciation) of
equity securities (373) (167)
Retained earnings 505,622 422,093
Unearned compensation (deduction) (1,765) (1,310)
___________ ___________
Total stockholders' equity 587,330 527,962
___________ ___________
Total liabilities and stockholders' equity $692,770 $619,022
=========== ===========
<FN>
*Eliminated in consolidation.
</TABLE>
SCHEDULE III
CONDENSED FINANCIAL INFORMATION OF REGISTRANT - CONTINUED
EQUITABLE OF IOWA COMPANIES (PARENT COMPANY)
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
STATEMENTS OF INCOME
Year ended December 31 1994 1993 1992
_______________________________________________________________________________
<S> <C> <C> <C>
Revenues:
Investment income (including interest
and fees received from subsidiaries*
of $2,068 in 1994, $456 in 1993 and
$994 in 1992) $2,788 $1,462 $2,472
Realized gains (losses) on
investments -- (3,011) 115
___________ ___________ ___________
2,788 (1,549) 2,587
Expenses:
Interest 7,880 9,502 9,761
General and administrative 1,039 935 4,809
___________ ___________ ___________
8,919 10,437 14,570
___________ ___________ ___________
Loss from continuing operations before
intercompany tax benefit, equity
in income of subsidiaries and
cumulative effect of change in
accounting principles (6,131) (11,986) (11,983)
Intercompany income tax benefit (1,819) (3,646) (3,900)
___________ ___________ ___________
(4,312) (8,340) (8,083)
Equity in income of subsidiaries'
continuing operations before
cumulative effect of change in
accounting principles* 102,596 95,496 65,343
___________ ___________ ___________
Income from continuing operations
before cumulative effect of
change in accounting principles 98,284 87,156 57,260
</TABLE>
SCHEDULE III
CONDENSED FINANCIAL INFORMATION OF REGISTRANT - CONTINUED
EQUITABLE OF IOWA COMPANIES (PARENT COMPANY)
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
STATEMENTS OF INCOME - CONTINUED
Year ended December 31 1994 1993 1992
_______________________________________________________________________________
<S> <C> <C> <C>
Discontinued operations:
Loss from retail operations,
net of related income taxes -- -- (3,182)
Gain on disposal of retail operations,
net of related income taxes -- -- 5,106
___________ ___________ ___________
-- -- 1,924
___________ ___________ ___________
Income before cumulative effect of
change in accounting principles 98,284 87,156 59,184
Cumulative effect on prior years (to
December 31, 1991) of change in
method of accounting for postre-
tirement benefits, net of related
income tax benefit -- -- (4,678)
___________ ___________ ___________
Net income $98,284 $87,156 $54,506
=========== =========== ===========
<FN>
*Eliminated in consolidation.
</TABLE>
SCHEDULE III
CONDENSED FINANCIAL INFORMATION OF REGISTRANT - CONTINUED
EQUITABLE OF IOWA COMPANIES (PARENT COMPANY)
(Dollars in thousands)
<TABLE>
<CAPTION>
STATEMENTS OF CASH FLOWS
Year ended December 31 1994 1993 1992
_______________________________________________________________________________
<S> <C> <C> <C>
OPERATING ACTIVITIES
Income from continuing operations $98,284 $87,156 $52,582
Adjustments to reconcile net income to
net cash provided by (used in)
operating activities:
Changes in other assets, other lia-
bilities and accrued income taxes 1,223 (3,690) 6,675
Provision for depreciation and
amortization 1,111 785 793
Provision for deferred income taxes 3,345 1,821 (1,519)
Equity in earnings of subsidiaries (102,596) (95,496) (57,640)
Realized (gains) losses on -- 3,011 (5,221)
investments
Discontinued operations - Net income -- -- 1,924
Adjustment to reconcile net income
to net cash provided by (used in)
