SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ X ] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended December 31, 1995
Commission file number 0-8590
EQUITABLE OF IOWA COMPANIES
(Exact name of registrant as specified in its charter)
Iowa 42-1083593
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
604 Locust Street, P.O. Box 1635
Des Moines, Iowa 50306
(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number, including area code: (515) 245-6911
Securities Registered Pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Common Stock New York Stock Exchange
____________________________________________________________________________
Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (229.405 of this chapter) is not contained herein, and will
not be contained, to the best of registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. [ ].
The aggregate market value of voting stock (Common Stock) held by nonaffiliates
of the registrant as of February 29, 1996, was $898,495,000.
As of February 29, 1996, 31,853,432 shares of Common Stock are issued and
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information contained in registrant's proxy statement for the annual
meeting of shareholders to be held April 25, 1996, is incorporated by
reference into Part III hereof.
PART I
ITEM 1. Business
Overview
Equitable of Iowa Companies ("company"), a Des Moines, Iowa based
insurance holding company organized in 1977, is a provider of
individual annuity and life insurance products, targeting middle-income
individuals and small businesses throughout the United States. Through
its insurance subsidiaries, Equitable Life Insurance Company of Iowa
("Equitable Life") and USG Annuity & Life Company ("USG"), the company
offers its products in 49 states and the District of Columbia. Equitable
Life was founded in 1867 and is the oldest life insurance company west
of the Mississippi River. The company began actively marketing annuity
products in 1988, principally through USG, which was acquired by the
company in 1988 as a shell organization. Both Equitable Life and USG
are rated "A+" (Superior) by A.M. Best. A.M. Best's ratings are
directed toward the protection of policyholders, not investors.
The company has had a rapid rate of growth in assets over the past few
years, primarily as a result of increased demand for its annuity
products. The company's total assets grew 23%, 24% and 27% in 1995,
1994 and 1993, respectively. Industry-wide asset growth averaged 7% in
1994 and 11% in 1993, based on information compiled by A.M. Best Co.
Inc. The company's total assets at December 31, 1995 were $9.8 billion,
compared to $8.0 billion at December 31, 1994. Excluding the impact of
Statement of Financial Accounting Standards ("SFAS") No. 115, the asset
growth rates were 18%, 24% and 27% in 1995, 1994 and 1993, respectively.
The company achieved its growth in assets while generating spreads and
an overall level of profitability that met its objectives.
Strategy
The company's continuing strategy to achieve its growth and profit goals
is to:
- offer a diversified portfolio of annuity and life insurance
products designed to appeal to a broad range of customers in the
fast-growing retirement savings market segment;
- expand its existing base of over 53,000 agents;
- provide superior, cost-effective service to its policyholders
and agents, brokers and other distributors;
- maintain high quality ratings;
- issue competitive products with protection from early policy
termination; and
- maintain high quality investments having cash flows consistent
with the characteristics of the company's policy liabilities.
The company believes that, because of its diversified portfolio of
annuity and life insurance products, it is well-positioned to take
advantage of certain demographic and economic trends that are expected
to increase demand for these types of products. These trends include:
an aging "baby boomer" segment of the population that is increasingly
concerned about retirement and estate planning, as well as maintaining
their standard of living in retirement; lower public confidence that
government and employer-provided benefits at retirement will be
sufficient; rising health care costs; and the 1993 increase in
individual federal income tax rates.
The company believes that financial strength and ratings also are
important in attracting customers, and give it a competitive advantage
over other companies in the annuity marketplace. The company intends to
manage its business to preserve its current insurance ratings.
The company structures its products to contractually protect itself from
early policy termination. The majority of the company's life insurance
products currently sold incorporate a charge for early withdrawal of the
cash value of the policy. In addition, all deferred annuity policies
sold by the company include surrender charges, which generally decline
over time and apply only during a stated period.
The company's investment strategy emphasizes current income and high
credit quality. The persistency of the company's products enables the
company to invest in longer maturity investments. Longer maturities
typically have provided higher yields than shorter maturities. These
higher yields, together with the overall quality of the investment
portfolio, allow the company to maintain competitive crediting rates on
its interest-sensitive products.
Products
The company offers, through its insurance subsidiaries, a portfolio of
annuity and life insurance products designed to meet the needs of its
customers for supplemental retirement income, estate planning and
protection from unexpected death. For all products, the target market
is middle-income individuals, families and small businesses throughout
the United States. The company requires that each of its products be
priced to earn an adequate margin between the return to the policyholder
and the return earned by the company on its investments.
Fixed Annuities. Fixed annuities are long-term savings vehicles that
are particularly attractive to customers over the age of 50 who are
planning for retirement and seeking secure, tax-deferred savings
products. The individual annuity business is a growing segment of the
savings and retirement market, and among the fastest growing segments of
the life insurance industry. Annuity products currently enjoy an
advantage over certain other retirement savings products, because the
payment of federal income taxes on interest credited on annuity policies
is deferred during the accumulation period.
The company offers a variety of fixed annuity products. Single premium
deferred annuities ("SPDAs"), in general, are savings vehicles in which
the policyholder, or annuitant, makes a single premium payment to an
insurance company. The insurance company credits the account of the
annuitant with earnings at an interest rate (the "crediting rate"),
which is declared by the insurance company from time to time and may
exceed but may not be lower than any contractually guaranteed minimum
crediting rate. All of the company's fixed annuities have a minimum
guaranteed crediting rate. The company also offers flexible premium
deferred annuities ("FPDAs"). FPDAs are deferred annuities in which the
policyholder may elect to make more than one premium payment.
The company had 235,000 deferred annuity policies in force at December
31, 1995, with an average account balance of $27,600.
At least once each month the company establishes an interest crediting
rate for its new annuity policies. In determining the company's interest
crediting rate on new policies, management considers the competitive
position of the company, prevailing market rates and the profitability
of the annuity product. The company maintains the initial crediting
rate for a minimum period of one year. Thereafter, the company may
adjust the crediting rate not more frequently than once a year. In
establishing renewal crediting rates, the company primarily considers
the anticipated yield on its investment portfolio. Interest rates
credited on the company's in force annuity policies ranged from 3.4% to
11.2% at December 31, 1995. All of the company's fixed annuity products
have minimum guaranteed crediting rates ranging from 3.0% to 4.5% for
the life of the policy. At December 31, 1995, 1.8% of the company's in
force annuity policies had rates credited for a multi-year period.
Certain of the company's annuity policies have a bonus crediting rate
for the first year of the policy, which typically exceeds the annual
crediting rate by 1.0 to 2.0%. The bonus and the base crediting rates
are disclosed to the policyholders. The expected renewal crediting rate
on such policies is lower than the expected rate on the company's
comparable products that do not have a bonus feature.
The company incorporates a number of features in its annuity products
designed to reduce the early withdrawal or surrender of the policies and
to partially compensate the company for lost investment opportunities
and costs if policies are withdrawn early. Under the terms of the
company's policies, the policyholder is permitted to withdraw all or
part of the premium paid plus the amount credited to his or her account,
less a surrender charge for withdrawals. Certain of the company's
deferred annuity contracts provide for penalty-free partial withdrawals,
typically up to 10% of the accumulation value annually. Surrender
charge periods on deferred annuity policies currently typically range from
five years to the term of the policy, with 94% of such policies being
issued with a surrender charge period of seven years or more during 1995.
The average length of the surrender period on the company's deferred
annuity policies issued during 1995 was 9.3 years. The initial surrender
charge on annuity policies generally ranges from 5% to 20% of the premium
and decreases over the surrender charge period. At December 31, 1995, 79%
of the company's deferred annuity liabilities were subject to a surrender
charge of 5% or more, and only 9% carried no surrender penalty.
In 1992, the company introduced a number of annuity products with a
Market Value Adjustment feature, in which a "market value adjustment" is
applied to adjust the accumulation value (either up or down but not below
the amount of the initial premium plus credited interest at a stated rate)
during the surrender charge period. MVA policies accounted for 62% of the
company's total annuity sales during 1995 and 35% of total annuity
liabilities at December 31, 1995. Notwithstanding policy features, the
withdrawal rates of policyholder funds may be affected by changes in
interest rates.
The company also markets tax-qualified retirement annuities that meet
the requirements of Section 403(b) of the Internal Revenue Code of 1986
("TSAs") to employees of public schools and certain other tax-exempt
organizations. Teachers and other school employees purchase TSAs
through automatic payroll deductions. TSA products tend to be purchased
by customers who are younger than purchasers of the company's other
annuity products. Therefore, the company's specialty TSA products tend
to incorporate features that are attractive to customers in this younger
age bracket (early 40s to early 50s) who have a longer period to
retirement, such as combining a higher crediting interest rate with a
longer surrender charge period. The company believes that the market
for TSAs is attractive because TSAs broaden its customer base and
provide an on-going source of renewal premiums. During 1995,
the company derived 9% of its annuity premiums from TSAs and intends
to continue to grow this percentage over time. In addition to TSAs, the
company also sells other tax-qualified retirement annuities for individual
retirement accounts and simplified employee pension plans. Total tax-
qualified retirement annuity premiums totaled $648 million, or 44% of
total 1995 annuity premiums.
Variable Annuities. Variable annuities are long-term savings vehicles
in which policyholder premiums (purchase payments) are recorded and
maintained in a separate account established as a registered investment
company. Premiums are invested by the separate account in an underlying
series mutual fund or the company's general account at the direction of
the policyholder. Policyholders may choose among several available fund
options. Investment risk is borne by the policyholder and the value of
the policyholder's account depends upon the performance of the funds
chosen by the policyholder. Variable annuities provide the company with
fee-based revenues in the form of management and administration fees
charged to the policyholder's account. The company began marketing
variable annuity products in October 1994, and related funds deposited
in the company's variable annuity separate account totaled $73.9 million
at December 31, 1995.
Life Insurance Products. The company offers a variety of traditional,
universal and term life insurance products. Traditional life insurance
policies incorporate a fixed premium schedule and combine guaranteed
insurance protection with a savings feature. Traditional life policies
cost more than comparable term life insurance coverage when the
policyholder is younger but less as the policyholder grows older. The
policyholder may borrow against the accumulated cash value, with policy
loans typically available at a rate of interest lower than that
available from other lending sources. The policyholder may also choose
to surrender the policy at any time and receive the accumulated cash
value, less any applicable withdrawal charge, rather than continuing the
insurance protection. The company currently offers fixed premium,
current interest as well as traditional life insurance products, and its
insurance in force also includes participating policies.
Universal life insurance products provide whole life insurance and
adjustable rates of return related to current interest rates.
Policyholders may vary the frequency and size of their premium payments,
although policy benefits may also fluctuate according to such payments.
Term life insurance policies provide insurance protection for unexpected
death during the period in which the policy is in force, generally one,
five, ten or twenty years. These products are designed to meet
customers' shorter-term needs because the policies do not have an
accumulation feature and no cash value is built up. Term life premiums
are accordingly lower than certain of the company's other products. The
company's current term life products include annually renewable term and
five-year, ten-year and fifteen-year renewable and convertible term.
In order to discourage early policy withdrawals and to partially
compensate the company for lost investment opportunities and costs if
policies are terminated, all of the company's universal life and
interest-sensitive policies issued since 1986 have incorporated
withdrawal charges or similar provisions. At December 31, 1995, 25% of
the company's life insurance liabilities were subject to such charges.
Reserves. In accordance with applicable insurance regulations, the
company records as liabilities in its statutory financial statements,
actuarially determined reserves that are calculated to meet future
obligations under outstanding insurance policies. The reserves are
based on statutory recognized methods using prescribed morbidity and
mortality tables, as applicable, and interest rates. Reserves include
premium deposits, claims that have been reported but are not yet paid,
claims that have been incurred but have not been reported, and claims in
the process of settlement. The company's reserves satisfy statutory
requirements.
The reserves reflected in the company's Consolidated Financial
Statements are calculated based on generally accepted accounting
principles ("GAAP"). These reserves are based upon the company's best
estimates of mortality, persistency, expenses and investment income,
with appropriate provisions for adverse statistical deviation, and the
use of the net level premium method for all non-interest-sensitive
products and at full account value with no reduction for surrender
penalties, for interest-sensitive products. GAAP reserves differ from
statutory reserves due to the use of different assumptions regarding
mortality and interest rates and the introduction of lapse and expense
assumptions into the GAAP reserve calculation.
The following table sets forth certain consolidated information
regarding the development of the company's annuity and insurance
business and its reserves calculated based on GAAP for each of the five
years in the period ended December 31, 1995. Premiums represent
premiums and deposits received (as adjusted for due and uncollected
premiums), and include premiums on annuity and universal life contracts
as well as premiums on traditional products.
(Table following)
PRODUCTS AND SOURCES OF BUSINESS
(Dollars in thousands)
<TABLE>
<CAPTION>
As of and for the year
ended December 31 1995 1994 1993 1992 1991
_________________________________________________________________________________
<S> <C> <C> <C> <C> <C>
First year and single
premiums:
Fixed annuities and
other investment
contracts $1,348,087 $1,581,930 $1,104,222 $871,310 $461,805
Variable annuities 65,974 2,808 -- -- --
Universal life 28,092 15,210 11,345 8,139 10,904
Fixed premium cur-
rent interest life 9,502 7,456 4,404 4,594 4,103
Participating life -- -- -- -- 12,420
Term life and other 2,488 3,135 2,826 1,977 1,698
____________ ____________ ___________ ___________ ___________
Total first-year
and single
premiums $1,454,143 $1,610,539 $1,122,797 $886,020 $490,930
============ ============ =========== =========== ===========
Total premiums:
Fixed annuities and
other investment
contracts $1,398,194 $1,615,768 $1,117,255 $883,951 $474,447
Variable annuities 65,987 2,808 -- -- --
Universal life 65,630 50,236 44,784 38,993 39,251
Fixed premium cur-
rent interest life 21,535 18,227 14,821 13,178 11,462
Traditional whole
life nonpar 6,127 6,544 7,146 7,794 8,549
Participating life 28,809 30,103 31,323 32,550 35,240
Term life and other 8,489 9,618 8,401 2,678 7,245
____________ ____________ ___________ ___________ ___________
Total premiums $1,594,771 $1,733,304 $1,223,730 $979,144 $576,194
============ ============ =========== =========== ===========
New life insurance written
(at face amount):
Universal life $1,465,297 $793,711 $628,086 $510,409 $584,693
Fixed premium cur-
rent interest life 139,318 167,401 157,567 166,249 160,228
Term life and other 333,122 456,270 630,923 721,369 393,327
____________ ____________ ___________ ___________ ___________
Total new life
insurance
written $1,937,737 $1,417,382 $1,416,576 $1,398,027 $1,138,248
============ ============ =========== =========== ===========
</TABLE>
PRODUCTS AND SOURCES OF BUSINESS (continued)
(Dollars in thousands)
<TABLE>
<CAPTION>
As of and for the year
ended December 31 1995 1994 1993 1992 1991
_________________________________________________________________________________
<S> <C> <C> <C> <C> <C>
Life insurance in force
(at face amount) 1:
Universal life $6,485,252 $5,439,647 $4,637,995 $4,178,116 $3,955,898
Fixed premium cur-
rent interest life 1,119,339 1,082,509 891,499 805,204 721,003
Traditional whole
life nonpar 340,173 362,353 385,984 407,934 437,630
Participating life 1,024,315 1,070,747 1,112,765 1,159,629 1,242,055
Term life and other 1,958,366 2,191,684 2,589,638 2,376,443 2,035,146
____________ ____________ ___________ ___________ ___________
Total life
insurance
in force $10,927,445 $10,146,940 $9,617,881 $8,927,326 $8,391,732
============ ============ =========== =========== ===========
Reserves:
Fixed annuities and
other investment
contracts $6,957,554 $5,826,964 $4,440,259 $3,320,188 $2,443,545
Universal life 374,683 329,424 296,435 264,584 240,033
Fixed premium cur-
rent interest life 95,897 80,719 67,035 55,456 45,349
Traditional whole
life nonpar 157,691 155,146 154,929 153,038 158,774
Participating life 578,541 580,881 581,291 575,627 580,079
Term life and other 42,625 41,073 38,136 34,620 31,635
____________ ____________ ___________ ___________ ___________
Total reserves $8,206,991 $7,014,207 $5,578,085 $4,403,513 $3,499,415
============ ============ =========== =========== ===========
<FN>
1 Before reduction for ceded reinsurance of: 1995-$1,459,523; 1994-$1,421,608;
1993-$1,326,020; 1992-$1,242,003 and 1991-$1,066,555.
</TABLE>
Sales are not concentrated in any geographical area, nor are assets and
profitability separately attributed to geographical areas. The states
from which the most life and annuity premiums were received are: 1995
California 17.0%; 1994 - California 20.9%; 1993 - California 15.9%; 1992
California 11.6% and 1991 - Texas 13.6% .
Marketing and Distribution
The company markets its products through a variable cost distribution
network of over 52,500 insurance brokerage agents, 805 career agents
and 50 financial institutions, such as banks and thrifts. Since 1992,
the company has offered certain life insurance products through its
independent insurance brokerage agents and certain annuity products
through its career agents and other producers. The company currently
offers a full range of products through both distribution networks, with
an emphasis on the continued development of variable cost distribution
systems.
The company, in expanding its independent insurance brokerage agent
network, relies primarily on national and regional wholesale marketing
organizations to market its products and to recruit agents and other
producers. The organizations typically recruit agents for the company
by advertising its products and commission structure through direct mail
advertising and through seminars for insurance agents and brokers. These
organizations bear most of the costs incurred in marketing the company
and its products. The company compensates the marketing organization by
paying it a percentage of the commissions earned on new annuity and
insurance policies generated by the agents recruited by the
organizations. The company generally does not enter into exclusive
arrangements with these marketing organizations.
Certain of the marketing organizations with which the company has a
relationship are specialty organizations that have a marketing
expertise or a distribution system relating to a particular product,
such as TSA policies. The company believes that use of wholesale
marketing organizations is a cost-effective means of recruiting capable
agents and brokers, and advertising its products. The company employs
marketing personnel and customer service representatives who respond by
telephone to questions from agents, brokers and other producers
regarding the company and its products. The company believes that the
service it provides to the agents, brokers and other producers who
market and sell its products helps establish a relationship between the
company and its sales force, and that such interaction also provides
marketing opportunities.
The company also utilizes a career insurance agent system to sell its
individual annuity and life insurance policies. The company provides
career agents with a professional support program that includes a
competitive benefits package, ongoing training, assistance in
professional certification, and advertising and advanced sales support.
In addition, the company provides conferences and seminars designed to
motivate and train its career agents.
Ratings
A. M. Best, an independent insurance industry rating organization,
assigns fifteen letter ratings to insurance companies. A. M. Best's
ratings currently range from "A++" to "F" and some insurance companies
are not rated. A. M. Best performs a quantitative and qualitative
evaluation for each company it rates. The quantitative evaluation
compares a company's performance to industry standards established by A.
M. Best in three areas: profitability, leverage or capitalization, and
liquidity. The qualitative evaluation examines nine factors for each
company: spread of risk, quality and appropriateness of the reinsurance
program, quality and diversification of assets, adequacy of policy or
loss reserves, adequacy of surplus, capital structure, management's
experience and objectives, market presence, and policyholders'
confidence. A. M. Best also may review other qualitative factors.
Publications of A. M. Best indicate that "A+" and "A++" ratings are
assigned to those companies which, in A. M. Best's opinion, have
demonstrated superior overall performance when compared to the standards
established by A. M. Best and generally have a very strong ability to
meet their policyholder obligations over a long period of time. A. M.
Best's ratings are directed toward the protection of policyholders, not
investors.
Equitable Life has received A. M. Best's quality rating of "A+"
(Superior) (or comparable rating) since the ratings were established in
1905. USG has also received A. M. Best's rating of "A+" (Superior),
which was based on the consolidated financial condition and operating
performance of USG and its parent, Equitable Life.
Underwriting
Substantially all of the life insurance policies written by the
company's insurance subsidiaries are individually underwritten, although
standardized underwriting procedures have been adopted for certain
coverages. The company uses information from a prospective
policyholder's application, and in some cases, inspection reports,
doctors' statements or medical examinations, to determine whether a
policy should be issued as applied for, issued at a higher premium
because of unfavorable factors, or rejected. In addition, the company
may request medical examinations from any applicant, regardless of age
and amount of insurance, if information obtained from the application or
other sources indicates an examination is advisable before determining
to underwrite the risk. The company requires medical examinations for
applicants for insurance in excess of prescribed amounts. Underwriting
with respect to annuities is minimal.
The increasing incidence of Acquired Immune Deficiency Syndrome ("AIDS")
is expected to adversely affect mortality rates for the life insurance
industry. The company regularly requires applicants for insurance in
excess of $100,000 to submit to blood screening for AIDS, drug and
alcohol abuse and other factors.
