SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
=========
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 0-8590
Equitable of Iowa Companies
(Exact name of registrant as specified in its charter)
Iowa 42-1083593
(State or other jurisdiction of (IRS employer identification no.)
incorporation or organization)
604 Locust Street, Des Moines, Iowa 50306
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (515) 245-6911
__________________________________________________________________________
Former name, former address and formal fiscal year, if changed since last
report
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes /X/ No / /
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all
documents and reports required to be filed by Section 12, 13 or 15(d)
of the Securities Exchange Act of 1934 subsequent to the distribution
of securities under a plan confirmed by a court. Yes / / No / /
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: 31,967,880 shares of
Common Stock as of November 07, 1996.
FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Person for whom the Financial Information is given: EQUITABLE OF IOWA
COMPANIES AND ITS
SUBSIDIARIES
Consolidated Statements of Income (Unaudited):
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
September 30, 1996 September 30, 1995
_________________ __________________
(Current Year) (Preceding Year)
(Dollars in thousands)
<S> <C> <C>
REVENUES:
Annuity and universal life product
charges $19,006 $13,269
Traditional life insurance premiums 9,814 10,597
Net investment income 180,346 162,867
Realized gains on investments 4,510 1,114
Other income 7,047 4,194
_________________ __________________
220,723 192,041
BENEFITS AND EXPENSES:
Annuity and universal life benefits:
Interest credited to account balances 111,156 99,435
Benefit claims incurred in excess of
account balances 1,993 3,186
Traditional life insurance benefits 9,831 14,538
Increase (decrease) in future policy
benefits 733 (472)
Distributions to participating
policyholders 6,284 6,398
Underwriting, acquisition and insurance
expenses:
Commissions 35,409 35,618
General expenses 13,676 10,287
Insurance taxes 2,007 2,670
Policy acquisition costs deferred (42,600) (43,337)
Amortization:
Deferred policy acquisition costs 21,287 17,774
Present value of in force acquired 915 --
Goodwill 215 19
_________________ __________________
160,906 146,116
Interest expense 3,091 4,046
Other expenses 5,765 2,208
_________________ __________________
169,762 152,370
_________________ __________________
50,961 39,671
</TABLE>
Consolidated Statements of Income (Unaudited): (CONTINUATION)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
September 30, 1996 September 30, 1995
________________ __________________
(Current Year) (Preceding Year)
(Dollars in thousands,
except per share data)
<S> <C> <C>
Income taxes:
Current $17,522 $10,325
Deferred (343) 2,535
________________ __________________
17,179 12,860
________________ __________________
33,782 26,811
Equity income, net of related tax expense
of $16 in 1996 and $15 in 1995 28 29
________________ __________________
Net income before distributions on
company-obligated, mandatorily-
redeemable preferred securities 33,810 26,840
Distributions on company-obligated,
mandatorily-redeemable preferred
securities of subsidiary, Equitable of
Iowa Companies Capital Trust, holding
solely debt securities of the company 2,115 --
________________ __________________
NET INCOME $31,695 $26,840
================ ==================
NET INCOME PER COMMON SHARE (average
shares used: 1996 - 31,935,891;
1995 - 31,731,063): $0.99 $0.85
================ ==================
CASH DIVIDENDS PAID PER COMMON SHARE $0.15 $0.135
</TABLE>
Consolidated Statements of Income (Unaudited):
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
September 30, 1996 September 30, 1995
_________________ __________________
(Current Year) (Preceding Year)
(Dollars in thousands)
<S> <C> <C>
REVENUES:
Annuity and universal life product
charges $48,953 $37,889
Traditional life insurance premiums 29,712 32,815
Net investment income 528,612 469,633
Realized gains on investments 15,828 3,017
Other income 16,756 14,776
_________________ __________________
639,861 558,130
BENEFITS AND EXPENSES:
Annuity and universal life benefits:
Interest credited to account balances 328,380 289,561
Benefit claims incurred in excess of
account balances 6,367 7,693
Traditional life insurance benefits 34,761 43,914
Increase (decrease) in future
policy benefits (2,275) 2,565
Distributions to participating
policyholders 18,753 18,872
Underwriting, acquisition and insurance
expenses:
Commissions 97,402 115,279
General expenses 36,129 31,052
Insurance taxes 6,110 7,724
Policy acquisition costs deferred (117,917) (140,909)
Amortization:
Deferred policy acquisition costs 59,485 49,040
Present value of in force acquired 915 --
Goodwill 252 56
_________________ __________________
468,362 424,847
Interest expense 10,832 9,819
Other expenses 13,929 6,107
_________________ __________________
493,123 440,773
_________________ __________________
146,738 117,357
</TABLE>
Consolidated Statements of Income (Unaudited): (CONTINUATION)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
September 30, 1996 September 30, 1995
________________ __________________
(Current Year) (Preceding Year)
(Dollars in thousands,
except per share data)
<S> <C> <C>
Income taxes:
Current $47,996 $32,468
Deferred 2,869 7,677
________________ __________________
50,865 40,145
________________ __________________
95,873 77,212
Equity income (loss), net of related
tax benefit (expense) of $46 in 1996
and $(23) in 1995 (86) 42
________________ __________________
Net income before distributions on
company-obligated mandatorily-redeemable
preferred securities 95,787 77,254
Distributions on company-obligated,
mandatorily-redeemable preferred
securities of subsidiary, Equitable of
Iowa Companies Capital Trust, holding
solely debt securities of the company 2,115 --
________________ __________________
NET INCOME $93,672 $77,254
================ ==================
NET INCOME PER COMMON SHARE (average
shares used: 1996 - 31,880,469;
1995 - 31,690,934): $2.94 $2.44
================ ==================
CASH DIVIDENDS PAID PER COMMON SHARE $0.435 $0.39
</TABLE>
Consolidated Balance Sheets (Unaudited):
<TABLE>
<CAPTION>
September 30, 1996 December 31, 1995
__________________ _________________
(Dollars in thousands)
<S> <C> <C>
ASSETS
Investments:
Fixed maturities, available for sale, at
market (cost: 1996 - $7,240,800;
1995 - $6,884,837) $7,287,010 $7,352,211
Equity securities, at market
(cost: 1996 - $51,461; 1995 - $49,789) 63,690 50,595
Mortgage loans on real estate 1,652,140 1,169,456
Real estate, less allowances for
depreciation of $4,483 in 1996
and $4,804 in 1995 8,929 13,960
Policy loans 187,128 182,423
Short-term investments 59,685 39,234
__________________ _________________
TOTAL INVESTMENTS 9,258,582 8,807,879
Cash and cash equivalents 28,970 10,730
Securities and indebtedness of
related parties 14,173 13,755
Accrued investment income 130,197 122,834
Notes and other receivables 24,121 32,410
Deferred policy acquisition costs 744,708 554,179
Present value of in force acquired 84,881 --
Property and equipment, less
allowances for depreciation of
$12,971 in 1996 and $9,761 in 1995 9,837 8,039
Current income taxes recoverable 12,908 6,968
Intangible assets, less accumulated
amortization of $1,089 in 1996 and
$683 in 1995 48,049 3,639
Other assets 74,985 48,102
Separate account assets 1,502,646 171,881
__________________ _________________
TOTAL ASSETS $11,934,057 $9,780,416
================== =================
</TABLE>
Consolidated Balance Sheets (Unaudited):
<TABLE>
<CAPTION>
September 30, 1996 December 31, 1995
___________________ _________________
(Dollars in thousands)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Policy liabilities and accruals:
Future policy benefits:
Annuity and universal life products $8,344,238 $7,500,494
Traditional life insurance products 714,311 718,110
Unearned revenue reserve 18,554 14,326
Other policy claims and benefits 5,871 8,980
___________________ _________________
9,082,974 8,241,910
Other policyholders' funds:
Advance premiums and other deposits 634 691
Accrued dividends 12,555 12,715
___________________ _________________
13,189 13,406
Deferred income taxes 18,971 114,915
Commercial paper notes 75,400 58,100
Long-term debt 100,000 100,000
Other liabilities 218,962 186,272
Separate account liabilities 1,502,646 171,881
___________________ _________________
TOTAL LIABILITIES 11,012,142 8,886,484
Commitments and contingencies
Company-obligated, mandatorily-redeemable
8.70% preferred securities, due 2026,
of its subsidiary, Equitable of Iowa
Companies Capital Trust, holding solely
debt securities of the company 125,000 --
Stockholders' equity:
Serial preferred stock, without par value,
authorized 2,500,000 shares -- --
Common stock, without par value (stated
value $1.00 per share), authorized
70,000,000 shares, issued and outstanding
31,967,625 shares in 1996 and 31,769,490
in 1995 31,968 31,769
Additional paid-in capital 84,981 80,100
Unrealized appreciation (depreciation) on
fixed maturity securities 18,725 208,932
Unrealized appreciation (depreciation) on
marketable equity securities 12,229 806
Retained earnings 653,544 573,799
Unearned compensation (deduction) (4,532) (1,474)
___________________ _________________
TOTAL STOCKHOLDERS' EQUITY 796,915 893,932
___________________ _________________
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $11,934,057 $9,780,416
=================== =================
</TABLE>
Consolidated Statements of Cash Flows (Unaudited):
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
September 30, 1996 September 30, 1995
_________________ __________________
(Current Year) (Preceding Year)
(Dollars in thousands)
<S> <C> <C>
OPERATING ACTIVITIES
Net income $93,672 $77,254
Adjustments to reconcile net income to
net cash provided by operations:
Adjustments related to annuity and
universal life products:
Interest credited to account balances 326,528 289,561
Charges for mortality and
administration (49,811) (40,012)
Change in unearned revenues 1,548 (416)
Increase (decrease) in traditional life
policy liabilities and accruals (337) 3,406
Decrease in other policyholders' funds (217) (287)
Increase in accrued investment income (4,096) (13,109)
Policy acquisition costs deferred (117,917) (140,909)
Amortization of deferred policy
acquisition costs 59,485 49,040
Amortization of present value of in force
acquired 915 --
Change in other assets, other liabilities,
and accrued income taxes (18,486) (6,233)
Provision for depreciation and
amortization 69 (3,857)
Provision for deferred income taxes 2,908 7,715
Share of losses (equity in earnings)
of related parties 132 (65)
Realized gains on investments (15,828) (3,017)
_________________ __________________
NET CASH PROVIDED BY OPERATING ACTIVITIES 278,565 219,071
INVESTING ACTIVITIES
Sale, maturity or repayment of investments:
Fixed maturities - available for sale 453,098 77,995
Fixed maturities - held for investment -- 171,793
Equity securities 12,366 225
Mortgage loans on real estate 29,817 41,238
Real estate 7,213 1,799
Policy loans 25,745 20,170
Short-term investments - net -- 32,920
_________________ __________________
528,239 346,140
Acquisition of investments:
Fixed maturities - available for sale (614,575) (893,832)
Fixed maturities - held for investment -- (59,684)
Equity securities (13,287) (257)
Mortgage loans on real estate (512,943) (467,988)
Real estate (681) (901)
Policy loans (26,452) (24,901)
</TABLE>
Consolidated Statements of Cash Flows (Unaudited): (CONTINUATION)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
September 30, 1996 September 30, 1995
_________________ __________________
(Current Year) (Preceding Year)
(Dollars in thousands)
<S> <C> <C>
INVESTING ACTIVITIES - continued
Acquisition of investments - continued:
Short-term investments - net (1,826) --
_________________ __________________
(1,169,764) (1,447,563)
Disposal of investments accounted for
by the equity method $18 $17
Repayments of notes receivable -- 146
Sales of property and equipment 86 89
Purchase of subsidiary, net of cash
acquired (136,172) --
Purchases of property and equipment (3,861) (2,477)
_________________ __________________
NET CASH USED IN INVESTING ACTIVITIES (781,454) (1,103,648)
FINANCING ACTIVITIES
Issuance of company-obligated, mandatorily-
redeemable preferred securities 125,000 --
Issuance of long term debt -- 100,000
Issuance of commercial paper - net 17,300 90,550
Receipts from annuity and universal life
policies credited to policyholder
account balances 1,030,581 1,332,037
Return of policyholder account balances
on annuity and universal life policies (638,309) (625,883)
Issuance of stock under stock plans 484 (3,521)
Cash dividends paid (13,927) (12,409)
_________________ __________________
NET CASH PROVIDED BY FINANCING
ACTIVITIES 521,129 880,774
_________________ __________________
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 18,240 (3,803)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 10,730 12,674
_________________ __________________
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $28,970 $8,871
================= ==================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Cash paid during the period for:
Interest $12,889 $8,814
Income taxes 52,506 20,702
Non-cash investing activities:
Foreclosure of mortgage loans 675 --
</TABLE>
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for annual financial statements. In the opinion of management,
all adjustments considered necessary for a fair presentation have been
included. All adjustments were of a normal recurring nature, unless otherwise
noted in Management's Discussion and Analysis and the Notes to Financial
Statements. Operating results for the three months and nine months ended
September 30, 1996 are not necessarily indicative of the results that may be
expected for the year ending December 31, 1996. For further information,
refer to the consolidated financial statements and footnotes thereto included
in the company's Annual Report on Form 10-K for the year ended December 31,
1995.
