SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
=========
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 0-8590
Equitable of Iowa Companies
(Exact name of registrant as specified in its charter)
Iowa 42-1083593
(State or other jurisdiction of (IRS employer identification no.)
incorporation or organization)
604 Locust Street, Des Moines, Iowa 50306
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (515) 245-6911
__________________________________________________________________________
Former name, former address and formal fiscal year, if changed since last
report
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes /X/ No / /
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all
documents and reports required to be filed by Section 12, 13 or 15(d)
of the Securities Exchange Act of 1934 subsequent to the distribution
of securities under a plan confirmed by a court. Yes / / No / /
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: 31,917,668 shares of
Common Stock as of July 30, 1996.
FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Person for whom the Financial Information is given: EQUITABLE OF IOWA
COMPANIES AND ITS
SUBSIDIARIES
Consolidated Statements of Income (Unaudited):
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
June 30, 1996 June 30, 1995
________________ ________________
(Current Year) (Preceding Year)
(Dollars in thousands)
<S> <C> <C>
REVENUES:
Annuity and universal life product
charges $15,230 $12,110
Traditional life insurance premiums 9,747 10,923
Net investment income 177,054 158,520
Realized gains on investments 6,168 1,790
Other income 5,363 4,048
________________ ________________
213,562 187,391
BENEFITS AND EXPENSES:
Annuity and universal life benefits:
Interest credited to account balances 109,466 96,960
Benefit claims incurred in excess of
account balances 2,752 2,467
Traditional life insurance benefits 11,809 14,134
Increase (decrease) in future policy
benefits (1,124) 528
Distributions to participating
policyholders 6,170 6,232
Underwriting, acquisition and insurance
expenses:
Commissions 29,314 37,862
General expenses 11,453 9,731
Insurance taxes 1,286 2,255
Policy acquisition costs deferred (35,636) (46,117)
Amortization of deferred policy
acquisition costs 20,075 16,795
________________ ________________
155,565 140,847
Interest expense 4,415 3,752
Other expenses 4,593 1,780
________________ ________________
164,573 146,379
________________ ________________
48,989 41,012
</TABLE>
Consolidated Statements of Income (Unaudited): (CONTINUATION)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
June 30, 1996 June 30, 1995
________________ ________________
(Current Year) (Preceding Year)
(Dollars in thousands,
except per share data)
<S> <C> <C>
Income taxes:
Current $15,992 $13,536
Deferred 1,226 874
________________ ________________
17,218 14,410
________________ ________________
31,771 26,602
Equity income, net of related tax expense
of $10 in 1995 1 18
________________ ________________
NET INCOME $31,772 $26,620
================ ================
NET INCOME PER COMMON SHARE (average
shares used: 1996 - 31,888,206;
1995 - 31,677,568): $1.00 $0.84
================ ================
CASH DIVIDENDS PAID PER COMMON SHARE $0.150 $0.135
</TABLE>
Consolidated Statements of Income (Unaudited):
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
June 30, 1996 June 30, 1995
________________ ________________
(Current Year) (Preceding Year)
(Dollars in thousands)
<S> <C> <C>
REVENUES:
Annuity and universal life product charges $29,947 $24,620
Traditional life insurance premiums 19,898 22,218
Net investment income 348,266 306,766
Realized gains on investments 11,318 1,903
Other income 9,709 10,582
________________ ________________
419,138 366,089
BENEFITS AND EXPENSES:
Annuity and universal life benefits:
Interest credited to account balances 217,224 190,126
Benefit claims incurred in excess of
account balances 4,374 4,507
Traditional life insurance benefits 24,930 29,376
Increase (decrease) in future
policy benefits (3,008) 3,037
Distributions to participating
policyholders 12,469 12,474
Underwriting, acquisition and insurance
expenses:
Commissions 61,993 79,661
General expenses 22,490 20,802
Insurance taxes 4,103 5,054
Policy acquisition costs deferred (75,317) (97,572)
Amortization of deferred policy
acquisition costs 38,198 31,266
________________ ________________
307,456 278,731
Interest expense 7,741 5,773
Other expenses 8,164 3,899
________________ ________________
323,361 288,403
________________ ________________
95,777 77,686
</TABLE>
Consolidated Statements of Income (Unaudited): (CONTINUATION)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
June 30, 1996 June 30, 1995
________________ ________________
(Current Year) (Preceding Year)
(Dollars in thousands,
except per share data)
<S> <C> <C>
Income taxes:
Current $30,474 $22,143
Deferred 3,212 5,142
________________ ________________
33,686 27,285
________________ ________________
62,091 50,401
Equity income (loss), net of related tax
benefit (expense) of $62 in 1996 and
$(7) in 1995 (114) 13
________________ ________________
NET INCOME $61,977 $50,414
================ ================
NET INCOME PER COMMON SHARE (average
shares used: 1996 - 31,852,453;
1995 - 31,670,536): $1.95 $1.59
================ ================
CASH DIVIDENDS PAID PER COMMON SHARE $0.285 $0.255
</TABLE>
Consolidated Balance Sheets (Unaudited):
<TABLE>
<CAPTION>
June 30, 1996 December 31, 1995
________________ _________________
(Dollars in thousands)
<S> <C> <C>
ASSETS
Investments:
Fixed maturities, available for sale, at
market (cost: 1996 - $6,989,796;
1995 - $6,884,837) $7,017,874 $7,352,211
Equity securities, at market
(cost: 1996 - $51,119; 1995 - $49,789) 52,468 50,595
Mortgage loans on real estate 1,537,827 1,169,456
Real estate, less allowances for
depreciation of $5,095 in 1996
and $4,804 in 1995 14,273 13,960
Policy loans 181,544 182,423
Short-term investments 46,818 39,234
________________ _________________
TOTAL INVESTMENTS 8,850,804 8,807,879
Cash and cash equivalents 8,002 10,730
Securities and indebtedness of
related parties 14,117 13,755
Accrued investment income 125,506 122,834
Notes and other receivables 30,800 32,410
Deferred policy acquisition costs 729,008 554,179
Property and equipment, less
allowances for depreciation of
$11,442 in 1996 and $9,761 in 1995 8,739 8,039
Current income taxes recoverable 6,768 6,968
Intangible assets, less accumulated
amortization of $796 in 1996 and
$683 in 1995 4,040 3,639
Other assets 74,066 48,102
Separate account assets 269,229 171,881
________________ _________________
TOTAL ASSETS $10,121,079 $9,780,416
================ =================
</TABLE>
Consolidated Balance Sheets (Unaudited):
<TABLE>
<CAPTION>
June 30, 1996 December 31, 1995
________________ _________________
(Dollars in thousands)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Policy liabilities and accruals:
Future policy benefits:
Annuity and universal life products $7,924,523 $7,500,494
Traditional life insurance products 714,986 718,110
Unearned revenue reserve 17,155 14,326
Other policy claims and benefits 9,191 8,980
________________ _________________
8,665,855 8,241,910
Other policyholders' funds:
Advance premiums and other deposits 618 691
Accrued dividends 12,643 12,715
________________ _________________
13,261 13,406
Deferred income taxes 11,946 114,915
Notes and loans payable:
Commercial paper notes 116,000 58,100
Long-term debt 100,000 100,000
________________ _________________
216,000 158,100
Other liabilities 191,419 186,272
Separate account liabilities 269,229 171,881
________________ _________________
TOTAL LIABILITIES 9,367,710 8,886,484
Stockholders' equity:
Serial preferred stock, without par value,
authorized 2,500,000 shares -- --
Common stock, without par value (stated
value $1.00 per share), authorized 70,000,000
shares, issued and outstanding 31,896,824
shares in 1996 and 31,769,490 in 1995 31,897 31,769
Additional paid-in capital 83,859 80,100
Unrealized appreciation (depreciation) on
fixed maturity securities 13,551 208,932
Unrealized appreciation (depreciation) on
marketable equity securities 1,349 806
Retained earnings 626,660 573,799
Unearned compensation (deduction) (3,947) (1,474)
________________ _________________
TOTAL STOCKHOLDERS' EQUITY 753,369 893,932
________________ _________________
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $10,121,079 $9,780,416
================ =================
</TABLE>
Consolidated Statements of Cash Flows (Unaudited):
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
June 30, 1996 June 30, 1995
________________ ________________
(Current Year) (Preceding Year)
(Dollars in thousands)
<S> <C> <C>
OPERATING ACTIVITIES
Net income $61,977 $50,414
Adjustments to reconcile net income to
net cash provided by operations:
Adjustments related to annuity and
universal life products:
Interest credited to account balances 216,603 190,126
Charges for mortality and
administration (30,445) (25,841)
Change in unearned revenues 234 (462)
Increase in traditional life policy
liabilities and accruals 5,257 6,638
Decrease in other policyholders' funds (145) (42)
Increase in accrued investment income (2,672) (11,671)
Policy acquisition costs deferred (75,317) (97,572)
Amortization of deferred policy
acquisition costs 38,198 31,266
Change in other assets, other liabilities,
and accrued income taxes (27,208) (28,292)
Provision for depreciation and
amortization (828) (2,357)
Provision for deferred income taxes 3,238 5,167