Investments
The company's investment philosophy emphasizes the careful underwriting
of credit risk, identifying relative values within a range of investment
choices, providing liquidity to meet operating needs and maximizing current
income. As part of its objective of effective asset liability management,
the company conducts computer simulations which model its assets and
liabilities under a wide variety of interest rate scenarios. Based on the
results of these computer simulations, the company's investment portfolio
has been structured with a view to maintaining a desired investment spread
between the yield on portfolio assets and the rate credited on its reserves
and to match the cash flows of the investments with the policy liabilities.
Competition
The insurance and annuity business is highly competitive with numerous
companies offering similar products through comparable marketing and
distribution systems. Companies typically compete for policyholders on
the basis of benefit rates, financial strength and customer service and
compete for agents and brokers on the basis of commissions, financial
strength and customer service. The company maintains competitive policy
benefit rates. However, the company believes that it competes primarily
on the basis of its customer service and financial strength. See Item
7, Management's Discussion and Analysis of Financial Condition and
Results of Operations - Insurance Industry Issues.
Regulation
The company's life insurance operations are conducted in a highly regulated
environment. Each of the company's insurance subsidiaries is subject to the
insurance laws of the state in which it is organized and of the other
jurisdictions in which it transacts business. The primary regulators of the
company's insurance operations are the Commissioner of Insurance for the
State of Iowa for Equitable Life and the Commissioner of Insurance for the
State of Oklahoma for USG. See Item 7, Management's Discussion and Analysis
of Financial Condition and Results of Operations - Insurance Industry Issues.
Other Operations
Equitable Investment Services, Inc. ("EISI"), a wholly-owned subsidiary
of the company, manages the company's $8.6 billion investment portfolio
and serves as investment advisor to the Equi-Select Series Trust mutual
fund portfolios underlying the company's variable annuity product. EISI
is a registered investment advisor under the Investment Company Act of
1940.
Equitable of Iowa Securities Network, Inc. ("EISN"), a wholly-owned
subsidiary of the company, is a broker dealer registered under the
Securities Exchange Act of 1934. EISN serves as the principal
distributor of the company's variable annuity product.
Locust Street Securities, Inc. ("LSSI"), a wholly-owned subsidiary of
the company, markets mutual funds, variable annuities, tax-exempt bond
funds and investment-oriented products of other companies primarily
through Equitable Life career agents. Founded in 1968, LSSI also
contracts with agents of other companies to be a wholesaler of
broker/dealer products. LSSI has a distribution network of
approximately 1,200 representatives in 46 states. LSSI is a broker
dealer registered under the Securities Exchange Act of 1934.
Employees
At December 31, 1995, the company had 492 full-time and 23 part-time
employees. The company provides its employees with a comprehensive
range of benefit programs. The company believes that its employee
relations are excellent.
ITEM 2. Properties
Substantially all of the company's business is carried on in leased
facilities located at 604 Locust Street, 699 Walnut Street, 700 Locust
Street and 312 Eighth Street in Des Moines, Iowa. All owned properties
consist of real estate held for investment purposes or acquired through
foreclosure. Property and equipment primarily represent leasehold
improvements at the company's headquarters and at various agency offices
and office furniture and equipment, and are not considered to be
significant to the company's overall operations. Property and equipment
are reported at cost less allowances for depreciation. The company
believes that its present facilities are adequate for its current needs,
but has entered into agreements with a developer to construct and lease
a 200,000 square foot office building in downtown Des Moines, Iowa to
address its future facilities needs with occupancy anticipated to
commence in late 1997.
ITEM 3. Legal Proceedings
Equitable of Iowa Companies, Equitable Life Insurance Company of Iowa
and Equitable American Insurance Company are defendants in a class
action lawsuit brought on May 2, 1995 in the Iowa District Court for
Polk County by a policyholder, Russell A. Kolsrud, claiming unspecified
damages as a result of sales of life insurance policies with so-called
"vanishing premiums" which use cash values to pay insurance premiums
under certain interest rate scenarios. The complaint alleges the
policyholders were misled by optimistic policy illustrations. The
company and its subsidiaries deny the allegations, including the
existence of a legitimate class, and believe that the allegations are
without merit because full and appropriate disclosure was made as a
matter of practice. The company intends to defend the suit vigorously.
The suit is in the discovery stage. It has not yet been certified as a
class action.
On February 14, 1996, a new class action similar to the one described
above was brought by policyholders, Brenda G. Elkins and Jerry
Bedenbaugh, in the United States District Court for the Middle District
of Florida, Tampa Division, claiming unspecified damages against the
same defendants. The lawsuit was filed by some of the same law firms as
in the earlier suit. The company believes the new action was filed in
response to jurisdictional and procedural problems faced by the
plaintiffs in the Iowa action. The company and its subsidiaries deny
the allegations of the new matter, including the existence of a
legitimate class, and believe that the allegations are without merit
because full and appropriate disclosure was made as a matter of
practice. The company intends to defend the suit vigorously. The suit
is in its early procedural stages. It has not yet been certified as a
class action.
On December 15, 1995, USG Annuity & Life Company ("USG"), a subsidiary
of Equitable Life Insurance Company of Iowa, received a Notice of
Intention to Arbitrate a dispute with Carnes & Associates, Inc.
("Carnes") before the American Arbitration Association, which alleges
that USG has failed to pay an unspecified amount of commissions to
Carnes for the sale of insurance products, including alleged future
commissions on future policy values if the policies stay in force. USG
believes the claims are without merit based upon its interpretation of
the agreements between the parties, the business relations between the
parties and custom and practice in the industry. Therefore, USG has
denied the allegations and intends to defend the proceeding vigorously.
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 4. Submission of Matters to a Vote of Security Holders
None.
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters.
Stock Symbols
The company's common stock is quoted on the New York Stock Exchange with
a stock symbol of EIC.
Quarterly Stock Quotations
The following table shows the range of high and low closing and quarter
end closing sales prices per share of Common Stock of the company for
the periods indicated as reported on the New York Stock Exchange.
Quarter
High Low End Close
_______________________________
1994
____
First Quarter 35 29-1/8 33-3/4
Second Quarter 35-3/4 31-1/4 31-5/8
Third Quarter 39-1/8 32 36
Fourth Quarter 36-3/4 26-7/8 28-1/4
1995
____
First Quarter 33-7/8 27-3/4 33-7/8
Second Quarter 37-3/8 32-5/8 32-7/8
Third Quarter 38-1/4 31-3/8 37
Fourth Quarter 37-1/4 31-7/8 32-1/8
1996
____
First Quarter (as of
February 22, 1996) 37-7/8 33-1/4 37-7/8
Number of Holders of Record
The number of holders of record of common stock was 959 at February 22,
1996, the dividend record date.
Dividends
Cash dividends are paid quarterly, at an amount determined by the Board
of Directors. The company's bank credit arrangements restrict the
amount of dividends paid annually on its common stock. Also, insurance
regulations restrict the amount of dividends that can be paid to the
company by Equitable Life. See Note 1 to the consolidated financial
statements and Item 7, Management's Discussion and Analysis - Liquidity
and Capital Resources.
Dividends paid per share of common stock, were $0.525 in 1995 and $0.465
in 1994.
Transfer Agent and Registrar
Boatmen's Trust Company, 510 Locust, P.O. Box 14768, St. Louis, Missouri 63178.
ITEM 6. Selected Financial Data
The following table sets forth a consolidated summary of selected
financial data for the company and its subsidiaries (all significant
intercompany accounts have been eliminated) for each of the last ten
years. In this table the years ended December 31, 1986 and 1987 have
been restated to reflect the implementation of SFAS No. 97 in 1988. In
addition, the years ended December 31, 1986 through 1991 have been
restated to reflect the sale of Younkers, Inc. in 1992 and treatment of
that entity as a discontinued operation. This summary should be read in
conjunction with the related consolidated financial statements and notes
thereto.
(Table following)
SELECTED FINANCIAL DATA
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
As of and for the year
ended December 31 1995 1994 1993 1992 1991
_________________________________________________________________________________
<S> <C> <C> <C> <C> <C>
Consolidated results:
Revenues $764,862 $651,660 $572,968 $458,374 $400,289
Operating income 1 100,747 88,212 68,911 49,309 40,121
Income from continuing
operations 2 84,890 98,284 87,156 57,260 24,740
Net income 3 84,890 98,284 87,156 54,506 40,530
Per share data: 4
Operating income 1 $3.18 $2.79 $2.33 $1.72 $1.42
Income from continuing
operations 2 2.68 3.11 2.95 1.99 0.87
Net income 3 2.68 3.11 2.95 1.90 1.43
Consolidated financial
position:
Assets $9,780,416 $7,965,593 $6,431,435 $5,066,874 $4,231,361
Excluding SFAS
No. 115 9,457,982 7,992,086 6,431,435 5,066,874 4,231,361
Debt and redeemable
preferred stock 158,100 90,450 84,214 89,508 95,602
Stockholders' equity 893,932 587,330 527,962 373,801 322,780
Excluding SFAS
No. 115 685,000 613,823 527,962 373,801 322,780
Common stock data: 4
Dividends per share $0.525 $0.465 $0.405 $0.35 $0.32
Book value per share 28.14 18.54 16.76 12.89 11.35
Excluding SFAS
No. 115 21.56 19.38 16.76 12.89 11.35
Price range 27.75-38.25 26.88-39.13 20.88-39.00 9.63-22.50 4.25-10.88
Closing price 32.13 28.25 33.88 22.50 10.50
Shares outstanding
at year end 31,769,490 31,677,891 31,504,586 28,994,640 28,428,176
Average shares
outstanding
during year 31,709,032 31,612,675 29,540,274 28,688,660 28,392,860
</TABLE>
SELECTED FINANCIAL DATA (continued)
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
As of and for the year
ended December 31 1995 1994 1993 1992 1991
_________________________________________________________________________________
<S> <C> <C> <C> <C> <C>
Ratios and other data:
Return on assets -
operating income 1 1.1% 1.2% 1.2% 1.1% 1.0%
Excluding SFAS
No. 115 1.2% 1.2% 1.2% 1.1% 1.0%
Return on equity -
operating income 1 13.6% 15.8% 15.3% 15.2% 15.4%
Excluding SFAS
No. 115 15.5% 15.5% 15.3% 15.2% 15.4%
Return on equity -
net income 11.5% 17.6% 19.3% 15.6% 13.3%
Excluding SFAS
No. 115 13.1% 17.2% 19.3% 15.6% 13.3%
Year-end debt to
total capital 15.0% 13.3% 13.8% 19.3% 22.8%
Excluding SFAS
No. 115 18.8% 12.8% 13.8% 19.3% 22.8%
Year-end price to
operating income 1 10.1x 10.1x 14.5x 13.1x 7.4x
Year-end price to
book value 1.1x 1.5x 2.0x 1.7x 0.9x
Excluding SFAS
No. 115 1.5x 1.5x 2.0x 1.7x 0.9x
Year-end total market
capitalization $1,020,595 $894,900 $1,067,218 $652,379 $298,496
<FN>
1 Operating income equals income from continuing operations before cumulative
effect of change in accounting principles, excluding, net of related income
taxes, prepayment gains on mortgages and mortgage-backed securities,
realized gains or losses and related amortization of deferred policy
acquisition costs. Operating income excludes the after-tax income effect
of special reserve accruals for future guaranty fund assessments totaling
$23,400,000 ($(0.74) per share) in 1995 and $10,259,000 ($(0.36) per share)
in 1991.
2 Excludes the cumulative effect of changes in the method of accounting for
postretirement benefits (1992) and deferred income taxes (1991) and
participating line of business (1988).
3 Includes the cumulative effect of changes in the method of accounting for
postretirement benefits of $(4,678,000) ($(0.16) per share) in 1992 and
deferred income taxes of $9,444,000 ($0.34 per share) in 1991 and
participating line of business of $11,555,000 ($0.35 per share) in 1988.
4 Share and per share amounts have been restated to reflect the 2-for-1 stock
splits as of May 12, 1993 and May 14, 1992 and the reversion of Class A and
Class B stock to one class of common stock as of May 1, 1992.
</TABLE>
SELECTED FINANCIAL DATA
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
As of and for the year
ended December 31 1990 1989 1988 1987 1986
_________________________________________________________________________________
<S> <C> <C> <C> <C> <C>
Consolidated results:
Revenues $340,750 $273,230 $198,008 $202,282 $203,721
Operating income 1 35,636 24,399 16,410 14,303 11,737
Income from continuing
operations 2 20,772 26,083 16,819 21,233 17,557
Net income 3 23,204 20,609 36,668 26,071 29,600
Per share data: 4
Operating income 1 $1.26 $0.85 $0.49 $0.40 $0.32
Income from continuing
operations 2 0.74 0.91 0.50 0.60 0.48
Net income 3 0.82 0.72 1.10 0.73 0.81
Consolidated financial
position:
Assets $3,652,687 $2,896,253 $1,969,674 $1,688,091 $1,633,867
Excluding SFAS
No. 115 3,652,687 2,896,253 1,969,674 1,688,091 1,633,867
Debt and redeemable
preferred stock 107,920 103,926 54,231 25,500 41,889
Stockholders' equity 285,026 270,106 276,610 248,046 257,217
Excluding SFAS
No. 115 285,026 270,106 276,610 248,046 257,217
Common stock data: 4
Dividends per share $0.29 $0.27 $0.25 $0.23 $0.21
Book value per share 10.05 9.67 8.37 7.35 7.09
Excluding SFAS
No. 115 10.05 9.67 8.37 7.35 7.09
Price range 3.38-8.00 5.50-9.06 4.69-5.63 4.00-6.75 4.00-5.94
Closing price 4.25 7.81 5.50 4.25 5.75
Shares outstanding
at year end 28,366,588 27,937,600 33,061,656 33,765,720 36,265,476
Average shares
outstanding
during year 28,349,760 28,777,192 33,259,548 35,495,744 36,258,786
</TABLE>
SELECTED FINANCIAL DATA (continued)
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
As of and for the year
ended December 31 1990 1989 1988 1987 1986
_________________________________________________________________________________
<S> <C> <C> <C> <C> <C>
Ratios and other data:
Return on assets -
operating income 1 1.1% 1.0% 0.9% 0.9% 0.7%
Excluding SFAS
No. 115 1.1% 1.0% 0.9% 0.9% 0.7%
Return on equity -
operating income 1 16.1% 12.5% 9.1% 8.2% 7.4%
Excluding SFAS
No. 115 16.1% 12.5% 9.1% 8.2% 7.4%
Return on equity -
net income 8.4% 7.5% 14.0% 10.3% 11.9%
Excluding SFAS
No. 115 8.4% 7.5% 14.0% 10.3% 11.9%
Year-end debt to
total capital 27.5% 27.8% 16.4% 9.3% 14.0%
Excluding SFAS
No. 115 27.5% 27.8% 16.4% 9.3% 14.0%
Year-end price to
operating income 1 3.4x 9.2x 11.2x 10.6x 18.2x
Year-end price to
book value 0.4x 0.8x 0.7x 0.6x 0.8x
Excluding SFAS
No. 115 0.4x 0.8x 0.7x 0.6x 0.8x
Year-end total market
capitalization $120,558 $218,263 $181,839 $143,504 $208,526
<FN>
1 Operating income equals income from continuing operations before cumulative
effect of change in accounting principles, excluding, net of related income
taxes, prepayment gains on mortgages and mortgage-backed securities,
realized gains or losses and related amortization of deferred policy
acquisition costs. Operating income excludes the after-tax income effect
of special reserve accruals for future guaranty fund assessments totaling
$23,400,000 ($(0.74) per share) in 1995 and $10,259,000 ($(0.36) per share)
in 1991.
2 Excludes the cumulative effect of changes in the method of accounting for
postretirement benefits (1992) and deferred income taxes (1991) and
participating line of business (1988).
3 Includes the cumulative effect of changes in the method of accounting for
postretirement benefits of $(4,678,000) ($(0.16) per share) in 1992 and
deferred income taxes of $9,444,000 ($0.34 per share) in 1991 and
participating line of business of $11,555,000 ($0.35 per share) in 1988.
4 Share and per share amounts have been restated to reflect the 2-for-1 stock
splits as of May 12, 1993 and May 14, 1992 and the reversion of Class A and
Class B stock to one class of common stock as of May 1, 1992.
</TABLE>
ITEM 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The purpose of this section is to discuss and analyze the company's
consolidated 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 which are wholly
owned at December 31, 1995. The company's primary subsidiaries are
Equitable Life Insurance Company of Iowa ("Equitable Life") and USG
Annuity & Life Company ("USG").
RESULTS OF OPERATIONS
Sales
<TABLE>
<CAPTION>
Percentage Percentage
Year ended December 31 1995 Change 1994 Change 1993
_____________________________________________________________________________
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
First year and single
premiums:
Annuities $1,414,061 (10.8)% $1,584,738 43.5% $1,104,222
Life insurance 40,082 55.4 25,801 38.9 18,575
___________________________________________________
1,454,143 (9.7) 1,610,539 43.4 1,122,797
Renewal premiums:
Annuities 50,120 48.1 33,838 159.6 13,033
Life insurance 90,508 1.8 88,927 1.2 87,900
___________________________________________________
140,628 14.6 122,765 21.6 100,933
___________________________________________________
Total premiums $1,594,771 (8.0)% $1,733,304 41.6% $1,223,730
===================================================
</TABLE>
Total annuity and life insurance sales, as measured by first year and
single premiums, decreased 9.7% to $1,454,143,000 in 1995 compared to an
increase of 43.4% to $1,610,539,000 in 1994 from $1,122,797,000 in 1993.
The current year decrease in annuity sales from record sales in 1994
reflects the impact of a more challenging sales environment during 1995
than in previous years wherein high short-term interest rates have
allowed bank certificates of deposit and other shorter duration
investments to be more competitive than usual, while declining long-term
rates have caused returns on annuity and life insurance products to be
comparatively lower than usual. However, the company believes
that the 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 products as consumers seek a secure return on their retirement
savings. Insurance agents are attracted to sell the company's products
by several factors, including the company's diversified product
portfolio, competitive commissions, prompt policy issuance and weekly
commission payments. The increase in life insurance premiums resulted
primarily from a simplified career agent contract which emphasizes life
production, an increase in experienced career agent recruits and
increased production from brokers, especially on our single premium life
products.
Revenues
<TABLE>
<CAPTION>
Percentage Percentage
Year ended December 31 1995 Change 1994 Change 1993
_____________________________________________________________________________
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Annuity and universal life
product charges $51,466 17.6% $43,767 27.7% $34,281
Traditional life insurance
premiums 43,425 (6.1) 46,265 (1.3) 46,870
Net investment income 641,094 22.3 524,411 20.8 434,069
Realized gains on
investments 9,524 (51.7) 19,697 (53.1) 41,985
Other income 19,353 10.5 17,520 11.2 15,763
___________________________________________________
$764,862 17.4% $651,660 13.7% $572,968
===================================================
</TABLE>
Total revenues increased 17.4% to $764,862,000 in 1995 compared to an
increase of 13.7% to $651,660,000 in 1994 from $572,968,000 in 1993.
Annuity and universal life insurance product charges increased 17.6% in
1995 compared to an increase of 27.7% in 1994. These product charges
consist primarily of cost of insurance charges, policy administrative
charges and surrender charges that increase as the company's policyholder
liabilities grow. In addition, withdrawals and surrenders of the
company's annuity products which contain a "market value adjustment"
feature generate greater surrender charge income as interest rates
increase and lower surrender charge income as interest rates decrease.
Surrender charge income allows the company to recover a portion of the
expenses incurred to generate policy sales, and partially offsets the
amortization of deferred policy acquisition costs related to surrendered
policies. Premiums from traditional life insurance products, which are
included in revenue, decreased 6.1% in 1995 compared to a decrease of 1.3%
in 1994 as a result of the company's continued emphasis on the more
popular universal life and fixed premium, current interest life insurance
products (for which premiums are not included in revenues).
Net investment income increased 22.3% to $641,094,000 in 1995 compared
to an increase of 20.8% to $524,411,000 in 1994 from $434,069,000 in
1993 as invested assets continued to increase and decreases in portfolio
yield slowed. The effective average annual yield on assets invested to
support policy accounts for interest-sensitive products, including
annuities, universal life-type policies and participating life policies,
was 8.60% in 1995 compared to 8.62% in 1994 and 9.12% in 1993. The company's
total investment portfolio, excluding policy loans, had a yield at
amortized cost of 8.3% at December 31, 1995 and 1994, compared to 8.5% at
December 31, 1993. During 1995, the company had realized gains on the
disposal of investments, which were generated primarily from calls and
repayments of fixed maturities, of $9,524,000 compared to realized gains of
$19,697,000 in 1994 and $41,985,000 in 1993.