On August 13, 1996, Equitable of Iowa Companies ("Equitable") acquired all of
the outstanding capital stock of BT Variable, Inc. ("BT Variable") from
Whitewood Properties Corp. ("Whitewood") pursuant to the terms of a Stock
Purchase Agreement dated as of May 3, 1996 between Equitable and Whitewood
(the "Purchase Agreement"). Refer to Note 6 for additional information.
Certain amounts in the 1995 financial statements have been reclassified to
conform to the 1996 financial statement presentation.
NOTE 2 -- INVESTMENT OPERATIONS
All of the company's fixed maturity securities are designated as available
for sale although the company is not precluded from designating fixed
maturity securities as held for investment or trading at some future date.
Investments classified as 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.
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. Sales of securities designated as held for investment
are severely restricted by Statement of Financial Accounting Standards (SFAS)
No. 115. Securities that are bought and held principally for the purpose of
selling them in the near term are designated as trading securities.
Unrealized gains and losses on trading securities are included in current
earnings. Transfers of securities between categories are restricted and are
recorded at fair value at the time of the 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.
Equity securities (common and nonredeemable preferred stocks) are reported at
market if readily marketable, or at cost if not readily marketable. The
change in unrealized appreciation and depreciation of marketable equity
securities (net of related deferred income taxes, if any) is included
directly in stockholders' equity. 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
costs, 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 and average cost methods for manager
initiated and issuer initiated disposals, respectively.
At September 30, 1996 and December 31, 1995, amortized cost, gross unrealized
gains and losses and estimated market values of fixed maturity securities
designated as available for sale are as follows:
<TABLE>
<CAPTION>
AVAILABLE FOR SALE
Gross Gross Estimated
Amortized Unrealized Unrealized Market
September 30, 1996 Cost Gains Losses Value
________________________________________________________________________________
(Dollars in thousands)
<S> <C> <C> <C> <C>
U.S. government and
governmental agencies
and authorities:
Mortgage-backed securities $259,194 $8,343 ($2,395) $265,142
Other 90,060 1,754 (1,961) 89,853
States, municipalities and
political subdivisions 15,223 906 (1) 16,128
Foreign governments 10,572 2,248 -- 12,820
Public utilities 1,249,066 28,747 (28,346) 1,249,467
Investment grade corporate 2,642,008 123,617 (31,794) 2,733,831
Below investment grade
corporate 688,700 7,726 (24,468) 671,958
Mortgage-backed securities 2,285,357 29,013 (66,950) 2,247,420
Redeemable preferred stock 620 -- (229) 391
___________ ___________ ___________ ___________
TOTAL AVAILABLE FOR SALE $7,240,800 $202,354 ($156,144) $7,287,010
=========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
December 31, 1995 Cost Gains Losses Value
________________________________________________________________________________
(Dollars in thousands)
<S> <C> <C> <C> <C>
U.S. government and
governmental agencies
and authorities:
Mortgage-backed securities $289,422 $16,738 $306,160
Other 60,567 4,163 ($2) 64,728
States, municipalities and
political subdivisions 15,485 1,639 -- 17,124
Foreign governments 10,573 3,426 -- 13,999
Public utilities 1,271,641 92,546 (2,077) 1,362,110
Investment grade corporate 2,322,036 277,981 (1,303) 2,598,714
Below investment grade
corporate 574,284 19,428 (12,492) 581,220
Mortgage-backed securities 2,340,194 75,704 (8,142) 2,407,756
Redeemable preferred stock 635 -- (235) 400
___________ ___________ ___________ ___________
TOTAL AVAILABLE FOR SALE $6,884,837 $491,625 ($24,251) $7,352,211
=========== =========== =========== ===========
</TABLE>
No fixed maturity securities were designated as held for investment at
September 30, 1996 or December 31, 1995. Short-term investments with
maturities of 30 days or less have been excluded from the preceding schedules
in this note. Amortized cost approximates market value for these securities.
Amortized cost and estimated market value of debt securities at September 30,
1996, by contractual maturity, are shown below. Expected maturities will
differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
Estimated
Amortized Market
AVAILABLE FOR SALE Cost Value
____________________________________________________________________________
(Dollars in thousands)
<S> <C> <C>
Due within one year $31,924 $32,236
Due after one year through five years 310,436 314,426
Due after five years through ten years 1,812,558 1,835,172
Due after ten years 2,541,331 2,592,614
_____________ _____________
4,696,249 4,774,448
Mortgage-backed securities 2,544,551 2,512,562
_____________ _____________
TOTAL AVAILABLE FOR SALE $7,240,800 $7,287,010
============= =============
</TABLE>
The amortized cost and estimated market value of mortgage-backed securities,
which comprise 35% of the company's investment in fixed maturity securities
as of September 30, 1996, are as follows:
<TABLE>
<CAPTION>
Estimated
Amortized Market
Cost Value
_______________________________
(Dollars in thousands)
<S> <C> <C>
Mortgage-backed securities:
Government and agency guaranteed pools:
Very accurately defined maturities $17,354 $17,735
Planned amortization class 70,267 72,916
Targeted amortization class 29,325 28,414
Sequential pay 64,228 63,915
Pass through 78,020 82,162
Private Label CMOs and REMICs:
Very accurately defined maturities 30,646 31,061
Planned amortization class 25,553 26,369
Targeted amortization class 437,297 418,450
Sequential pay 1,729,596 1,709,419
Mezzanines 37,787 37,209
Private placements and subordinate issues 24,478 24,912
_____________ _____________
TOTAL MORTGAGE-BACKED SECURITIES $2,544,551 $2,512,562
============= =============
</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 owns no
"interest only" or "principal only" mortgage-backed securities. Further, the
company has not purchased obligations at significant premiums, thereby
limiting exposure to capital loss during periods of accelerated prepayments.
At September 30, 1996, unamortized premiums on mortgage-backed securities
totaled $4,441,000 and unaccrued discounts on mortgage-backed securities
totaled $53,898,000.
An analysis of sales, maturities and principal repayments of the company's
fixed maturities portfolio for the nine months ended September 30, 1996 and
1995 is as follows:
<TABLE>
<CAPTION>
Gross Gross Proceeds
Amortized Realized Realized from
Cost Gains Losses Sale
____________________________________________
<S> <C> <C> <C> <C>
Nine months ended September 30, 1996
- -------------------------------------
Available for sale:
Scheduled principal repayments,
calls and tenders $236,058 $10,581 ($286) $246,353
Sales 203,750 3,400 (405) 206,745
___________ __________ _________ ___________
TOTAL $439,808 $13,981 ($691) $453,098
=========== ========== ========= ===========
</TABLE>
<TABLE>
<CAPTION>
Gross Gross Proceeds
Amortized Realized Realized from
Cost Gains Losses Sale
____________________________________________
<S> <C> <C> <C> <C>
Nine months ended September 30, 1995
- -------------------------------------
Scheduled principal repayments,
calls and tenders:
Available for sale $37,935 $126 ($17) $38,044
Held for investment 141,185 4,562 (262) 145,485
Sales:
Available for sale 39,370 584 (3) 39,951
Held for investment 21,983 4,325 -- 26,308
___________ __________ _________ ___________
TOTAL $240,473 $9,597 ($282) $249,788
=========== ========== ========= ===========
</TABLE>
At September 30, 1996, the company owned equity securities with a combined
book value of $51,461,000 and an estimated market value of $63,690,000,
resulting from gross unrealized appreciation of $12,445,000 and gross
unrealized depreciation of $216,000.
At September 30, 1996, one mortgage loan with a carrying value of $44,000 was
delinquent by 90 days or more.
The carrying value of investments which have been non-income producing for
the twelve months preceding September 30, 1996 totaled $537,000 related to a
mortgage loan and two investment real estate properties in the amount of
$44,000 and $493,000, respectively.
The company's investment policies related to its investment portfolio require
diversification by asset type, company and industry and sets 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. The
percentages quoted in the following sentences relate to the holdings at
September 30, 1996 and December 31, 1995, respectively. Fixed maturity
investments included investments in various non-governmental mortgage-backed
securities (31% in 1996, 33% in 1995), public utilities (18% in 1996, 19% in
1995), basic industrials (23% in 1996, 21% in 1995) and consumer products
(12% in 1996 and 1995). Mortgage loans on real estate have been analyzed by
geographical location and there are no concentrations of mortgage loans in
any state exceeding ten percent in 1996 and 1995. Mortgage loans on real
estate have also been analyzed by collateral type with significant
concentrations identified in retail facilities (27% in 1996, 32% in 1995),
industrial buildings (29% in 1996, 26% in 1995), multi-family residential
buildings (20% in 1996, 24% in 1995) and office buildings (22% in 1996, 17%
in 1995). Equity securities (which represent 0.7% of the company's
investments) are comprised of investments in the company's registered
separate account and an investment of $44,370,000 in a real estate investment
trust. 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 September 30, 1996.
NOTE 3 -- FINANCIAL INSTRUMENTS
During the second quarter of 1996, the company implemented a hedging program
under which certain derivative financial instruments, interest rate caps and
cash settled put swaptions ("instruments"), were purchased to reduce the
negative effects of potential increases in withdrawal activity related to the
company's annuity liabilities which may result from extreme increases in
interest rates. The company purchased instruments, all during the second
quarter, with notional amounts totaling approximately $600,000,000 in
interest rate caps and $1,300,000,000 in cash settled put swaptions all of
which were outstanding at September 30, 1996. The company paid approximately
$21,100,000 in premiums for these instruments. The cost of this program has
been incorporated into the company's product pricing. The instruments do not
require any additional payments by the company.
The agreements for these instruments entitle the company to receive payments
from the instruments' counterparties on future reset dates if interest rates,
as specified in the agreements, rise above a specified fixed rate (9.0% and
9.5%). The amount of such payments to be received by the company for the
interest rate caps, if any, will be calculated by taking the excess of the
current applicable rate over the specified fixed rate, and multiplying this
excess by the notional amount of the caps. Payments on cash settled put
swaptions are also calculated based upon the excess of the current applicable
rate over the specified fixed rate multiplied by the notional amount. The
product of this rate differential times the notional amount is assumed to
continue for a series of defined future semi-annual payment dates and the
resulting hypothetical payments are discounted to the current payment date
using the discount rate defined in the agreement. Any payments received from
the counterparties will be recorded as an adjustment to interest credited.
The following table summarizes the contractual maturities of notional amounts
by type of instrument at September 30, 1996:
<TABLE>
<CAPTION>
1998 1999 2000 2001 2002 Total
_________________________________________________________________________________
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest rate
caps $400,000 $200,000 $600,000
Cash settled
put swaptions $100,000 $400,000 $400,000 350,000 50,000 1,300,000
_________________________________________________________________
Total notional
amount $100,000 $400,000 $400,000 $750,000 $250,000 $1,900,000
=================================================================
</TABLE>
Premiums paid to enter into these instruments are deferred and included in
other assets. Premiums are amortized and included in interest credited to
account balances over the term of the instruments on a straight-line basis.
The company has recorded amortization of $1,230,000 in the third quarter of
1996, and $1,851,000 in the nine months ended September 30, 1996. Unrealized
gains and losses on these instruments and related assets or liabilities will
not be recorded in income until realized. The Financial Accounting Standards
Board ("FASB") and the Securities and Exchange Commission are evaluating the
accounting and disclosure requirements for these instruments. FASB has issued
an exposure draft titled "Accounting for Derivative and Similar Financial
Instruments and for Hedging Activities" which, if adopted as a Statement of
Financial Accounting Standards in its current form, would require the company
to change its accounting treatment for these instruments. The requirements
of any final standard which may result from this exposure process are not
known at this time and, therefore, the impact of such a standard on the
company's financial statements cannot be determined at this time.
Any unrealized gain or loss on the instruments is off-balance sheet and
therefore, is not reflected in the financial statements. The following table
summarizes the amortized cost, gross unrealized gains and losses and
estimated market value on these instruments as of September 30, 1996:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
September 30, 1996 Cost Gains Losses Value
________________________________________________________________________
(Dollars in thousands)
<S> <C> <C> <C> <C>
Interest rate
caps $5,437 $15 ($519) $4,933
Cash settled
put swaptions 13,834 574 (916) 13,492
___________________________________________________
Total $19,271 $589 ($1,435) $18,425
===================================================
</TABLE>
The decline in market value from amortized cost reflects changes in interest
rates and market conditions since time of purchase.
The company is exposed to the risk of losses in the event of non-performance
by the counterparties of these instruments. Losses recorded in the company's
financial statements in the event of non-performance will be limited to the
unamortized premium (remaining amortized cost) paid to enter into the
instrument because no additional payments are required by the company on
these instruments after the initial premium. Counterparty non-performance
would result in an economic loss if interest rates exceeded the specified
fixed rate. Economic losses would be measured by the net replacement cost,
or estimated market value, for such instruments. The estimated market value
is the average of quotes obtained from related and unrelated counterparties.
The company limits its exposure to such losses by: diversification among
counterparties, limiting exposure to any individual counterparty based upon
that counterparty's credit rating, and by limiting its exposure by instrument
type to only those instruments that do not require future payments. For
purposes of determining risk exposure to any individual counterparty, the
company evaluates the combined exposure to that counterparty on both a
derivative financial instruments' level and on the total investment portfolio
credit risk and reports its exposure to senior management at least monthly.
The maximum potential economic loss (the cost of replacing an instrument or
the net replacement value) due to nonperformance of the counterparties will
increase or decrease during the life of the instruments as a function of
maturity and market conditions.