discontinued operations -- -- (3,792)
___________ ___________ ___________
Net cash provided by (used in)
operating activities 1,367 (6,413) (6,198)
INVESTING ACTIVITIES
Sale of equity securities -- -- 469
Sale of real estate -- -- 360
Sale of short-term investments - net 5,059 37,432 --
Acquisition of fixed maturity invest-
ments -- (3,011) --
Acquisition of short-term investments
- net -- -- (44,577)
Proceeds from sale of subsidiary -- -- 54,938
Capital contribution to subsidiary (25) (90,000) (10,000)
Cash dividends received from sub- 1,940 1,616 17,865
sidiaries
Repayments of notes receivable 1,053,747 594,532 47,753
Issuance of notes receivable (1,053,746) (594,494) (47,779)
Sales of property and equipment 1 459 201
Purchases of property and equipment -- -- (80)
___________ ___________ ___________
Net cash provided by (used in)
investing activities 6,976 (53,466) 19,150
</TABLE>
SCHEDULE III
CONDENSED FINANCIAL INFORMATION OF REGISTRANT - CONTINUED
EQUITABLE OF IOWA COMPANIES (PARENT COMPANY)
(Dollars in thousands)
<TABLE>
<CAPTION>
STATEMENTS OF CASH FLOWS - CONTINUED
Year ended December 31 1994 1993 1992
_______________________________________________________________________________
<S> <C> <C> <C>
FINANCING ACTIVITIES
Proceeds from long-term debt -- -- 266
Repayments of long-term debt (50,214) (10,520) (68)
Issuance (repayment) of commercial
paper - net 56,450 5,226 (6,026)
Issuance of common stock under primary
stock offering -- 76,264 --
Issuance of common stock under stock
plans and upon debt conversion 67 861 3,158
Cash dividends paid (14,755) (12,071) (10,092)
___________ ___________ ___________
Net cash provided by (used in)
financing activities (8,452) 59,760 (12,762)
___________ ___________ ___________
Increase (decrease) in cash and cash
equivalents (109) (119) 190
Cash and cash equivalents at beginning
of year 162 281 91
___________ ___________ ___________
Cash and cash equivalents at end of year $53 $162 $281
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest $7,649 $10,403 $8,570
Income taxes, net of amounts received
from subsidiaries (6,662) (1,862) (6,540)
</TABLE>
SCHEDULE V
SUPPLEMENTARY INSURANCE INFORMATION
(Dollars in thousands)
<TABLE>
<CAPTION>
Column Column Column Column Column Column
A B C D E F
_______________________________________________________________________________
Future
Policy Other
De- Benefits, Policy
ferred Losses, Claims Insur-
Policy Claims Un- and ance
Acqui- and earned Bene- Premiums
sition Loss Revenue fits and
Segment Costs Expenses Reserve Payable Charges
_______________________________________________________________________________
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1994:
Life insurance $607,626 $7,014,207 $14,317 $7,785 $90,032
Year ended December 31, 1993:
Life insurance 451,180 5,578,085 14,451 5,765 81,151
Year ended December 31, 1992:
Life insurance 356,105 4,403,513 12,899 3,310 73,434
</TABLE>
<TABLE>
<CAPTION>
Column Column Column Column Column Column
A G H I J K
_______________________________________________________________________________
Amorti-
Benefits zation
Claims, of
Losses Deferred
Net and Policy Other
Invest- Settle- Acqui- Opera-
ment ment sitions ting Premiums
Segment Income Expenses Costs Expenses Written
_______________________________________________________________________________
<S> <C> <C> <C> <C> <S>
Year ended December 31, 1994:
Life insurance $524,411 $414,450 $50,921 $17,128 --
Year ended December 31, 1993:
Life insurance 434,069 358,172 42,078 20,185 --
Year ended December 31, 1992:
Life insurance 362,433 316,026 20,176 18,179 --
</TABLE>
SCHEDULE VI
REINSURANCE
EQUITABLE OF IOWA COMPANIES AND SUBSIDIARIES