Expenses
Total insurance benefits and expenses increased 27.3% to $613,905,000 in
1995 compared to an increase of 14.8% to $482,499,000 in 1994 from
$420,435,000 in 1993. Interest credited to annuity and universal life
account balances increased 21.8% to $390,039,000 in 1995 compared to an
increase of 19.1% to $320,312,000 in 1994 from $268,992,000 in 1993 as a
result of higher account balances associated with those products.
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 annual
yield on assets invested to support policy accounts for interest-
sensitive products, the average interest rate credited to those products
and the interest rate spread for the years ended December 31, 1995, 1994
and 1993. Yield on assets and cost of funds are estimated by
calculating the weighted average of the twelve month end values for
those items.
<TABLE>
<CAPTION>
Years ended December 31, Yield on Credited Interest
1995, 1994 and 1993 Assets Rate Rate Spread
_______________________________________________________________________________
<S> <C> <C> <C>
Average base rate (excluding first year bonus):
1995 8.60% 5.71% 2.89%
1994 8.62 5.80 2.82
1993 9.12 6.56 2.56
Average total (including first year bonus):
1995 8.60% 6.08% 2.52%
1994 8.62 6.25 2.37
1993 9.12 6.86 2.26
</TABLE>
At December 31, 1995 and 1994, the effective annual yield on assets, credited
rate and interest rate spread were as follows:
<TABLE>
<CAPTION>
Yield on Credited Interest
December 31, 1995 and 1994 Assets Rate Rate Spread
_______________________________________________________________________________
<S> <C> <C> <C>
Base rate (excluding first year bonus):
1995 8.58% 5.63% 2.95%
1994 8.62 5.74 2.88
Total (including first year bonus):
1995 8.58 5.93 2.65
1994 8.62 6.19 2.43
</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 policies.
Total interest credited rate includes first year bonus interest credited
to certain annuity policies.
Death benefits on traditional life products and benefit claims incurred
in excess of account balances increased 12.3% to $37,073,000 in 1995
compared to an increase of 19.9% to $33,020,000 in 1994 from $27,536,000
in 1993. After adjustment for charges for mortality risk, reserves
released on death claims and taxes, the overall impact of mortality on
net income was less favorable in 1995 compared to 1994 by approximately
$722,000 and less favorable in 1994 compared to 1993 by $2,003,000.
Other benefits increased 27.1% to $41,661,000 in 1995 compared to an
increase of 1.4% to $32,780,000 in 1994 from $32,344,000 in 1993. The
increase in other benefits in 1995 is primarily attributable to the 100%
coinsurance of a small block of disability income business which was offset
by a corresponding reduction in future policy benefits and, therefore, had
only a minor impact on net income.
Commissions decreased 7.0% to $146,069,000 in 1995 compared to an
increase of 38.4% to $157,028,000 in 1994 from $113,450,000 in 1993.
General expenses decreased 5.7% to $40,929,000 in 1995 compared to an
increase of 15.6% to $43,402,000 in 1994 from $37,554,000 in 1993.
Insurance taxes increased 356.5% to $45,472,000 in 1995 compared to an
increase of 57.2% to $9,961,000 in 1994 from $6,334,000 in 1993.
Increases and decreases in commissions and insurance taxes are generally
related to changes in the level of annuity sales. The 1995 increase in
insurance taxes resulted from the special reserve accrual for future
guaranty fund assessments totaling $36,000,000 in the fourth quarter of
1995. Most costs incurred as the result of new sales have been deferred,
thus having very little impact on current earnings. The decrease in
general expenses is the result of restructuring the company's career
agent contracts and compensation to eliminate certain fixed costs that
were included in general expenses in 1994 and 1993. As a result of this
change, agent compensation is predominately in the form of commissions
and, as such, will vary directly with sales production levels. Additionally,
with the more challenging annuity sales environment, management began an
aggressive expense management program in the second quarter which also
reduced the level of general expenses. Management intends to closely
manage general expenses and plans for general expenses to continue to
decline as a percentage of assets and/or revenues, but does not expect
these expenses to decline at a rate comparable to that achieved during 1995.
The amortization of deferred policy acquisition costs increased 42.5% to
$72,537,000 in 1995 compared to an increase of 21.0% to $50,921,000
in 1994 from $42,078,000 in 1993. 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, higher withdrawals and surrenders of the company's
products have accelerated the amortization of deferred acquisition costs
related to those products although surrender charges assessed on certain
withdrawals offset some of the earnings impact of this accelerated
amortization. Amortization related to realized gains continues to
decline as a result of the decrease in realized and prepayment gains.
<TABLE>
<CAPTION>
Percentage Percentage
Year ended December 31 1995 Change 1994 Change 1993
_____________________________________________________________________________
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Amortization related to:
Operating income $67,183 50.3% $44,711 58.8% $28,162
Realized gains 5,354 (13.8) 6,210 (55.4) 13,916
___________________________________________________
Total income $72,537 42.5% $50,921 21.0% $42,078
===================================================
</TABLE>
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 is experiencing an increase in its
underlying withdrawal rate as its annuity liabilities age. (2) When
interest rates on new sales are higher than inforce rates, as in 1994,
withdrawals tend to increase. (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. At December 31, 1995, all policies issued from 1988
through 1990 with a five year interest guarantee represent approximately
1.5% ($97 million) of the company's annuity liabilities. The company is
currently studying a hedging program which would use certain derivative
instruments (interest rate caps or swap options) to reduce the negative
effect of increased withdrawal activity which may result from extreme
increases in interest rates.
The following table summarizes the annual annuity withdrawal rates and
the life insurance lapse ratios for the years ended December 31, 1995,
1994 and 1993.
<TABLE>
<CAPTION>
Year ended December 31 1995 1994 1993
_______________________________________________________________________________
<S> <C> <C> <C>
Annuity Withdrawals 8.2% 9.0% 4.6%
Annuity withdrawals excluding withdrawals
of policies for which the five year
interest guarantee and five year
surrender charge have expired 7.4 6.1 4.5
Life insurance lapse ratio 8.4 7.4 7.2
</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 annual lapse ratio for life insurance
is measured in terms of face amount and uses A.M. Best's formula.
During 1995, the company made one fixed annuity product available for
sale through stockbrokers, but has modified the pricing assumptions to
reflect higher lapse expectations. Prior to this, the company had not
actively solicited fixed annuity sales through stockbrokers since 1989.
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 channels.
Product features and pricing assumptions are expected to be modified to
reflect the differing characteristics and needs of these different
markets.
Operating income (income, excluding, net of related income tax,
prepayment gains on mortgages and mortgage-backed securities, realized
gains or losses, related amortization of deferred policy acquisition
costs, and the 1995 special reserve accrual for future guaranty fund
assessments) increased 14.2% in 1995 compared to an increase of 28.0%
in 1994. Net income decreased 13.6% in 1995 compared to an increase of
12.8% in 1994. A breakdown of income is as follows:
<TABLE>
<CAPTION>
Year ended December 31 1995 1994
_____________________________________________________________________________
$ Per Share $ Per Share
_________ _________ _________ _________
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C>
Operating income $100,747 $3.18 $88,212 $2.79
Realized gains (net of tax):
Gains realized on disposal
of investments 6,293 0.17 12,953 0.41
Mortgage and mortgage-backed
securities prepayment gains 4,730 0.15 1,156 0.04
Realized gains related
amortization of DPAC (3,480) (0.08) (4,037) (0.13)
_________ _________ _________ _________
7,543 0.24 10,072 0.32
Guaranty fund accrual (23,400) (0.74) -- --
_________ _________ _________ _________
Net Income $84,890 $2.68 $98,284 $3.11
========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
Year ended December 31 1993
_______________________________________________________
$ Per Share
_________ _________
(Dollars in thousands,
except per share data)
<S> <C> <C>
Operating income $68,911 $2.33
Realized gains (net of tax):
Gains realized on disposal
of investments 27,290 0.92
Mortgage and mortgage-backed
securities prepayment gains -- --
Realized gains related
amortization of DPAC (9,045) (0.30)
_________ _________
18,245 0.62
Guaranty fund accrual -- --
_________ _________
Net Income $87,156 $2.95
========= =========
</TABLE>
Average shares outstanding totaled 31,709,032 in 1995 compared to
31,612,675 in 1994 and 29,540,274 in 1993.
Operating earnings increased primarily as a result of the growth in
average assets. Realized gains continue to decline due to fewer
prepayments and calls. The decline in net income in 1995 is
attributable to the $23,400,000, or $0.74 per share, after tax accrual
of a special reserve for future guaranty fund assessments. Earnings per
share, operating and net income, grew less than operating earnings and
net income in 1994 due to the additional shares outstanding as a result
of the common stock offering in October 1993.
FINANCIAL CONDITION
Investments
The financial statement carrying value of the company's total
investments grew 25.8% in 1995. The amortized cost basis of the
company's total investment portfolio grew 18.3% 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 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 insurance and annuity 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 December
31, 1995, the company's investment portfolio was comprised of the
following:
<TABLE>
<CAPTION>
Yield at
Amortized % of Estimated % of Amortized
Cost Total Market Value Total Cost
___________________________________________________
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Investment cash and
short-term investments $43,072 0.5% $43,072 0.5% 5.9%
Governments and agency
mortgage-backed
securities 376,047 4.6 402,011 4.6 8.3
Conventional mortgage-
backed securities 2,340,194 28.7 2,407,756 27.6 8.0
Investment grade
corporate securities 3,594,312 44.1 3,961,224 45.5 8.4
Below-investment grade
corporate securities 574,284 7.0 581,220 6.7 9.3
Mortgage loans 1,169,456 14.3 1,245,128 14.3 8.6
___________________________________________________
Total cash and fixed 8,097,365 99.2 8,640,411 99.2 8.3
income investments
Equity securities 49,789 0.6 50,595 0.6 7.3
Real estate 13,960 0.2 13,960 0.2 2.6
___________________________________________________
Total investments $8,161,114 100.0% $8,704,966 100.0% 8.3%
===================================================
<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 December 31, 1995, 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 $2,656,917 38.6% $2,746,392 37.4%
AA+ to AA- 333,233 4.8 361,544 4.9
A+ to A- 1,978,320 28.7 2,191,517 29.8
BBB+ to BBB- 1,236,182 18.0 1,360,093 18.5
BB+ to BB- 505,675 7.4 519,686 7.1
B+ to B- 81,402 1.2 77,152 1.0
CCC+ to CCC- 1,976 0.0 1,800 0.0
Issues not rated by S&P
(by NAIC rating):
Rated 1 (AAA to A-) 24,087 0.3 25,849 0.4
Rated 2 (BBB+ to BBB-) 28,066 0.4 30,179 0.4
Rated 3 (BB+ to BB-) 30,711 0.5 31,682 0.5
Rated 4 (B+ to B-) 2,465 0.0 2,266 0.0
Rated 6 (C1, D) 5,168 0.1 3,651 0.0
Redeemable preferred stock 635 0.0 400 0.0
_______________________________________________
Total fixed maturities $6,884,837 100.0% $7,352,211 100.0%
===============================================
</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 $2,492,816 36.2% $2,578,906 35.1%
Aa1 to Aa3 396,810 5.8 417,039 5.7
A1 to A3 2,266,499 32.9 2,511,722 34.1
Baa1 to Baa3 1,012,249 14.7 1,111,833 15.1
Ba1 to Ba3 545,365 7.9 564,127 7.7
B1 to B3 77,990 1.2 72,757 1.0
Caa1 to Caa3 1,976 0.0 1,800 0.0
Issues not rated by Moody's
(by NAIC rating):
Rated 1 (Aaa to A3) 24,087 0.3 25,849 0.4
Rated 2 (Baa1 to Baa3) 28,066 0.4 30,179 0.4
Rated 3 (Ba1 to Ba3) 30,711 0.5 31,682 0.5
Rated 4 (B1 to B3) 2,465 0.0 2,266 0.0
Rated 6 (C1 to Ca) 5,168 0.1 3,651 0.0
Redeemable preferred stock 635 0.0 400 0.0
_______________________________________________
Total fixed maturities $6,884,837 100.0% $7,352,211 100.0%
===============================================
</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
shareholders' 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 the
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 shareholders' equity as interest rates
change. As a result, the company expects that its shareholders' 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.
Due to this potential for distortion in shareholders' equity, fair value
disclosure is provided in Note 4 of the accompanying Consolidated
Financial Statements. SFAS No. 107, "Disclosures about Fair Value of
Financial Instruments" requires disclosure of fair values for selected
financial instruments but does not require disclosure of fair value of
life insurance liabilities. Although the company's life insurance
liabilities are specifically exempted from this disclosure requirement,
estimated fair value disclosure of these liabilities is provided in an
effort to more properly reflect changes in shareholders' equity from
fluctuations in interest rates.
On December 31, 1995, fixed income securities with an amortized cost of
$6,884,837,000 and an estimated market value of $7,352,211,000 were
designated as available for sale. Unrealized holding gains on these
securities, net of adjustments to deferred policy acquisition costs and
deferred income taxes, increased stockholders' equity by $208,932,000,
or $6.58 per share at December 31, 1995.
Net unrealized appreciation of fixed maturity securities of $467,374,000
was comprised of gross appreciation of $491,625,000 and gross
depreciation of $24,251,000.
The percentage of the company's portfolio invested in below investment
grade securities increased slightly during 1995. At December 31, 1995,
the amortized cost value of the company's total investment in below
investment grade securities consisted of investments in 92 issuers
totaling $574,284,000, or 7.0%, of the company's investment portfolio
compared to 80 issuers totaling $423,505,000, or 6.1%, at December 31,
1994. 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%. At
December 31, 1995, the yield at amortized cost on the company's below
investment grade portfolio was 9.3% compared to 8.4% for the company's
investment grade corporate bond portfolio. The company estimates that
the market value of its below investment grade portfolio was
$581,220,000, or 101.2% of amortized cost value, at December 31, 1995.
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 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. At
December 31, 1995, no fixed maturity securities were deemed to have
impairments in value that are other than temporary.
The company's fixed maturity investment portfolio had a combined yield
at amortized cost of 8.3% at December 31, 1995 and 1994.
Mortgage loans make up approximately 14.3% of the company's investment
portfolio, as compared to an industry average of 15.1%, based on
information reported in the "1995 ACLI Fact Book". The company has resumed
active mortgage lending to broaden its investment alternatives and, as a
result of this increase in lending activity, mortgages outstanding
increased to $1,169,456,000 from $613,208,000 during 1995. The company
expects this asset category to continue to grow over the next several
years. The company's mortgage loan portfolio includes 422 loans with an
average size of $2,771,000 and average seasoning of 5.3 years if
weighted by the number of loans, and 1.9 years if weighted by mortgage
loan carrying values. The company's mortgage loans are typically
secured by occupied buildings in major metropolitan locations
and not speculative developments, and are diversified by type of
property and geographic location. At December 31, 1995, the yield on
the company's mortgage loan portfolio was 8.6%.
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
_____________________
Farm 4 $140 0.0%
Multi-family residential 78 274,378 23.5
Industrial 158 300,353 25.7
Office buildings 66 202,559 17.3
Retail 112 377,557 32.3
Other 4 14,469 1.2
_______________________________________
Total 422 $1,169,456 100.0%
=======================================
</TABLE>
Distribution of these loans by geographic breakdown is as follows:
<TABLE>
<CAPTION>
% of
# of Carrying Mortgage
Loans Value Portfolio
_______________________________________
(Dollars in thousands)
<S> <C> <C> <C>
GEOGRAPHIC BREAKDOWN
____________________
Middle Atlantic 54 $186,021 15.9%
South Atlantic 57 164,407 14.1
East North Central 97 288,656 24.7
West North Central 52 151,763 13.0
East South Central 14 44,776 3.8
West South Central 24 66,895 5.7
Mountain 25 67,997 5.8
Pacific 99 198,941 17.0
_______________________________________
Total 422 $1,169,456 100.0%
=======================================
</TABLE>
At December 31, 1995, the company had established valuation allowances
of $202,000 on two mortgage loans (one of which was delinquent by 90
days or more) to reduce the carrying value of these investments to their
estimated fair value less costs to sell. The company does not expect to
incur material losses from its mortgage loan portfolio since mortgage
loans represent a small percentage of the company's investment
portfolio. The company has been able to recover 80% of the principal
amount of problem mortgages that have been resolved in the last three
years.
At December 31, 1995, the company owned real estate totaling
$13,960,000, including properties acquired through foreclosure valued at
$10,288,000.
In total, the company has experienced a relatively small number of
problems with its total investment portfolio, with only 0.01% of the
company's investments in default at December 31, 1995. The company
estimates its total investment portfolio, excluding policy loans, had a
market value equal to 106.7% of amortized cost value for accounting
purposes at December 31, 1995.
Other assets
Accrued investment income increased $16,875,000 during 1995 due to an
increase in new fixed income investments and in the overall size of the
portfolio. Deferred policy acquisition costs decreased $53,447,000 over
year-end 1994 levels. Excluding the adjustment to reflect the impact of
SFAS No. 115, deferred policy acquisition costs increased $105,596,000
as the deferral of current period costs (primarily commissions) incurred
to generate insurance and annuity sales totaled $178,133,000.
Amortization of costs deferred totaled $72,537,000. At December 31,
1995, the company had total assets of $9,780,416,000, an increase of
22.8% over total assets at December 31, 1994. The company's goal
remains to grow assets at a three year average growth rate of 20%,
excluding the impact of SFAS No. 115. This three year average was 23%
and 24% in 1995 and 1994, respectively.
Liabilities
In conjunction with the volume of insurance and annuity sales, and the
resulting increase in business in force, the company's liability for
policy liabilities and accruals increased $1,193,988,000, or 17.0%,
during 1995 and totaled $8,230,297,000 at December 31, 1995. Reserves
for the company's annuity policies increased $1,130,590,000, or 19.4%,
during 1995 and totaled $6,957,554,000 at December 31, 1995. Life
insurance reserves increased $62,194,000, or 5.2%, during 1995 and
totaled $1,249,437,000 at December 31, 1995.
The company incorporates a number of features in its annuity products
designed to reduce the early withdrawal or surrender of the policies and
to partially compensate the company for its costs if policies are
withdrawn early. Surrender charge periods on annuity policies currently
typically range from 5 years to the term of the policy, with 94% of such
policies being issued with a surrender charge period of seven years or
more during 1995. The initial surrender charge on annuity policies
ranges from 5% to 20% of the premium and decreases over the surrender
charge period. The following table summarizes the company's non-par
deferred annuity liabilities and sales at and for the year ended
December 31, 1995 by surrender charge range category. Notwithstanding
policy features, the withdrawal rates of policyholder funds may be
affected by changes in interest rates.
<TABLE>
<CAPTION>
Deferred Deferred
Surrender Charge % Annuity % of Annuity % of
Sales Total Liabilities Total
____________________________________________________________________________
(Dollars in thousands)
<S> <C> <C> <C> <C>
No surrender charge $570,539 8.7%
1 to 4 percent 806,717 12.4
5 to 6 percent $5,470 0.4% 885,763 13.6
7 to 9 percent 1,069,060 83.8 3,069,491 47.1
10 percent and greater 201,353 15.8 1,183,581 18.2
____________________________________________
$1,275,883 100.0% $6,516,091 100.0%
============================================
</TABLE>
Deferred income taxes increased $113,473,000 during 1995 and totaled
$114,915,000 at December 31, 1995, including $113,503,000 of deferred
taxes recorded as a result of unrealized gains of $467,374,000 on fixed
maturity securities designated as available for sale. Total
consolidated debt increased $67,650,000 during 1995 as the company
issued $100,000,000 of 8.5% notes in February 1995. Of that amount,
$50,000,000 was contributed to the company's insurance subsidiaries to
fund growth in insurance operations and the remainder was used to reduce
commercial paper and to provide for short-term operating needs. As a
result, commercial paper notes payable decreased $32,350,000 and
amounted to $58,100,000 at December 31, 1995. Other liabilities
increased $46,948,000 from year-end 1994 levels due to a $32,965,000 net
increase in the company's reserve for future guaranty fund assessments
and a $14,121,000 increase in draft accounts payable related to the
company's asset retention program.
At December 31, 1995, the company had total liabilities of
$8,886,484,000 compared to $7,378,263,000 at December 31, 1994, a 20.4%
increase.
Equity
At December 31, 1995, stockholders' equity was $893,932,000, or $28.14
per share, compared to $587,330,000, or $18.54 per common share, at year
end 1994. Unrealized appreciation of available for sale fixed maturity
securities increased stockholders' equity by $208,932,000, or $6.58 per
share, after adjustments to deferred acquisition costs and deferred
income taxes, at December 31, 1995. At December 31, 1994, unrealized
depreciation of available for sale fixed maturity securities, net of
adjustments, reduced stockholders' equity by $26,493,000, or $0.84 per
share. The ratio of consolidated debt to total capital was 15.0% (18.8%
excluding SFAS No. 115) at December 31, 1995, up from 13.4% (12.8%
excluding SFAS No. 115) at year-end 1994 as a result of the increase in
consolidated debt. At December 31, 1995, there were 31,769,490 common
shares outstanding compared to 31,677,891 shares at December 31, 1994.