Share of losses (eqiuty in earnings)
of related parties 176 (21)
Realized gains on investments (11,318) (1,903)
________________ ________________
NET CASH PROVIDED BY OPERATING
ACTIVITIES 177,750 115,450
INVESTING ACTIVITIES
Sale, maturity or repayment of investments:
Fixed maturities - available for sale 338,778 26,722
Fixed maturities - held for investment -- 127,440
Equity securities 10,350 225
Mortgage loans on real estate 21,044 24,676
Real estate -- 1,566
Policy loans 18,301 12,743
Short-term investments - net -- 34,781
________________ ________________
388,473 228,153
Acquisition of investments:
Fixed maturities - available for sale (429,928) (642,921)
Fixed maturities - held for investment -- (24,897)
Equity securities (11,126) (227)
Mortgage loans on real estate (389,257) (236,307)
Real estate (604) (701)
Policy loans (17,423) (15,933)
Short-term investments - net (7,584) --
________________ ________________
(855,922) (920,986)
</TABLE>
Consolidated Statements of Cash Flows (Unaudited): (CONTINUATION)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
June 30, 1996 June 30, 1995
________________ ________________
(Current Year) (Preceding Year)
(Dollars in thousands)
<S> <C> <C>
INVESTING ACTIVITIES - continued
Disposal of investments accounted for
by the equity method $12 $11
Repayments of notes receivable -- 56
Sales of property and equipment 39 122
Purchases of property and equipment (2,449) (1,654)
________________ ________________
NET CASH USED IN INVESTING ACTIVITIES (469,847) (694,298)
FINANCING ACTIVITIES
Issuance of long term debt -- 100,000
Issuance of commercial paper - net 57,900 19,185
Receipts from annuity and universal life
policies credited to policyholder
account balances 639,739 853,616
Return of policyholder account balances
on annuity and universal life policies (399,709) (382,298)
Issuance of stock under stock plans 555 (3,916)
Cash dividends paid (9,116) (8,111)
________________ ________________
NET CASH PROVIDED BY FINANCING
ACTIVITIES 289,369 578,476
________________ ________________
DECREASE IN CASH AND CASH EQUIVALENTS (2,728) (372)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 10,730 12,674
________________ ________________
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $8,002 $12,302
================ ================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Cash paid during the period for:
Interest $7,766 $2,853
Income taxes 29,889 7,275
</TABLE>
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for annual financial statements. In the opinion of management,
all adjustments considered necessary for a fair presentation have been
included. All adjustments were of a normal recurring nature, unless otherwise
noted in Management's Discussion and Analysis and the Notes to Financial
Statements. Operating results for the three months and six months ended June
30, 1996 are not necessarily indicative of the results that may be expected
for the year ending December 31, 1996. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
company's Annual Report on Form 10-K for the year ended December 31, 1995.
Certain amounts in the 1995 financial statements have been reclassified to
conform to the 1996 financial statement presentation.
NOTE 2 -- INVESTMENT OPERATIONS
All of the company's fixed maturity securities are designated as available
for sale although the company is not precluded from designating fixed
maturity securities as held for investment or trading at some future date.
Investments classified as available for sale securities are reported at
market value and unrealized gains and losses on these securities are included
directly in stockholders' equity, after adjustment for related changes in
deferred policy acquisition costs, policy reserves and deferred income taxes.
Securities that the company has the positive intent and ability to hold to
maturity are designated as "held for investment". Held for investment
securities are reported at cost adjusted for amortization of premiums and
discounts. Changes in the market value of these securities, except for
declines that are other than temporary, are not reflected in the company's
financial statements. Sales of securities designated as held for investment
are severely restricted by Statement of Financial Accounting Standards (SFAS)
No. 115. Securities that are bought and held principally for the purpose of
selling them in the near term are designated as trading securities.
Unrealized gains and losses on trading securities are included in current
earnings. Transfers of securities between categories are restricted and are
recorded at fair value at the time of the transfer. Securities that are
determined to have a decline in value that is other than temporary are
written down to estimated fair value which becomes the security's new cost
basis by a charge to realized losses in the company's Statement of Income.
Premiums and discounts are amortized/accrued utilizing the scientific
interest method which results in a constant yield over the securities'
expected life. Amortization/accrual of premiums and discounts on mortgage-
backed securities incorporates a prepayment assumption to estimate the
securities' expected life.
Equity securities (common and nonredeemable preferred stocks) are reported at
market if readily marketable, or at cost if not readily marketable. The
change in unrealized appreciation and depreciation of marketable equity
securities (net of related deferred income taxes, if any) is included
directly in stockholders' equity. Equity securities that are determined to
have a decline in value that is other than temporary are written down to
estimated fair value, which becomes the security's new cost basis, by a
charge to realized losses in the company's Statement of Income.
Mortgage loans on real estate are reported at cost adjusted for amortization
of premiums and accrual of discounts. If the value of any mortgage loan is
determined to be impaired (i.e. when it is probable that the company will be
unable to collect all amounts due according to the contractual terms of the
loan agreement), the carrying value of the mortgage loan is reduced to the
present value of expected future cash flows from the loan, discounted at the
loan's effective interest rate, or to the loan's observable market price, or
the fair value of the underlying collateral. The carrying value of impaired
loans is reduced by the establishment of a valuation allowance which is
adjusted at each reporting date for significant changes in the calculated
value of the loan. Changes in this valuation allowance are charged or
credited to income.
Real estate, which includes real estate acquired through foreclosure, is
reported at cost less allowances for depreciation. Real estate acquired
through foreclosure, or in-substance foreclosure, is recorded at the lower of
cost (which includes the balance of the mortgage loan, any accrued interest
and any costs incurred to obtain title to the property) or fair value as
determined at or before the foreclosure date. The carrying value of these
assets is subject to regular review. If the fair value, less estimated sale
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.
At June 30, 1996 and December 31, 1995, amortized cost, gross unrealized
gains and losses and estimated market values of fixed maturity securities
designated as available for sale are as follows:
<TABLE>
<CAPTION>
AVAILABLE FOR SALE
Gross Gross Estimated
Amortized Unrealized Unrealized Market
June 30, 1996 Cost Gains Losses Value
______________________________________________________________________________
(Dollars in thousands)
<S> <C> <C> <C> <C>
U.S. government and
governmental agencies
and authorities:
Mortgage-backed securities $261,972 $8,177 ($3,251) $266,898
Other 87,585 1,641 (2,031) 87,195
States, municipalities and
political subdivisions 15,314 828 (3) 16,139
Foreign governments 10,572 2,170 -- 12,742
Public utilities 1,205,572 27,452 (30,399) 1,202,625
Investment grade corporate 2,489,308 123,721 (36,265) 2,576,764
Below investment grade
corporate 644,796 6,437 (26,470) 624,763
Mortgage-backed securities 2,274,044 26,291 (69,984) 2,230,351
Redeemable preferred stocks 633 -- (236) 397
___________ ___________ ___________ ___________
TOTAL AVAILABLE FOR
SALE $6,989,796 $196,717 ($168,639) $7,017,874
=========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
December 31, 1995 Cost Gains Losses Value
______________________________________________________________________________
(Dollars in thousands)
<S> <C> <C> <C> <C>
U.S. government and
governmental agencies
and authorities:
Mortgage-backed securities $289,422 $16,738 $306,160
Other 60,567 4,163 ($2) 64,728
States, municipalities and
political subdivisions 15,485 1,639 -- 17,124
Foreign governments 10,573 3,426 -- 13,999
Public utilities 1,271,641 92,546 (2,077) 1,362,110
Investment grade corporate 2,322,036 277,981 (1,303) 2,598,714
Below investment grade
corporate 574,284 19,428 (12,492) 581,220
Mortgage-backed securities 2,340,194 75,704 (8,142) 2,407,756
Redeemable preferred stocks 635 -- (235) 400
___________ ___________ ___________ ___________
TOTAL AVAILABLE FOR
SALE $6,884,837 $491,625 ($24,251) $7,352,211
=========== =========== =========== ===========
</TABLE>
No fixed maturity securities were designated as held for investment at June
30, 1996 or December 31, 1995. Short-term investments with maturities of 30
days or less have been excluded from the above schedules. Amortized cost
approximates market value for these securities.