The company determines counterparty credit quality by reference to ratings
from independent rating agencies. As of September 30, 1996, the ratings
assigned by Standard & Poor's Corporation by instrument with respect to the
net replacement value (market value) of the company's instruments was as
follows:
<TABLE>
<CAPTION>
September 30, 1996 Net Replacement Value
_________________________________________________________________________
Interest Cash Settled
Rate Put
Caps Swaptions Total
______________________________________________
(Dollars in thousands)
<S> <C> <C> <C>
Counterparties
credit quality:
AAA $3,301 $7,100 $10,401
A+ 1,632 6,392 8,024
______________________________________________
Total $4,933 $13,492 $18,425
==============================================
</TABLE>
NOTE 4 -- CREDIT ARRANGEMENTS
Company-Obligated, Mandatorily-Redeemable Preferred Securities of Subsidiary
Trust: On July 23, 1996, Equitable of Iowa Companies Capital Trust (the
"Trust"), a consolidated, wholly-owned subsidiary of Equitable, issued
$125,000,000 of its 8.70% Trust Originated Preferred Securities (the
"Preferred Securities"). Concurrent with the issuance of the Trust's
Preferred Securities, Equitable issued to the Trust $128,866,000 in principal
amount of its 8.70% Subordinated Deferrable Interest Debentures (the "Debt
Securities") due July 30, 2026. The sole assets of the Trust are and will
remain the Debt Securities and any accrued interest thereon. The interest
and other payment dates on the Debt Securities correspond to the distribution
and other payment dates on the Preferred Securities. The Debt Securities
mature on July 30, 2026, with an option to extend the maturity an additional
19 years, and are redeemable by Equitable, in whole or in part, beginning
July 30, 2001. The Preferred Securities will mature or be called
simultaneously with the Debt Securities. The Preferred Securities have a
liquidation value of $25 per Preferred Security plus accrued and unpaid
distributions. As of September 30, 1996, 5,000,000 shares of Preferred
Securities were outstanding.
Equitable has obligations under the Debt Securities, the Preferred Securities
Guarantee Agreement, the Declaration of Trust, as amended, and the Indenture,
as amended by the First Supplemental Indenture. These obligations, when
considered together, constitute a full and unconditional guarantee by
Equitable of the Trust's obligations under the Preferred Securities.
Net proceeds of approximately $120,300,000 from the issuance of $125,000,000
of Preferred Securities, were used to fund, in part, the acquisition of BT
Variable, which owns all the outstanding capital stock of Golden American
Life Insurance Company ("Golden American") and Directed Services, Inc. Refer
to Note 6 for further information regarding the acquisition.
NOTE 5 -- COMMITMENTS AND CONTINGENCIES
Reinsurance: 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.
Reinsurance contracts do not relieve the company from its obligations to its
policyholders. To the extent that reinsuring companies are later unable to
meet obligations under reinsurance agreements, the company's life insurance
subsidiaries would be liable for these obligations, and 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 September 30, 1996, the company had reinsurance treaties with 15
reinsurers, all of which are deemed to be long-duration, retroactive
contracts, and has established a receivable totaling $18,437,000 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 has been increased by $16,940,000 at September 30, 1996 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
$5,431,000 in the first nine months and $1,984,000 in the third quarter of
1996 compared to $4,699,000 and $1,648,000, respectively, in the same periods
of 1995, as a result of the cession agreements. Insurance benefits and
expenses have been reduced by $4,186,000 in the first nine months and
$1,190,000 in the third quarter of 1996 compared to $6,976,000 and
$3,450,000, respectively, in the same periods of 1995. The amount of
reinsurance assumed is not significant.
Investment Commitments: At September 30, 1996, outstanding commitments to
fund mortgage loans on real estate totaled $56,690,000. In addition,
outstanding commitments to purchase mortgage-backed securities totaled
$26,810,000 at September 30, 1996.
Guaranty Fund Assessments: Assessments are 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. The company cannot predict whether and to what extent legislative
initiatives may affect the right to offset. The company has established a
reserve to cover such assessments and regularly reviews information regarding
known failures and revises it's estimates of future guaranty fund assessments
accordingly. At September 30, 1996, the company has a reserve of $48,079,000
to cover estimated future assessments (net of related anticipated premium tax
credits) and has established an asset totaling $13,421,000 for items expected
to be recoverable through future premium tax offsets. The company believes
this reserve is sufficient to cover expected future insurance guaranty fund
assessments related to known insolvencies at this time.
Litigation: As previously reported, the company and certain of its
subsidiaries are defendants in class action lawsuits filed in the United
States District Court for the Middle District of Florida, Tampa Division, in
February, 1996 and in the Court of Common Pleas of Allegheny County,
Pennsylvania in June 1996. The suits claim unspecified damages as a result of
alleged improper life insurance sales practices. The company believes the
allegations are without merit. The suits are in the discovery and procedural
stages and have not yet been certified as class actions. The company intends
to defend the suits vigorously. The amount of any liability which may arise
as a result of these suits, if any, cannot be reasonably estimated and no
provision for loss has been made in the company's financial statements. The
company had also been a party to a similar previously reported class action
lawsuit filed in Iowa which has now been dismissed.
As previously reported, on December 15, 1995, USG received a Notice of
Intention to Arbitrate a dispute with one of its insurance brokerage agencies
before the American Arbitration Association regarding the payment of certain
commissions. The matter was submitted to arbitration and the determination
of the arbitration panel was that the company must pay, over time,
commissions in amounts that are not material.
In the ordinary course of business, the company and its subsidiaries are also
engaged in certain other litigation, none of which management believes is
material.
Vulnerability from Concentrations: The company has various concentrations in
its investment portfolio (see Note 2 for further information). The company's
asset growth, net investment income and cash flow are primarily generated
from the sale of individual fixed annuity policies and associated future
policy benefits. Substantial changes in tax laws that would make these
products less attractive to consumers or extreme fluctuations in interest
rates which may result in higher withdrawal experience than assumed, could
cause a severe impact to the company's financial condition.
NOTE 6 -- ACQUISITION
On August 13, 1996, Equitable acquired all of the outstanding capital stock
of BT Variable Inc., ("BT Variable"), a New York corporation, from Whitewood
Properties Corp. ("Whitewood"), a New York corporation and wholly-owned
subsidiary of Bankers Trust Company ("Bankers Trust"), pursuant to the terms
of a Purchase Agreement dated as of May 3, 1996 between Equitable and
Whitewood. BT Variable, a New York corporation, in turn, owns all the
outstanding capital stock of Golden American Life Insurance Company ("Golden
American"), a Delaware stock life insurance company, and all of the
outstanding capital stock of Directed Services, Inc. ("DSI"), a New York
corporation and registered broker dealer and investment adviser. In exchange
for the outstanding capital stock of BT Variable, Equitable paid the sum of
$93,000,000 in cash to Whitewood in accordance with the terms of the Purchase
Agreement. Equitable also paid the sum of $51,000,000 in cash to Bankers
Trust to retire certain debt owed by BT Variable to Bankers Trust pursuant to
a revolving credit arrangement. The funds used in completing the acquisition
were obtained primarily through a recent offering of securities undertaken by
the Equitable of Iowa Companies Capital Trust, an affiliate of Equitable, the
proceeds of which were loaned to Equitable in exchange for subordinated
debentures issued by Equitable to the Trust. Additional funds were provided
by reducing short-term investments of Equitable and its insurance subsidiaries.
Funds provided by Equitable's insurance subsidiaries were transferred to
Equitable in the form of dividends paid. The acquisition was accounted for
using the purchase method, and the results of operations of BT Variable are
included in the consolidated statement of income from the date of acquisition.
Subsequent to the acquisition, the BT Variable, Inc. name was changed to EIC
Variable, Inc.
The following unaudited pro forma information is presented as if the
acquisition had occurred on January 1, 1995. This information is intended
for informational purposes only and may not be indicative of the company's
future results of operations.
<TABLE>
<CAPTION>
Nine months ended Nine months ended
September 30,1996 September 30,1995
______________________________________________
(Dollars in thousands except per share data)
<S> <C> <C>
Revenues $659,752 $583,226
Net income 90,220 73,016
Net income per share 2.83 2.31
</TABLE>
As part of the acquisition, a portion of the cost was allocated to the right
to receive future cash flows from the insurance contracts existing with
Golden American at the date of acquisition. This allocated cost represents
the present value of in force acquired ("PVIF") which reflects the value of
those purchased policies calculated by discounting the expected future cash
flows at the discount rate determined by the company. The expected future
cash flows used to determine the PVIF are based on actuarially determined
projected net cash flows from the policies in force acquired from Golden
American.
An analysis of the PVIF asset for the three months ended September 30, 1996
is as follows:
<TABLE>
<CAPTION>
(Dollars in thousands)
<S> <C>
Beginning balance $0
Acquired 85,796
Imputed interest 822
Amortization (1,737)
_______________
Ending balance $84,881
===============
</TABLE>
Interest is imputed on the unamortized balance of PVIF at rates of 7.70% to
7.80%. Amortization of PVIF is charged to expense and adjusted for the
unrealized gains (losses) on available for sale securities. Based on current
conditions and assumptions as to future events on acquired policies in force,
the expected approximate amortization relating to the beginning balance of
the PVIF is as follows:
<TABLE>
<CAPTION>
Year Amount
________________________________________________________
(Dollars in thousands)
<S> <C>
4th quarter 1996 $1,830
1997 9,664
1998 10,109
1999 9,243
2000 7,919
2001 6,798
</TABLE>
The acquisition was accounted for as a purchase resulting in a new basis of
accounting, reflecting estimated fair values for assets and liabilities at
August 13, 1996. The purchase price was allocated to the three companies
purchased - BT Variable, DSI, and Golden American. Goodwill relating to the
acquisition was established for the excess of the acquisition cost over the
fair value of the net assets acquired and pushed down to Golden American.
The purchase price is preliminary with respect to the final settlement of
taxes with Bankers Trust and estimated acquisition costs and, as a result,
goodwill may change. The total amount of goodwill and other intangibles
deferred relating to the acquisition is comprised of $39,207,000 of estimated
goodwill and $4,700,000 of estimated costs of issuance of the preferred
securities mentioned above. Goodwill and preferred securities issuance costs
will be amortized on a straight-line basis over 25 years and 35 years,
respectively, and the carrying value will be reviewed periodically for any
indication of impairment in value.
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The purpose of this section is to discuss and analyze the company's
consolidated results of operations, financial condition, and liquidity and
capital resources. This analysis should be read in conjunction with the
consolidated financial statements and related notes which appear elsewhere in
this report. The company reports financial results on a consolidated basis.
The consolidated financial statements include the accounts of the company and
its subsidiaries. All of the company's significant subsidiaries are wholly-
owned. The company's primary subsidiaries are Equitable Life Insurance
Company of Iowa ("Equitable Life"), USG Annuity & Life Company ("USG"), and
Golden American Life Insurance Company ("Golden American").
On August 13, 1996, Equitable of Iowa Companies ("Equitable") acquired all of
the outstanding capital stock of BT Variable, Inc. ("BT Variable"), a New
York corporation, from Whitewood Properties Corp. ("Whitewood"), a New York
corporation and wholly-owned subsidiary of Bankers Trust Company ("Bankers
Trust"), pursuant to the terms of a Stock Purchase Agreement dated as of May
3, 1996 between Equitable and Whitewood (the "Purchase Agreement"). BT
Variable, in turn, owns all the outstanding capital stock of Golden American,
a Delaware stock life insurance company, and all of the outstanding capital
stock of Directed Services, Inc. ("DSI"), a New York corporation and
registered broker dealer and investment adviser. In exchange for the
outstanding capital stock of BT Variable, Equitable paid the sum of
$93,000,000 in cash to Whitewood in accordance with the terms of the Purchase
Agreement. Equitable also paid the sum of $51,000,000 in cash to Bankers
Trust to retire certain debt owed by BT Variable to Bankers Trust pursuant to
a revolving credit arrangement. The funds used in completing the acquisition
were obtained primarily through a recent offering of securities undertaken by
Equitable of Iowa Companies Capital Trust (the "Trust"), an affiliate of
Equitable, the proceeds of which were loaned to Equitable in exchange for
subordinated debentures issued by Equitable to the Trust. Additional funds
were provided by reducing short-term investments of Equitable and its
insurance subsidiaries. Funds provided by Equitable's insurance subsidiaries
were transferred to Equitable in the form of dividends paid. Subsequent to
the acquisition, the name BT Variable, Inc. was changed to EIC Variable, Inc.
The following unaudited pro forma information is presented as if the
acquisition had occurred on January 1, 1995. This information is intended
for informational purposes only and may not be indicative of the company's
future results of operations.