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E Column F
________________________________________________________________________________
Percentage
Ceded to Assumed of Amount
Gross Other from Other Net Assumed
Amount Companies Companies Amount to Net
________________________________________________________________________________
<S> <C> <C> <C> <C> <S>
Year ended December 31, 1994:
Life insurance in
force $10,146,940 $1,421,608 $ -- $8,725,332 --
============ ============ ========= =========== ==========
Insurance premiums
and charges $95,821 $5,916 $127 $90,032 --
============ ============ ========= =========== ==========
Year ended December 31, 1993:
Life insurance in
force $9,617,881 $1,326,020 $ -- $8,291,861 --
============ ============ ========= =========== ==========
Insurance premiums
and charges $86,615 $5,653 $189 $81,151 --
============ ============ ========= =========== ==========
Year ended December 31, 1992:
Life insurance in
force $8,927,326 $1,242,003 $ -- $7,685,323 --
============ ============ ========= =========== ==========
Insurance premiums
and charges $78,639 $5,845 $640 $73,434 1%
============ ============ ========= =========== ==========
</TABLE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
EQUITABLE OF IOWA COMPANIES
(Registrant)
Dated March 8, 1995
By s/ Frederick S. Hubbell
______________________________________
Frederick S. Hubbell
President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signatures Title
__________ _____
s/Frederick S. Hubbell Chairman of the Board,
______________________ President, Chief
Frederick S. Hubbell Executive Officer
(principal executive officer) and Director
s/Paul E. Larson Executive Vice President
______________________ and Chief Financial
Paul E. Larson Officer
(principal financial officer) March 8, 1995
s/David A. Terwilliger Vice President and
______________________ Controller
David A. Terwilliger
(principal accounting officer)
s/Richard B. Covey Director
______________________
Richard B. Covey
s/Doris M. Drury Director
______________________
Doris M. Drury
s/James L. Heskett Director
______________________
James L. Heskett
Signatures Title
__________ _____
s/Richard S. Ingham, Jr. Director
______________________
Richard S. Ingham, Jr.
s/Robert E. Lee Director
______________________
Robert E. Lee
s/James E. Luhrs Director
______________________
James E. Luhrs
March 8, 1995
s/Jack D. Rehm Director
______________________
Jack D. Rehm
s/Thomas N. Urban Director
______________________
Thomas N. Urban
______________________ Director
Hans F. E. Wachtmeister
s/Richard S. White Director
______________________
Richard S. White
INDEX
Exhibits to Annual Report on Form 10-K
Year ended December 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 --
(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 Annual Report on Form 10-K
Year ended December 31, 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 --
(b) Consent of counsel (not required) --
27 Financial Data Schedule (electronic filing only) --
99 Additional Exhibits
Independence Policy filed as an Exhibit to Form 8-K dated November
11, 1991, is incorporated by reference --
Exhibit 4
AGREEMENT TO FURNISH
DEBT INSTRUMENTS
March 8, 1995
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 $25,925,988
due through August 19, 1996.
4. Trust Indenture dated as of January 17, 1995 between Equitable of
Iowa Companies and The First National Bank of Chicago, as Trustee,
relating to $100,000,000 of 8.5% Notes due 2005.
5. Note payable dated February 22, 1995, bearing interest at 8.5%,
maturing February 15, 2005 with outstanding principal amount of
$100,000,000.