Amortized cost and estimated market value of debt securities at June 30,
1996, by contractual maturity, are shown below. Expected maturities will
differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
Estimated
Amortized Market
AVAILABLE FOR SALE Cost Value
____________________________________________________________________________
(Dollars in thousands)
<S> <C> <C>
Due within one year $12,573 $12,735
Due after one year through five years 200,301 203,703
Due after five years through ten years 1,670,007 1,685,817
Due after ten years 2,570,899 2,618,370
_____________ _____________
4,453,780 4,520,625
Mortgage-backed securities 2,536,016 2,497,249
_____________ _____________
TOTAL AVAILABLE FOR SALE $6,989,796 $7,017,874
============= =============
</TABLE>
The amortized cost and estimated market value of mortgage-backed securities,
which comprise 36% of the company's investment in fixed maturity securities
as of June 30, 1996, are as follows:
<TABLE>
<CAPTION>
Estimated
Amortized Market
Cost Value
_____________________________
(Dollars in thousands)
<S> <C> <C>
Mortgage-backed securities:
Government and agency guaranteed pools:
Very accurately defined maturities $17,301 $17,688
Planned amortization class 70,230 72,537
Targeted amortization class 29,313 28,094
Sequential pay 65,371 64,568
Pass through 79,758 84,012
Private Label CMOs and REMICs:
Very accurately defined maturities 30,615 31,035
Planned amortization class 25,517 26,248
Targeted amortization class 439,731 420,378
Sequential pay 1,715,713 1,689,996
Mezzanines 37,871 37,403
Private placements and subordinate issues 24,596 25,290
_____________ _____________
TOTAL MORTGAGE-BACKED SECURITIES $2,536,016 $2,497,249
============= =============
</TABLE>
During periods of significant interest rate volatility, the mortgages
underlying mortgage-backed securities may prepay more quickly or more slowly
than anticipated. If the principal amount of such mortgages are prepaid
earlier than anticipated during periods of declining interest rates,
investment income may decline due to reinvestment of these funds at lower
current market rates. If principal repayments are slower than anticipated
during periods of rising interest rates, increases in investment yield may
lag behind increases in interest rates because funds will remain invested at
lower historical rates rather than reinvested at higher current rates. To
mitigate this prepayment volatility, the company invests primarily in
intermediate tranche collateralized mortgage obligations ("CMOs"). CMOs are
pools of mortgages that are segregated into sections, or tranches, which
provide sequential retirement of bonds rather than pro-rata share of
principal return in the pass-through structure. The company owns no
"interest only" or "principal only" mortgage-backed securities. Further, the
company has not purchased obligations at significant premiums, thereby
limiting exposure to capital loss during periods of accelerated prepayments.
At June 30, 1996, unamortized premiums on mortgage-backed securities totaled
$4,716,000 and unaccrued discounts on mortgage-backed securities totaled
$55,996,000.
An analysis of sales, maturities and principal repayments of the company's
fixed maturities portfolio for the six months ended June 30, 1996 and 1995 is
as follows:
<TABLE>
<CAPTION>
Gross Gross Proceeds
Amortized Realized Realized from
Cost Gains Losses Sale
_______________________________________________
<S> <C> <C> <C> <C>
Six months ended June 30, 1996
- -------------------------------
Available for sale:
Scheduled principal repayments,
calls and tenders $195,050 $9,501 ($257) $204,294
Sales 133,515 1,141 (172) 134,484
___________ ___________ ___________ ___________
TOTAL $328,565 $10,642 ($429) $338,778
=========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
Gross Gross Proceeds
Amortized Realized Realized from
Cost Gains Losses Sale
_______________________________________________
<S> <C> <C> <C> <C>
Six months ended June 30, 1995
- -------------------------------
Scheduled principal repayments
calls and tenders (available
for sale only):
Available for sale $18,996 $8 ($7) $18,997
Held for investment 97,300 3,992 (160) 101,132
Sales:
Available for sale 7,465 260 -- 7,725
Held for investment 21,983 4,325 -- 26,308
___________ ___________ ___________ ___________
TOTAL $145,744 $8,585 ($167) $154,162
=========== =========== =========== ===========
</TABLE>
At June 30, 1996, the company owned equity securities with a combined book
value of $51,119,000 and an estimated market value of $52,468,000, resulting
in gross unrealized appreciation of $1,561,000 and gross unrealized
depreciation of $212,000.
At June 30, 1996, two mortgage loans with a combined carrying value of
$719,000 were delinquent by 90 days or more. At June 30, 1996, the company
had established a valuation allowance of $180,000 on one of the loans to
reduce the carrying value of this investment to its estimated fair value,
less costs to sell.
The carrying value of investments which have been non-income producing for
the twelve months preceding June 30, 1996 totaled $239,000 related to one
real estate property.
The company's investment policies related to its investment portfolio require
diversification by asset type, company and industry and sets limits on the
amount which can be invested in an individual issuer. Such policies are at
least as restrictive as those set forth by regulatory authorities. The
percentages quoted in the following sentences relate to the holdings at June
30, 1996 and December 31, 1995, respectively. Fixed maturity investments
included investments in various non-governmental mortgage-backed securities
(32% in 1996, 33% in 1995), public utilities (18% in 1996, 19% in 1995),
basic industrials (23% in 1996, 21% in 1995) and consumer products (12% in
1996 and 1995). Mortgage loans on real estate have been analyzed by
geographical location and there are no concentrations of mortgage loans in
any state exceeding ten percent in 1996 and 1995. Mortgage loans on real
estate have also been analyzed by collateral type with significant
concentrations identified in retail facilities (28% in 1996 and 32% in 1995),
industrial buildings (28% in 1996 and 26% in 1995), multi-family residential
buildings (21% in 1996 and 24% in 1995) and office buildings (22% in 1996 and
17% in 1995). Equity securities (which represent 0.2% of the company's
investments) are comprised of investments in the company's registered
separate account and an investment of $31,840,000 in a real estate investment
trust. Real estate and investments accounted for by the equity method are
not significant to the company's overall investment portfolio.
No investment in any person or its affiliates (other than bonds issued by
agencies of the United States government) exceeded ten percent of
stockholders' equity at June 30, 1996.
NOTE 3 -- FINANCIAL INSTRUMENTS
During the second quarter of 1996, the company implemented a hedging program
under which certain derivative financial instruments, interest rate caps and
cash settled put swaptions ("instruments"), were purchased to reduce the
negative effects of potential increases in withdrawal activity related to the
company's annuity liabilities which may result from extreme increases in
interest rates. The agreements for these instruments entitle the company to
receive payments from the instruments' counterparties on future reset dates
if interest rates, as specified in the agreements, rise above a specified
fixed rate (9.0% and 9.5% as of June 30, 1996). The amount of such payments
to be received by the company for the interest rate caps, if any, will be
calculated by multiplying the percentage by which the applicable rate exceeds
the fixed rate times the notional amount of the caps and will be recorded as
an adjustment to interest-credited. Payments on cash settled put swaptions
are also calculated based upon the percentage by which the specified rate
exceeds the fixed rate times the notional amount. The product of this rate
differential times the notional amount is assumed to continue for a series of
defined future semi-annual payment dates and the resulting hypothetical
payments are discounted to the current payment date using the rate defined in
the agreement as the discount rate. For both interest rate caps and put
swaptions, payments are required only if in the company's favor. During the
second quarter, the company purchased instruments with notional amounts
totaling approximately $600,000,000 in interest rate caps and $1,300,000,000
in cash settled put swaptions all of which were outstanding at June 30, 1996.
Through June 30, 1996, the company paid approximately $21,100,000 in premiums
for these instruments. The cost of this program has been incorporated into
the company's product pricing.
The following table summarizes the contractual maturities of notional amounts
by type of instrument at June 30, 1996:
<TABLE>
<CAPTION>
1998 1999 2000 2001 2002 Total
_________________________________________________________________________________
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest rate
caps $400,000 $200,000 $600,000
Cash settled
put swaptions $100,000 $400,000 $400,000 350,000 50,000 1,300,000
__________________________________________________________________
Total notional
amount $100,000 $400,000 $400,000 $750,000 $250,000 $1,900,000
==================================================================
</TABLE>
Premiums paid to enter into these instruments are deferred and included in
other assets. Premiums are amortized and included in interest credited to
account balances over the term of the instruments on a straight-line basis.
Through June 30, 1996, the company has recorded amortization of $621,000.