<TABLE>
<CAPTION>
1996 1995
------------------------------------------
Nine months ended September 30 $ Per Share $ Per Share
- ------------------------------------------------------------------------------
(Dollars in thousands,
except per share data)
<S> <C> <C> <C> <C>
Operating income $82,202 $2.58 $69,856 $2.21
Realized gains (net of tax):
Gains realized on disposal
of investments 10,017 0.31 2,007 0.06
Commercial mortgage and
mortgage-backed securities
prepayment gains 1,172 0.04 2,458 0.08
Realized gains related
amortization of DPAC (3,171) (0.10) (1,305) (0.04)
------------------------------------------
8,018 0.25 3,160 0.10
------------------------------------------
Net income $90,220 $2.83 $73,016 $2.31
==========================================
</TABLE>
As part of the acquisition, $85,796,000 of the cost was allocated to the
right to receive future cash flows from the insurance contracts existing with
Golden American at the date of acquisition. This allocated cost represents
the present value of in force acquired ("PVIF") which reflects the value of
those purchased policies calculated by discounting the expected future cash
flows at the discount rate determined by the company. The expected future
cash flows used to determine the PVIF are based on actuarially determined
projected net cash flows from the policies in force acquired from Golden
American.
The acquisition was accounted for as a purchase resulting in a new basis of
accounting, reflecting estimated fair values for assets and liabilities at
the acquisition date. The purchase price was allocated to the three
companies purchased - BT Variable, DSI, and Golden American. Goodwill
represents the excess of the acquisition cost over the fair value of net
assets acquired. Goodwill established as a result of the acquisition was
pushed down to Golden American. The purchase price is preliminary with
respect to the final settlement of taxes with Bankers Trust and estimated
acquisition costs and, as a result, goodwill may change. The total amount of
goodwill and other intangibles deferred relating to the acquisition is
comprised of $39,207,000 of estimated goodwill and $4,700,000 of estimated
costs of issuance of the preferred securities mentioned above. Goodwill and
preferred securities issuance costs will be amortized on a straight-line
basis over 25 years and 35 years respectively, and the carrying value will be
reviewed periodically for any indication of impairment in value.
RESULTS OF OPERATIONS
Premiums
- --------
<TABLE>
<CAPTION>
Percentage Dollar
Quarter ended September 30 1996 Change Change 1995
________________________________________________________________________________
(Dollars in thousands)
<S> <C> <C> <C> <C>
Fixed annuity premiums $328,464 (7.6)% ($26,918) $355,382
Variable annuity premiums:
Separate account 86,409 325.9 66,122 20,287
Fixed account 17,720 3,442.8 17,217 503
_______________________________________________
Total variable annuity premiums 104,129 400.9 83,339 20,790
_______________________________________________
Total annuity premiums 432,593 15.0 56,421 376,172
Life insurance premiums:
First year and single premiums 8,661 (11.8) (1,162) 9,823
Renewal premiums 23,738 5.1 1,144 22,594
_______________________________________________
Total life insurance premiums 32,399 (0.1) (18) 32,417
_______________________________________________
Total premiums $464,992 13.8% $56,403 $408,589
===============================================
</TABLE>
<TABLE>
<CAPTION>
Percentage Dollar
Nine months ended September 30 1996 Change Change 1995
________________________________________________________________________________
(Dollars in thousands)
<S> <C> <C> <C> <C>
Fixed annuity premiums $912,176 (17.4)% ($192,197) $1,104,373
Variable annuity premiums:
Separate account 179,843 328.2 137,847 41,996
Fixed account 19,949 834.2 17,813 2,136
_______________________________________________
Total variable annuity premiums 199,792 352.7 155,660 44,132
_______________________________________________
Total annuity premiums 1,111,968 (3.2) (36,537) 1,148,505
Life insurance premiums:
First year and single premiums 24,931 (16.4) (4,887) 29,818
Renewal premiums 69,346 2.2 1,469 67,877
_______________________________________________
Total life insurance premiums 94,277 (3.5) (3,418) 97,695
_______________________________________________
Total premiums $1,206,245 (3.2)% ($39,955) $1,246,200
===============================================
</TABLE>
Total annuity and life insurance premiums, increased 13.8% in the third
quarter and decreased 3.2% in the first nine months of 1996. Fixed annuity
premiums decreased 7.6% in the third quarter and 17.4% in the first nine
months of 1996. Variable annuity premiums reflected strong growth, with a
72.3% increase in the third quarter compared to the second quarter of 1996.
This is due, in part, to the August 13, 1996 acquisition of Golden American,
recent strong stock market returns and marketing efforts. Golden American
reported variable annuity premiums of $29,987,000, and variable life premiums
of $1,451,000, from August 14 to September 30, 1996. Equitable Life
introduced its variable annuity product in the fourth quarter of 1994.
Based on Life Insurance Marketing and Research Association ("LIMRA") data,
fixed annuity premiums for the industry appear to have fallen an average of
40% for the 12 month period ended June 30, 1996, while the company's fixed
annuity premiums were off 23% for the same period. The decrease in fixed
annuity premiums during the third quarter and the first nine months of 1996
reflects the impact of a relatively low interest rate environment, flat yield
curve and strong stock market returns. In such an environment, the returns
provided by variable annuities and mutual funds are relatively more
attractive than fixed annuity returns, placing pressure on fixed annuity
sales. The acquisition of Golden American has complemented and significantly
enhanced the company's existing variable annuity business. As a result of the
acquisition, the company plans to expand the distribution of it's variable
products, as well as marketing fixed products through Golden American's
distribution system. While fixed annuity sales are lower than in previous
periods, the company believes that the product diversification achieved with
the acquisition of Golden American, growth in the number of its agents, its
commitment to customer service, the quality of its investment portfolio,
competitive pricing and its overall financial strength will continue to
attract consumers to its annuity products as consumers seek a secure return
on their retirement savings. The diversity of products and distribution
channels the company now offers is intended to improve the stability of sales
under a variety of market conditions. Insurance agents are attracted to sell
the company's products by several factors, including the company's
diversified product portfolio, competitive commissions, rapid policy issuance
and weekly commission payments.
The table above includes premiums for Golden American since August 13, 1996.
As a result, the premiums provide insight as to the reported results of
operations. However, the significant increases reflected for variable
annuity premiums and life premiums are primarily a result of the acquisition
and, to a lesser extent, a growth in the sales of the variable annuity
products. After the company has reflected a full year of premium activity
for Golden American, the percentage increase trend in variable annuity premiums
and life premiums will lessen. The following premium analysis is provided on a
pro forma combined basis including Golden American premiums as if the
acquisition occurred on January 1, 1995. Total annuity and life insurance
premiums on a pro forma basis increased $63,194,000 or 14.3% to $505,175,000 in
the third quarter, and $134,943,000 or 10.1% to $1,475,123,000 in the first
nine months of 1996. Variable annuities on a pro forma combined basis increased
$87,508,000 or 162.5% to $141,373,000 in the third quarter and $322,306,000
or 237.2% to $458,164,000 in the first nine months of 1996. Life insurance
sales, as measured by first year and single premiums on a pro forma combined
basis increased $1,459,000 or 14.4% to $11,600,000 in the third quarter and
$3,365,000 or 10.5% to $35,437,000 in the first nine months of 1996.
Revenues
- --------
<TABLE>
<CAPTION>
Percentage Dollar
Quarter ended September 30 1996 Change Change 1995
________________________________________________________________________________
(Dollars in thousands)
<S> <C> <C> <C> <C>
Annuity and universal life
product charges $19,006 43.2% $5,737 $13,269
Traditional life insurance
premiums 9,814 (7.4) (783) 10,597
Net investment income 180,346 10.7 17,479 162,867
Realized gains on investments 4,510 305.0 3,396 1,114
Other income 7,047 68.0 2,853 4,194
_______________________________________________
$220,723 14.9% $28,682 $192,041
===============================================
</TABLE>
<TABLE>
<CAPTION>
Percentage Dollar
Nine months ended September 30 1996 Change Change 1995
________________________________________________________________________________
(Dollars in thousands)
<S> <C> <C> <C> <C>
Annuity and universal life
product charges $48,953 29.2% $11,064 $37,889
Traditional life insurance
premiums 29,712 (9.5) (3,103) 32,815
Net investment income 528,612 12.6 58,979 469,633
Realized gains on investments 15,828 424.6 12,811 3,017
Other income 16,756 13.4 1,980 14,776
_______________________________________________
$639,861 14.6% $81,731 $558,130
===============================================
</TABLE>
Total revenues increased 14.9% in the third quarter and 14.6% in the first
nine months of 1996. Annuity and universal life insurance product charges
increased 43.2% in the third quarter and 29.2% in the first nine months of
1996, in conjunction with the growth in the company's policyholder
liabilities, and higher surrender charges associated with annuity
withdrawals. This increase includes annuity and universal life product
charges reported by Golden American of $2,397,000 in the third quarter and
nine months ended September 30, 1996. Premiums from traditional life
insurance products decreased 7.4% in the third quarter and 9.5% in the first
nine months of 1996, as a result of the company's continued emphasis on the
more popular universal life and current interest products (for which premiums
are not included in revenues).
Net investment income increased 10.7% in the third quarter and 12.6% in the
first nine months of 1996 due to the increase in invested assets. During the
third quarter and first nine months of 1996, the company had realized gains
on the sale of investments of $4,510,000 and $15,828,000, compared to gains
of $1,114,000 and $3,017,000 in the same periods of 1995. The level of
realized gains in the first nine months of 1996 was higher than the same
period of 1995 due to an increase in gains on calls of fixed maturity
securities.
Expenses
- --------
Total insurance benefits and expenses increased $14,790,000, or 10.1%, to
$160,906,000 in the third quarter and $43,515,000, or 10.2%, to $468,362,000
in the first nine months of 1996. Interest credited to annuity and universal
life account balances increased $11,721,000, or 11.8%, to $111,156,000 in the
third quarter and $38,819,000, or 13.4%, to $328,380,000 in the first nine
months of 1996 as a result of higher account balances associated with those
products. Additionally, the amortization of financial instruments purchased
for the company's hedging program during the second quarter increased
interest credited to account balances by $1,230,000 in the third quarter and
$1,851,000 through September 30, 1996. See further discussion of the hedging
program in the financial instruments section below.
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 products, including annuities, universal life-type policies and
participating policies, allow for interest rate adjustments at least
annually. The following table summarizes the effective average annual yield
on assets invested to support policy accounts for interest-sensitive
products, the average annual interest rate credited to those products and the
interest rate spread for the nine months ended September 30, 1996 and 1995.
Yield on assets and cost of funds are estimated by calculating the weighted
average of the nine month end values for those items. The following
information is exclusive of Golden American data which would have an
immaterial impact on the information presented. At September 30, 1996,
Golden American had $194,239,000 of policy liabilities.
<TABLE>
<CAPTION>
Yield on Credited Interest
Nine months ended September 30 Assets Rate Rate Spread
_____________________________________ _______ ________ ___________
<S> <C> <C> <C>
Average base rate (excluding first
year bonus):
1996 8.49% 5.55% 2.94%
1995 8.61% 5.73% 2.88%
Average total (including first
year bonus):
1996 8.49% 5.83% 2.66%
1995 8.61% 6.13% 2.48%
</TABLE>
At September 30, 1996 and 1995, the effective annual yield on assets,
credited rate and interest rate spread were as follows:
<TABLE>
<CAPTION>
Yield on Credited Interest
Assets Rate Rate Spread
_______ ________ ___________
<S> <C> <C> <C>
Base rate (excluding first
year bonus):
1996 8.45% 5.50% 2.95%
1995 8.56% 5.65% 2.91%
Total (including first year bonus):
1996 8.45% 5.74% 2.71%
1995 8.56% 5.95% 2.61%
</TABLE>
The base interest credited rate represents the average interest rate credited
to policy accounts for interest sensitive products, including annuities,
universal life-type policies and participating life policies. Total interest
credited rate includes first year bonus interest credited to certain
policies.
Death benefits on traditional life products and benefit claims incurred in
excess of account balances decreased $2,000,000, or 20.9%, to $7,553,000 in
the third quarter and $1,420,000, or 5.3%, to $25,544,000 in the first nine
months of 1996. After adjustment for charges for mortality risk, reserves
released on death claims and taxes, the overall impact of mortality on net
income was more favorable in 1996 by approximately $1,670,000 in the third
quarter and $3,004,000 on a year to date basis. Other benefits decreased
$3,900,000, or 47.7%, to $4,271,000 in the third quarter and $9,059,000, or
36.8%, to $15,584,000 in the first nine months of 1996. These changes were
offset by a corresponding change in the reserve for future policy benefits
and, therefore, had a smaller impact on net income.
Commissions decreased $209,000, or 0.6%, to $35,409,000 in the third quarter
and $17,877,000, or 15.5%, to $97,402,000 in the first nine months of 1996.
The decrease in commissions for the third quarter is minimal as a result of
the increased sales of the variable annuity and the variable life product
through Golden American during the third quarter. General expenses increased
$3,389,000, or 32.9%, to $13,676,000 in the third quarter and $5,077,000, or
16.4%, to $36,129,000 in the first nine months of 1996. The increase in
general expenses includes expenses of Golden American of $1,517,000 in the
third quarter and nine months ended September 30, 1996. Excluding Golden
American, general expenses increased $1,872,000 or 18.2% during the third
quarter. Insurance taxes decreased $663,000, or 24.8%, to $2,007,000 in the
third quarter and $1,614,000, or 20.9%, to $6,110,000 in the first nine
months of 1996. Decreases in commissions during the nine months ended
September 30, 1996 are directly related to lower fixed annuity sales during
this period. The decrease in insurance taxes resulted from refunds as a
result of finalizing the company's state premium tax returns in the second
quarter and the elimination of premium taxes on annuity premiums in
Pennsylvania. Most costs incurred as the result of new sales have been
deferred, and thus have very little impact on total insurance expenses.