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 insurance and annuity
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
$5,000,000 in computer technology will be spent in 1997 for the new
location. In addition, the company intends to increase its commitment
to improve customer service and operating efficiencies by spending
approximately $7,000,000 per year over the next three years on capital
needs, primarily for information technology, as compared to the
approximately $3,400,000 spent in 1995. No other material capital
expenditures are planned.
The company issues short-term debt, including commercial paper notes,
for working capital needs and to provide short term liquidity. At
December 31, 1995, the company had $58,100,000 in commercial paper notes
outstanding, a decrease of $32,350,000 from December 31, 1994, as a
portion of the proceeds from the issuance of long-term debt discussed
below were used to reduce commercial paper notes outstanding. 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 March 30, 1995, the company entered into a new
agreement which provides for a line of credit totaling $225,000,000,
expiring on March 30, 2000. 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 December
31, 1995, $148,917,000 of retained earnings were free of restrictions
and could be distributed to the company's 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 $85,758,000 during 1996. 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 insurance and annuity
business require 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 totaling $98,812,000, after expenses. The company contributed
$50,000,000 of the proceeds to its insurance subsidiaries and has
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 internal 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 plans to file a universal
shelf registration on Form S-3 with the Securities and Exchange
Commission in the near future with respect to $300,000,000 of
securities, including any combination of debt securities, common stock
and preferred stock. These 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. These securities may not be sold nor may offers to buy be
accepted prior to the time a registration statement relating to the
securities has been filed and becomes effective. This communication
shall not constitute an offer to sell or the solicitation of an offer to
buy nor shall there by any sale of these securities in any state in
which such offer, solicitation or sale would be unlawful prior to
registration or qualification under the securities laws of any such
state.
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 late December 1995, the company
received updated information on insurance company insolvencies from the
National Organization of Life and Health Insurance Guaranty Associations.
As a result of the company's analysis of this information, the company
accrued and added to its reserve for anticipated future guaranty fund
assessments an additional $36,000,000 in the fourth quarter of 1995. 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 has completed development
of proposals to govern insurance company investments and holding company
investments in subsidiaries and affiliates. These final proposals will
be considered for adoption by the NAIC as model laws in 1996. The
company does not presently anticipate any material adverse change in its
business if the proposals as currently drafted, are adopted.
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 then the end of 1996.
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 has adopted Guideline XXXIII, which will require 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 financial statements include an increase in annuity
reserves of approximately $8,100,000 pursuant to the requirements of the
guideline. 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.
The company has conducted a thorough review of its sales and marketing
process and has re-emphasized 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
In October 1995, FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation". The accounting requirements of this Statement are
effective for transactions entered into in fiscal years that begin after
December 15, 1995. Disclosure requirements are also effective for
fiscal years beginning after December 15, 1995 although pro-forma
disclosure is required for all awards granted in fiscal years beginning
after December 15, 1994. Disclosures for awards granted in the first
fiscal year beginning after December 15, 1994 (i.e. 1995 awards) are not
required in financial statements for that fiscal year but must be
presented subsequently whenever financial statements for that fiscal
year are presented for comparative purposes. SFAS No. 123 encourages
all entities to adopt a fair value based method of accounting for all
employee stock compensation plans. Under this fair value based method,
compensation cost is measured at the grant date based upon the fair
value (as defined by the Statement) of the award at that date and is
recognized over the service period. Companies not electing to adopt
this fair value based method may continue to account for these plans
using the intrinsic value based method prescribed by APB Opinion No. 25,
although they must make pro forma disclosures of net income and earnings
per share as if the fair value based method had been used. The company
intends to continue to account for employee stock compensation plans
using APB No. 25 and will begin providing required pro forma disclosures
in 1996.
The company and certain of its subsidiaries are defendants in class action
lawsuits filed in the Iowa District Court for Polk County in May 1995 and
the United States District Court for the Middle District of Florida, Tampa
Division in February 1996. The Florida suit is similar to the Iowa suit
and was filed by some of the same law firms as in the earlier Iowa suit.
The company believes the new action was filed in response to jurisdictional
and procedural problems faced by the plaintiffs in the Iowa suit. The suits
claim unspecified damages as a result of the sale of life insurance policies
with so-called "vanishing premiums" wherein cash values are used to pay
insurance premiums under certain interest rate scenarios. The complaints
allege that the policyholders were misled by optimistic policy illustrations.
The company believes the allegations are without merit because full and
appropriate disclosure was made as a matter of practice. The suits are
in the early 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 accompanying financial statements.
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. The agency alleges that USG has failed to pay
an unspecified amount of commissions for the sale of insurance products,
including alleged future commissions on future policy values if the
policies stay in force. USG believes the claims are without merit based
upon its interpretation of the agreements between the parties, the
business relations between the parties and custom and practice in the
industry. Therefore, USG has denied the allegations and intends to defend
the proceeding vigorously. The amount of any liability which may arise as
a result of this arbitration, if any, cannot be reasonably estimated and no
provision for loss has been made in the accompanying financial statements.
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
The 1995 Private Securities Litigation Reform Act provides issuers the
opportunity to make cautionary statements regarding forward-looking
statements. Accordingly, 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, including any continuation of the
current relatively flat yield curve for short-term investments in
comparison to long-term investments, 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
of insurance products, which may affect the competitive environment for
the company's products.
ITEM 8. Financial Statements and Supplementary Data
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
December 31 1995 1994
______________________________________________________________________________
<S> <C> <C>
ASSETS
Investments:
Fixed maturities:
Available for sale, at market (cost:
1995-$6,884,837; 1994-$819,083) $7,352,211 $778,486
Held for investment, at amortized cost
(market: 1994-$5,059,090) -- 5,393,798
Equity securities, at market (cost: 1995 -
$49,789; 1994 - $23,351) 50,595 22,978
Mortgage loans on real estate 1,169,456 613,208
Real estate, less allowances for depreciation
of $4,804 in 1995 and $4,659 in 1994 13,960 15,668
Policy loans 182,423 176,448
Short-term investments 39,234 50,975
_________________________
Total investments 8,807,879 7,051,561
Cash and cash equivalents 10,730 12,674
Securities and indebtedness of related parties 13,755 11,034
Accrued investment income 122,834 105,959
Notes and other receivables 32,410 23,173
Deferred policy acquisition costs 554,179 607,626
Property and equipment, less allowances for
depreciation of $9,761 in 1995 and $6,795 in 1994 8,039 7,843
Current income taxes recoverable 6,968 14,491
Intangible assets, less accumulated amortization
of $683 in 1995 and $559 in 1994 3,639 2,605
Other assets 48,102 43,664
Separate account assets 171,881 84,963
_________________________
Total assets $9,780,416 $7,965,593
=========================
</TABLE>
See accompanying notes.
CONSOLIDATED BALANCE SHEETS - CONTINUED
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
December 31 1995 1994
______________________________________________________________________________
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Policy liabilities and accruals:
Future policy benefits:
Annuity and universal life products $7,428,134 $6,237,107
Traditional life insurance products 778,857 777,100
Unearned revenue reserve 14,326 14,317
Other policy claims and benefits 8,980 7,785
_________________________
8,230,297 7,036,309
Other policyholders' funds:
Supplementary contracts without life contingencies 11,613 12,224
Advance premiums and other deposits 691 790
Accrued dividends 12,715 12,761
_________________________
25,019 25,775
Deferred income taxes 114,915 1,442
Long-term debt 100,000 --
Commercial paper notes 58,100 90,450
Other liabilities 186,272 139,324
Separate account liabilities 171,881 84,963
_________________________
Total liabilities 8,886,484 7,378,263
Commitments and contingencies
Stockholders' equity:
Serial preferred stock, without par value -
authorized 2,500,000 shares -- --
Common stock, without par value (stated value
$1.00 per share) - authorized 70,000,000 shares
in 1995 and 1994, issued and outstanding 31,769,490
shares in 1995 and 31,677,891 shares in 1994 31,769 31,678
Additional paid-in capital 80,100 78,661
Unrealized appreciation (depreciation) of fixed
maturities 208,932 (26,493)
Unrealized appreciation (depreciation) of equity
securities 806 (373)
Retained earnings 573,799 505,622
Unearned compensation (deduction) (1,474) (1,765)
_________________________
Total stockholders' equity 893,932 587,330
_________________________
Total liabilities and stockholders' equity $9,780,416 $7,965,593
=========================
</TABLE>
See accompanying notes.
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Year ended December 31 1995 1994 1993
_______________________________________________________________________________
<S> <C> <C> <C>
Revenues:
Annuity and universal life
product charges $51,466 $43,767 $34,281
Traditional life insurance premiums 43,425 46,265 46,870
Net investment income 641,094 524,411 434,069
Realized gains on investments 9,524 19,697 41,985
Other income 19,353 17,520 15,763
_______________________________________
764,862 651,660 572,968
Insurance benefits and expenses:
Annuity and universal life benefits:
Interest credited to account balances 390,039 320,312 268,992
Benefit claims incurred in excess of
account balances 10,396 8,877 5,618
Traditional life insurance benefits 68,338 56,923 54,262
Increase (decrease) in future
traditional policy benefits (6,867) 3,350 3,439
Distributions to participating
policyholders 25,125 24,988 25,861
Underwriting, acquisition and
insurance expenses:
Commissions 146,069 157,028 113,450
General Expenses 40,929 43,402 37,554
Insurance Taxes 45,472 9,961 6,334
Policy acquisition costs deferred (178,133) (193,263) (137,153)
Amortization of deferred
acquisition costs 72,537 50,921 42,078
_______________________________________
613,905 482,499 420,435
Interest expense 13,779 7,882 9,522
Other expenses 8,672 10,035 8,016
_______________________________________
636,356 500,416 437,973
_______________________________________
128,506 151,244 134,995
Income taxes 43,633 52,921 47,965
_______________________________________
84,873 98,323 87,030
Equity income (loss), net of related
income taxes 17 (39) 126
_______________________________________
Net income $84,890 $98,284 $87,156
=======================================
Net income per common share $2.68 $3.11 $2.95
=======================================
</TABLE>
See accompanying notes.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Dollars in thousands)
<TABLE>
<CAPTION>
Unreal- Unreal-
ized ized
Appre Appre
ciation ciation
(Depre (Depre
ciation) ciation) Unearned
Addi- of of Compen- Total
tional Fixed Equity sation Stock-
Common Paid-In Matur- Secur- Retained (Deduc- holders'
Stock Capital ities ities Earnings tion) Equity
________________________________________________________________
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at
January 1, 1993 $14,497 $4,186 ($134) $356,202 ($950) $373,801
Issuance of shares
in connection
with 2-for-1
stock split 14,497 (5,303) -- (9,194) -- --
Issuance of
2,300,000 shares
under primary stock
offering 2,300 73,964 -- -- -- 76,264
Net income for
1993 -- -- -- 87,156 -- 87,156
Unrealized
depreciation
of equity
securities -- -- (33) -- -- (33)
Issuance of 207,304
shares of common
stock under stock
incentive plans, net
of amortization and
related income tax
benefit 207 2,981 -- -- (360) 2,828
Conversion of
installment
notes 4 13 -- -- -- 17
Cash dividends -- -- -- (12,071) -- (12,071)
________________________________________________________________
Balance at Decem-
ber 31, 1993 31,505 75,841 (167) 422,093 (1,310) 527,962
</TABLE>
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY - CONTINUED
(Dollars in thousands)
<TABLE>
<CAPTION>
Unreal- Unreal-
ized ized
Appre Appre
ciation ciation
(Depre (Depre
ciation) ciation) Unearned
Addi- of of Compen- Total
tional Fixed Equity sation Stock-
Common Paid-In Matur- Secur- Retained (Deduc- holders'
Stock Capital ities ities Earnings tion) Equity
________________________________________________________________
<S> <C> <C> <C> <C> <C> <C> <C>
Cumulative effect
of change in
accounting principle
regarding fixed
maturity
securities -- -- $22,516 -- -- -- $22,516
Net income for
1994 -- -- -- -- $98,284 -- 98,284
Unrealized
depreciation
of fixed
maturities -- -- (49,009) -- -- -- (49,009)
Unrealized
depreciation
of equity
securities -- -- -- ($206) -- (206)
Issuance of 165,452
shares of common
stock under stock
incentive plans, net
of amortization and
related income tax
benefit $165 $2,623 -- -- -- ($455) 2,333
Issuance of shares
of common stock
under dividend re-
investment plan 8 219 -- -- -- -- 227
Other -- (22) -- -- -- -- (22)
Cash dividends -- -- -- -- (14,755) -- (14,755)
________________________________________________________________
Balance at Decem-
ber 31, 1994 31,678 78,661 (26,493) (373) 505,622 (1,765) 587,330
</TABLE>
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY - CONTINUED
(Dollars in thousands)
<TABLE>
<CAPTION>
Unreal- Unreal-
ized ized
Appre Appre
ciation ciation
(Depre (Depre
ciation) ciation) Unearned
Addi- of of Compen- Total
tional Fixed Equity sation Stock-
Common Paid-In Matur- Secur- Retained (Deduc- holders'
Stock Capital ities ities Earnings tion) Equity
________________________________________________________________
<S> <C> <C> <C> <C> <C> <C> <C>
Net income for
1995 -- -- -- -- $84,890 -- $84,890
Unrealized
appreciation
of fixed
maturities -- -- $235,425 -- -- -- 235,425
Unrealized
appreciation
of equity
securities -- -- -- $1,179 -- -- 1,179
Issuance of 64,131
shares of common
stock under stock
incentive plans, net
of amortization and
related income tax
benefit $64 $523 -- -- -- $291 878
Issuance of shares
of common stock
under employee
purchase and
dividend re-
investment plan 27 916 -- -- -- -- 943
Cash dividends -- -- -- -- (16,713) -- (16,713)
________________________________________________________________
Balance at Decem-
ber 31, 1995 $31,769 $80,100 $208,932 $806 $573,799 ($1,474) $893,932
================================================================
<FN>
Notes: Share amounts set forth in the above statement at January 1, 1993 have
not been restated to reflect the 2-for-1 stock split payable June 1,
1993 to holders of record on May 12, 1993.
</TABLE>
See accompanying notes.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
Year ended December 31 1995 1994 1993
_______________________________________________________________________________
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $84,890 $98,284 $87,156
Adjustments to reconcile net income to
net cash provided by operations:
Adjustments related to annuity and
universal life products:
Interest credited to account balances 390,039 320,312 268,992
Charges for mortality and
administration (54,308) (46,280) (31,151)
Change in unearned revenues (293) (449) (840)
Increase in traditional life
policy liabilities and accruals 2,758 3,750 5,987
Decrease in other policyholders' funds (756) (130) (194)
Increase in accrued investment income (16,875) (13,486) (14,376)
Policy acquisition costs deferred (178,133) (193,263) (137,153)
Amortization of deferred policy
acquisition costs 72,537 50,921 42,078
Change in other assets, other
liabilities, and accrued income taxes 43,227 28,564 23,450
Provision for depreciation and
amortization (7,909) 260 509
Provision for deferred income taxes (216) 13,211 (1,305)
Share of losses (equity in earnings)
of related parties (27) 51 (194)
Realized gains on investments (9,524) (19,697) (41,985)
_______________________________________
Net cash provided by operating
activities 325,410 242,048 200,974
INVESTING ACTIVITIES
Sale, maturity, or repayment of investments:
Fixed maturities-available for sale 145,173 204,847 --
Fixed maturities-held for investment 203,395 286,844 1,056,544
Equity securities 6,572 -- --
Mortgage loans on real estate 56,774 47,960 49,081
Real estate 2,030 5,662 289
Policy loans 28,436 30,397 25,963
Short-term investments - net 11,741 16,644 --
_______________________________________
454,121 592,354 1,131,877
Acquisition of investments:
Fixed maturities-available for sale (943,285) (181,303) --
Fixed maturities-held for investment (59,759) (1,422,409) (2,124,615)
Equity securities (32,097) (23,101) --
Mortgage loans on real estate (612,449) (314,255) (152,274)
Real estate (1,018) (876) (346)
Policy loans (34,411) (29,996) (26,083)
Short-term investments - net -- -- (12,717)
_______________________________________
(1,683,019) (1,971,940) (2,316,035)
</TABLE>
See accompanying notes.
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
(Dollars in thousands)
<TABLE>
<CAPTION>
Year ended December 31 1995 1994 1993
_______________________________________________________________________________
<S> <C> <C> <C>
INVESTING ACTIVITIES - CONTINUED
Disposal of investments accounted for
by the equity method $498 $489 $939
Additions to investments accounted for
by the equity method -- (1,376) (467)
Repayments of notes receivable 1,317 223 38
Issuance of notes receivable -- (2,438) --
Sales of property and equipment 109 282 107
Purchases of property and equipment (3,397) (3,052) (3,873)
_______________________________________
Net cash used in investing activities (1,230,371) (1,385,458) (1,187,414)
FINANCING ACTIVITIES
Issuance (repayment) of commercial
paper - net (32,350) 56,450 5,226
Issuance of long-term debt 100,000 -- --
Repayment of long-term debt -- (50,214) (10,520)
Receipts from annuity and universal
life policies credited to
policyholder account balances 1,691,189 1,746,108 1,190,024
Return of policyholder account balances
on annuity policies and universal
life policies (835,893) (586,762) (264,364)
Issuance of common stock under
primary stock offering -- -- 76,264
Issuance of stock under stock
plans and upon debt conversion (3,216) 67 861
Cash dividends paid (16,713) (14,755) (12,071)
_______________________________________
Net cash provided by financing
activities 903,017 1,150,894 985,420
_______________________________________
Increase (decrease) in cash and cash
equivalents (1,944) 7,484 (1,020)
Cash and cash equivalents at beginning
of year 12,674 5,190 6,210
_______________________________________
Cash and cash equivalents at end of year $10,730 $12,674 $5,190
=======================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest $10,192 $7,650 $10,404
Income taxes 32,158 61,834 42,367
Noncash investing and financing activities:
Foreclosure of mortgage loans and notes
receivable, including taxes and costs
capitalized ($106) and operating funds
retained ($283) in 1993 -- 250 6,577
</TABLE>
See accompanying notes.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995
1. SIGNIFICANT ACCOUNTING POLICIES
Consolidation: The consolidated financial statements include the
company and its subsidiaries. The principal subsidiaries are Equitable
Life Insurance Company of Iowa ("Equitable Life") and USG Annuity & Life
Company ("USG"). At December 31, 1995 and 1994, all subsidiaries are
wholly owned. All significant intercompany accounts and transactions
have been eliminated.
Organization: Equitable Life and USG offer various insurance products
including deferred fixed annuities, universal and term life insurance
and variable annuities. These products are marketed by the company's
career agency force, brokers and through financial institutions. The
company's primary customers are middle-income individuals and small
businesses.
Investments: Effective January 1, 1994, the company adopted Statement
of Financial Accounting Standards ("SFAS") No. 115, "Accounting for
Certain Investments in Debt and Equity Securities". Pursuant to SFAS
No. 115, fixed maturity securities are designated as either "available
for sale", "held for investment" or "trading". Sales of fixed
maturities designated as "available for sale" are not restricted by SFAS
No. 115. 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. At
December 31, 1995, 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. 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 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.
Prior to the adoption of SFAS No. 115, all of the company's fixed
maturity securities were classified as "held to maturity". Fixed
maturity securities were written down to net realizable value (the sum
of the estimated nondiscounted cash flows from the securities) if the
securities were determined to have declines in value that were "other
than temporary". Future investment income was recognized at the rate
implicit in this calculation of net realizable value.
Equity securities (common and non-redeemable preferred stocks) are
reported at market if readily marketable, or at cost if not readily
marketable. The change in unrealized appreciation and depreciation of
marketable equity securities (net of related deferred income taxes, if
any) is included directly in stockholders' equity. Equity securities
that are determined to have a decline in value that is other than
temporary are written down to estimated fair value which becomes the
security's new cost basis by a charge to realized losses in the
company's Statement of Income.
Mortgage loans on real estate are reported at cost adjusted for
amortization of premiums and accrual of discounts. If the value of any
mortgage loan is determined to be impaired (i.e., when it is probable
that the company will be unable to collect all amounts due according to
the contractual terms of the loan agreement), the carrying value of the
mortgage loan is reduced to the present value of expected future cash
flows from the loan, discounted at the loan's effective interest rate,
or to the loan's observable market price, or the fair value of the
underlying collateral. The carrying value of impaired loans is reduced
by the establishment of a valuation allowance which is adjusted at each
reporting date for significant changes in the calculated value of the
loan. Changes in this valuation allowance are charged or credited to
income.
Real estate, which includes real estate acquired through foreclosure,
is reported at cost less allowances for depreciation. Real estate
acquired through foreclosure, or in-substance foreclosure, is recorded
at the lower of cost (which includes the balance of the mortgage loan,
any accrued interest and any costs incurred to obtain title to the
property) or fair value as determined at or before the foreclosure date.