Unrealized gains and losses on these instruments and related assets or
liabilities will not be recorded in income until realized. The Financial
Accounting Standards Board ("FASB") and the Securities and Exchange
Commission are evaluating the accounting and disclosure requirements for
these instruments. The company is in the process of reviewing a recently
published exposure draft by FASB titled "Accounting for Derivative and
Similar Financial Instruments and for Hedging Activities". The impact of the
final standard cannot be clearly defined at this time, however, the current
accounting treatment for these instruments may change.
Any unrealized gain or loss on the instruments is off-balance sheet. The
following table summarizes the amortized cost, gross unrealized gains and
losses and estimated market value on these instruments as of June 30, 1996:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
June 30, 1996 Cost Gains Losses Value
______________________________________________________________________________
(Dollars in thousands)
<S> <C> <C> <C> <C>
Interest rate caps $5,709 $53 ($787) $4,975
Cash settled put swaptions 14,791 309 (2,027) 13,073
_______________________________________________
Total $20,500 $362 ($2,814) $18,048
===============================================
</TABLE>
The decline in market value from amortized cost reflects changes in interest
rates and market conditions since time of purchase.
The company is exposed to the risk of losses in the event of non-performance
by the counterparties of these instruments. Losses recorded in the company's
financial statements in the event of non-performance will be limited to the
unamortized premium paid to enter into the instrument because no additional
payments are required by the company on these instruments after the initial
premium. Economic losses would be measured by the net replacement cost, or
estimated market value, for such instruments if the net market value is in
the company's favor. The estimated market value is obtained from quotes
provided by the related counterparty. The company limits its exposure to
such losses by: diversification among counterparties, limiting exposure to
any individual counterparty based upon that counterparty's credit rating, and
by limiting its exposure by instrument type to only those instruments that do
not require future payments. For purposes of determining risk exposure to
any individual counterparty, the company evaluates the combined exposure to
that counterparty from financial instruments' and investment portfolio credit
risk exposures and reports its exposure to senior management at least
monthly. The maximum potential economic loss due to nonperformance of the
counterparties will increase or decrease during the life of the instruments'
as a function of maturity and market conditions.
The company determines counterparty credit quality by reference to ratings
from independent rating agencies. As of June 30, 1996, the counterparties
credit quality by instrument with respect to the net replacement value of the
company's instruments was as follows:
<TABLE>
<CAPTION>
June 30, 1996 Net Replacement Value
__________________________________________________________________
Interest Cash Settled
Rate Put
Caps Swaptions Total
___________________________________
<S> <C> <C> <C>
Counterparties credit quality:
AAA $3,389 $7,048 $10,437
A 1,586 6,025 7,611
___________________________________
Total $4,975 $13,073 $18,048
===================================
</TABLE>
NOTE 4 -- COMMITMENTS AND CONTINGENCIES
Reinsurance: In the normal course of business, the company seeks to limit
its exposure to loss on any single insured and to recover a portion of
benefits paid by ceding reinsurance to other insurance enterprises or
reinsurers. Reinsurance coverages for life insurance vary according to the
age and risk classification of the insured with retention limits ranging up
to $500,000 of coverage per individual life. The company does not use
financial or surplus relief reinsurance.
Reinsurance contracts do not relieve the company from its obligations to its
policyholders. To the extent that reinsuring companies are later unable to
meet obligations under reinsurance agreements, the company's life insurance
subsidiaries would be liable for these obligations, and payment of these
obligations could result in losses to the company. To limit the possibility
of such losses the company evaluates the financial condition of its
reinsurers, monitors concentrations of credit risk arising from factors such
as similar geographic regions, and limits its exposure to any one reinsurer.
At June 30, 1996, the company had reinsurance treaties with 15 reinsurers,
all of which are deemed to be long-duration, retroactive contracts, and has
established a receivable totaling $20,270,000 for reserve credits,
reinsurance claims and other receivables from these reinsurers. No allowance
for uncollectible amounts has been established since none of the receivables
are deemed to be uncollectible, and because such receivables, either
individually or in the aggregate, are not material to the company's
operations. The company's liability for future policy benefits and notes and
other receivables has been increased by $18,453,000 at June 30, 1996 for
reserve credits on reinsured policies. This "gross-up" of assets and
liabilities for reserve credits on reinsurance had no impact on the company's
net income. Insurance premiums and product charges have been reduced by
$3,446,000 in the first six months and $1,529,000 in the second quarter of
1996 compared to $3,051,000 and $1,217,000, respectively, in the same periods
of 1995, as a result of the cession agreements. Insurance benefits and
expenses have been reduced by $2,997,000 in the first six months and
$1,802,000 in the second quarter of 1996 compared to $3,526,000 and
$2,422,000, respectively, in the same periods of 1995. The amount of
reinsurance assumed is not significant.
Investment Commitments: At June 30, 1996, outstanding commitments to fund
mortgage loans on real estate totaled $106,384,000.
Guaranty Fund Assessments: Assessments are levied on the company's life
insurance subsidiaries by life and health guaranty associations in most
states in which these subsidiaries are licensed to cover losses of
policyholders of insolvent or rehabilitated insurers. In some states, these
assessments can be partially recovered through a reduction in future premium
taxes. The company cannot predict whether and to what extent legislative
initiatives may affect the right to offset. The company has established a
reserve to cover such assessments and regularly reviews information regarding
known failures and revises it's estimates of future guaranty fund assessments
accordingly. At June 30, 1996, the company has a reserve of $47,565,000 to
cover estimated future assessments (net of related anticipated premium tax
credits) and has established an asset totaling $13,237,000 for items expected
to be recoverable through future premium tax offsets. The company believes
this reserve is sufficient to cover expected future insurance guaranty fund
assessments related to known insolvencies at this time.
Litigation: As previously reported, the company and certain of its
subsidiaries are defendants in class action lawsuits filed in the 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. A similar
class action law suit has recently been filed against a subsidiary of the
company in the Court of Common Pleas of Allegheny County, Pennsylvania. The
three suits claim unspecified damages as a result of alleged improper life
insurance sales practices. The company believes the allegations are without
merit. The company is awaiting an order of dismissal in the Iowa suit. The
Iowa Court has agreed to dismiss that action pursuant to the application of
the Plaintiff and as agreed to by the company. The remaining 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 company's
financial statements.
As previously reported, on December 15, 1995, USG received a Notice of
Intention to Arbitrate a dispute with one of its insurance brokerage agencies
before the American Arbitration Association. 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 2 for further information). The company's
asset growth, net investment income and cash flow are primarily generated
from the sale of individual fixed annuity policies and associated future
policy benefits. Substantial changes in tax laws that would make these
products less attractive to consumers or extreme fluctuations in interest
rates which may result in higher withdrawal experience than assumed, could
cause a severe impact to the company's financial condition.
NOTE 5 -- PENDING ACQUISITION
On May 3, 1996, Equitable of Iowa Companies signed a definitive agreement to
purchase all of the outstanding stock of BT Variable, Inc., a Delaware
corporation, including its wholly-owned subsidiaries, Golden American Life
Insurance Company ("Golden American") and Directed Services, Inc. (a broker-
dealer). Total consideration is approximately $144,000,000 in cash, which
includes the repayment of $51,000,000 in debt. The transaction, which is
subject to customary closing conditions and regulatory approvals, is expected
to close in August, 1996. Golden American is a Delaware domiciled life
insurance company specializing in the issuance of variable annuities with
assets of $1,300,000,000 at March 31, 1996. Through the first quarter ended
March 1996, Golden American collected $116,000,000 of variable annuity and
life premiums and reported net income of $1,000,000.
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The purpose of this section is to discuss and analyze the company's
consolidated results of operations, financial condition, and liquidity and
capital resources. This analysis should be read in conjunction with the
consolidated financial statements and related notes which appear elsewhere in
this report. The company reports financial results on a consolidated basis.
The consolidated financial statements include the accounts of the company and
its subsidiaries. All of the company's significant subsidiaries are wholly-
owned. The company's primary subsidiaries are Equitable Life Insurance
Company of Iowa ("Equitable Life") and USG Annuity & Life Company ("USG").