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. Withdrawal rates have been impacted by several factors.
(1) The company expected and has experienced an increase in withdrawals as
its annuity liabilities age. (2) Withdrawals tend to increase in periods of
rising interest rates as policyholders seek higher returns on their savings.
(3) 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
experienced, higher surrenders related to this block of business. The impact
of the higher withdrawal levels on this block of business was reflected
primarily in the 1994 financial statements and to a smaller degree in 1995.
At September 30, 1996, all policies originally issued from 1988 through
September 1991, with a 5 year interest guarantee represent approximately 1.2%
($81.8 million) of the company's fixed annuity liabilities (this information
is exclusive of Golden American data).
The company currently has two fixed annuity products available for sale
through stockbrokers. The pricing assumptions have been modified on these
products to reflect higher withdrawal expectations. Prior to second quarter
of 1995, the company had not actively solicited fixed annuity sales through
stockbrokers since 1989. The variable products sold through Golden American
are primarily distributed by stockbrokers. The company plans to continue to
expand its distribution channels to include stockbrokers, banks, and other
financial institutions in addition to its current brokerage and career agency
distribution.
The following table summarizes the annualized annuity withdrawal rates and
the life insurance lapse ratios for the three and the nine months ended
September 30, 1996 and 1995. The information presented below is exclusive of
Golden American which would have an immaterial effect on the information
presented.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
------------------ -----------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Annuity withdrawals 9.0% 7.1% 8.6% 8.2%
Annuity withdrawals, excluding
withdrawals of policies for which
the five year interest guarantee
and five year surrender charge 9.0% 6.9% 8.5% 7.3%
have expired
Life insurance lapse rates 7.8% 9.0% 7.5% 8.3%
</TABLE>
The withdrawal ratio for the company's annuity products is calculated by
dividing aggregate surrenders and withdrawals by beginning of period account
balances. The company's annualized lapse ratio for life insurance is
measured in terms of face amount and uses A.M. Best's formula.
The amortization of deferred policy acquisition costs increased by
$3,513,000, or 19.8%, in the third quarter and $10,445,000, or 21.3%, in the
first nine months of 1996. Golden American had amortization of deferred
policy acquisition costs of $176,000 in the third quarter and nine months
ended September 30, 1996. Amortization of deferred acquisition costs related
to operating earnings increased $3,062,000, or 17.9%, in the third quarter
and $7,574,000, or 16.1%, in the first nine months of 1996. Increases in
amortization of deferred acquisition costs related to operating earnings are
the result of increases in the deferred policy acquisition cost asset (before
adjustment to reflect the impact of SFAS No. 115) as costs of generating
sales of the company's products are deferred and amortized in later periods.
Also, 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 the
earnings impact of this accelerated amortization. Amortization related to
realized gains increased $451,000, or 67.1%, in the third quarter and
$2,871,000, or 143.0%, in the first nine months of 1996 due to the increase
in total realized gains.
A breakdown of the amortization of deferred policy acquisition costs for the
three and nine months ended September 30, 1996 and 1995 is as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------ ------------------
1996 1995 1996 1995
---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C>
Amortization related to:
Operating income $20,164 $17,102 $54,606 $47,032
Realized gains 1,123 672 4,879 2,008
-------- -------- -------- --------
Total $21,287 $17,774 $59,485 $49,040
======== ======== ======== ========
</TABLE>
Income
- ------
Operating income (income excluding realized gains and losses, commercial
mortgage and mortgage-backed securities prepayment gains and related
amortization of deferred policy acquisition costs, net of related income
taxes) increased $3,335,000, or 12.9%, in the third quarter and $11,243,000,
or 15.2%, in the first nine months of 1996. Net income increased $4,855,000,
or 18.1%, in the third quarter and $16,418,000 or 21.3%, in the first nine
months of 1996. A breakdown of income is as follows:
<TABLE>
<CAPTION>
1996 1995
------------------------------------------
Three months ended September 30 $ Per Share $ Per Share
- ------------------------------------------------------------------------------
(Dollars in thousands,
except per share data)
<S> <C> <C> <C> <C>
Operating income $29,103 $0.91 $25,768 $0.81
Realized gains (net of tax):
Gains realized on disposal
of investments 2,932 0.09 724 0.02
Commercial mortgage and
mortgage-backed securities
prepayment gains 390 0.02 785 0.03
Realized gains related
amortization of DPAC (730) (0.03) (437) (0.01)
------------------------------------------
2,592 0.08 1,072 0.04
------------------------------------------
Net income $31,695 $0.99 $26,840 $0.85
==========================================
</TABLE>
<TABLE>
<CAPTION>
1996 1995
------------------------------------------
Nine months ended September 30 $ Per Share $ Per Share
- ------------------------------------------------------------------------------
(Dollars in thousands,
except per share data)
<S> <C> <C> <C> <C>
Operating income $85,383 $2.68 $74,140 $2.34
Realized gains (net of tax):
Gains realized on disposal
of investments 10,288 0.32 1,961 0.06
Commercial mortgage and
mortgage-backed securities
prepayment gains 1,172 0.04 2,458 0.08
Realized gains related
amortization of DPAC (3,171) (0.10) (1,305) (0.04)
------------------------------------------
8,289 0.26 3,114 0.10
------------------------------------------
Net income $93,672 $2.94 $77,254 $2.44
==========================================
</TABLE>
The acquisition of Golden American is currently expected to dilute 1997
operating earnings per share by 6 to 10 cents per share. In the third
quarter of 1996 the acquisition diluted earnings by 3 cents per share.
Subsequent to 1997, however, the acquisition is expected to have a positive
impact on earnings per share as opportunities are available to market fixed
products through Golden American's distribution channels, expand the
distribution of variable products and achieve expense efficiencies. See
"Cautionary Statement Regarding Forward-Looking Statements" below.
Average shares outstanding totaled 31,935,891 in the third quarter and
31,880,469 in the first nine months of 1996 up from 31,731,063 and 31,690,934
in the same periods of 1995.
FINANCIAL CONDITION
Investments
- -----------
The financial statement carrying value of the company's total investments
grew 5.1% in the first nine months of 1996. The amortized cost basis of the
company's total investment portfolio grew 10.4% during the same period.
Effective December 1, 1995, all of the company's investments, other than
mortgage loans and real estate, are carried at market value in the company's
financial statements. As such, growth in the carrying value of the company's
investment portfolio included changes in unrealized appreciation and
depreciation of fixed maturity and equity securities as well as growth in the
cost basis of these securities. Growth in the cost basis of the company's
investment portfolio resulted from the investment of premiums from the sale
of the company's annuity and insurance products. The company manages the
growth of its insurance operations in order to maintain adequate capital
ratios.
To support the company's annuities and life insurance products, cash flow was
invested primarily in fixed income investments. At September 30, 1996, the
company's investment portfolio was comprised of the following:
<TABLE>
<CAPTION>
Estimated Yield at
Amortized % of Market % of Amortized
Cost Total Value Total Cost
_______________________________________________
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Investment cash and short-term
investments $54,043 0.6% $54,043 0.6% 4.7%
Governments and agency mortgage-
backed securities 375,049 4.2 383,943 4.2 8.1
Conventional mortgage-backed
securities 2,285,357 25.4 2,247,420 24.8 7.9
Investment grade corporate
securities 3,891,694 43.2 3,983,689 44.0 8.2
Below-investment grade corporate
securities 688,700 7.6 671,958 7.4 9.1
Mortgage loans 1,652,141 18.3 1,651,190 18.2 8.3
_______________________________________________
Total cash and fixed income
investments 8,946,984 99.3 8,992,243 99.2 8.2
Equity securities 51,461 0.6 63,690 0.7 7.5
Real estate 8,929 0.1 8,929 0.1 3.4
_______________________________________________
Total investments $9,007,374 100.0% $9,064,862 100.0% 8.2%
===============================================
<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 values of publicly
traded equity securities are based upon the most recently available
quoted price for those securities. Market values of the company's
investment in its registered separate account are based upon the
quoted market value of the securities comprising the individual
portfolios underlying the separate account. Market value of owned
real estate is estimated to be equal to, or in excess of, carrying
value based upon appraised values.
</TABLE>
At September 30, 1996, 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>
Amortized % of Estimated % of
Cost Total Market Value Total
____________ _______ ____________ _______
(Dollars in thousands)
<S> <C> <C> <C> <C>
RATINGS ASSIGNED BY
STANDARD & POOR'S:
U.S. governments, agencies
& AAA Corporates $2,625,409 36.3% $2,596,465 35.6%
AA+ to AA- 389,224 5.4 395,014 5.4
A+ to A- 2,044,838 28.2 2,106,224 28.9
BBB+ to BBB- 1,382,950 19.1 1,404,979 19.3
BB+ to BB- 574,223 7.9 565,442 7.8
B+ to B- 123,824 1.7 118,687 1.6
Issues not rated by S&P
(by NAIC rating):
Rated 1 (AAA to A-) 37,803 0.5 38,540 0.5
Rated 2 (BBB+ to BBB-) 19,424 0.3 19,817 0.3
Rated 3 (BB+ to BB-) 42,485 0.6 41,451 0.6
Redeemable preferred stock 620 0.0 391 0.0
____________ _______ ____________ _______
TOTAL FIXED MATURITIES $7,240,800 100.0% $7,287,010 100.0%
============ ======= ============ =======
</TABLE>
<TABLE>
<CAPTION>
Amortized % of Estimated % of
Cost Total Market Value Total
____________ _______ ____________ _______
(Dollars in thousands)
<S> <C> <C> <C> <C>
RATINGS ASSIGNED BY MOODY'S:
U.S. governments, agencies
& Aaa Corporates $2,463,754 34.0% $2,440,435 33.5%
Aa1 to Aa3 463,530 6.4 459,387 6.3
A1 to A3 2,373,417 32.8 2,438,291 33.5
Baa1 to Baa3 1,100,771 15.2 1,121,940 15.4
Ba1 to Ba3 635,922 8.8 630,322 8.6
B1 to B3 109,442 1.5 103,228 1.4
Issues not rated by Moody's
(by NAIC rating):
Rated 1 (Aaa to A3) 34,952 0.5 35,483 0.5
Rated 2 (Baa1 to Baa3) 23,546 0.3 23,977 0.3
Rated 3 (Ba1 to Ba3) 34,846 0.5 33,556 0.5
Redeemable preferred stock 620 0.0 391 0.0
____________ _______ ____________ _______
TOTAL FIXED MATURITIES $7,240,800 100.0% $7,287,010 100.0%
============ ======= ============ =======
</TABLE>
On November 15, 1995, the Financial Accounting Standards Board ("FASB")
issued a special report "A Guide to Implementation of Statement 115 on
Accounting for Certain Investments in Debt and Equity Securities." This
report allowed companies a one-time opportunity to reassess the
classification of their securities holdings pursuant to Statement of
Financial Accounting Standards ("SFAS") No. 115. SFAS No. 115 requires
companies to classify their securities as "held to maturity", "available for
sale" or "trading". SFAS No. 115 significantly restricts a company's ability
to sell securities in the held to maturity category without raising questions
about the appropriateness of its accounting policy for such securities.
Classification of securities as held to maturity, therefore, limits a
company's ability to manage its investment portfolio in many circumstances.
For example, a company would be prohibited from accepting a tender offer or
responding to an anticipated decline in the credit quality of assets in a
particular industry when the security is categorized as held to maturity.
Additionally, a company is unable to adjust its portfolio to take advantage
of tax planning opportunities or economic changes that would assist in asset
liability management. Thus a company's ability to maintain the appropriate
flexibility to make optimal investment decisions is significantly restricted
if it classifies securities as held to maturity.
In response to this opportunity, the company reclassified 100% of the
securities in its "held to maturity" category to "available for sale" on
December 1, 1995 to maximize investment flexibility. As a result of this
reclassification, the net unrealized investment gain component of
stockholders' equity increased by $138,795,000 on December 1, 1995 (net of
deferred taxes of $74,735,000 and an adjustment of $96,068,000 to deferred
policy acquisition costs) to reflect the net unrealized investment gains on
securities classified as available for sale that were previously classified
as held to maturity. The company is not, however, precluded from classifying
securities as held to maturity in the future. While it is not the company's
current practice to engage in active management of the fixed maturities
securities portfolio such that significant sales would occur, the inability
to respond to prudent financial management decisions necessitated this
change.
SFAS No. 115 requires the carrying value of fixed maturity securities
classified as available for sale to be adjusted for changes in market value,
primarily caused by interest rates. While other related accounts are
adjusted as discussed above, the insurance liabilities supported by these
securities are not adjusted under SFAS No. 115, thereby creating volatility
in stockholders' equity as interest rates change. As a result, the company
expects that its stockholders' equity will be exposed to incremental
volatility due to changes in market interest rates and the accompanying
changes in the reported value of securities classified as available for sale,
with equity increasing as market interest rates decline and, conversely,
decreasing as market interest rates rise.
On September 30, 1996, fixed income securities with an amortized cost of
$7,240,800,000 and an estimated market value of $7,287,010,000 were
designated as available for sale. Unrealized holding losses on these
securities, net of adjustments to deferred policy acquisition costs and
deferred income taxes, increased stockholders' equity by $18,725,000, or
$0.59 per share at September 30, 1996 compared to an increase of
$208,932,000, or $6.58 per share at December 31, 1995.