The carrying value of these assets is subject to regular review. If the
fair value, less estimated sale cost, of real estate owned decreases to
an amount lower than its carrying value, a valuation allowance is
established for the difference. This valuation allowance can be
restored should the fair value of the property increase. Changes in this
valuation allowance are charged or credited to income.
Policy loans are reported at unpaid principal. Short-term investments
are reported at cost adjusted for amortization of premiums and accrual
of discounts. Investments accounted for by the equity method include
investments in, and advances to, various joint ventures and
partnerships.
Market values, as reported herein, of publicly traded fixed maturity
securities are as reported by an independent pricing service. Market
values of conventional mortgage-backed securities not actively traded in
a liquid market are estimated using a third party pricing system, which
uses a matrix calculation assuming a spread over U.S. Treasury bonds
based upon the expected average lives of the securities. Market values
of private placement bonds are estimated using a matrix that assumes a
spread (based on interest rates and a risk assessment of the bonds) over
U.S. Treasury bonds. Market values of redeemable preferred stocks are
as reported by the National Association of Insurance Commissioners
("NAIC"). Market values of equity securities are based on the latest
quoted market prices, or where not readily marketable, at values which
are representative of the market values of issues of comparable yield
and quality. Realized gains and losses are determined on the basis of
specific identification and average cost methods for manager initiated
and issuer initiated disposals, respectively.
Cash and Cash Equivalents: For purposes of the consolidated statement
of cash flows, the company considers all demand deposits and interest
bearing accounts not related to the investment function to be cash
equivalents. All interest-bearing accounts classified as cash
equivalents have original maturities of three months or less.
Deferred Policy Acquisition Costs: Certain costs of acquiring new
insurance business, principally commissions and other expenses related
to the production of new business, have been deferred. For annuity and
universal life products, such costs are being amortized generally in
proportion to the present value (using the assumed crediting rate) of
expected gross profits. This amortization is adjusted retrospectively,
or "unlocked", when the company revises its estimate of current or
future gross profits to be realized from a group of products. For
traditional life insurance products, such costs are being amortized over
the premium-paying period of the related policies in proportion to
premium revenues recognized, using principally the same assumptions for
interest, mortality and withdrawals that are used for computing
liabilities for future policy benefits subject to traditional "lock-in"
concepts. Deferred policy acquisition costs are adjusted to reflect the
pro-forma impact of unrealized gains and losses on fixed maturity
securities the company has designated as "available for sale" under SFAS
No. 115.
Property and Equipment: Property and equipment primarily represent
leasehold improvements at the company's headquarters and at various
agency offices and office furniture and equipment and are not considered
to be significant to the company's overall operations. Property and
equipment are reported at cost less allowances for depreciation.
Depreciation expense is computed primarily on the basis
of the straight-line method over the estimated useful lives of the
assets.
Intangible Assets: Intangible assets include the value of various
licenses acquired in conjunction with the purchase of USG and
capitalized costs related to the company's lines of credit and long-term
debt. Intangible assets related to insurance licenses are being
amortized over forty years using the straight-line method. Capitalized
line of credit costs are being amortized over the term of the underlying
line of credit agreement.
Future Policy Benefits: The liability for future policy benefits for
traditional life insurance products has been calculated on a net-level
premium basis. Interest assumptions range from 2.75% for 1956 and prior
issues to a 9.00% level, graded to 6.00% after twenty years for current
issues. Mortality, morbidity and withdrawal assumptions generally are
based on actual experience. These assumptions have been modified to
provide for possible unfavorable deviation from the assumptions. Future
dividends for participating business (which accounted for 1.8% of
premiums and 9.4% of inforce in 1995) are provided for in the liability
for future policy benefits.
With respect to annuity and universal life products, the company
utilizes the retrospective deposit accounting method. Policy reserves
represent the premiums received plus accumulated interest, less
mortality and administration charges. Interest credited to these
policies ranged from 3.35% to 11.35% during 1995, 3.50% to 11.35% during
1994 and 4.50% to 10.00% during 1993.
The unearned revenue reserve reflects the unamortized balance of the
excess of first year administration charges over renewal period
administration charges (policy initiation fees) on annuity and universal
life products. These excess charges have been deferred and are being
recognized in income over the period benefited using the same
assumptions and factors used to amortize deferred policy acquisition
costs.
Recognition of Premium Revenues and Costs: Traditional life insurance
premiums are recognized as revenues over the premium-paying period.
Future policy benefits and policy acquisition costs are associated with
the premiums as earned by means of the provision for future policy
benefits and amortization of deferred policy acquisition costs.
Revenues for annuity and universal life products consist of policy
charges for the cost of insurance, policy administration charges,
amortization of policy initiation fees and surrender charges assessed
against policyholder account balances during the period. Expenses
related to these products include interest credited to policyholder
account balances and benefit claims incurred in excess of policyholder
account balances.
Deferred Income Taxes: Deferred tax assets or liabilities are computed
based on the difference between the financial statement and income tax
bases of assets and liabilities using the enacted marginal tax rate.
Deferred tax assets or liabilities are adjusted to reflect the pro-forma
impact of unrealized gains and losses on fixed maturity securities the
company has designated as available for sale under SFAS No. 115.
Changes in deferred tax assets or liabilities resulting from this SFAS
No. 115 adjustment are charged or credited directly to stockholders'
equity. Deferred income tax expenses or credits reflected in the
company's Statements of Income are based on the changes in the deferred
tax asset or liability from period to period (excluding the SFAS No. 115
adjustment).
Interest Rate Swaps: The company had interest rate swap agreements
outstanding during 1993, whereby any interest rate differential to be
received/paid was recognized as an adjustment to interest expense. All
of these swap agreements expired, or were terminated in August 1993.
Separate Accounts: The transactions in the separate accounts (which are
charged or credited directly to the accounts) are excluded from the
consolidated statements of income.
Capital Stock: On April 29, 1993 the company's Board of Directors
approved a 2-for-1 stock split payable June 1, 1993, to holders of
record on May 12, 1993. With respect to the statement of changes in
stockholders' equity, share and per share amounts prior to January 1,
1993, have not been restated to reflect the 1993 stock split. All other
share and per share data presented in the consolidated financial
statements and notes thereto have been restated to reflect this stock
split.
Net Income per Share of Common Stock: Net income per share is based on
the weighted average number of shares of common stock outstanding during
each year (1995 - 31,709,032; 1994 - 31,612,675 and 1993 - 29,540,274).
Employee stock options and installment notes convertible (1993 only)
into shares of common stock have not been included in the net income per
share computations because their effect is not material.
Dividends per Share of Common Stock: For the years ended December 31,
1995, 1994 and 1993, the company paid dividends per share of $0.525,
$0.465 and $0.405 respectively, after giving effect for the 2-for-1
stock split as of May 12, 1993.
Dividend Restrictions: The company's ability to pay dividends to its
stockholders is restricted by certain debt covenants. The most
restrictive covenant requires the company to maintain tangible net worth
equal to the sum of $490,000,000 plus proceeds from any issuance of
capital stock plus one-half of net income recognized subsequent to
January 1, 1995. At December 31, 1995, retained earnings available for
dividends aggregated $148,917,000.
The ability of Equitable Life to pay dividends to the parent company
is restricted because prior approval of insurance regulatory authorities
is required for payment of dividends to the stockholder which exceed an
annual limitation. During 1996, Equitable Life could pay dividends to
the parent company of approximately $85,758,000 without prior approval
of statutory authorities. Also, the amount ($514,576,000 at December
31, 1995) by which the stockholder's equity stated in conformity with
generally accepted accounting principles exceeds statutory capital and
surplus as reported is restricted and cannot be distributed.
Use of Estimates: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenue and
expenses during the preparation period. Actual results could differ
from those estimates.
Significant estimates and assumptions are utilized in the calculation
of deferred policy acquisition costs, policyholder liabilities and
accruals, postretirement benefits, guaranty fund assessment accruals and
valuation allowances on investments and deferred tax benefits. It is
reasonably possible that actual experience could differ from the
estimates and assumptions utilized which could have a material impact on
the financial statements.
Reclassification: Certain amounts in the 1994 and 1993 financial
statements have been reclassified to conform to the 1995 financial
statement presentation.
2. BASIS OF FINANCIAL REPORTING - LIFE INSURANCE OPERATIONS
The financial statements of the life insurance subsidiaries differ from
related statutory financial statements principally as follows:
(1) acquisition costs of acquiring new business are deferred and amortized
over the life of the policies rather than charged to operations as incurred,
(2) future policy benefit reserves on traditional life insurance products
are based on reasonable assumptions of expected mortality, interest and
withdrawals which include a provision for possible unfavorable deviation
from such assumptions, which may differ from reserves based upon statutory
mortality rates and interest, (3) future policy benefit reserves for
annuity and universal life products are based on full account values, rather
than the greater of cash surrender value or amounts derived from discounting
methodologies utilizing statutory interest rates, (4) reserves are reported
before reduction for reserve credits related to reinsurance ceded and a
receivable is established, net of an allowance for uncollectible amounts,
for these credits rather than presented net of these credits, (5) fixed
maturity investments are designated as "available for sale" and valued at
fair value with unrealized appreciation/depreciation, net of adjustments to
deferred income taxes (if applicable) and deferred policy acquisition costs,
credited/charged directly to stockholders' equity rather than valued at
amortized cost, (6) the carrying value of fixed maturity securities is
reduced to fair value by a charge to realized losses in the statements of
income when declines in carrying value are judged to be other than temporary,
rather than through the establishment of a formula-determined statutory
investment reserve (carried as a liability), changes in which are charged
directly to surplus, (7) deferred income taxes are provided for the
difference between the financial statement and income tax bases of assets
and liabilities, (8) net realized gains or losses attributed to changes in
the level of interest rates in the market are recognized when the sale is
completed rather than deferred and amortized over the remaining life of the
fixed maturity security or mortgage loan, (9) gains arising from sale
lease-back transactions are deferred and amortized over the life of the
lease rather than recognized in the period of sale, (10) a liability is
established for anticipated guaranty fund assessments, net of related
anticipated premium tax credits, rather than capitalized when assessed and
amortized in accordance with procedures permitted by insurance regulatory
authorities, (11) a prepaid pension cost asset established in accordance with
SFAS No. 87, "Employers' Accounting for Pensions", agents' balances and
certain other assets designated as "non-admitted assets" for statutory
purposes are reported as assets rather than being charged to surplus,
(12) revenues for annuity and universal life products consist of policy
charges for the cost of insurance, policy administration charges,
amortization of policy initiation fees and surrender charges assessed
rather than premiums received, (13) expenses for postretirement benefits
other than pensions are recognized for all qualified employees rather than
for only vested and fully-eligible employees, and the accumulated
postretirement benefit obligation for years prior to adoption of SFAS
No. 106, "Employers' Accounting for Postretirement Benefits Other than
Pensions" was recognized as a cumulative effect of change in accounting
method rather than deferred and amortized over twenty years, and (14) assets
and liabilities are restated to fair values when a change in ownership
occurs, with provisions for goodwill and other intangible assets, rather
than continuing to be presented at historical cost.
Net income for Equitable Life, USG and Equitable American Insurance Company
as determined in accordance with statutory accounting practices was
$87,179,000 in 1995, $61,421,000 in 1994 and $42,182,000 in 1993. Total
statutory capital and surplus was $532,817,000 at December 31, 1995 and
$431,585,000 at December 31, 1994.
3. INVESTMENT OPERATIONS
Effective January 1, 1994, the company adopted SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities." SFAS
No. 115 requires companies to classify their securities as "held to
maturity", "available for sale" or "trading".
On November 15, 1995, the Financial Accounting Standards Board 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 SFAS No. 115.
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 providing the most appropriate
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, securities with combined cost totaling
$5,250,921,000 and estimated fair value of $5,560,519,000 were
transferred from the company's held for investment portfolio to its
available for sale portfolio. This transfer caused the net unrealized
investment gain component of shareholders' equity to increase by
$138,795,000 (net of deferred income taxes of $74,735,000 and an
adjustment of $96,068,000 to deferred policy acquisition costs). 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 maturity securities
portfolio such that significant sales would occur, the inability to
implement 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 shareholders' equity as interest rates change. As a
result, the company expects that its shareholders' 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.
Due to this potential for distortion in shareholders' equity, fair
value disclosure is provided in Note 4. SFAS No. 107, "Disclosures
about Fair Value of Financial Instruments" requires disclosure of fair
values for selected financial instruments but does not require
disclosure of fair value of life insurance liabilities. Although the
company's life insurance liabilities are specifically exempted from this
disclosure requirement, estimated fair value disclosure of these
liabilities is provided in an effort to more properly reflect changes in
shareholders' equity from fluctuations in interest rates.
The cumulative effect of the adoption of SFAS No. 115 was to increase
stockholders' equity by $22,516,000, or $0.71 per share, at January 1,
1994. The change in unrealized gain or loss included in stockholders'
equity, net of adjustments, totaled $235,425,000 of unrealized gains
(including the unrealized gain of $138,795,000 related to the December
1, 1995 reclassification of securities to available for sale) for the
year ended December 31, 1995 and $49,009,000 of unrealized losses for
the year ended December 31, 1994.
Realized gains (losses) and unrealized appreciation (depreciation) on
investments are summarized below:
<TABLE>
<CAPTION>
Realized*
Year ended December 31 1995 1994 1993
______________________________________________________________________________
(Dollars in thousands)
<S> <C> <C> <C>
Fixed maturities:
Available for sale ($3,401) $7,417
Held for investment 9,330 11,364 $41,754
Equity securities 912 -- --
Mortgage loans on real estate -- (62) (363)
Real estate (161) 7 14
Equity investments 2,844 971 580
_______________________________________
Realized gains on investments $9,524 $19,697 $41,985
=======================================
<FN>
*See Note 6 for the income tax effects attributable to realized gains and
losses on investments.
</TABLE>
<TABLE>
<CAPTION>
Unrealized
Year ended December 31 1995 1994 1993
______________________________________________________________________________
(Dollars in thousands)
<S> <C> <C> <C>
Fixed maturities:
Available for sale $507,971 ($40,597)
Held for investment 334,708 (663,840) $144,409
Equity securities 1,179 (206) (33)
_______________________________________
Unrealized appreciation (depre-
ciation) of investments $843,858 ($704,643) $144,376
=======================================
</TABLE>
Major categories of net investment income are summarized below:
<TABLE>
<CAPTION>
Year ended December 31 1995 1994 1993
______________________________________________________________________________
(Dollars in thousands)
<S> <C> <C> <C>
Fixed maturities $558,903 $478,436 $397,912
Equity securities 1,255 303 45
Mortgage loans on real estate 76,382 39,117 28,408
Real estate 2,747 3,696 2,696
Policy loans 10,049 9,788 9,838
Short-term investments 1,275 886 933
Other - net 996 801 425
_______________________________________
651,607 533,027 440,257
Less investment expenses (10,513) (8,616) (6,188)
_______________________________________
Net investment income $641,094 $524,411 $434,069
=======================================
</TABLE>
At December 31, 1995 and 1994, the amortized cost, gross unrealized gains and
losses and estimated market value of the company's fixed maturity securities
designated as available for sale are as follows:
<TABLE>
<CAPTION>
AVAILABLE FOR SALE
Gross Gross Estimated
Amortized Unrealized Unrealized Market
December 31, 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
stocks 635 -- (235) 400
_____________________________________________________
Total available for sale $6,884,837 $491,625 ($24,251) $7,352,211
=====================================================
</TABLE>
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
December 31, 1994 Cost Gains Losses Value
________________________________________________________________________________
<S> <C> <C> <C> <C>
U.S. government and
governmental agencies
and authorities:
Mortgage-backed
securities $17,817 ($730) $17,087
Other 30,624 (1,178) 29,446
Public utilities 70,184 $704 (7,173) 63,715
Investment grade
corporate 365,162 9,288 (19,574) 354,876
Below investment grade
corporate 199,597 589 (23,417) 176,769
Mortgage-backed
securities 135,699 1,926 (1,032) 136,593
_____________________________________________________
Total available for sale $819,083 $12,507 ($53,104) $778,486
=====================================================
</TABLE>
At December 31, 1994, the amortized cost, gross unrealized gains and losses,
and estimated market value of the company's fixed maturity securities
designated as held for investment are as follows:
<TABLE>
<CAPTION>
HELD FOR INVESTMENT
Gross Gross Estimated
Amortized Unrealized Unrealized Market
December 31, 1994 Cost Gains Losses Value
________________________________________________________________________________
(Dollars in thousands)
<S> <C> <C> <C> <C>
U.S. government and
governmental agencies
and authorities:
Mortgage-backed
securities $288,914 $2,971 ($13,949) $277,936
Other 3,980 66 (104) 3,942
States, municipalities
and political
subdivisions 15,557 -- (1,128) 14,429
Foreign governments 10,573 719 -- 11,292
Public utilities 1,231,799 7,148 (99,517) 1,139,430
Investment grade
corporate 1,594,095 33,750 (80,108) 1,547,737
Below investment grade
corporate 223,908 477 (19,074) 205,311
Mortgage-backed
securities 2,024,281 4,389 (170,091) 1,858,579
Redeemable preferred
stocks 691 -- (257) 434
_____________________________________________________
Total held for investment $5,393,798 $49,520 ($384,228) $5,059,090
=====================================================
</TABLE>
No fixed maturity securities were designated as held for investment at
December 31, 1995. Short-term investments, all with maturities of 30
days or less, have been excluded from the above schedules. Amortized
cost approximates market value for these securities.
The amortized cost and estimated market value of fixed maturity
securities, by contractual maturity, at December 31, 1995, 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>
AVAILABLE FOR SALE
Estimated
Amortized Market
December 31, 1995 Cost Value
_____________________________________________________________________
(Dollars in thousands)
<S> <C> <C>
Due after one year through five years $178,935 $183,442
Due after five years through ten years 1,343,419 1,450,436
Due after ten years 2,732,867 3,004,417
_________________________
4,255,221 4,638,295
Mortgage-backed securities 2,629,616 2,713,916
_________________________
Total available for sale $6,884,837 $7,352,211
=========================
</TABLE>
The amortized cost and market value of mortgage-backed securities,
which comprise 37% of the company's investment in fixed maturity
securities at December 31, 1995, by type, are as follows:
<TABLE>
<CAPTION>
Estimated
Amortized Market
December 31, 1995 Cost Value
___________________________________________________________________________
(Dollars in thousands)
<S> <C> <C>
Mortgage-backed securities:
Government and agency guaranteed pools:
Very accurately defined maturities $17,199 $18,646
Planned amortization class 84,746 91,044
Targeted amortization class 29,290 30,216
Sequential pay 69,084 71,439
Pass through 89,103 94,815
Private label CMOs and REMICS:
Very accurately defined maturities 30,555 32,026
Planned amortization class 25,448 27,357
Targeted amortization class 445,545 449,932
Sequential pay 1,767,444 1,823,761
Mezzanines 38,026 39,655
Private placements and subordinate issues 33,176 35,025
__________________________
Total mortgage-backed securities $2,629,616 $2,713,916
==========================
</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 a 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 loss during periods of accelerated prepayments. At
December 31, 1995, unamortized premiums on mortgage-backed securities
totaled $5,611,000 and unaccrued discounts on mortgage-backed securities
totaled $61,808,000.
An analysis of sales, maturities and principal repayments of the
company's fixed maturities portfolio for the years ended December 31,
1995, 1994 and 1993 is as follows:
<TABLE>
<CAPTION>
Gross Gross Proceeds
Amortized Realized Realized from
Cost Gains Losses Sale
_____________________________________________________________________________
(Dollars in thousands)
<S> <C> <C> <C> <C>
Year ended December 31, 1995:
Scheduled principal repayments
calls and tenders (available
for sale only):
Available for sale $59,935 $319 ($19) $60,235
Held for investment 172,082 5,279 (274) 177,087
Sales:
Available for sale 82,837 2,104 (3) 84,938
Held for investment 21,983 4,325 -- 26,308
_________________________________________________
Total $336,837 $12,027 ($296) $348,568
=================================================
Year ended December 31, 1994:
Scheduled principal repayments
calls and tenders (available
for sale only):
Available for sale $167,285 $4,877 ($11) $172,151
Held for investment 275,480 11,389 (25) 286,844
Sales:
Available for sale 29,526 3,184 (14) 32,696
_________________________________________________
Total $472,291 $19,450 ($50) $491,691
=================================================
Year ended December 31, 1993:
Scheduled principal
repayments, calls and
tenders $999,855 $50,924 -- $1,050,779
Sales 5,481 284 -- 5,765
_________________________________________________
Total $1,005,336 $51,208 $ -- $1,056,544
=================================================
</TABLE>
During the second quarter of 1995, the company sold one security with
an amortized cost of $21,983,000 from the held for investment portfolio
generating a realized gain of $4,325,000. This sale was due to a
significant deterioration of the issuer's creditworthiness resulting
from the announced reorganization of the issuer.