RESULTS OF OPERATIONS
Sales
- -----
<TABLE>
<CAPTION>
Percentage Dollar
Quarter ended June 30 1996 Change Change 1995
______________________________________________________________________________
(Dollars in thousands)
<S> <C> <C> <C> <C>
First year and single premiums:
Fixed annuities $251,303 (23.0)% ($74,901) $326,204
Variable annuities 58,388 338.5 45,073 13,315
Life insurance 7,982 (20.8) (2,096) 10,078
_____________________________________________
317,673 (9.1) (31,924) 349,597
Renewal premiums:
Fixed annuities 17,490 (30.7) (7,729) 25,219
Variable annuities 663 NA 663 --
Life insurance 22,534 0.0 4 22,530
_____________________________________________
40,687 (14.8) (7,062) 47,749
_____________________________________________
Total premiums $358,360 (9.8)% ($38,986) $397,346
=============================================
</TABLE>
<TABLE>
<CAPTION>
Percentage Dollar
Six months ended June 30 1996 Change Change 1995
______________________________________________________________________________
(Dollars in thousands)
<S> <C> <C> <C> <C>
First year and single premiums:
Fixed annuities $552,560 (22.6)% ($161,172) $713,732
Variable annuities 92,471 325.0 70,763 21,708
Life insurance 16,270 (18.6) (3,725) 19,995
_____________________________________________
661,301 (12.5) (94,134) 755,435
Renewal premiums:
Fixed annuities 33,382 (9.5) (3,510) 36,892
Variable annuities 962 NA 962 --
Life insurance 45,608 0.7 324 45,284
_____________________________________________
79,952 (2.7) (2,224) 82,176
_____________________________________________
Total premiums $741,253 (11.5)% ($96,358) $837,611
=============================================
</TABLE>
Total annuity and life insurance sales, as measured by first year and single
premiums, decreased 9.1% in the second quarter and 12.5% in the first six
months of 1996. Fixed annuity sales decreased 23.0% in the second quarter
and 22.6% in the first six months of 1996. Variable annuity sales are
reflecting strong growth, with a 71.3% increase in the second quarter
compared to the first quarter of 1996. This is due, in part, to recent
strong stock market returns and marketing efforts. The variable annuity
product was introduced in the fourth quarter of 1994. Based on Life
Insurance Marketing and Research Association ("LIMRA") data, fixed annuity
premiums for the industry appear to have fallen an average of 33% for the 12
month period ended March 31, 1996, while the company's fixed annuity premiums
were off 23% for the same period.
The decrease in fixed annuity sales during the second quarter and the first
six months of 1996 reflects the impact of a relatively low interest rate
environment, flat yield curve and strong stock market returns. In such an
environment, the returns provided by variable annuities and mutual funds are
relatively more attractive than fixed annuity returns, placing pressure on
fixed annuity sales. The pending acquisition of Golden American Life
Insurance Company ("Golden American") is anticipated to complement and
significantly enhance the company's existing variable annuity business. As a
result of the acquisition, opportunities will be available to expand the
distribution of variable products, as well as market fixed products through
Golden American's distribution system. While fixed annuity sales are lower
than in previous periods, the company believes that the product
diversification to be achieved with the acquisition of Golden American,
growth in its agents, its commitment to customer service, the quality of its
investment portfolio, competitive pricing and its overall financial strength
will continue to attract consumers to its annuity products as consumers seek
a secure return on their retirement savings. Insurance agents are attracted
to sell the company's products by several factors, including the company's
diversified product portfolio, competitive commissions, rapid policy issuance
and weekly commission payments.
First year and single life insurance premiums decreased 20.8% in the second
quarter and 18.6% in the first six months of 1996 due to decreases in sales
of the company's single premium life insurance products. As with fixed
annuity sales, the current interest rate environment and stock market returns
have made sales of single premium life insurance products more challenging.
Revenues
- --------
<TABLE>
<CAPTION>
Percentage Dollar
Quarter ended June 30 1996 Change Change 1995
______________________________________________________________________________
(Dollars in thousands)
<S> <C> <C> <C> <C>
Annuity and universal life
product charges $15,230 25.8% $3,120 $12,110
Traditional life insurance
premiums 9,747 (10.8) (1,176) 10,923
Net investment income 177,054 11.7 18,534 158,520
Realized gains on investments 6,168 244.5 4,378 1,790
Other income 5,363 32.5 1,315 4,048
_____________________________________________
$213,562 14.0% $26,171 $187,391
=============================================
</TABLE>
<TABLE>
<CAPTION>
Percentage Dollar
Six months ended June 30 1996 Change Change 1995
______________________________________________________________________________
(Dollars in thousands)
<S> <C> <C> <C> <C>
Annuity and universal life
product charges $29,947 21.6% $5,327 $24,620
Traditional life insurance
premiums 19,898 (10.4) (2,320) 22,218
Net investment income 348,266 13.5 41,500 306,766
Realized gains on investments 11,318 494.6 9,415 1,903
Other income 9,709 (8.2) (873) 10,582
_____________________________________________
$419,138 14.5% $53,049 $366,089
=============================================
</TABLE>
Total revenues increased 14.0% in the second quarter and 14.5% in the first
six months of 1996. Annuity and universal life insurance product charges
increased 25.8% in the second quarter and 21.6% in the first six months of
1996, in conjunction with the growth in the company's policyholder
liabilities. Premiums from traditional life insurance products decreased
10.8% in the second quarter and 10.4% in the first six months of 1996, as a
result of the company's continued emphasis on the more popular universal life
and current interest products (for which premiums are not included in
revenues).
Net investment income increased 11.7% in the second quarter and 13.5% in the
first six months of 1996 due to the increase in invested assets. During the
second quarter and first six months of 1996, the company had realized gains
on the sale of investments of $6,168,000 and $11,318,000, compared to gains
of $1,790,000 and $1,903,000 in the same periods of 1995. The level of
realized gains in the first six months of 1996 was higher than the same
period of 1995 due to an increase in calls of fixed maturity securities.
Expenses
- --------
Total insurance benefits and expenses increased $14,718,000, or 10.4%, to
$155,565,000 in the second quarter and $28,724,000, or 10.3%, to $307,456,000
in the first six months of 1996. Interest credited to annuity and universal
life account balances increased $12,506,000, or 12.9%, to $109,466,000 in the
second quarter and $27,098,000, or 14.3%, to $217,224,000 in the first six
months of 1996 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 average annual yield
on assets invested to support policy accounts for interest-sensitive
products, the average annual interest rate credited to those products and the
interest rate spread for the six months ended June 30, 1996 and 1995. Yield
on assets and cost of funds are estimated by calculating the weighted average
of the six month end values for those items.
<TABLE>
<CAPTION>
Yield on Credited Interest
Six months ended June 30 Assets Rate Rate Spread
------------------------ -------- -------- -----------
<S> <C> <C> <C>
Average base rate (excluding
first year bonus):
1996 8.50% 5.57% 2.93%
1995 8.62% 5.77% 2.85%
Average total (including
first year bonus):
1996 8.50% 5.86% 2.64%
1995 8.62% 6.19% 2.43%
</TABLE>
At June 30, 1996 and 1995, the effective annual yield on assets, credited rate
and interest rate spread were as follows:
<TABLE>
<CAPTION>
Yield on Credited Interest
Assets Rate Rate Spread
-------- -------- -----------
<S> <C> <C> <C>
Base rate (excluding first
year bonus):
1996 8.46% 5.50% 2.96%
1995 8.61% 5.70% 2.91%
Total (including first year
bonus):
1996 8.46% 5.77% 2.69%
1995 8.61% 6.06% 2.55%
The base interest credited rate represents the average interest rate credited
to policy accounts for interest sensitive products, including annuities,
universal life-type policies and participating life policies. Total interest
credited rate includes first year bonus interest credited to certain
policies.
Death benefits on traditional life products and benefit claims incurred in
excess of account balances increased $938,000, or 11.3%, to $9,200,000 in the
second quarter and $580,000, or 3.3%, to $17,991,000 in the first six months
of 1996. After adjustment for charges for mortality risk, reserves released
on death claims and taxes, the overall impact of mortality on net income was
more favorable in 1996 by approximately $374,000 in the second quarter and
$1,334,000 on a year to date basis. Other benefits decreased $2,978,000, or
35.7%, to $5,361,000 in the second quarter and $5,159,000, or 31.3%, to
$11,313,000 in the first six months of 1996. These changes were offset by a
corresponding change in the reserve for future policy benefits and,
therefore, had a smaller impact on net income.
Commissions decreased $8,548,000, or 22.6%, to $29,314,000 in the second
quarter and $17,668,000, or 22.2%, to $61,993,000 in the first six months of
1996. General expenses increased $1,722,000, or 17.7%, to $11,453,000 in the
second quarter and $1,688,000, or 8.1%, to $22,490,000 in the first six
months of 1996. Insurance taxes decreased $969,000, or 43.0%, to $1,286,000
in the second quarter and $951,000, or 18.8%, to $4,103,000 in the first six
months of 1996. Decreases in commissions during the second quarter are
directly related to lower fixed annuity sales during this period. The
decrease in insurance taxes resulted from refunds as a result of finalizing
the company's state premium tax returns in the second quarter and the
elimination of premium taxes on annuity premiums in Pennsylvania. Most costs
incurred as the result of new sales have been deferred, and thus have very
little impact on total insurance expenses.