Net unrealized appreciation of fixed maturity investments of $46,210,000 was
comprised of gross appreciation of $202,354,000 and gross depreciation of
$156,144,000.
The percentage of the company's portfolio invested in below investment grade
securities has increased during the first nine months of 1996. At September
30, 1996 the amortized cost value of the company's total investment in below
investment grade securities consisted of investments in 94 issuers totaling
$688,700,000, or 7.6% of the company's investment portfolio compared to 92
issuers totaling $574,284,000, or 7.0%, at December 31, 1995. 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 exceed 10% of the investment portfolio. At September 30, 1996,
the yield at amortized cost on the company's below investment grade portfolio
was 9.1% compared to 8.2% for the company's investment grade corporate bond
portfolio. The company estimates that the market value of its below
investment grade portfolio was $671,958,000, or 97.6% of amortized cost
value, at September 30, 1996.
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 the first nine months of 1995, the company identified two below
investment grade securities as having impairments in value that were other
than temporary. As a result of those determinations, the company recognized
pre-tax losses of $5,802,000 to reduce the amortized cost basis of these two
securities to their estimated fair value. These securities were subsequently
sold resulting in realized gains totaling $1,200,000. No securities were
deemed to have an impairment in value that was other than temporary in 1996.
During the first nine months of 1996, fixed maturity securities designated as
available for sale with a combined amortized cost value of $236,058,000 were
called or repaid by their issuers generating net realized gains totaling
$10,295,000. In total, pre-tax gains from sales, calls, repayments, tenders
and writedowns of fixed maturity investments amounted to $13,290,000 in the
first nine months of 1996.
The company's fixed maturity investment portfolio had a combined amortized
cost yield of 8.2% at September 30, 1996 compared to 8.3% at December 31,
1995.
Mortgage loans make up approximately 18.2% of the company's investment
portfolio carrying value. The company resumed active mortgage lending in
1994 to broaden its investment alternatives and has continued to increase the
lending activity. Mortgages outstanding increased to $1,652,140,000 from
$1,169,456,000 during the first nine months of 1996. The company's mortgage
loan portfolio includes 549 loans with an average size of $3,009,000, and
average seasoning of 3.7 years if weighted by the number of loans, and 1.8
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 September 30, 1996, the yield on the
company's mortgage loan portfolio was 8.3%.
Distribution of these loans by type of collateral is as follows:
<TABLE>
<CAPTION>
% of
# of Carrying Mortgage
Loans Value Portfolio
_______________________________
(Dollars in thousands)
<S> <C> <C> <C>
Collateral Breakdown
- ------------------------------
Multi-family residential 95 $331,959 20.1%
Industrial 207 486,902 29.5
Office buildings 105 356,822 21.6
Retail 131 452,758 27.4
Farm 4 125 --
Other 7 23,574 1.4
______ ____________ _________
TOTAL 549 $1,652,140 100.0%
====== ============ =========
</TABLE>
Distribution of these loans by geographic location is as follows:
<TABLE>
<CAPTION>
% of
# of Carrying Mortgage
Loans Value Portfolio
_______________________________
(Dollars in thousands)
<S> <C> <C> <C>
Geographic Breakdown
- ------------------------------
New England 4 $18,557 1.1%
Middle Atlantic 72 251,604 15.2
South Atlantic 82 273,461 16.6
East North Central 111 356,882 21.6
West North Central 68 213,107 12.9
East South Central 19 67,683 4.1
West South Central 34 92,347 5.6
Mountain 38 109,963 6.7
Pacific 121 268,536 16.2
______ ____________ _________
TOTAL 549 $1,652,140 100.0%
====== ============ =========
</TABLE>
At September 30, 1996, one mortgage loan with a carrying value of $44,000 was
delinquent by 90 days or more. The company does not expect to incur material
losses from its mortgage loan portfolio because of the historically low
default rate in the company's mortgage loan portfolio and because the company
has been able to recover 99.8% of the principal amount of problem mortgages
that have been resolved in the last three years.
At September 30, 1996, the company owned real estate totaling $8,929,000,
including properties acquired through foreclosure valued at $5,625,000.
None of the company's investments were in default at September 30, 1996. The
company estimates its total investment portfolio, excluding policy loans, had
a market value equal to 100.6% of amortized cost value at September 30, 1996.
Financial Instruments
- ---------------------
During the second quarter of 1996, the company implemented a hedging program
under which certain derivative financial instruments, interest rate caps and
cash settled put swaptions ("instruments"), were purchased to reduce the
negative effects of potential increases in withdrawal activity related to the
company's annuity liabilities which may result from extreme increases in
interest rates. The company purchased instruments, all during the second
quarter, with notional amounts totaling approximately $600,000,000 in
interest rate caps and $1,300,000,000 in cash settled put swaptions all of
which were outstanding at September 30, 1996. The company paid approximately
$21,100,000 in premiums for these instruments. The cost of this program has
been incorporated into the company's product pricing. The instruments do not
require any additional payments by the company.
The agreements for these instruments entitle the company to receive payments
from the instruments' counterparties on future reset dates if interest rates,
as specified in the agreements, rise above a specified fixed rate (9.0% and
9.5%). The amount of such payments to be received by the company for the
interest rate caps, if any, will be calculated by taking the excess of the
current applicable rate over the specified fixed rate, and multiplying this
excess by the notional amount of the caps. Payments on cash settled put
swaptions are also calculated based upon the excess of the current applicable
rate over the specified fixed rate multiplied by the notional amount. The
product of this rate differential times the notional amount is assumed to
continue for a series of defined future semi-annual payment dates and the
resulting hypothetical payments are discounted to the current payment date
using the discount rate defined in the agreement. Any payments received from
the counterparties will be recorded as an adjustment to interest credited.
The following table summarizes the contractual maturities of notional amounts
by type of instrument at September 30, 1996:
<TABLE>
<CAPTION>
1998 1999 2000 2001 2002 Total
________________________________________________________________
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest rate
caps $400,000 $200,000 $600,000
Cash settled
put swaptions $100,000 $400,000 $400,000 350,000 50,000 1,300,000
________________________________________________________________
Total notional
amount $100,000 $400,000 $400,000 $750,000 $250,000 $1,900,000
================================================================
</TABLE>
Premiums paid to enter into these instruments are deferred and included in
other assets. Premiums are amortized and included in interest credited to
account balances over the term of the instruments on a straight-line basis.
The company has recorded amortization of $1,230,000 in the third quarter of
1996, and $1,851,000 in the nine months ended September 30, 1996. Unrealized
gains and losses on these instruments and related assets or liabilities will
not be recorded in income until realized. The Financial Accounting Standards
Board ("FASB") and the Securities and Exchange Commission are evaluating the
accounting and disclosure requirements for these instruments. FASB has issued
an exposure draft titled "Accounting for Derivative and Similar Financial
Instruments and for Hedging Activities" which, if adopted as a statement of
Financial Accounting Standards in its current form, would require the company
to change its accounting treatment for these instruments. The requirements
of any final standard which may result from this exposure process are not
known at this time and, therefore, the impact of such a standard on the
company's financial statements cannot be determined at this time.
Any unrealized gain or loss on the instruments is off-balance sheet and
therefore, is not reflected in the financial statements. The following table
summarizes the amortized cost, gross unrealized gains and losses and
estimated market value on these instruments as of September 30, 1996:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
September 30, 1996 Cost Gains Losses Value
_______________________________________________________________________________
(Dollars in thousands)
<S> <C> <C> <C> <C>
Interest rate caps $5,437 $15 ($519) $4,933
Cash settled put swaptions 13,834 574 (916) 13,492
_________________________________________________
Total $19,271 $589 ($1,435) $18,425
=================================================
</TABLE>
The decline in market value from amortized cost reflects changes in interest
rates and market conditions since time of purchase.
The company is exposed to the risk of losses in the event of non-performance
by the counterparties of these instruments. Losses recorded in the company's
financial statements in the event of non-performance will be limited to the
unamortized premium (remaining amortized cost) paid to enter into the
instrument because no additional payments are required by the company on
these instruments after the initial premium. Counterparty non-performance
would result in an economic loss if interest rates exceeded the specified
fixed rate. Economic losses would be measured by the net replacement cost,
or estimated market value, for such instruments. The estimated market value
is the average of quotes obtained from related and unrelated counterparties.
The company limits its exposure to such losses by: diversification among
counterparties, limiting exposure to any individual counterparty based upon
that counterparty's credit rating, and by limiting its exposure by instrument
type to only those instruments that do not require future payments. For
purposes of determining risk exposure to any individual counterparty, the
company evaluates the combined exposure to that counterparty on both a
derivative financial instruments' level and on the total investment portfolio
credit risk and reports its exposure to senior management at least monthly.
The maximum potential economic loss (the cost of replacing an instrument or
the net replacement value) due to nonperformance of the counterparties will
increase or decrease during the life of the instruments as a function of
maturity and market conditions.
The company determines counterparty credit quality by reference to ratings
from independent rating agencies. As of September 30, 1996, the ratings
assigned by Standard & Poor's Corporation by instrument with respect to the
net replacement value (market value) of the company's instruments was as
follows:
<TABLE>
<CAPTION>
September 30, 1996 Net Replacement Value
______________________________________________________________________________
Interest Cash Settled
Rate Put
Caps Swaptions Total
____________________________________________________
(Dollars in thousands)
<S> <C> <C> <C>
Counterparties
credit quality:
AAA $3,301 $7,100 $10,401
A+ 1,632 6,392 8,024
____________________________________________________
Total $4,933 $13,492 $18,425
====================================================
</TABLE>
Other assets
- ------------
Accrued investment income increased $7,363,000 primarily due to an increase
in new fixed income investments and in the overall size of the portfolio.
Deferred policy acquisition costs increased $190,529,000 over year-end 1995
levels. Excluding the adjustment to reflect the impact of SFAS No. 115,
deferred policy acquisition costs increased $58,432,000 as the deferral of
current period costs (primarily commissions) totaled $117,917,000.
Amortization of costs deferred totaled $59,485,000.
Present value of in force acquired (PVIF) was established as a result of the
recent acquisition of life insurance business inforce on Golden American. At
September 30, 1996, PVIF was $84,881,000 and amortization totaled $915,000
for the period from August 14, 1996, to September 30, 1996.
At September 30, 1996, the company had $1,502,646,000 of separate account
assets compared to $171,881,000 at December 31, 1995. The increase in
separate account assets is due to the acquisition of Golden American and
growth in Equitable Life's variable annuity product. Golden American had
separate account assets of $1,151,614,000 at September 30, 1996. At
September 30, 1996, the company had total assets of $11,934,057,000, an
increase of 22.0% over total assets at December 31, 1995.
Liabilities
- -----------
In conjunction with the volume of annuity and insurance sales, the
acquisition of Golden American and the resulting increase in business in
force, the company's liability for policy liabilities and accruals increased
$841,064,000, or 10.2%, during the first nine months of 1996 and totaled
$9,082,974,000 at September 30, 1996. Reserves for the company's fixed
annuity policies increased $624,231,000, or 8.9%, during this period and
totaled $7,651,486,000 at September 30, 1996. Life insurance reserves
increased $56,498,000, or 4.8%, during the first nine months of 1996 and
totaled $1,245,188,000 at September 30, 1996.
The company incorporates a number of features in its annuity products
designed to reduce 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 typically
range from five years to the term of the policy, with 85% of such policies
being issued on Equitable Life and USG with a surrender charge period of
seven years or more during the first nine months of 1996. The initial
surrender charge on Equitable Life and USG 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 for the nine months ended September 30, 1996 by
surrender charge range category (this information is exclusive of Golden
American). Notwithstanding policy features, the withdrawal rates of
policyholder funds may be affected by changes in interest rates.
<TABLE>
<CAPTION>
Deferred Deferred
Annuity % of Annuity % of
Surrender Charge % Sales Total Liabilities Total
______________________________________________________________________
(Dollars in thousands)
<S> <C> <C> <C> <C>
No surrender charge $682,141 9.7%
1 to 4 percent 858,639 12.2
5 to 6 percent $45,897 5.8% 1,102,652 15.7
7 to 9 percent 650,682 81.9 3,132,426 44.5
10 percent and greater 97,425 12.3 1,254,941 17.9
____________________________________________
$794,004 100.0% $7,030,799 100.0%
============================================
</TABLE>
Deferred income taxes decreased $95,944,000 to $18,971,000 from December 31,
1995 of which $98,861,000 of the decrease relates to the decrease in the
level of unrealized gains on fixed maturity securities. Total consolidated
debt increased $17,300,000 during the first nine months of 1996 as the
company issued additional commercial paper. Commercial paper, issued to
offset short-term timing differences in investment related cash receipts and
disbursements (investment smoothing) and to provide for short-term operating
needs, amounted to $75,400,000 at September 30, 1996. At September 30, 1996
none of the commercial paper was issued for investment smoothing purposes.
The company's commercial paper levels will fluctuate throughout the year as
the amounts outstanding for investment smoothing purposes changes. Other
liabilities increased $32,690,000 from year-end 1995 levels primarily due to
an increase in draft accounts payable, mortgage trust funds, and transfer
and suspense accounts, partially offset by decreases in reinsurance payables.