At December 31, 1995, unrealized appreciation of equity securities of
$806,000, is comprised of gross unrealized appreciation of $1,019,000 on
the company's investment in its registered separate account and gross
unrealized depreciation of $213,000 on the company's other equity
securities.
The carrying value of investments which have been non-income producing
for the twelve months preceding December 31, 1995, totaled $239,000
related to one real estate property.
The company analyzes its investment portfolio at least quarterly in
order to determine if the carrying value of any of its investments has
been impaired. The carrying value of debt and equity securities is
written down to fair value by a charge to realized losses when an
impairment in value appears to be other than temporary. During 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 carrying value of the securities to their
estimated fair value. These securities were subsequently sold resulting
in realized gains totaling $1,200,000. During 1994, the company
recognized a pre-tax loss of $619,000 to reduce the carrying value of
one fixed maturity security to its estimated fair value. This security
had been previously written down to its estimated net realizable value
by a charge to realized losses of $6,443,000 during 1993. This security
was sold in the fourth quarter of 1994 at a nominal gain.
At December 31, 1995, the company had established valuation allowances
of $202,000 on two mortgage loans (one of which was delinquent by 90
days or more) to reduce the carrying value of these investments to their
estimated fair value less costs to sell. At December 31, 1994, the
company had established valuation allowances of $57,000 on one mortgage
loan and $959,000 on one real estate property (sold in 1995) to reduce
the carrying value of these investments to their estimated fair value,
less costs to sell. During the year ended December 31, 1993, the
company recognized a pre-tax loss of $363,000 to reduce the carrying
value of one mortgage loan (sold in 1994) and established a valuation
allowance of $86,000 on one real estate property to reduce
the carrying value of these investments to their estimated fair value,
less costs to sell.
At December 31, 1995, affidavits of deposits covering bonds with a par
value of $1,693,573,000 (1994 - $1,519,564,000), mortgage loans with an
unpaid principal balance of $304,729,000 (1994 - $225,404,000) and
policy loans with an unpaid balance of $167,844,000 (1994 $168,653,000)
were on deposit with state agencies to meet regulatory requirements. In
addition, at December 31, 1995, pursuant to a reinsurance agreement, the
company had investments with a carrying value of $64,350,000 (1994 -
$84,156,000) and estimated market values of $64,350,000 (1994 -
$72,637,000) deposited in a trust for the benefit of the ceding company.
The company's investment policies related to its investment portfolio
require diversification by asset type, company and industry and set
limits on the amount which can be invested in an individual issuer. Such
policies are at least as restrictive as those set forth by regulatory
authorities. Fixed maturity investments included investments in various
non-governmental mortgage-backed securities (33% in 1995, 35% in 1994),
public utilities (19% in 1995, 22% in 1994), basic industrials (21% in
1995, 18% in 1994) and consumer products (12% in 1995, 13% in 1994).
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 1995 and 1994. Mortgage loans on real estate
have also been analyzed by collateral type with significant
concentrations identified in retail facilities (32% in 1995 and 33% in
1994), industrial buildings (26% in 1995 and 25% in 1994), multi-family
residential buildings (24% in 1995 and 25% in 1994) and office buildings
(17% in 1995 and 15% in 1994). Equity securities are comprised of
investments in the company's registered separate account and other
equity securities and do not contain any concentrations of risk by
issuer or industry. Real estate and investments accounted for by the
equity method are not significant to the company's overall investment
portfolio.
No investment in any person or its affiliates (other than bonds issued
by agencies of the United States government) exceeded ten percent of
stockholders' equity at December 31, 1995.
4. FAIR VALUES OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments"
requires disclosure of estimated fair value of all financial
instruments, including both assets and liabilities recognized and not
recognized in a company's balance sheet, unless specifically exempted.
SFAS No. 119, "Disclosure about Derivative Financial Instruments and
Fair Value of Financial Instruments" requires additional disclosures
about derivative financial instruments. Most of the company's
investments, insurance liabilities and debt, as well as off-balance-sheet
items such as loan guarantees, fall within the standards' definition of
a financial instrument. Although the company's life insurance
liabilities are specifically exempted from this disclosure requirement,
estimated fair value disclosure of these liabilities is also provided in
order to make the disclosures more meaningful. Accounting, actuarial and
regulatory bodies are continuing to study the methodologies to be used
in developing fair value information, particularly as it relates to such
things as liabilities for insurance contracts. Accordingly, care should
be exercised in deriving conclusions about the company's business or
financial condition based on the information presented herein.
The company closely monitors the level of its insurance liabilities,
the level of interest rates credited to its interest-sensitive products
and the assumed interest margin provided for within the pricing
structure of its other products. These amounts are taken into
consideration in the company's overall management of interest rate risk,
which attempts to minimize exposure to changing interest rates through
the matching of investment cash flows with amounts expected to
be due under insurance contracts. In addition, the company is not
currently a party to any financial instruments such as futures, forward,
swap or option contracts, or other financial instruments with similar
characteristics. As such, the company believes that it has reduced the
volatility inherent in its "fair value" adjusted stockholders' equity,
although such volatility will not be reduced completely. As discussed
below, the company has used discount rates in its determination of fair
values for its liabilities which are consistent with market yields for
related assets. The use of the asset market yield is consistent with
management's opinion that the risks inherent in its asset and liability
portfolios are similar. This assumption, however, might not result in
values that are consistent with those obtained through an actuarial
appraisal of the company's business or values that might arise in a
negotiated transaction.
The following compares carrying values as shown for financial reporting
purposes with estimated fair values.
<TABLE>
<CAPTION>
December 31 1995 1994
_________________________________________________________________________________
(Dollars in thousands)
Estimated Estimated
Carrying Fair Carrying Fair
Value Value Value Value
___________ ___________ ___________ ___________
<S> <C> <C> <C> <C>
ASSETS
Balance sheet financial assets:
Fixed maturities:
Available for sale $7,352,211 $7,352,211 $778,486 $778,486
Held for investment -- -- 5,393,798 5,059,090
Equity securities 50,595 50,595 22,978 22,978
Mortgage loans on real
estate 1,169,456 1,245,128 613,208 589,333
Short-term investments 39,234 39,234 50,975 50,975
Cash and cash equivalents 10,730 10,730 12,674 12,674
Notes and other
receivables 137,141 137,141 119,261 119,261
Separate account assets 171,881 171,881 84,963 84,963
____________________________________________________
8,931,248 9,006,920 7,076,343 6,717,760
Deferred policy acquisition
costs and intangible
assets 557,818 -- 610,231 --
Prepaid pension and other
postretirement benefits 24,209 23,634 21,460 19,130
Non-financial assets 57,529 57,529 62,572 62,572
____________________________________________________
Total assets $9,570,804 $9,088,083 $7,770,606 $6,799,462
=====================================================
</TABLE>
<TABLE>
<CAPTION>
December 31 1995 1994
_________________________________________________________________________________
(Dollars in thousands)
Estimated Estimated
Carrying Fair Carrying Fair
Value Value Value Value
___________ ___________ ___________ ___________
<S> <C> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Balance sheet financial liabilities:
Future policy benefits (net of related policy loans):
Universal life and
current interest
products $441,726 $309,142 $390,061 $258,852
Annuity products 6,846,030 5,905,241 5,718,888 4,312,559
Participating life insur-
ance and dividend
accumulations 577,599 444,497 580,043 377,577
Traditional life insurance
- nonpar 167,740 113,948 166,227 114,193
____________________________________________________
8,033,095 6,772,828 6,855,219 5,063,181
Long-term debt 100,000 115,080 -- --
Commercial paper notes 58,100 58,100 90,450 90,450
Separate account
liabilities 171,881 171,881 84,963 84,963
____________________________________________________
8,363,076 7,117,889 7,030,632 5,238,594
Deferred income taxes on fair
value adjustments -- 267,710 -- 288,185
Non-financial liabilities 313,796 313,796 152,644 152,644
____________________________________________________
Total liabilities 8,676,872 7,699,395 7,183,276 5,679,423
Stockholders' equity 893,932 1,388,688 587,330 1,120,039
____________________________________________________
Total liabilities and
stockholders' equity $9,570,804 $9,088,083 $7,770,606 $6,799,462
=====================================================
</TABLE>
The following methods and assumptions were used by the company in estimating
fair values.
Fixed maturities: Estimated market values of publicly traded
securities are as reported by an independent pricing service. Estimated
market values of conventional mortgage-backed securities not actively
traded in a liquid market are estimated using a third party pricing
system, which uses a matrix calculation assuming a spread over U.S.
Treasury bonds based upon the expected average lives of the securities.
Market values of private placement bonds are estimated using a matrix
that assumes a spread (based on interest rates and a risk assessment of
the bonds) over U.S. Treasury bonds. Estimated market values of
redeemable preferred stocks are as reported by the NAIC.
Equity securities: Estimated fair values are based upon the latest
quoted market prices, where available. For equity securities not
actively traded, estimated fair values are based upon values of issues
of comparable yield and quality.
Mortgage loans on real estate: Fair values are estimated by
discounting expected cash flows, using interest rates currently being
offered for similar loans.
Short-term investments, cash and cash equivalents, notes and other
receivables, commercial paper notes: Carrying values reported in the
company's historical cost basis balance sheet approximate estimated fair
value for these instruments, due to their short-term nature.
Prepaid pension and other postretirement benefits: Estimated fair
value of the prepaid pension costs asset and other postretirement
benefits obligations represents the fair value of plan assets less
accumulated benefit obligations (pension) and accumulated postretirement
benefit obligations. Differences in estimated fair value and carrying
value are the result of deferral of recognition of: prior service costs,
unrecognized gains and losses and the remaining balance of the
unrecognized transition asset for pensions.
Separate account assets and liabilities: Separate account assets and
liabilities are reported at estimated fair value in the company's
historical cost basis balance sheet.
Future policy benefits: Estimated fair values of the company's
liabilities for future policy benefits for universal life and current
interest products, annuity products, participating life insurance and
dividend accumulations and non-par traditional life insurance products
are based upon discounted cash flow calculations. Cash flows of future
policy benefits are discounted using the market yield rate of the assets
supporting these liabilities. Estimated fair values are presented net
of the estimated fair value of corresponding policy loans due to the
interdependent nature of the cash flows associated with these items.
Deferred policy acquisition costs and intangible assets: For
historical cost purposes, the recovery of policy acquisition costs is
based on the realization, among other things, of future interest spreads
and gross premiums on in-force business. Because these cash flows are
considered in the computation of the future policy benefit
cash flows, the deferred policy acquisition cost balance does not appear
on the estimated fair value balance sheet. Intangible assets do not
appear in the estimated fair value balance sheet because there are no
cash flows related to these assets.
Long-term debt: Estimated fair value of the company's publicly-traded
debt issue was based upon quoted market prices at December 31, 1995.
Off-balance-sheet instrument: The company has made guarantees on
behalf of certain borrowers in the event the borrower is not able to
make its principal or interest payments. The company has not provided a fair
value liability for this obligation as management believes the
value of the collateral underlying the commitments is sufficient.
Derivative financial instruments: SFAS No. 119 requires disclosures
about derivative financial instruments such as futures, forward, swap or
option contracts, or other financial instruments with similar
characteristics. The company was not a party to such derivative
financial instruments at any time during 1995 or 1994.
Deferred income taxes on fair value adjustments: Deferred income
taxes have been reported at the statutory rate for the differences
(except for those attributed to permanent differences) between the
carrying value and estimated fair value of assets and liabilities set
forth herein.
Non-financial assets and liabilities: Values are presented at
historical cost. Non-financial assets consist primarily of real estate,
securities and indebtedness of related parties, property and equipment,
current income taxes recoverable and guaranty fund premium tax offset.
Non-financial liabilities consist primarily of other policy claims and
benefits, accrued dividends, deferred income taxes payable, guaranty
fund assessments payable, outstanding checks, suspense accounts, draft
accounts payable and payable to reinsurers.
SFAS No. 107 and SFAS No. 119 require disclosure of estimated fair
value information about financial instruments, whether or not recognized
in the consolidated balance sheets, for which it is practicable to
estimate that value. In cases where quoted market prices are not
available, estimated fair values are based on estimates using present
value or other valuation techniques. Those techniques are significantly
affected by the assumptions used, including the discount rate and
estimates of future cash flows. In that regard, the derived fair value
estimates cannot be substantiated by comparison to independent markets
and, in many cases, could not be realized in immediate settlement of the
instrument. The above presentation should not be viewed as an appraisal
as there are several factors, such as the fair value associated with
customer or agent relationships and other intangible items, which have
not been considered. In addition, interest rates and other assumptions
might be modified if an actual appraisal were to be performed.
Accordingly, the aggregate estimated fair value amounts presented herein
are limited by each of these factors and do not purport to represent the
underlying value of the company.
5. CREDIT ARRANGEMENTS
Long-term debt: In February 1995, the company issued $100 million of
8.5% notes, maturing on February 15, 2005, receiving net proceeds totaling
$98,812,000, after expenses. The company has contributed $50 million of
the proceeds to its insurance subsidiaries and has applied the remaining
net proceeds to the repayment of outstanding commercial paper notes.
Notes payable bearing interest at 9.3% totaling $49,996,000 at December
31, 1993 were repaid on June 1, 1994. Subordinated installment notes
bearing interest at 9% totaling $218,000 at December 31, 1993 were
repaid on January 3, 1994. Prior to repayment, the subordinated
installment notes were convertible, at the option of the holder, into
the company's common stock. During the year ended December 31, 1993,
2,642 shares of common stock were issued pursuant to this conversion
feature.
The Industrial Development Revenue Refunding Bonds Series 1983 bearing
interest at 9.16% totaling $10,500,000 at December 31, 1992, were repaid
on December 1, 1993.
Guarantees of Indebtedness of Others: At December 31, 1995 and 1994,
the company had unconditionally guaranteed $25,508,000 and $25,926,000,
respectively, in remaining principal amount of notes payable issued by
the Walnut Mall Limited Partnership ("WMLP"). The final payment on this
note is due in 1996. Effective January 1, 1995, the partnership was
dissolved and the company received a guarantee in full from Midwest
Resources Inc., a Des Moines, Iowa based public utility holding company,
a former partner, in addition to a first mortgage on a 284,000 square
foot office tower, to secure its guarantee. In the event of a default
on the notes payable by WMLP, the company would be required to make
payments to note holders and seek recourse from Midwest Resources
and/or through exercise of its rights as a mortgagee.
Commercial Paper Notes: The company issues commercial paper notes to
provide for working capital needs and to provide short term liquidity.
This commercial paper program is supported by the company's line of
credit discussed below.
Commercial paper notes are issued for periods not exceeding 270 days.
At December 31, 1995 and 1994, commercial paper notes of $58,100,000
and $90,450,000, respectively, were outstanding under this arrangement
at a weighted average interest rate of 6.0% and 6.2%, respectively.
At December 31, 1995, the company's commercial paper was rated A1 by
Standard and Poor's Corporation, D1 by Duff & Phelps Credit Rating
Company and P2 by Moody's Investors Service.
Line of Credit: The company maintains a line of credit arrangement with
several banks to support its commercial paper notes payable and to
provide short-term liquidity. The maximum borrowing allowed under this
facility is $225,000,000 (no amounts outstanding at December 31, 1995)
expiring on March 30, 2000. The terms of the credit arrangement set
limits on debt of the company and its insurance subsidiaries, require
maintenance of a minimum level of consolidated tangible net worth and
insurance subsidiary statutory capital and surplus and risk-based
capital and restricts certain investments.
6. INCOME TAXES
The company and all of its subsidiaries file a consolidated federal
income tax return. The parent company and its subsidiaries each report
current income tax expense as allocated under a consolidated tax
allocation agreement. Generally, this allocation results in profitable
companies recognizing a tax provision as if the individual company filed
a separate return and loss companies recognizing benefits to the extent
their losses contribute to reduce consolidated taxes. Deferred income
taxes have been established by each member of the consolidated group
based upon the temporary differences, the reversal of which will result
in taxable or deductible amounts in future years when the related asset
or liability is recovered or settled, within each entity.
Income tax expenses (credits) are included in the consolidated
financial statements as follows:
<TABLE>
<CAPTION>
Year ended December 31 1995 1994 1993
______________________________________________________________________________
(Dollars in thousands)
<S> <C> <C> <C>
Taxes provided in consolidated statements
of income on:
Income before equity income (loss)
Current $43,901 $39,762 $49,313
Deferred (268) 13,159 (1,348)
_______________________________________
43,633 52,921 47,965
Equity income (loss):
Current (43) (65) 25
Deferred 52 52 43
_______________________________________
9 (13) 68
Taxes provided in consolidated statement
of changes in stockholders' equity:
Amounts attributable to stock
incentive plans - current (4,177) (1,309) (1,377)
Amounts attributable to unrealized
gains and losses, less valuation
allowance of $9,403 in 1994 -
deferred 113,503 -- --
_______________________________________
$152,968 $51,599 $46,656
=======================================
</TABLE>
Income tax expense (credits) attributed to realized gains and losses
on investments amounted to $3,333,000, $6,744,000 and $14,695,000 for
the years ended December 31, 1995, 1994 and 1993, respectively. The
effective tax rate on income before income taxes and equity income
(loss) is different from the prevailing federal income tax rate as
follows:
<TABLE>
<CAPTION>
Year ended December 31 1995 1994 1993
______________________________________________________________________________
(Dollars in thousands)
<S> <C> <C> <C>
Income before income taxes and
equity income (loss) $128,506 $151,244 $134,995
Income tax at federal statutory rate 44,977 52,935 47,248
Tax effect (decrease) of:
Taxes provided for IRS examinations -- -- 200
State income taxes, net of federal
effect 82 79 87
Other items (1,426) (93) 430
_______________________________________
Income tax expense $43,633 $52,921 $47,965
=======================================
</TABLE>
The Internal Revenue Service ("IRS") is currently examining, or has
examined, the company's consolidated income tax returns through 1992.
The 1993 and 1994 consolidated income tax returns remain open to
examination. Management believes amounts provided for IRS examinations
are adequate to settle any adjustments raised by the IRS.
The tax effect of temporary differences giving rise to the company's
deferred income tax assets and liabilities at December 31, 1995 and
1994, is as follows:
<TABLE>
<CAPTION>
December 31 1995 1994
____________________________________________________________________________
(Dollars in thousands)
<S> <C> <C>
Deferred tax assets:
Net unrealized depreciation of available for sale
fixed maturity securities -- $14,339
Future policy benefits $208,431 187,609
Accrued dividends 4,375 4,397
Guaranty fund assessment accruals 17,030 5,557
Other 10,689 10,110
_________________________
240,525 222,012
Deferred tax liabilities:
Net unrealized appreciation of available for sale
fixed maturity securities (163,581) --
Deferred policy acquisition costs (168,753) (192,061)
Prepaid pension costs (11,653) (10,434)
Other (11,453) (11,556)
_________________________
(355,440) (214,051)
Valuation allowance, for amounts attributable
to net unrealized depreciation for assets
available for sale -- (9,403)
_________________________
Deferred income tax liability ($114,915) ($1,442)
=========================
</TABLE>
A valuation allowance of $9,403,000 was established to offset the
deferred tax asset related to the unrealized depreciation of assets held
in the available for sale account at December 31, 1994. No valuation
allowance was established for 1995 because the available for sale
account reflected net unrealized appreciation.
Prior to 1984, a portion of Equitable Life's current income was not
subject to current income taxation, but was accumulated, for tax
purposes, in a memorandum account designated as "policyholders' surplus
account". The aggregate accumulation in this account at December 31,
1995, was $14,388,000. Should the policyholders' surplus account of
Equitable Life exceed the limitation prescribed by federal income tax
law, or should distributions be made by Equitable Life to the parent
company in excess of $358,918,000 such excess would be subject to
federal income taxes at rates then effective. Deferred income taxes of
$5,036,000 have not been provided on amounts included in this memorandum
account since the company contemplates no action and can foresee no
events that would create such a tax.
Deferred income taxes (credits) were also reported on equity income
during these periods. These taxes arise from the recognition of income
and losses differently for purposes of filing federal income tax returns
than for financial reporting purposes.
7. EMPLOYEE STOCK AND INCENTIVE COMPENSATION PLANS
The company's Restated and Amended 1992 Stock Incentive Plan is a successor
to the 1982 Stock Incentive Plan. These plans provide for the award of
stock options or shares of the company's common stock to key employees
through three means: qualified incentive stock options (as defined in the
Internal Revenue Code), non-qualified stock options and restricted shares.