Most of the company's annuity products have surrender charges which are
designed to discourage early withdrawals and to allow the company to recover
a portion of the expenses incurred to generate annuity sales in the event of
early withdrawal. Withdrawal rates have been impacted by several factors.
(1) The company expected and has experienced an increase in withdrawals as
its annuity liabilities age. (2) Withdrawals tend to increase in periods of
rising interest rates as policyholders seek higher returns on their savings.
(3) A block of annuity policies sold in 1988 and 1989 primarily by
stockbrokers contained a five-year surrender charge and a portion also
contained a five-year interest guarantee. The company planned for, and
experienced, higher surrenders related to this block of business. The impact
of the higher withdrawal levels on this block of business was reflected
primarily in the 1994 financial statements and to a smaller degree in 1995.
At June 30, 1996, all policies originally issued from 1988 through June 1991,
with a 5 year interest guarantee represent approximately 1.3% ($87.5 million)
of the company's fixed annuity liabilities.
The company currently has two fixed annuity products available for sale
through stockbrokers. The pricing assumptions have been modified on these
products to reflect higher withdrawal expectations. Prior to second quarter
of 1995, the company had not actively solicited fixed annuity sales through
stockbrokers since 1989. The company plans to continue to expand its
distribution channels to include stockbrokers, banks, and other financial
institutions in addition to its current brokerage and career agency
distribution.
The following table summarizes the annualized annuity withdrawal rates and
the life insurance lapse ratios for the three and the six months ended June
30, 1996 and 1995:
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------ ------------------
June 30 June 30
------- -------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Annuity withdrawals 8.4% 8.4% 8.3% 8.8%
Annuity withdrawals, excluding
withdrawls of policies for which
the five year interest guarantee
and five year surrender charge
have expired 8.3% 7.5% 8.3% 7.4%
Life insurance lapse rates 7.8% 8.2% 7.3% 8.0%
</TABLE>
The withdrawal ratio for the company's annuity products is calculated by
dividing aggregate surrenders and withdrawals by beginning of period account
balances. The company's annualized lapse ratio for life insurance is
measured in terms of face amount and uses A.M. Best's formula.
The amortization of deferred policy acquisition costs increased by $3,280,000,
or 19.5%, in the second quarter and $6,932,000, or 22.2%, in the first six
months of 1996. Amortization of deferred acquisition costs related to
operating earnings increased $2,662,000, or 17.2%, in the second quarter and
$4,512,000, or 15.1%, in the first six months of 1996. Increases in
amortization of deferred acquisition costs related to operating earnings are
the result of increases in the deferred policy acquisition cost asset (before
adjustment to reflect the impact of SFAS No. 115) as costs of generating sales
of the company's products are deferred and amortized in later periods. Also,
withdrawals and surrenders of the company's products have accelerated the
amortization of deferred acquisition costs related to those products although
surrender charges assessed on certain withdrawals offset some of the earnings
impact of this accelerated amortization. Amortization related to realized
gains increased $618,000, or 46.4%, in the second quarter and $2,420,000, or
181.2%, in the first six months of 1996 due to the increase in total realized
gains.
A breakdown of the amortization of deferred policy acquisition costs for the
three and six months ended June 30, 1996 and 1995 is as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------ ------------------
1996 1995 1996 1995
---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C>
Amortization related to:
Operating income $18,121 $15,459 $34,442 $29,930
Realized gains 1,954 1,336 3,756 1,336
-------- -------- -------- --------
Total $20,075 $16,795 $38,198 $31,266
======== ======== ======== ========
</TABLE>
Income
Operating income (income excluding realized gains and losses, commercial
mortgage and mortgage-backed securities prepayment gains and related
amortization of deferred policy acquisition costs, net of related income
taxes) increased $3,620,000, or 14.5%, in the second quarter and $7,908,000,
or 16.3%, in the first six months of 1996. Net income increased $5,152,000,
or 19.4%, in the second quarter and $11,563,000 or 22.9%, in the first six
months of 1996. A breakdown of income is as follows:
<TABLE>
<CAPTION>
1996 1995
------------------------------------------
Three months ended June 30 $ Per Share $ Per Share
- ------------------------------------------------------------------------------
(Dollars in thousands,
except per share data)
<S> <C> <C> <C> <C>
Operating income $28,605 $0.90 $24,985 $0.79
Realized gains (net of tax):
Gains realized on disposal
of investments 4,009 0.12 1,164 0.04
Commercial mortgage and
mortgage-backed securities
prepayment gains 429 0.01 1,339 0.04
Realized gains related
amortization of DPAC (1,271) (0.03) (868) (0.03)
------------------------------------------
3,167 0.10 1,635 0.05
------------------------------------------
Net income $31,772 $1.00 $26,620 $0.84
==========================================
</TABLE>
<TABLE>
<CAPTION>
1996 1995
------------------------------------------
Six months ended June 30 $ Per Share $ Per Share
- ------------------------------------------------------------------------------
(Dollars in thousands,
except per share data)
<S> <C> <C> <C> <C>
Operating income $56,280 $1.77 $48,372 $1.53
Realized gains (net of tax):
Gains realized on disposal
of investments 7,356 0.23 1,237 0.04
Commercial mortgage and
mortgage-backed securities
prepayment gains 782 0.02 1,673 0.05
Realized gains related
amortization of DPAC (2,441) (0.07) (868) (0.03)
------------------------------------------
5,697 0.18 2,042 0.06
Net income ------------------------------------------
$61,977 $1.95 $50,414 $1.59
==========================================
</TABLE>
The pending acquisition of Golden American is currently expected to dilute
1997 operating earnings by 6 to 10 cents per share. Subsequent to 1997,
however, the acquisition is expected to have a positive impact on earnings
per share as opportunities will be available to market fixed products through
Golden American's distribution channels, expand the distribution of variable
products and achieve expense efficiencies. See "Cautionary Statement
Regarding Forward Looking Statements" below.
Average shares outstanding totaled 31,888,206 in the second quarter and
31,852,453 in the first six months of 1996 up from 31,677,568 and 31,670,536
in the same periods of 1995.
FINANCIAL CONDITION
Investments
The financial statement carrying value of the company's total investments
grew 0.5% in the first six months of 1996. The amortized cost basis of the
company's total investment portfolio grew 5.9% during the same period.
Effective December 1, 1995, all of the company's investments, other than
mortgage loans and real estate, are carried at market value in the company's
financial statements. As such, growth in the carrying value of the company's
investment portfolio included changes in unrealized appreciation and
depreciation of fixed maturity and equity securities as well as growth in the
cost basis of these securities. Growth in the cost basis of the company's
investment portfolio resulted from the investment of premiums from the sale
of the company's annuity and insurance products. The company manages the
growth of its insurance operations in order to maintain adequate capital
ratios.
To support the company's annuities and life insurance products, cash flow was
invested primarily in fixed income investments. At June 30, 1996, the
company's investment portfolio was comprised of the following:
<TABLE>
<CAPTION>
Estimated Yield at
Amortized % of Market % of Amortized
Cost Total Value Total Cost
_______________________________________________
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Investment cash and short-term
investments $47,482 0.6% $47,482 0.6% 5.0%
Governments and agency mortgage-
backed securities 375,443 4.3 382,974 4.4 8.1
Conventional mortgage-backed
securities 2,274,044 26.3 2,230,351 25.7 7.9
Investment grade corporate
securities 3,695,513 42.7 3,779,786 43.6 8.2
Below-investment grade corporate
securities 644,796 7.5 624,763 7.2 9.2
Mortgage loans 1,537,827 17.8 1,537,937 17.7 8.3
_______________________________________________
Total cash and fixed income
investments 8,575,105 99.2 8,603,293 99.2 8.2
Equity securities 51,119 0.6 52,468 0.6 7.0
Real estate 14,273 0.2 14,273 0.2 2.5
_______________________________________________
Total investments $8,640,497 100.0% $8,670,034 100.0% 8.2%
===============================================
<FN>
Note: Estimated market values of publicly traded securities are as reported by
an independent pricing service. Market values of conventional mortgage-
backed securities not actively traded in a liquid market are estimated
using a third party pricing system, which uses a matrix calculation
assuming a spread over U.S. Treasury bonds based upon the expected
average lives of the securities. Market values of private placement
bonds are estimated using a matrix that assumes a spread (based on
interest rates and a risk assessment of the bonds) over U.S. Treasury
bonds. Estimated market values of redeemable preferred stocks are as
reported by the National Association of Insurance Commissioners
("NAIC"). Market values of mortgage loans on real estate are estimated
by discounting expected cash flows, using interest rates currently being
offered for similar loans. Market values of publicly traded equity
securities are based upon the most recently available quoted price for
those securities. Market values of the company's investment in its
registered separate account are based upon the quoted market value of
the securities comprising the individual portfolios underlying the
separate account. Market value of owned real estate is estimated to be
equal to, or in excess of, carrying value based upon appraised values.