Separate account liabilities increased $1,330,765,000 to $1,502,646,000 from
December 31, 1995 due to the acquisition of Golden American and growth in
Equitable Life's variable annuity product. At September 30, 1996, the
company had total liabilities of $11,012,142,000 compared to $8,886,484,000
at December 31, 1995, a 23.9% increase.
Preferred Securities
- --------------------
On July 23, 1996, Equitable of Iowa Companies Capital Trust, a consolidated,
wholly-owned subsidiary of the company, issued $125,000,000 of 8.70% Trust
Originated Preferred Securities (see Liquidity and Capital Resources section
below). The net proceeds of this offering were used to fund, in part, the
acquisition of BT Variable, Inc.
Equity
- ------
At September 30, 1996, stockholders' equity was $796,915,000, or $24.93 per
share, compared to $893,932,000 or $28.14 per common share at year end 1995.
Unrealized appreciation of available for sale fixed maturity securities
increased stockholders' equity by $18,725,000, or $0.59 per share, after
adjustments to deferred acquisition costs and deferred income taxes, at
September 30, 1996 compared to an increase of $208,932,000 or $6.58 per share
at December 31, 1995. The ratio of consolidated debt to total capital was
16.0% (16.3% excluding SFAS No. 115) at September 30, 1996, compared to 15.0%
(18.8% excluding SFAS No. 115) at year-end 1995. The issuance of the
preferred securities, discussed below, increased the company's total capital
resulting in a lower ratio when the effects of SFAS No. 115 are excluded. At
September 30, 1996, there were 31,967,625 common shares outstanding compared
to 31,769,490 shares at December 31, 1995.
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 annuity and insurance premiums, investment income, and maturities of
fixed maturity investments and mortgage loans. The company primarily uses
funds for the payment of annuity and insurance benefits, operating expenses
and commissions, and the purchase of new investments.
The company's home office operations are currently housed in four leased
locations in downtown Des Moines, Iowa. The company has entered into
agreements with a developer to develop and lease a 200,000 square foot office
building in downtown Des Moines, Iowa to house all of the company's home
office operations. The company anticipates an additional $3,000,000 to
$4,000,000 for fixed assets will be spent in 1997 for the new location.
In addition, the company intends to increase its commitment to improve product
development, customer service and operating efficiencies by increasing spending
by approximately an additional $3,000,000 to $6,000,000 over the next 3 to 5
years on capital needs, primarily for information technology, as compared to
the approximately $3,400,000 spent in 1995. These amounts will be capitalized
and amortized over their useful life. No other material capital expenditures
are planned.
The company issues short-term debt, including commercial paper notes, for
working capital needs, investment smoothing purposes and to provide short-
term liquidity. At September 30, 1996 the company had $75,400,000 in
commercial paper notes outstanding, an increase of $17,300,000 from December
31, 1995. The company's commercial paper is rated A1 by Standard and Poor's,
D1 by Duff & Phelps Credit Rating Co., and P2 by Moody's.
To enhance short term liquidity and back up its outstanding commercial paper
notes, the company maintains a line of credit agreement with several banks.
On May 10, 1996, the company amended its agreement to increase the line of
credit to $300,000,000, and extend its term to May 10, 2001. The terms of
the agreement 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 covenant
requires the company maintain adjusted consolidated tangible net worth equal
to or in excess of the sum of (1) $490,000,000, plus (2) 50% of consolidated
net income from January 1, 1995 to the end of the most recent quarter, plus
(3) net proceeds from the issuance of capital stock from January 1, 1995 to
the end of the most recent quarter. At September 30, 1996, $129,342,000 of
retained earnings were free of restrictions and could be distributed to the
companies public stockholders.
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 $61,758,000 during the remainder of 1996. On August 12, 1996,
Equitable Life paid dividends of $24,000,000 to provide additional funding for
the acquisition. 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.
Writing and supporting increased volumes of annuity and insurance business
requires increased amounts of capital and surplus for the company's insurance
operations. Historically, the company has funded growth in its insurance
operations internally through the retention of earnings. Increased levels of
growth in recent years have required capital contributions in excess of
amounts generated by operating activities. In 1993 the company completed a
primary stock offering to the public and contributed $70,000,000 of the
proceeds from the offering to its insurance operations. In February 1995,
the company issued $100,000,000 of 8.5% notes, maturing on February 15, 2005,
receiving net proceeds of $98,812,000, after expenses. The company
contributed $50,000,000 of the proceeds to its insurance subsidiaries and
applied the remaining net proceeds to the repayment of outstanding commercial
paper notes. Future growth in the company's insurance operations, internally
or through acquisitions, may require additional capital although the company
believes it has sufficient resources to support growth in operations for the
next few years. The company's primary sources of capital are the retention
of earnings and the issuance of additional securities.
In order to provide the flexibility to respond promptly to capital needs as
opportunities or needs arise, the company has available an effective
universal shelf registration on Form S-3 with the Securities and Exchange
Commission with respect to $300,000,000 of securities, including any
combination of debt securities, common stock and preferred stock, of which
$175,000,000 remains to be issued. Securities may be issued and sold upon
such terms and conditions and at such time or times as may be later
determined. Any such offering will be made only by means of a prospectus.
Pursuant to this shelf registration, on July 23, 1996, Equitable of Iowa
Companies Capital Trust (the "Trust"), a consolidated, wholly-owned
subsidiary of Equitable, issued $125,000,000 of its 8.70% Trust Originated
Preferred Securities (the "Preferred Securities"). Concurrent with the
issuance of the Trust's Preferred Securities, Equitable issued to the Trust
$128,866,000 in principal amount of its 8.70% Subordinated Deferrable
Interest Debentures (the "Debt Securities") due July 30, 2026. The sole
assets of the Trust are and will remain the Debt Securities and any accrued
interest thereon. The interest and other payment dates on the Debt
Securities correspond to the distribution and other payment dates on the
Preferred Securities. The Debt Securities mature on July 30, 2026, with an
option to extend the maturity an additional 19 years, and are redeemable by
Equitable, in whole or in part, beginning July 30, 2001. The Preferred
Securities will mature or be called simultaneously with the Debt Securities.
The Preferred Securities have a liquidation value of $25 per Preferred
Security plus accrued and unpaid distributions. As of September 30, 1996,
5,000,000 shares of Preferred Securities were outstanding.
Equitable has obligations under the Debt Securities, the Preferred Securities
Guarantee Agreement, the Declaration of Trust, as amended, and the Indenture,
as amended by the First Supplemental Indenture. These obligations, when
considered together, constitute a full and unconditional guarantee by
Equitable of the Trust's obligations under the Preferred Securities.
Net proceeds of approximately $120,300,000 from the issuance of $125,000,000
of Preferred Securities were used to fund, in part, the acquisition of BT
Variable, a New York Corporation who owns all the outstanding capital stock
of Golden American Life Insurance Company and Directed Services, Inc.
As discussed above, on August 13, 1996, Equitable acquired all of the
outstanding capital stock of BT Variable from Whitewood, pursuant to the
terms of the Purchase Agreement dated as of May 3, 1996 between Equitable and
Whitewood. In exchange for the outstanding capital stock of BT Variable,
Equitable paid the sum of $93,000,000 in cash to Whitewood in accordance with
the terms of the Purchase Agreement. Equitable also paid the sum of
$51,000,000 in cash to Bankers Trust to retire certain debt owed by BT
Variable to Bankers Trust pursuant to a revolving credit arrangement. The
funds used in completing the acquisition were obtained primarily through a
recent offering of securities undertaken by the Trust, the proceeds of which
were loaned to Equitable in exchange for subordinated debentures issued by
Equitable to the Trust. Additional funds were provided by reducing short-
term investments of Equitable and its insurance subsidiaries. Funds provided
by Equitable's insurance subsidiaries were transferred to Equitable in the
form of dividends paid. Subsequent to the acquisition, the name BT Variable,
Inc. was changed to EIC Variable, Inc. ("EIC Variable").
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.
INSURANCE INDUSTRY ISSUES
The company's insurance subsidiaries are assessed contributions by life and
health guaranty associations in almost all states to indemnify policyholders
of failed companies. In several states the company may reduce premium taxes
paid to recover a portion of assessments paid to the states' guaranty fund
association. This right of "offset" may come under review by the various
states, and the company cannot predict whether and to what extent legislative
initiatives may affect this right to offset. Also, some state guaranty
associations have adjusted the basis by which they assess the cost of
insolvencies to individual companies. The company believes that its reserve
for future guaranty fund assessments is sufficient to provide for assessments
related to known insolvencies. This reserve is based upon management's
current expectation of the availability of this right of offset and state
guaranty fund assessment bases. However, changes in the basis whereby
assessments are charged to individual companies and changes in the
availability of the right to offset assessments against premium tax payments
could materially affect the company's results.
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 scrutinized by various
states, the federal government and the NAIC. The NAIC, in conjunction with
state regulators, has been reviewing existing insurance laws and regulations.
A committee of the NAIC proposed changes in the regulations governing
insurance company investments and holding company investments in subsidiaries
and affiliates which were adopted by the NAIC as model laws in 1996. The
company does not presently anticipate any material adverse change in its
business as a result of these changes.
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 earlier than the end of 1997.
Specific recommendations have been set forth in papers issued by the NAIC for
industry review. 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.
The NAIC adopted Guideline XXXIII in 1995 which requires the company to
increase annuity reserves in its statutory financial statements by
approximately $24,000,000. The company has received approval from the Iowa
and Oklahoma insurance departments for a three year phase-in. The 1995
statutory statements included an increase in annuity reserves of
approximately $8,100,000 pursuant to the requirements of the guideline. The
quarterly statutory financial statements include an increase in annuity
reserves of approximately $4,328,000 pursuant to the requirements of the
guideline for the nine months ended September 30, 1996. The guideline has no
effect on financial statements prepared in accordance with GAAP.
There has been increased scrutiny by insurance regulators and the insurance
industry itself of insurance sales and marketing activities. New rules for
life insurance illustrations have been adopted as a model regulation by the
NAIC. Many states have adopted the regulation effective January 1, 1997, and
an NAIC committee has begun to work on the issue of annuity illustrations.
The company has conducted a thorough review of its sales and marketing
process and continues to emphasize its compliance efforts.
Legislative and regulatory initiatives regarding changes in the regulation of
banks and other financial services businesses and restructuring of the
federal income tax system could, if adopted and depending on the form they
take, have an adverse impact on the company by altering the competitive
environment for its products. 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.
RECENT DEVELOPMENTS
As previously reported, the company and certain of its subsidiaries are
defendants in class action lawsuits filed in the United States District Court
for the Middle District of Florida, Tampa Division, in February, 1996 and in
the Court of Common Pleas of Allegheny County, Pennsylvania in June 1996. The
suits claim unspecified damages as a result of alleged improper life insurance
sales practices. The company believes the allegations are without merit. The
suits are in the discovery and procedural stages and have not yet been
certified as class actions. The company intends to defend the suits
vigorously. The amount of any liability which may arise as a result of these
suits, if any, cannot be reasonably estimated and no provision for loss has
been made in the company's financial statements. The company had also been a
party to a similar previously reported class action lawsuit filed in Iowa
which has now been dismissed.
As previously reported, on December 15, 1995, USG received a Notice of
Intention to Arbitrate a dispute with one of its insurance brokerage agencies
before the American Arbitration Association regarding the payment of certain
commissions. The matter was submitted to arbitration and the determination
of the arbitration panel was that the company must pay, over time,
commissions in amounts that are not material.
In the ordinary course of business, the company and its subsidiaries are also
engaged in certain other litigation, none of which management believes is
material.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Any forward-looking statement contained herein or in any other oral or
written statement by the company or any of its officers, directors or
employees is qualified by the fact that actual results of the company may
differ materially from such statement due to the following important factors,
among other risks and uncertainties inherent in the company's business:
1. Prevailing interest rate levels which may affect the ability of the company
to sell its products, the market value of the company's investments and
the lapse rate of the company's policies, notwithstanding product design
features intended to enhance persistency of the company's products.
2. Changes in the federal income tax laws and regulations which may affect
the relative tax advantages of the company's products.
3. Changes in the regulation of financial services, including bank sales
and underwriting of insurance products, which may affect the competitive
environment for the company's products.
4. Other factors affecting the performance of the company, including, but not
limited to, stock market performance, litigation, insurance industry
insolvencies, investment performance of the underlying portfolios of the
variable annuity products, variable annuity product design and sales volume
by significant sellers of the company's variable annuity products.
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
As previously reported, the company and certain of its subsidiaries
are defendants in class action lawsuits filed in the United States
District Court for the Middle District of Florida, Tampa Division, in
February, 1996 and in the Court of Common Pleas of Allegheny County,
Pennsylvania in June 1996. The suits claim unspecified damages as a
result of alleged improper life insurance sales practices. The company
believes the allegations are without merit. The suits are in the
discovery and procedural stages and have not yet been certified as class
actions. The company intends to defend the suits vigorously. The amount
of any liability which may arise as a result of these suits, if any,
cannot be reasonably estimated and no provision for loss has been made in
the company's financial statements. The company had been a party to a
similar previously reported class action lawsuit filed in Iowa which
has now been dismissed.
As previously reported, on December 15, 1995, USG received a Notice of
Intention to Arbitrate a dispute with one of its insurance brokerage
agencies before the American Arbitration Association regarding the payment
of certain commissions. The matter was submitted to arbitration and the
determination of the arbitration panel was that the company must pay, over
time, commissions in amounts that are not material.