Shares of common stock may be awarded under the 1982 plan for outstanding
stock options granted prior to adoption of the 1992 plan. Under the 1992
plan an initial base of 2,240,000 shares of common stock may be awarded with
automatic increases of 7.5% for shares issued after April 30, 1992. At
December 31, 1995, the company has reserved 2,803,051 shares (3,094,135
shares at December 31, 1994) of its common stock for future issuances under
these plans.
After giving effect for the 2-for-1 stock splits as of May 12, 1993,
stock option transactions under these plans are summarized as follows:
<TABLE>
<CAPTION>
Option Price
Number _____________________________
of Shares Per Share Total
____________________________________________________________________________
(Dollars in thousands, except per share data)
<S> <C> <C> <C>
Balance at January 1, 1993 1,068,600 $4.97 -$12.00 $7,594
Granted during 1993 238,000 25.75 - 36.75 6,304
Exercised during 1993 (195,300) 5.22 - 12.00 (1,141)
Terminated during 1993 (21,400) 4.97 - 25.75 (325)
___________ ___________
Balance at December 31, 1993 1,089,900 4.97 - 36.75 12,432
Granted during 1994 202,500 32.50 - 34.50 6,588
Exercised during 1994 (154,705) 4.97 - 25.75 (938)
Terminated during 1994 (20,420) 4.97 - 32.50 (369)
___________ ___________
Balance at December 31, 1994 1,117,275 4.97 - 36.75 17,713
Granted during 1995 285,750 27.75 - 37.63 8,905
Exercised during 1995 (215,600) 4.97 - 11.88 (1,464)
Terminated during 1995 (163,700) 4.97 - 36.75 (3,463)
___________ ___________
Balance at December 31, 1995 1,023,725 $4.97 -$37.63 $21,691
=========== ===========
Exercisable at December 31:
1994 252,515 $4.97 - $7.56 $1,562
1995 210,135 4.97 - 11.88 1,400
Became exercisable during:
1993 223,740 $5.31 - $7.56 $1,341
1994 215,880 4.97 - 25.75 1,334
1995 177,220 4.97 - 11.88 1,327
</TABLE>
The non-qualified stock options are compensatory, and require the accrual
of compensation expense over the period of service from the date the options
are granted until they become fully exercisable if market values exceed the
option price on the measurement date. During the years ended December 31,
1995, 1994 and 1993, compensation (income)/expense of $(4,000), $16,000 and
$89,000, respectively, was recognized related to these options.
Shares of common stock issued under the company's stock incentive plans are
set forth in the following table:
<TABLE>
<CAPTION>
Year ended December 31 1995 1994 1993
_______________________________________________________________________
<S> <C> <C> <C>
Issued:
Exercise of stock options 215,600 154,705 195,300
Restricted stock grants 23,494 47,752 35,770
Discretionary stock awards 1,650 570 750
__________________________________
240,744 203,027 231,820
Restricted shares forfeited (7,981) (1,323) (5,628)
Shares received as consideration (168,632) (36,252) (18,888)
__________________________________
Net issuance of common stock 64,131 165,452 207,304
==================================
</TABLE>
Shares of restricted common stock awarded (see table) to certain key
employees and directors are subject to forfeiture to the company should
the individuals terminate their relationship with the company for
reasons other than death, permanent disability or change in company
control prior to full vesting. Shares granted generally vest over three
to five years from the date of grant. The company amortizes as
compensation expense the market value on date of grant ($831,000 in
1995, $1,661,000 in 1994 and $997,000 in 1993) of the restricted stock
using the straight-line method over the vesting periods. Compensation
expense recognized during the years ended December 31, 1995, 1994 and
1993 aggregated $861,000, $1,161,000 and $607,000, respectively.
The company has a discretionary stock award plan under which employees,
agents and other representatives of the company are awarded shares of
stock for superior performance. During the years ended December 31,
1995, 1994 and 1993, awards of shares of the company's common stock
under this plan (see table) resulted in charges to income of $52,000,
$19,000 and $19,000, respectively.
Equitable Life sponsors a long-term incentive compensation plan which
allows certain agents to earn units equal to shares of the company's
common stock based on personal production and the maintenance of
specific levels of assets under management. This program resulted in
expense/(income) of $736,000, $(129,000) and $926,000 in the years ended
December 31, 1995, 1994 and 1993, respectively.
8. RETIREMENT PLANS
Substantially all full-time employees of the company are covered by a
non-contributory self-insured defined benefit pension plan. The
benefits are based on years of service and the employee's compensation
during the last five years of employment. Further, the company sponsors
a supplemental defined benefit plan to provide benefits in excess of
amounts allowed pursuant to Internal Revenue Code Section 401(a) (17)
and those allowed due to integration rules. The company's funding
policy with respect to these plans is consistent with the funding
requirements of federal law and regulations.
The following table sets forth the plans' funded status and amounts
recognized in the company's consolidated balance sheet:
<TABLE>
<CAPTION>
December 31 1995 1994
______________________________________________________________________________
(Dollars in thousands)
<S> <C> <C>
Accumulated benefit obligation, including vested
benefits of $56,617 in 1995 and $48,232 in 1994 $57,604 $49,033
========================
Plan assets at fair value, primarily bonds, common
stocks (including 600,000 shares in 1995 and 1994
of the company's common stock), mortgage loans
and short-term investments $98,018 $82,161
Projected benefit obligation for service rendered
to date 65,432 54,909
________________________
Plan assets in excess of projected benefit obligation 32,586 27,252
Unrecognized net loss from past experience
different from that assumed and effects of
changes in assumptions 1,530 6,053
Prior service cost not yet recognized 652 797
Unrecognized net asset at the transition date, net
of amortization (1,100) (3,484)
________________________
Prepaid pension cost $33,668 $30,618
========================
</TABLE>
Net periodic pension benefit included the following components:
<TABLE>
<CAPTION>
Year ended December 31 1995 1994 1993
_______________________________________________________________________________
(Dollars in thousands)
<S> <C> <C> <C>
Actual return on plan assets $19,487 ($8,581) $14,626
Service cost-benefits earned during
the period (1,238) (1,411) (1,092)
Interest cost on projected benefit
obligation (4,347) (4,097) (3,831)
Net amortization and deferral (10,928) 18,068 (5,525)
_____________________________________
Net periodic pension benefit $2,974 $3,979 $4,178
=====================================
</TABLE>
The discount rate and rate of increase in future compensation levels
used in determining the actuarial present value of the projected benefit
obligation were 7.0% and 5.0%, respectively, at December 31, 1995, and
8.0% and 5.0%, respectively, at December 31, 1994. The average expected
long term rate of return on plan assets was 8.0% in 1995 and 1994 and
8.5% in 1993.
In addition to the company's defined benefit pension plan, the company
sponsors plans that provide postretirement medical and group term life
insurance benefits to full-time employees and agents who had worked for
the company for five years and attained age 55 as of January 1, 1992.
The medical plans are contributory, with retiree contributions adjusted
annually, and contain other cost-sharing features such as deductibles
and coinsurance. The accounting for these plans anticipates that the
company's contributions will increase annually by the lesser of the
health care inflation rate or 3%, with increases in excess of these
amounts borne by the employee or agent. All payments of the liability
for group-term life insurance are funded by the company on a pay-as-you
go (cash) basis.
The company has chosen not to fund any amounts in excess of current
benefits. The following table sets forth the amounts recognized in the
company's consolidated balance sheet:
<TABLE>
<CAPTION>
December 31 1995
_____________________________________________________________________________
(Dollars in thousands)
Life
Medical Insurance
Plans Plans Total
_____________________________
<S> <C> <C> <C>
Accumulated postretirement benefit obligation:
Retirees $4,090 $2,094 $6,184
Fully eligible active plan participants 969 140 1,109
Other active plan participants 1,256 77 1,333
_____________________________
Accumulated postretirement benefit obligation
in excess of plan assets 6,315 2,311 8,626
Prior service cost not yet recognized in net
post-retirement benefit cost 382 103 485
Unrecognized net gain (373) (129) (502)
_____________________________
Accrued postretirement benefit cost $6,324 $2,285 $8,609
=============================
</TABLE>
<TABLE>
<CAPTION>
December 31 1994
_____________________________________________________________________________
(Dollars in thousands)
Life
Medical Insurance
Plans Plans Total
_____________________________
<S> <C> <C> <C>
Accumulated postretirement benefit obligation:
Retirees $3,430 $1,962 $5,392
Fully eligible active plan participants 1,026 160 1,186
Other active plan participants 1,247 85 1,332
_____________________________
Accumulated postretirement benefit obligation
in excess of plan assets 5,703 2,207 7,910
Prior service cost not yet recognized in net
post-retirement benefit cost 417 113 530
Unrecognized net gain (81) (37) (118)
_____________________________
Accrued postretirement benefit cost $6,039 $2,283 $8,322
=============================
</TABLE>
Net periodic postretirement benefit costs include the following components:
<TABLE>
<CAPTION>
Life
Medical Insurance
Year ended December 31, 1995 Plans Plans Total
_____________________________________________________________________________
(Dollars in thousands)
<S> <C> <C> <C>
Service cost $251 $10 $261
Interest cost 414 163 577
Net amortization of prior service cost (35) (10) (45)
_____________________________
Net periodic postretirement benefit cost $630 $163 $793
=============================
</TABLE>
<TABLE>
<CAPTION>
Life
Medical Insurance
Year ended December 31, 1994 Plans Plans Total
_____________________________________________________________________________
(Dollars in thousands)
<S> <C> <C> <C>
Service cost $280 $12 $292
Interest cost 410 167 577
Net amortization of prior service cost and
amortization of unrecognized loss (28) (8) (36)
_____________________________
Net periodic postretirement benefit cost $662 $171 $833
=============================
</TABLE>
<TABLE>
<CAPTION>
Life
Medical Insurance
Year ended December 31, 1993 Plans Plans Total
_____________________________________________________________________________
(Dollars in thousands)
<S> <C> <C> <C>
Service cost $249 $27 $276
Interest cost 390 169 559
_____________________________
Net periodic postretirement benefit cost $639 $196 $835
=============================
</TABLE>
The weighted-average annual assumed rate of increase in the per capita
cost of health care benefits (i.e. health care cost trend rate) used in
determining the actuarial present value of the accumulated postretirement
benefit obligation was 12.5% at December 31, 1995 and 13.5% at December
31, 1994 for employees under 65 and 8.5% at December 31, 1995 and 9.0% at
December 31, 1994 for employees over 65, with the rates for both groups to
be graded down to 5.5% for 2005 and thereafter. The health care cost
trend rate assumption has a significant effect on the amounts reported.
For example, increasing the assumed health care trend rates by one percent
would increase the accumulated postretirement benefit obligation as of
December 31, 1995 by $752,000 and net periodic postretirement benefit costs
for the year ended December 31, 1995 by $95,000. The discount rate used in
determining the accumulated postretirement benefit obligation was 7.0% at
December 31, 1995 and 8.0% at December 31, 1994.
The company also sponsors an unfunded deferred compensation plan
providing benefits to certain former employees. The company recognized
benefits of $20,000, $38,000 and $44,000 during the years ended December
31, 1995, 1994 and 1993, respectively, in connection with this plan.
The company sponsors pension plans for its employees which are
qualified under Internal Revenue Code Section 401(k). Employees may
contribute a portion of their annual salary, subject to limitation, to
the plans. The company contributes an additional amount, subject to
limitation, based on the voluntary contribution of the employee. Company
contributions charged to expense with respect to these plans during the
years ended December 31, 1995, 1994 and 1993 were $328,000, $333,000 and
$287,000, respectively.
Equitable Life has non-contributory self-insured defined contribution
pension plans for its agents. Contributions charged to expense under
these plans during the years ended December 31, 1995, 1994 and 1993
amounted to $368,000, $389,000 and $566,000, respectively.
Certain assets related to these plans are on deposit with Equitable
Life and amounts relating to these plans are included in these
consolidated financial statements.
9. 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. At
December 31, 1995, life insurance in force ceded on a consolidated basis
amounted to $1,459,523,000, or approximately 13.4% of total life
insurance in force.
Reinsurance contracts do not relieve the company of its obligations to
its policyholders. To the extent that reinsuring companies are later
unable to meet obligations under reinsurance agreements, the company's
life insurance subsidiaries would be liable for these obligations, and
payment of these obligations could result in losses to the company. To
limit the possibility of such losses the company evaluates the financial
condition of its reinsurers, monitors concentrations of credit risk
arising from factors such as similar geographic regions and limits its
exposure to any one reinsurer. At December 31, 1995, the company had
reinsurance treaties with 16 reinsurers, all of which are deemed to be
long-duration, retroactive contracts, and has established a receivable
totaling $19,298,000 for reserve credits ($11,986,000 in 1994),
reinsurance claims and other receivables from these reinsurers. No
allowance for uncollectible amounts has been established since none of
the receivables are deemed to be uncollectible, and because such
receivables, either individually or in the aggregate, are not material
to the company's operations. The company's liability for future policy
benefits and notes and other receivables have been increased by
$18,103,000 at December 31, 1995 ($9,871,000 in 1994) for reserve
credits on reinsured policies. This "gross-up" of assets and
liabilities for reserve credits on reinsurance had no impact on the
company's net income. Insurance premiums and product charges have been
reduced by $6,271,000, $5,916,000 and $5,653,000 and insurance benefits
have been reduced by $8,281,000, $5,310,000 and $3,498,000 in 1995, 1994
and 1993, respectively, as a result of the cession agreements. The
amount of reinsurance assumed is not significant.
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. Based upon information currently available from
the National Organization of Life and Health Guaranty Association, the
company believes that it is probable that these insolvencies will result
in future assessments which will be material to the company's financial
statements. The company regularly reviews its reserve for these
insolvencies and updates its reserve based upon the Company's
interpretation of information recently received. Information received
during December 1995 reflected an increase in the estimated cost to the
insurance industry of approximately 44% from 1994. The associated cost
for a particular insurance company can vary significantly based upon its
premium volume by line of business in a particular state and its
potential for premium tax offset. The company's insurance subsidiaries
reported record premium levels in 1994 which served as the basis for
determining the associated liability for several new insolvencies. As a
result, the company accrued and charged to expense an additional
$36,492,000 during 1995 ($1,763,000 in 1994 and $2,109,000 in 1993). At
December 31, 1995, the company has reserved $48,562,000 to cover
estimated future assessments (net of related anticipated premium tax
credits) and has established an asset totaling $14,877,000 for items
expected to be recoverable through future premium tax offsets. The
company cannot predict whether and to what extent legislative
initiatives may affect the right to offset.
Litigation: The company and certain of its subsidiaries are defendants
in class action lawsuits filed in the Iowa District Court for Polk
County in May 1995 and the United States District Court for the Middle
District of Florida, Tampa Division in February 1996. The Florida suit
is similar to the Iowa suit and was filed by some of the same law firms
as in the earlier Iowa suit. The company believes the new action was
filed in response to jurisdictional and procedural problems faced by the
plaintiffs in the Iowa suit. The suits claim unspecified damages as a
result of the sale of life insurance policies with so-called "vanishing
premiums" wherein cash values are used to pay insurance premiums under
certain interest rate scenarios. The complaints allege that the
policyholders were misled by optimistic policy illustrations. The
company believes the allegations are without merit because full and
appropriate disclosure was made as a matter of practice. The suits are
in the early 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 accompanying financial statements.
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. The agency alleges that USG has failed to pay
an unspecified amount of commissions for the sale of insurance products,
including alleged future commissions on future policy values if the
policies stay in force. USG believes the claims are without merit based
upon its interpretation of the agreements between the parties, the
business relations between the parties and custom and practice in the
industry. Therefore, USG has denied the allegations and intends to
defend the proceeding vigorously. The amount of any liability which may
arise as a result of this arbitration, if any, cannot be reasonably
estimated and no provision for loss has been made in the accompanying
financial statements.
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 3 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 lapse experience than assumed, could cause a severe impact to the
company's financial condition.
Leases and Other Commitments: The company leases its home office space
and certain other equipment under operating leases which expire through
2017. During the years ended December 31, 1995, 1994 and 1993, rent
expense totaled $2,240,000, $1,998,000 and $1,831,000, respectively. At
December 31, 1995, minimum rental payments due under all non-cancelable
operating leases with initial terms of one year or more are: 1996 -
$2,167,000; 1997 - $1,485,000; 1998 - $3,960,000; 1999 $2,784,000 and
2000 - $2,553,000.
At December 31, 1995, outstanding commitments to fund mortgage loans
on real estate totaled $146,560,000.
10. SUMMARY OF QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) AND DIVIDENDS PAID
<TABLE>
<CAPTION>
Quarter ended March 31 June 30 September 30 December 31
______________________________________________________________________________
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C>
1995:
Premiums and other revenue $30,452 $28,871 $29,174 $35,271
Investment income - net 148,246 158,520 162,867 171,461
Net income 23,794 26,620 26,840 7,636
Net income per share 0.75 0.84 0.85 0.24
Dividends per common share 0.120 0.135 0.135 0.135
1994:
Premiums and other revenue $32,718 $33,892 $31,118 $29,521
Investment income - net 119,901 125,398 137,263 141,849
Net income 22,602 26,013 24,721 24,948
Net income per share 0.72 0.82 0.78 0.79
Dividends per common share 0.105 0.12 0.12 0.12
</TABLE>
Insurance revenues and profitability are typically not seasonal in
nature. However, the recognition of realized gains and losses on
investments may vary from quarter to quarter. During 1995, the company
recognized pre-tax realized gains of: first quarter - $113,000; second
quarter - $1,790,000; third quarter - $1,114,000 and fourth quarter
$6,507,000. During 1994, the company recognized pre-tax realized gains
of: first quarter - $6,009,000; second quarter - $7,705,000; third
quarter - $3,343,000 and fourth quarter - $2,640,000.
In the fourth quarter of 1995, the company established an additional
accrual for guaranty funds assessments of $23,400,000, net of tax. This
reduced net income per share by $0.74. See Note 9 for further
discussion.
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Equitable of Iowa Companies
We have audited the accompanying consolidated balance sheets
of Equitable of Iowa Companies and subsidiaries as of December
31, 1995 and 1994, and the related consolidated statements of
income, changes in stockholders' equity, and cash flows for each of
the three years in the period ended December 31, 1995. Our audits
also included the financial statement schedules listed in the Index at
Item 14(a). These financial statements and schedules are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and schedules based
on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements
referred to above present fairly, in all material respects, the
consolidated financial position of Equitable of Iowa Companies and
subsidiaries at December 31, 1995 and 1994, and the consolidated results
of their operations and their cash flows for each of the three years in
the period ended December 31, 1995, in conformity with generally
accepted accounting principles. Also, in our opinion, the related
financial statement schedules, when considered in relation to the basic
financial statements taken as a whole, present fairly in all material
respects the information set forth therein.
As discussed in Note 3 to the consolidated financial statements, in
1994 the Company changed its method of accounting for certain
investments in debt securities.
/s/Ernst & Young LLP
Des Moines, Iowa
February 7, 1996
MANAGEMENT REPORT ON RESPONSIBILITY FOR FINANCIAL REPORTING
The accompanying financial statements of Equitable of Iowa Companies
have been prepared by management, which is responsible for their
integrity and objectivity. The statements have been prepared in
conformity with generally accepted accounting principles appropriate in
the circumstances and are not misstated due to material error or fraud.
These statements include some amounts that are based upon management's
best estimates and judgments. Financial information contained elsewhere
in this annual report is consistent with that contained in the financial
statements.
In meeting its responsibility for the integrity of the financial
statements, management relies on the company's system of internal
control. This system is designed to provide reasonable assurance that
assets are safeguarded and that transactions are properly recorded and
executed in accordance with management's authorization. The company
maintains a strong internal auditing program that independently assesses
the effectiveness of the internal controls and recommends possible
improvements thereto.
The company's financial statements have been audited by Ernst & Young LLP,
independent auditors. In connection with this audit, Ernst & Young LLP
performed examinations in accordance with generally accepted auditing
standards, which include a review of the system of internal control and
assurance that the financial statements are fairly presented. Management
has made pertinent records available to Ernst & Young LLP and, furthermore,
believes that all representations made to Ernst & Young LLP during its audit
were valid and appropriate.
/s/Fred S. Hubbell
FRED S. HUBBELL
Chief Executive Officer
/s/Paul E. Larson
PAUL E. LARSON
Chief Financial Officer
/s/David A. Terwilliger
DAVID A. TERWILLIGER
Chief Accounting Officer
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None
PART III
ITEM 10. Directors and Executive Officers of the Registrant
Information regarding directors and executive officers on pages 3
through 6 and on page 19 of the Proxy Statement for the annual meeting
of shareholders to be held April 25, 1996 ("Proxy Statement") is
incorporated herein by reference.
ITEM 11. Executive Compensation
Executive compensation information on pages 8 through 18 of the Proxy
Statement is incorporated herein by reference.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
Security ownership information on pages 2, 3 and 7 of the Proxy
Statement is incorporated herein by reference.