Very truly yours,
s/ John A. Merriman
John A. Merriman
General Counsel/Secretary
Equitable of Iowa Companies
</TEXT
Exhibit 11
EQUITABLE OF IOWA COMPANIES
Consolidated Net Income Per Share Computation
<TABLE>
<CAPTION>
Year ended December 31 1994 1993 1992
_______________________________________________________________________________
(Dollars in thousands, except per share data)
<S> <C> <C> <C>
Primary:
Net income $98,284 $87,156 $54,506
=========== =========== ===========
Average shares outstanding 31,612,675 29,540,274 28,688,660
=========== =========== ===========
Net income per share $3.11 $2.95 $1.90
=========== =========== ===========
Fully diluted:
Net income $98,284 $87,156 $54,506
Add: Interest on 9% convertible
installment notes -- 20 14
___________ ___________ ___________
Total $98,284 $87,176 $54,520
=========== =========== ===========
Average shares outstanding 31,612,675 29,540,274 28,688,660
Add: Net effect of dilutive
stock options - based on
the treasury stock method
using year-end market price,
if higher than average
market price 591,980 724,264 731,092
Assumed conversion of 9%
convertible installment
notes -- 36,865 39,510
___________ ___________ ___________
Total 32,204,655 30,301,403 29,459,262
=========== =========== ===========
Net income per share $3.05 $2.88 $1.85
=========== =========== ===========
<FN>
NOTE: This computation is required by Regulation S-K Item 601 and is filed
as an exhibit under Item 14a(3) of Form 10-K. Fully diluted earnings
per share calculated above has not been presented on the face of the
company's Consolidated Statements of Income because dilution is less
than three percent and, therefore, presentation is not required by
Accounting Principles Board Opinion No. 15.
</TABLE>
Exhibit 21
The company's subsidiaries are:
Name State of Incorporation
_________________________________ ______________________
Equitable Investment Services, Inc. Iowa
Equitable Life Insurance Company of Iowa 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, and Equitable American
Insurance Company, an Iowa corporation, are wholly-owned subsidiaries 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.
Exhibit 23(a)
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 33-27838) pertaining to the Equitable of Iowa Companies (1982)
Stock Incentive Plan, in the Registration Statement (Form S-8 No. 33-57492),
pertaining to the Equitable of Iowa Companies (1992) Stock Incentive Plan,
in the Registration Statement (Form S-8 No. 33-57484), pertaining to the
Equitable of Iowa Companies Deferred Profit Sharing and Retirement Savings
Plan and Trust, in the Registration Statement (Form S-8 No. 33-51091)
pertaining to the Equitable of Iowa Companies Employee Stock Purchase Plan,
in the Registration Statement (Form S-3 No. 33-55045) pertaining to the
Equitable of Iowa Companies Dividend Reinvestment and Stock Purchase Plan, and
in the Registration Statement (Form S-3 No. 33-57343) pertaining to the
registration of debt securities and the respective related Prospectuses, of
our report dated February 7, 1995, with respect to the consolidated financial
statements and schedules of Equitable of Iowa Companies and subsidiaries
included in the Annual Report (Form 10-K) for the year ended December 31, 1994.
s/ Ernst & Young LLP
Des Moines, Iowa
March 6, 1995
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE CONSOLIDATED
BALANCE SHEETS AND STATEMENTS OF INCOME AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1994
<PERIOD-END> DEC-31-1994
<EXCHANGE-RATE> 1
<DEBT-HELD-FOR-SALE> 778,486
<DEBT-CARRYING-VALUE> 5,393,798
<DEBT-MARKET-VALUE> 5,059,090
<EQUITIES> 22,978
<MORTGAGE> 613,208
<REAL-ESTATE> 15,668
<TOTAL-INVEST> 7,051,561
<CASH> 12,674
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 607,626
<TOTAL-ASSETS> 7,965,593
<POLICY-LOSSES> 7,014,207
<UNEARNED-PREMIUMS> 14,317
<POLICY-OTHER> 7,785
<POLICY-HOLDER-FUNDS> 25,775
<NOTES-PAYABLE> 90,450
<COMMON> 31,678
0
0
<OTHER-SE> 555,652
<TOTAL-LIABILITY-AND-EQUITY> 7,965,593
46,265
<INVESTMENT-INCOME> 524,411
<INVESTMENT-GAINS> 19,697
<OTHER-INCOME> 61,287
<BENEFITS> 414,450
<UNDERWRITING-AMORTIZATION> 50,921
<UNDERWRITING-OTHER> 17,128
<INCOME-PRETAX> 151,244
<INCOME-TAX> 52,921
<INCOME-CONTINUING> 98,284
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 98,284
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