In the ordinary course of business, the company and its subsidiaries
are also engaged in certain other litigation, none of which management
believes is material.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
A list of exhibits included as part of this report is set forth
in the Exhibit Index which immediately precedes such exhibits
and is hereby incorporated by reference herein.
(b) The following reports on Form 8-K were filed during the quarter
ended September 30, 1996:
(i) The Company's report on Form 8-K filed on July 3, 1996,
containing the Underwriting Agreement for Preferred
Securities and Pro Forma Condensed Consolidated Financial
Statements (Unaudited) for Equitable of Iowa Companies and
BT Variable, Inc.
(ii) The Company's report on Form 8-K filed July 15, 1996,
providing a legal update on Item 5: Other Events.
(iii) The Company's report on Form 8-K filed August 28, 1996,
containing the Stock Purchase Agreement, Consolidated
Financial Statements for BT Variable, Inc. and subsidiaries,
and Pro Forma Condensed Consolidated Financial Statements
(Unaudited) for Equitable of Iowa Companies and BT Variable,
Inc.
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.
DATE: November 12, 1996 EQUITABLE OF IOWA COMPANIES
By/s/ Paul E. Larson
________________________________________
Executive Vice President and CFO
(Principal Financial Officer)
By/s/ David A. Terwilliger
________________________________________
Vice President and Controller
(Principal Accounting Officer)
INDEX
Exhibits to Form 10-Q
Nine Months ended September 30, 1996
EQUITABLE OF IOWA COMPANIES
2 Plan of Acquisition
(a) Stock Purchase Agreement dated as of May 3, 1996, between
Equitable and Whitewood Properties Corp. (incorporated by
reference from Exhibit 2 in Form 8-K filed August 28, 1996)
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
(c)(i) Indenture dated as of January 17, 1995 by and between Equitable
of Iowa Companies and The First National Bank of Chicago, as
Trustee, relating to the company's $100,000,000 of 8.5% Notes
due 2005 (incorporated by reference from Exhibit 4.1 to the
company's Registration Statement on Form S-3 Registration No.
33-57343 filed January 18, 1995)
(ii) Form of Global 8.5% Note dated February 22, 1995 due February
15, 2005 in the principal amount of $100,000,000 (incorporated
by reference from Exhibit 4.3 to the company's Report on Form
8-K filed February 15, 1995)
(iii) Form of First Supplemental Indenture dated July 18, 1996,
including therein the Form of Subordinated Deferrable Interest
Debenture, relating to the company's $128,866,000 of 8.70%
Subordinated Deferrable Interest Debentures (incorporated by
reference from Exhibit 4.7.1 to the company's Report on Form
8-K filed July 3, 1996)
(d) Certificate of Trust of Equitable of Iowa Companies Capital
Trust (incorporated by reference from Exhibit 4.8 to the
company's Registration Statement on Form S-3 Registration No.
333-1909 filed March 22, 1996)
INDEX
Exhibits to Form 10-Q
Nine Months ended September 30, 1996
EQUITABLE OF IOWA COMPANIES
(e)(i) Declaration of Trust of Equitable of Iowa Companies Capital
Trust (incorporated by reference from Exhibit 4.9 to the
company's Registration Statement on Form S-3 Registration No.
333-1909 filed March 22, 1996)
(ii) Form of First Amendment to Declaration of Trust of Equitable
of Iowa Companies Capital Trust dated July 18, 1996, including
therein the form of Preferred Securities, relating to
$125,000,000 of Trust Originated Preferred Securities issued
by Equitable of Iowa Companies Capital Trust (incorporated by
reference from Exhibit 4.9.1 to the company's Report on Form
8-K filed July 3, 1996)
(f) Form of Preferred Securities Guarantee Agreement by Equitable
of Iowa Companies dated July 18, 1996 relating to $125,000,000
of Trust Originated Preferred Securities issued by Equitable of
Iowa Companies Capital Trust (incorporated by reference from
Exhibit 4.10 to the company's Report on Form 8-K filed July 3,
1996)
10 Material Contracts
(a) Executive compensation plans and arrangements *
(i) Restated Executive Severance Pay Plan filed as Exhibit
10(a)(i) to Form 10-Q for the quarter ended September 30, 1996.
(ii) Directors' Deferred Compensation Plan filed as Exhibit
10(b) to Form 10-K for the year ended December 31, 1989,
is incorporated by reference
(iii) 1982 Stock Incentive Plan filed as Exhibit 10(c) to Form
10-K for the year ended December 31, 1989, is incorporated
by reference
(iv) Excess Benefit Plan filed as Exhibit 10(d) to Form 10-K
for the year ended December 31, 1989, is incorporated by
reference
(v) Supplemental Employee Retirement Plan filed as Exhibit
10(e) to Form 10-K for the year ended December 31, 1989,
is incorporated by reference
(vi) Executive Flexible Perquisite Program filed as Exhibit
10(f) to Form 10-K for the year ended December 31, 1992,
is incorporated by reference
(vii) Restated and Amended Key Employee Incentive Plan filed as
Exhibit A of Registrant's Proxy Statement dated
March 14, 1995, is incorporated by reference
INDEX
Exhibits to Form 10-Q
Nine Months ended September 30, 1996
EQUITABLE OF IOWA COMPANIES
(viii) Restated and Amended 1992 Stock Incentive Plan
Registration Statement No. 33-57492, filed as Exhibit
B of Registrant's Proxy Statement dated March 14, 1995,
is incorporated by reference
(ix) 1996 Non-Employee Directors' Stock Option Plan filed as Exhibit
A of Registrant's Proxy Statement dated April 25, 1996, is
incorporated by reference
* Management contracts or compensation plans required to
be filed as an Exhibit pursuant to Item 14(c) of Form
10(K).
11 Statement re: Computation of Per Share Earnings
21 Subsidiaries List
23 Consent of Experts and Counsel
(a) Consent of independent auditors (not required)
(b) Consent of counsel (not required)
27 Financial Data Schedule (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(a)
November 12, 1996
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 May
10, 1996, re: line of credit in amount of $300,000,000.
Very truly yours,
/s/ John A. Merriman
John A. Merriman
General Counsel/Secretary
Equitable of Iowa Companies
RESTATED
EQUITABLE OF IOWA COMPANIES
EXECUTIVE SEVERANCE PAY PLAN
Exhibit 10(a)(i)
1. The Chairman, President, Secretary and Treasurer of Equitable of
Iowa Companies (the "Company") shall be eligible employees. In addition,
such officers of the Company or any subsidiary of the Company as designated
by the Chief Executive Officer and approved by the Compensation Committee
shall also be eligible employees. The Company and its subsidiaries are
collectively referred to herein as the "Companies".
2. Each eligible employee whose employment is terminated as provided
below shall be paid severance pay in the total amount of one year's base
annual salary at the level in effect on the date of termination of
employment, plus the average of the bonuses earned by the eligible employee
for the most recent two full plan years under the Company's Key Employee
Incentive Plan. If the eligible employee has not been a participant in the
Key Employee Incentive Plan for a full two years, then the amount added to
the base annual salary with respect to the Key Employee Incentive Plan shall
be the percentage of base annual salary at the "target level" under each
performance goal established under the Key Employee Incentive Plan for the
year in which termination occurs.
3. Severance pay benefits will be paid to eligible employees whose
employment is terminated by one of the Companies and will be paid in twenty-
four semi-monthly installments, with each payment equal to one-twenty-fourth
of the amount determined under paragraph 2 above. The first payment shall be
made on the first payroll date of Equitable Life Insurance Company of Iowa
following termination of employment that covers the first payroll period
during which the eligible employee was not, at any time, an employee. Each of
the remaining twenty-three payments shall be made on each subsequent payroll
date thereafter. Employee health insurance and group life insurance benefit
plans will be continued during such payment period. Any amounts received
from other employment during this benefit period will be deducted from and
reduce the severance pay benefits otherwise payable.
4. No severance payments will be due employees (i) terminated after
age 65, (ii) terminated for just cause, (iii) receiving similar benefit under
written employment contracts, (iv) receiving disability or retirement
benefits from Equitable of Iowa Companies or a subsidiary, or (v) who
voluntarily resign.
5. Notwithstanding any other provisions, each eligible employee will
be entitled to receive the total benefit under the plan (reduced by
compensation from other employment) upon termination of employment for any
reason within one year (two years in the case of officers of Equitable of
Iowa Companies and other officers of the Companies as designated by the Chief
Executive Officer of Equitable of Iowa Companies) following a change of
control of the Company.
6. A "change of control" of the Company shall be deemed to have
occurred if: (i) any change of control occurs of a nature that would be
required to be disclosed in response to Item 6(e) of Regulation 14A of the
Securities Exchange Act of 1934; (ii) any person or entity owns 25% or more
of the combined voting power of the Company's then outstanding securities
unless thereafter the Board of Directors of the Company adopts a resolution
to the effect that this provision is inoperable; (iii) any person or entity
acquires 50% or more of the combined voting power of the Company's then
outstanding securities; or (iv) there shall have been a change in the
composition of the Board of Directors of the Company such that any time a
majority of the Board of Directors of the Company shall have been members of
the Board of Directors for less than 24 months, unless the election of each
new director who was not a director at the beginning of the period was
approved or recommended by at least two-thirds of the directors then still in
office who were directors at the beginning of such period.
7. In the event of the death of the eligible employee during the
period he or she is receiving payments pursuant to paragraph 3 above, the
eligible employee's designated beneficiary shall be entitled to receive the
balance of the payments; or in the event of no designated beneficiary, the
remaining payments shall be made to the eligible employee's estate.
8. All compensation payable to an employee shall be charged to the
company employing the eligible employee on the date of termination.
9. Participants may elect to reduce benefits otherwise payable in the
event total benefits payable would result in additional taxes to the
Companies, or any one of them, or an eligible employee under Internal Revenue
Code of 1986 Section 280G.
As amended through August 7, 1996.
EQUITABLE OF IOWA COMPANIES
Consolidated Net Income Per Share Computation
Exhibit 11
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
___________ ___________ ___________ ___________
1996 1995 1996 1995
___________ ___________ ___________ ___________
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C>
Primary:
Net income $31,695 $26,840 $93,672 $77,254
=========== =========== =========== ===========
Average shares
outstanding 31,935,891 31,731,063 31,880,469 31,690,934
=========== =========== =========== ===========
Net income per share $0.99 $0.85 $2.94 $2.44
=========== =========== =========== ===========
Fully diluted:
Net income $31,695 $26,840 $93,672 $77,254
=========== =========== =========== ===========
Average shares
outstanding 31,935,891 31,731,063 31,880,469 31,690,934
Add: Net effect of dilutive
stock options - based on
the treasury stock method
using period-end market
price, if higher than
average market price 459,612 446,888 484,791 423,539
___________ ___________ ___________ ___________
Total 32,395,503 32,177,951 32,365,260 32,114,473
=========== =========== =========== ===========
Net income per share $0.98 $0.83 $2.89 $2.41
=========== =========== =========== ===========
<FN>
Note: This computation is required by Regulation S-K Item 601 and is filed
as an Exhibit under 6(a) of Form 10-Q. Fully diluted earnings per
share calculated above has not been presented on the face of the
company's Consolidated Statements of Income because dilution is less
than three percent and, therefore, presentation is not required by
Accounting Principles Board Opinion No. 15.
</TABLE>
Exhibit 21
The company's subsidiaries are:
Name State of Organization
---------------------------------------- ---------------------
Equitable Life Insurance Company of Iowa Iowa corporation
Equitable Investment Services, Inc. Iowa corporation
Equitable of Iowa Securities Network, Inc. Iowa corporation
Locust Street Securities, Inc. Iowa corporation
Equitable of Iowa Companies Capital Trust Delaware business trust
EIC Variable, Inc. New York corporation
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. Golden American Life Insurance
Company, a Delaware stock life insurance company, and Directed Services,
Inc., a New York corporation, are wholly-owned subsidiaries of EIC Variable,
Inc. 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.
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE CONSOLIDATED
STATEMENTS OF INCOME AND CONSOLIDATED BALANCE SHEETS (UNAUDITED) AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<EXCHANGE-RATE> 1
<DEBT-HELD-FOR-SALE> 7,287,010
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 63,690
<MORTGAGE> 1,652,140
<REAL-ESTATE> 8,929
<TOTAL-INVEST> 9,258,582
<CASH> 28,970
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 744,708
<TOTAL-ASSETS> 11,934,057
<POLICY-LOSSES> 9,058,549
<UNEARNED-PREMIUMS> 18,554
<POLICY-OTHER> 5,871
<POLICY-HOLDER-FUNDS> 13,189
<NOTES-PAYABLE> 175,400
125,000
0
<COMMON> 31,968
<OTHER-SE> 764,947
<TOTAL-LIABILITY-AND-EQUITY> 11,934,057
29,712
<INVESTMENT-INCOME> 528,612
<INVESTMENT-GAINS> 15,828
<OTHER-INCOME> 65,709
<BENEFITS> 385,986
<UNDERWRITING-AMORTIZATION> 60,652
<UNDERWRITING-OTHER> 21,724
<INCOME-PRETAX> 146,738
<INCOME-TAX> 50,865
<INCOME-CONTINUING> 93,672
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 93,672
<EPS-PRIMARY> 2.94
<EPS-DILUTED> 2.89
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