</TABLE>
At June 30, 1996, the ratings assigned by Standard & Poor's Corporation
("Standard & Poor's") and Moody's Investors Service ("Moody's") to the
individual securities in the company's fixed maturities portfolio are
summarized as follows:
<TABLE>
<CAPTION>
Amortized % of Estimated % of
Cost Total Market Value Total
____________ _______ ____________ _______
(Dollars in thousands)
<S> <C> <C> <C> <C>
RATINGS ASSIGNED BY
STANDARD & POOR'S:
U.S. governments, agencies
& AAA Corporates $2,608,911 37.3% $2,572,334 36.8%
AA+ to AA- 403,707 5.8 409,608 5.8
A+ to A- 1,950,726 27.9 2,011,362 28.7
BBB+ to BBB- 1,245,104 17.8 1,265,207 18.0
BB+ to BB- 563,511 8.1 547,036 7.8
B+ to B- 122,925 1.8 118,971 1.7
Issues not rated by S&P
(by NAIC rating):
Rated 1 (AAA to A-) 35,938 0.5 36,507 0.5
Rated 2 (BBB+ to BBB-) 22,642 0.3 23,090 0.3
Rated 3 (BB+ to BB-) 30,600 0.4 30,465 0.4
Rated 6 (C1, D) 5,099 0.1 2,897 0.0
Redeemable preferred stock 633 0.0 397 0.0
____________ _______ ____________ _______
TOTAL FIXED MATURITIES $6,989,796 100.0% $7,017,874 100.0%
============ ======= ============ =======
</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 $2,451,841 35.2% $2,421,291 34.6%
Aa1 to Aa3 461,244 6.6 456,421 6.5
A1 to A3 2,229,786 31.9 2,296,654 32.7
Baa1 to Baa3 1,037,193 14.8 1,054,652 15.0
Ba1 to Ba3 603,802 8.6 588,933 8.4
B1 to B3 114,671 1.6 110,429 1.6
Issues not rated by Moody's
(by NAIC rating):
Rated 1 (Aaa to A3) 30,504 0.4 30,795 0.4
Rated 2 (Baa1 to Baa3) 22,642 0.3 23,090 0.3
Rated 3 (Ba1 to Ba3) 32,381 0.5 32,315 0.5
Rated 6 (Caa to C) 5,099 0.1 2,897 0.0
Redeemable preferred stock 633 0.0 397 0.0
____________ _______ ____________ _______
TOTAL FIXED MATURITIES $6,989,796 100.0% $7,017,874 100.0%
============ ======= ============ =======
</TABLE>
On November 15, 1995, the Financial Accounting Standards Board ("FASB")
issued a special report "A Guide to Implementation of Statement 115 on
Accounting for Certain Investments in Debt and Equity Securities." This
report allowed companies a one-time opportunity to reassess the
classification of their securities holdings pursuant to Statement of
Financial Accounting Standards ("SFAS") No. 115. SFAS No. 115 requires
companies to classify their securities as "held to maturity", "available for
sale" or "trading". SFAS No. 115 significantly restricts a company's ability
to sell securities in the held to maturity category without raising questions
about the appropriateness of its accounting policy for such securities.
Classification of securities as held to maturity, therefore, limits a
company's ability to manage its investment portfolio in many circumstances.
For example, a company would be prohibited from accepting a tender offer or
responding to an anticipated decline in the credit quality of assets in a
particular industry when the security is categorized as held to maturity.
Additionally, a company is unable to adjust its portfolio to take advantage
of tax planning opportunities or economic changes that would assist in asset
liability management. Thus a company's ability to maintain the appropriate
flexibility to make optimal investment decisions is significantly restricted
if it classifies securities as held to maturity.
In response to this opportunity, the company reclassified 100% of the
securities in its "held to maturity" category to "available for sale" on
December 1, 1995 to maximize investment flexibility. As a result of this
reclassification, the net unrealized investment gain component of
stockholders' equity increased by $138,795,000 on December 1, 1995 (net of
deferred taxes of $74,735,000 and an adjustment of $96,068,000 to deferred
policy acquisition costs) to reflect the net unrealized investment gains on
securities classified as available for sale that were previously classified
as held to maturity. The company is not, however, precluded from classifying
securities as held to maturity in the future. While it is not the company's
current practice to engage in active management of the fixed maturities
securities portfolio such that significant sales would occur, the inability
to respond to prudent financial management decisions necessitated this
change.
SFAS No. 115 requires the carrying value of fixed maturity securities
classified as available for sale to be adjusted for changes in market value,
primarily caused by interest rates. While other related accounts are
adjusted as discussed above, the insurance liabilities supported by these
securities are not adjusted under SFAS No. 115, thereby creating volatility
in stockholders' equity as interest rates change. As a result, the company
expects that its stockholders' equity will be exposed to incremental
volatility due to changes in market interest rates and the accompanying
changes in the reported value of securities classified as available for sale,
with equity increasing as market interest rates decline and, conversely,
decreasing as market interest rates rise.
On June 30, 1996, fixed income securities with an amortized cost of
$6,989,796,000 and an estimated market value of $7,017,874,000 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 $13,551,000, or
$0.42 per share at June 30, 1996 compared to an increase of $208,932,000, or
$6.58 per share at December 31, 1995.
Net unrealized appreciation of fixed maturity investments of $28,078,000 was
comprised of gross appreciation of $196,717,000 and gross depreciation of
$168,639,000.
The percentage of the company's portfolio invested in below investment grade
securities has increased during the first six months of 1996. At June 30,
1996 the amortized cost value of the company's total investment in below
investment grade securities consisted of investments in 92 issuers totaling
$644,796,000, or 7.5% of the company's investment portfolio compared to 92
issuers totaling $574,284,000, or 7.0%, at December 31, 1995. The company
intends to purchase additional below investment grade securities but it does
not expect the percentage of its portfolio invested in below investment grade
securities to exceed 10% of the investment portfolio. At June 30, 1996, the
yield at amortized cost on the company's below investment grade portfolio was
9.2% compared to 8.2% for the company's investment grade corporate bond
portfolio. The company estimates that the market value of its below
investment grade portfolio was $624,763,000, or 96.9% of amortized cost
value, at June 30, 1996.
Below investment grade securities have different characteristics than
investment grade corporate debt securities. Risk of loss upon default by the
borrower is significantly greater with respect to below investment grade
securities than with other corporate debt securities. Below investment grade
securities are generally unsecured and are often subordinated to other
creditors of the issuer. Also, issuers of below investment grade securities
usually have higher levels of debt and are more sensitive to adverse economic
conditions, such as recession or increasing interest rates, than are
investment grade issuers. The company attempts to reduce the overall risk in
its below investment grade portfolio, as in all of its investments, through
careful credit analysis, strict investment policy guidelines, and
diversification by company and by industry.
The company analyzes its investment portfolio, including below investment
grade securities, at least quarterly in order to determine if its ability to
realize its carrying value on any investment has been impaired. For debt and
equity securities, if impairment in value is determined to be other than
temporary (i.e. if it is probable that the company will be unable to collect
all amounts due according to the contractual terms of the security), the cost
basis of the impaired security is written down to fair value, which becomes
the security's new cost basis. The amount of the writedown is included in
earnings as a realized loss. Future events may occur, or additional or
updated information may be received, which may necessitate future write-downs
of securities in the company's portfolio. Significant write-downs in the
carrying value of investments could materially adversely affect the company's
net income in future periods.
During the first six months of 1995, the company identified two below
investment grade securities as having impairments in value that were other
than temporary. As a result of those determinations, the company recognized
pre-tax losses of $5,802,000 to reduce the amortized cost basis of these two
securities to their estimated fair value. These securities were subsequently
sold resulting in realized gains totaling $1,200,000. No securities were
deemed to have an impairment in value that was other than temporary in 1996.