ITEM 13. Certain Relationships and Related Transactions
None.
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a)(1) and (a)(2) Financial statements and schedules
The following consolidated financial statements of Equitable of Iowa
Companies and subsidiaries are included in Item 8:
Consolidated balance sheets - December 31, 1995 and 1994
Consolidated statements of income - Years ended December 31, 1995, 1994
and 1993
Consolidated statements of changes in stockholders' equity Years ended
December 31, 1995, 1994 and 1993
Consolidated statements of cash flows - Years ended December 31, 1995,
1994 and 1993
Notes to consolidated financial statements
The following consolidated financial statement schedules of Equitable of
Iowa Companies and Subsidiaries are included in Item 14 (d):
Schedule I - Summary of investments - other than investments in related
parties
Schedule II - Condensed financial information of registrant
Schedule III - Supplementary insurance information
Schedule IV - Reinsurance
All other schedules to the consolidated financial statements pursuant
to Article 7 of Regulation S-X are not required under the related
instructions or are inapplicable and therefore have been omitted.
Financial statements and summarized financial information of
unconsolidated subsidiaries or 50% or less owned persons accounted for
by the equity method have been omitted because they do not, considered
individually or in the aggregate, constitute a significant subsidiary.
(a)(3), and (c) Exhibits
Exhibits filed are listed in the attached exhibit index.
(b) No reports on Form 8-K were filed for the quarter ended December 31, 1995.
ITEM 14(d). Schedules
SCHEDULE I
SUMMARY OF INVESTMENTS
OTHER THAN INVESTMENTS IN RELATED PARTIES
(Dollars in thousands)
<TABLE>
<CAPTION>
Balance
Sheet
December 31, 1995 Cost 1 Value Amount
_______________________________________________________________________________
<S> <C> <C> <C>
TYPE OF INVESTMENT
Fixed maturities, available for sale:
Bonds:
United States Government and governmental
agencies and authorities $349,989 $370,888 $370,888
States, municipalities and
political subdivisions 15,485 17,124 17,124
Foreign governments 10,573 13,999 13,999
Public utilities 1,271,641 1,362,110 1,362,110
Investment grade corporate 2,322,036 2,598,714 2,598,714
Below investment grade corporate 574,284 581,220 581,220
Mortgage-backed securities 2,340,194 2,407,756 2,407,756
Redeemable preferred stocks 635 400 400
_______________________________________
Total fixed maturities, available
for sale 6,884,837 7,352,211 7,352,211
Equity securities:
Common stocks: industrial, miscel-
laneous and all other 49,789 50,595 50,595
Mortgage loans on real estate 1,169,456 1,169,456
Real estate:
Investment properties 3,672 3,672
Acquired in satisfaction of debt 10,288 10,288
___________ ___________
Total real estate 13,960 13,960
Policy loans 182,423 182,423
Short-term investments 39,234 39,234
___________ ___________
Total investments $8,339,699 $8,807,879
=========== ===========
<FN>
Note 1: Except as stated in Note 2 below, cost is defined as original
cost for stocks and other invested assets, amortized cost for
bonds and unpaid principal for policy loans and mortgage loans
on real estate, adjusted for amortization of premiums, accrual of
discounts and cost less allowances for depreciation for real
estate.
Note 2: Original cost and amortized cost of investments have been
adjusted to reflect other than temporary declines in value by
charges to income as follows. Mortgage loans on real estate:
1995 - $145,000; 1994 - $57,000. Real estate: 1991 - $123,000
and 1990 - $90,000.
</TABLE>
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT EQUITABLE
OF IOWA COMPANIES (PARENT COMPANY)
(Dollars in thousands, except per share data)
NOTES TO CONDENSED FINANCIAL STATEMENTS
The accompanying condensed financial statements should be read in conjunction
with the consolidated financial statements and notes thereto of Equitable of
Iowa Companies and subsidiaries.
The company has guaranteed certain indebtedness of subsidiaries. Additionally,
the company has issued commercial paper and also maintains lines of credit
with various banks. See Note 5 to notes to consolidated financial statements.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31 1995 1994
_______________________________________________________________________________
<S> <C> <C>
ASSETS
Cash and cash equivalents $111 $53
Investments, principally short-term investments 284 2,086
Due from subsidiaries* 4,875 --
Current income taxes recoverable 6,968 14,491
Other assets 1,362 444
_________________________
13,600 17,074
Investments in subsidiaries* 1,045,633 675,696
_________________________
Total assets $1,059,233 $692,770
=========================
</TABLE>
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT - CONTINUED
EQUITABLE OF IOWA COMPANIES (PARENT COMPANY)
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
December 31 1995 1994
_______________________________________________________________________________
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deferred income taxes $2,100 $3,527
Long-term debt 100,000 --
Commercial paper notes 58,100 90,450
Other liabilities 5,014 2,460
Due to subsidiaries* 87 9,003
_________________________
Total liabilities 165,301 105,440
Commitments and contingencies
Stockholders' equity:
Serial preferred stock, without par value -
authorized 2,500,000 shares -- --
Common stock, without par value (stated
value $1.00 per share) - authorized
70,000,000 shares in 1995 and 1994,
issued and outstanding 31,769,490
shares in 1995 and 31,677,891 shares
in 1994 31,769 31,678
Additional paid-in capital 80,100 78,661
Unrealized appreciation (depreciation) of
fixed maturities 208,932 (26,493)
Unrealized appreciation (depreciation) of
equity securities 806 (373)
Retained earnings 573,799 505,622
Unearned compensation (deduction) (1,474) (1,765)
_________________________
Total stockholders' equity 893,932 587,330
_________________________
Total liabilities and stockholders' equity $1,059,233 $692,770
=========================
<FN>
*Eliminated in consolidation.
</TABLE>
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT - CONTINUED
EQUITABLE OF IOWA COMPANIES (PARENT COMPANY)
(Dollars in thousands, except per share data)
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year ended December 31 1995 1994 1993
_______________________________________________________________________________
<S> <C> <C> <C>
Revenues:
Investment income (including interest
and fees received from subsidiaries*
of $2,527 in 1995, $2,068 in 1994 and
$456 in 1993) $3,171 $2,788 $1,462
Realized losses on investments -- -- (3,011)
_______________________________________
3,171 2,788 (1,549)
Expenses:
Interest 13,739 7,880 9,502
General and administrative 734 1,039 935
_______________________________________
14,473 8,919 10,437
_______________________________________
Loss before intercompany tax
benefit and equity in income
of subsidiaries (11,302) (6,131) (11,986)
Intercompany income tax benefit (5,389) (1,819) (3,646)
_______________________________________
(5,913) (4,312) (8,340)
Equity in income of subsidiaries'* 90,803 102,596 95,496
_______________________________________
Net income $84,890 $98,284 $87,156
=======================================
<FN>
*Eliminated in consolidation.
</TABLE>
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT - CONTINUED
EQUITABLE OF IOWA COMPANIES (PARENT COMPANY)
(Dollars in thousands)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended December 31 1995 1994 1993
_______________________________________________________________________________
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $84,890 $98,284 $87,156
Adjustments to reconcile net income to
net cash provided by (used in)
operating activities:
Changes in other assets, other lia-
bilities and accrued income taxes 78 1,223 (3,690)
Provision for depreciation and
amortization 327 1,111 785
Provision for deferred income taxes (1,427) 3,345 1,821
Equity in earnings of subsidiaries (90,803) (102,596) (95,496)
Realized losses on investments -- -- 3,011
______________________________________
Net cash provided by (used in)
operating activities (6,935) 1,367 (6,413)
INVESTING ACTIVITIES
Sale of short-term investments - net 1,802 5,059 37,432
Acquisition of fixed maturity invest-
ments -- -- (3,011)
Capital contribution to subsidiary (50,000) (25) (90,000)
Cash dividends received from sub-
sidiaries 7,470 1,940 1,616
Repayments of notes receivable 754,104 1,053,747 594,532
Issuance of notes receivable (754,104) (1,053,746) (594,494)
Sales of property and equipment -- 1 459
______________________________________
Net cash provided by (used in)
investing activities (40,728) 6,976 (53,466)
</TABLE>
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT - CONTINUED
EQUITABLE OF IOWA COMPANIES (PARENT COMPANY)
(Dollars in thousands)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended December 31 1995 1994 1993
_______________________________________________________________________________
<S> <C> <C> <C>
FINANCING ACTIVITIES
Proceeds from long-term debt $100,000 -- --
Repayments of long-term debt -- ($50,214) ($10,520)
Issuance (repayment) of commercial
paper - net (32,350) 56,450 5,226
Issuance of common stock under primary
stock offering -- -- 76,264
Issuance of common stock under stock
plans and upon debt conversion (3,216) 67 861
Cash dividends paid (16,713) (14,755) (12,071)
______________________________________
Net cash provided by (used in)
financing activities 47,721 (8,452) 59,760
______________________________________
Increase (decrease) in cash and cash
equivalents 58 (109) (119)
Cash and cash equivalents at beginning
of year 53 162 281
______________________________________
Cash and cash equivalents at end of year $111 $53 $162
=======================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest $10,152 $7,649 $10,403
Income taxes, net of amounts received
from subsidiaries (2,985) (6,662) (1,862)
</TABLE>
SCHEDULE III
SUPPLEMENTARY INSURANCE INFORMATION
(Dollars in thousands)
<TABLE>
<CAPTION>
Column Column Column Column Column Column
A B C D E F
_______________________________________________________________________________
Future
Policy Other
De- Benefits, Policy
ferred Losses, Claims Insur-
Policy Claims Un- and ance
Acqui- and earned Bene- Premiums
sition Loss Revenue fits and
Segment Costs Expenses Reserve Payable Charges
_______________________________________________________________________________
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1995:
Life insurance $554,179 $8,206,991 $14,326 $8,980 $94,891
Year ended December 31, 1994:
Life insurance 607,626 7,014,207 14,317 7,785 90,032
Year ended December 31, 1993:
Life insurance 451,180 5,578,085 14,451 5,765 81,151
</TABLE>
<TABLE>
<CAPTION>
Column Column Column Column Column Column
A G H I J K
_______________________________________________________________________________
Amorti-
Benefits zation
Claims, of
Losses Deferred
Net and Policy Other
Invest- Settle- Acqui- Opera-
ment ment sitions ting Premiums
Segment Income Expenses Costs Expenses Written
_______________________________________________________________________________
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1995:
Life insurance $641,094 $487,031 $72,537 $54,337 --
Year ended December 31, 1994:
Life insurance 524,411 414,450 50,921 17,128 --
Year ended December 31, 1993:
Life insurance 434,069 358,172 42,078 20,185 --
</TABLE>
SCHEDULE IV
REINSURANCE
EQUITABLE OF IOWA COMPANIES AND SUBSIDIARIES
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E Column F
________________________________________________________________________________
Percentage
Ceded to Assumed of Amount
Gross Other from Other Net Assumed
Amount Companies Companies Amount to Net
________________________________________________________________________________
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1995:
Life insurance in
force $10,927,445 $1,459,523 $ -- $9,467,922 --
==========================================================
Insurance premiums
and charges $101,095 $6,271 $67 $94,891 --
==========================================================
Year ended December 31, 1994:
Life insurance in
force $10,146,940 $1,421,608 $ -- $8,725,332 --
==========================================================
Insurance premiums
and charges $95,821 $5,916 $127 $90,032 --
==========================================================
Year ended December 31, 1993:
Life insurance in
force $9,617,881 $1,326,020 $ -- $8,291,861 --
==========================================================
Insurance premiums
and charges $86,615 $5,653 $189 $81,151 --
==========================================================
</TABLE>
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to
be signed on its behalf by the undersigned thereunto duly authorized.
EQUITABLE OF IOWA COMPANIES
(Registrant)
Dated March 5, 1996 By /s/Frederick S. Hubbell
_______________________
Frederick S. Hubbell
President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf
of the Registrant and in the capacities and on the dates indicated.
Signatures Title
__________ _____
/s/Frederick S. Hubbell Chairman of the Board,
______________________ President, Chief
Frederick S. Hubbell Executive Officer
(principal executive officer) and Director
/s/Paul E. Larson Executive Vice President
______________________ and Chief Financial
Paul E. Larson Officer
(principal financial officer) March 5, 1996
/s/David A. Terwilliger Vice President and
______________________ Controller
David A. Terwilliger
(principal accounting officer)
/s/Richard B. Covey Director
______________________
Richard B. Covey
/s/Doris M. Drury Director
______________________
Doris M. Drury
/s/James L. Heskett Director
______________________
James L. Heskett
Signatures Title
__________ _____
/s/Richard S. Ingham, Jr. Director
______________________
Richard S. Ingham, Jr.
/s/Robert E. Lee Director
______________________
Robert E. Lee
/s/ Jack D. Rehm Director
______________________
Jack D. Rehm
March 5, 1996
/s/Thomas N. Urban Director
______________________
Thomas N. Urban
Director
______________________
Hans F. E. Wachtmeister
Director
______________________
Richard S. White
INDEX
Exhibits to Annual Report on Form 10-K
Year ended December 31, 1995
EQUITABLE OF IOWA COMPANIES
Page Number
3 Articles of Incorporation and By-Laws
(a) Restated Articles of Incorporation as amended through
April 29, 1993, filed as Exhibit 3(a) to Form 10-Q for
the period ended June 30, 1993, is incorporated by
reference --
(b) Amended and restated By-Laws filed as Exhibit 2 to
Form 8-K dated November 11, 1991, is incorporated by
reference --
4 Instruments Defining the Rights of Security Holders, Including
Indentures
(a) Letter Agreement to furnish Commission upon request copies
of other long-term debt instruments --
(b)(i) Rights Agreement filed as Exhibit 1 to Form 8-K dated
April 30, 1992, is incorporated by reference --
(ii) First amendment to Rights Agreement changing Rights Agent
filed as Exhibit 4(b)(ii) to Form 10-Q for the period
ended September 30, 1992, is incorporated by reference --
(iii) Second amendment to Rights Agreement dated April 29, 1993,
adjusting Purchase Price filed as Exhibit 2.2 to Form
8-A/A dated May 13, 1993, is incorporated by reference --
10 Material Contracts
(a) Executive compensation plans and arrangements *
(i) Restated Executive Severance Pay Plan filed as Exhibit
10(a) to Form 10-K for the year ended December 31, 1992,
is incorporated by reference --
(ii) Directors' Deferred Compensation Plan filed as Exhibit
10(b) to Form 10-K for the year ended December 31, 1989,
is incorporated by reference --
(iii) 1982 Stock Incentive Plan filed as Exhibit 10(c) to Form
10-K for the year ended December 31, 1989, is incorporated
by reference --
(iv) Excess Benefit Plan filed as Exhibit 10(d) to Form 10-K
for the year ended December 31, 1989, is incorporated by
reference --
(v) Supplemental Employee Retirement Plan filed as Exhibit
10(e) to Form 10-K for the year ended December 31, 1989,
is incorporated by reference --
(vi) Executive Flexible Perquisite Program filed as Exhibit
10(f) to Form 10-K for the year ended December 31, 1992,
is incorporated by reference --
INDEX
Exhibits to Annual Report on Form 10-K
Year ended December 31, 1995
EQUITABLE OF IOWA COMPANIES
Page Number
(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 --
(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
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 --
27 Financial Data Schedule (electronic filing only) --
99 Additional Exhibits
Independence Policy filed as an Exhibit to Form 8-K dated November
11, 1991, is incorporated by reference --
Exhibit 4
AGREEMENT TO FURNISH
DEBT INSTRUMENTS
March 5, 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 March
30, 1996, re: line of credit in amount of $225,000,000.
2. Note Purchase Agreement dated August 19, 1986, between Walnut Mall
Limited Partnership ("Issuer") and Teacher Retirement System of
Texas ("Purchaser") in the remaining principal amount of $25,507,826
due through August 19, 1996.
3. Trust Indenture dated as of January 17, 1995 between Equitable of
Iowa Companies and The First National Bank of Chicago, as Trustee,
relating to $100,000,000 of 8.5% Notes due 2005.
4. Note payable dated February 22, 1995, bearing interest at 8.5%,
maturing February 15, 2005 with outstanding principal amount of
$100,000,000.
Very truly yours,
/s/ John A. Merriman
John A. Merriman
General Counsel/Secretary
Equitable of Iowa Companies
</TEXT
Exhibit 11
EQUITABLE OF IOWA COMPANIES
Consolidated Net Income Per Share Computation
<TABLE>
<CAPTION>
Year ended December 31 1995 1994 1993
_______________________________________________________________________________
(Dollars in thousands, except per share data)
<S> <C> <C> <C>
Primary:
Net income $84,890 $98,284 $87,156
=======================================
Average shares outstanding 31,709,032 31,612,675 29,540,274
=======================================
Net income per share $2.68 $3.11 $2.95
=======================================
Fully diluted:
Net income $84,890 $98,284 $87,156
Add: Interest on 9% convertible
installment notes -- -- 20
_______________________________________
Total $84,890 $98,284 $87,176
=======================================
Average shares outstanding 31,709,032 31,612,675 29,540,274
Add: Net effect of dilutive
stock options - based on
the treasury stock method
using year-end market price,
if higher than average
market price 381,726 591,980 724,264
Assumed conversion of 9%
convertible installment
notes -- -- 36,865
_______________________________________
Total 32,090,758 32,204,655 30,301,403
=======================================
Net income per share $2.65 $3.05 $2.88
=======================================
<FN>
NOTE: This computation is required by Regulation S-K Item 601 and is filed
as an exhibit under Item 14a(3) of Form 10-K. Fully diluted earnings
per share calculated above has not been presented on the face of the
company's Consolidated Statements of Income because dilution is less
than three percent and, therefore, presentation is not required by
Accounting Principles Board Opinion No. 15.
</TABLE>
Exhibit 21
The company's subsidiaries are:
Name State of Incorporation
_________________________________ ______________________
Equitable Investment Services, Inc. Iowa
Equitable Life Insurance Company of Iowa Iowa
Equitable of Iowa Securities Network, Inc. Iowa
Locust Street Securities, Inc. Iowa
All are wholly-owned.
USG Annuity & Life Company, an Oklahoma corporation, and Equitable American
Insurance Company, an Iowa corporation, are wholly-owned subsidiaries of
Equitable Life Insurance Company of Iowa. In addition, these entities own
other subsidiaries which are not considered in the aggregate to be a
significant subsidiary as defined in Securities and Exchange Commission
rules.
All subsidiaries do business only under their corporate names.
Exhibit 23(a)
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 33-27838) pertaining to the Equitable of Iowa Companies
(1982) Stock Incentive Plan, in the Registration Statement (Form S-8 No.
33-57492), pertaining to the Equitable of Iowa Companies Restated and
Amended 1992 Stock Incentive Plan, in the Registration Statement (Form S-8
No. 33-57484), pertaining to the Equitable of Iowa Companies Deferred
Profit Sharing and Retirement Savings Plan and Trust, in the Registration
Statement (Form S-8 No. 33-51091) pertaining to the Equitable of Iowa
Companies Employee Stock Purchase Plan, in the Registration Statement
(Form S-3 No. 33-55045) pertaining to the Equitable of Iowa Companies
Dividend Reinvestment and Stock Purchase Plan, and in the Registration
Statement (Form S-3 No. 33-57343) pertaining to the registration of debt
securities and the respective related Prospectuses, of our report dated
February 7, 1996, with respect to the consolidated financial statements
and schedules of Equitable of Iowa Companies and subsidiaries included in
the Annual Report (Form 10-K) for the year ended December 31, 1995.
/s/ Ernst & Young LLP
Des Moines, Iowa
March 4, 1996
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE CONSOLIDATED
BALANCE SHEETS AND STATEMENTS OF INCOME AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<EXCHANGE-RATE> 1
<DEBT-HELD-FOR-SALE> 7,352,211
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 50,595
<MORTGAGE> 1,169,456
<REAL-ESTATE> 13,960
<TOTAL-INVEST> 8,807,879
<CASH> 10,730
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 554,179
<TOTAL-ASSETS> 9,780,416
<POLICY-LOSSES> 8,206,991
<UNEARNED-PREMIUMS> 14,326
<POLICY-OTHER> 8,980
<POLICY-HOLDER-FUNDS> 25,019
<NOTES-PAYABLE> 58,100
0
0
<COMMON> 31,769
<OTHER-SE> 862,163
<TOTAL-LIABILITY-AND-EQUITY> 9,780,416
43,425
<INVESTMENT-INCOME> 641,094
<INVESTMENT-GAINS> 9,524
<OTHER-INCOME> 70,819
<BENEFITS> 487,031
<UNDERWRITING-AMORTIZATION> 72,537
<UNDERWRITING-OTHER> 54,337
<INCOME-PRETAX> 128,506
<INCOME-TAX> 43,633
<INCOME-CONTINUING> 84,890
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 84,890
<EPS-PRIMARY> 2.68
<EPS-DILUTED> 2.65
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