During the first six months of 1996, fixed maturity securities designated as
available for sale with a combined amortized cost value of $195,050,000 were
called or repaid by their issuers generating net realized gains totaling
$9,244,000. In total, pre-tax gains from sales, calls, repayments, tenders
and writedowns of fixed maturity investments amounted to $10,213,000 in the
first six months of 1996.
The company's fixed maturity investment portfolio had a combined amortized
cost yield of 8.2% at June 30, 1996 compared to 8.3% at March 31, 1996 and
December 31, 1995.
Mortgage loans make up approximately 17.7% of the company's investment
portfolio carrying value, as compared to an industry average of 15.1%, based
on information reported in the 1995 ACLI Fact Book. The company resumed
active mortgage lending in 1994 to broaden its investment alternatives and,
has continued to increase the lending activity. Mortgages outstanding
increased to $1,537,827,000 from $1,169,456,000 during the first six months
of 1996. The company expects this asset category to continue to grow over
the next several years. The company's mortgage loan portfolio includes 516
loans with an average size of $2,980,000, and average seasoning of 4.4 years
if weighted by the number of loans, and 1.8 years if weighted by mortgage
loan carrying values. The company's mortgage loans are typically secured by
occupied buildings in major metropolitan locations and not speculative
developments, and are diversified by type of property and geographic
location. At June 30, 1996, the yield on the company's mortgage loan
portfolio was 8.3%.
Distribution of these loans by type of collateral is as follows:
<TABLE>
<CAPTION>
% of
# of Carrying Mortgage
Loans Value Portfolio
_______________________________
(Dollars in thousands)
<S> <C> <C> <C>
Collateral Breakdown
- ------------------------------
Farm 4 $125 0.0%
Multi-family residential 90 319,771 20.8
Industrial 191 428,577 27.9
Office buildings 97 332,733 21.6
Retail 127 432,912 28.2
Other 7 23,709 1.5
______ ____________ _________
TOTAL 516 $1,537,827 100.0%
====== ============ =========
</TABLE>
Distribution of these loans by geographic location is as follows:
<TABLE>
<CAPTION>
% of
# of Carrying Mortgage
Loans Value Portfolio
_______________________________
(Dollars in thousands)
<S> <C> <C> <C>
Geographic Breakdown
- ------------------------------
New England 4 $18,636 1.2%
Middle Atlantic 65 234,520 15.2
South Atlantic 74 236,401 15.4
East North Central 105 336,567 21.9
West North Central 64 201,641 13.1
East South Central 18 64,116 4.2
West South Central 33 91,685 6.0
Mountain 33 95,255 6.2
Pacific 120 259,006 16.8
______ ____________ _________
TOTAL 516 $1,537,827 100.0%
====== ============ =========
</TABLE>
At June 30, 1996, two mortgage loans with combined carrying value of $719,000
were delinquent by 90 days or more. At June 30, 1996, the company had
established a valuation allowance of $180,000 on one of the loans to reduce
the carrying value of this investment to its estimated fair value less costs
to sell. The company does not expect to incur material losses from its
mortgage loan portfolio because of the historically low default rate in the
company's mortgage loan portfolio and because the company has been able to
recover 79% of the principal amount of problem mortgages that have been
resolved in the last three years.
At June 30, 1996, the company owned real estate totaling $14,273,000,
including properties acquired through foreclosure valued at $10,638,000.
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 June 30, 1996. The company estimates its total
investment portfolio, excluding policy loans, had a market value equal to
100.3% of amortized cost value at June 30, 1996.
Financial Instruments
During the second quarter of 1996, the company implemented a hedging program
under which certain derivative financial instruments, interest rate caps and
cash settled put swaptions ("instruments"), were purchased to reduce the
negative effects of potential increases in withdrawal activity related to the
company's annuity liabilities which may result from extreme increases in
interest rates. The agreements for these instruments entitle the company to
receive payments from the instrument's counterparties on future reset dates
if interest rates, as specified in the agreements, rise above a specified
fixed rate (9.0% and 9.5% as of June 30, 1996). The amount of such payments
to be received by the company for the interest rate caps, if any, will be
calculated by multiplying the percentage by which the applicable rate exceeds
the fixed rate times the notional amount of the caps and will be recorded as
an adjustment to interest credited. Payments on cash settled put swaptions
are also calculated based upon the percentage by which the specified rate
exceeds the fixed rate times the notional amount. The product of this rate
differential times the notional amount is assumed to continue for a series of
defined future semi-annual payment dates and the resulting hypothetical
payments are discounted to the current payment date using the rate defined in
the agreement as the discount rate. For both interest rate caps and put
swaptions, payments are required only if in the company's favor. During the
second quarter, the company purchased instruments with notional amounts
totaling approximately $600,000,000 in interest rate caps and $1,300,000,000
in cash settled put swaptions all of which were outstanding at June 30, 1996.
Through June 30, 1996, the company paid approximately $21,100,000 in premiums
for these instruments. The cost of this program has been incorporated into
the company's product pricing.
The following table illustrates the contractual maturities of notional
amounts by type of instrument at June 30, 1996:
<TABLE>
<CAPTION>
1998 1999 2000 2001 2002 Total
_________________________________________________________________
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest rate
caps $400,000 $200,000 $600,000
Cash settled
put swaptions $100,000 $400,000 $400,000 350,000 50,000 1,300,000
_________________________________________________________________
Total notional
amount $100,000 $400,000 $400,000 $750,000 $250,000 $1,900,000
=================================================================
</TABLE>
Premiums paid to enter into these instruments are deferred and included in
other assets. Premiums are amortized and included in interest credited to
account balances over the term of the instruments on a straight-line basis.
Through June 30, 1996, the company has recorded amortization of $621,000.
Unrealized gains and losses on these instruments and related assets or
liabilities will not be recorded in income until realized. The Financial
Accounting Standards Board ("FASB") and the Securities and Exchange
Commission are evaluating the accounting and disclosure requirements for
these instruments. The company is in the process of reviewing a recently
published exposure draft by FASB titled "Accounting for Derivative and
Similar Financial Instruments and for Hedging Activities". The impact of the
final standard cannot be clearly defined at this time, however, the current
accounting treatment for these instruments may change.
Any unrealized gain on loss on the instruments is off-balance sheet. The
following table summarizes the amortized cost, gross unrealized gains and
losses and estimated market value on the instruments as of June 30, 1996:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
June 30, 1996 Cost Gains Losses Value
__________________________________________________________
(Dollars in thousands)
<S> <C> <C> <C> <C>
Interest rate
caps $5,709 $53 ($787) $4,975
Cash settled
put swaptions 14,791 309 (2,027) 13,073
___________________________________________
Total $20,500 $362 ($2,814) $18,048
===========================================
</TABLE>
The decline in market value from amortized cost reflects changes in interest
rates and market conditions since time of purchase.
The company is exposed to the risk of losses in the event of non-performance
by the counterparties of these instruments. Losses recorded in the company's
financial statements in the event of non-performance will be limited to the
unamortized premium paid to enter into the instrument because no additional
payments are required by the company on these instruments after the initial
premium. Economic losses would be measured by the net replacement cost, or
estimated market value, for such instruments if the net market value is in
the company's favor. The estimated market value is obtained from quotes
provided by the related counterparty. The company limits its exposure to
such losses by: diversification among counterparties, limiting exposure to
any individual counterparty based upon that counterparty's credit rating, and
by limiting its exposure by instrument type to only those instruments that do
not require future payments. For purposes of determining risk exposure to
any individual counterparty, the company evaluates the combined exposure to
that counterparty from financial instruments' and investment portfolio credit
risk exposures and reports its exposure to senior management at least
monthly. The maximum potential economic loss related to nonperformance of
the counterparties will increase or decrease during the life of the
instruments' as a function of maturity and market conditions.
The company determines counterparty credit quality by reference to ratings
from independent rating agencies. As of June 30, 1996, the counterparties
credit quality by instrument with respect to the net replacement value of the
company's derivative portfolio was as follows:
<TABLE>
<CAPTION>
June 30, 1996 Net Replacement Value
_______________________________________________________________________
Interest
Rate Cash Settled
Caps Put Swaptions Total
______________________________________
(Dollars in thousands)
<S> <C> <C> <C>
Counterparties credit quality:
AAA $3,389 $7,048 $10,437
A 1,586 6,025 7,611
______________________________________
Total $4,975 $13,073 $18,048
======================================
</TABLE>
Other assets
- ------------
Accrued investment income increased $2,672,000 primarily due to an increase
in new fixed income investments and in the overall size of the portfolio.
Deferred policy acquisition costs increased $174,829,000 over year-end 1995
levels. Excluding the adjustment to reflect the impact of SFAS No. 115,
deferred policy acquisition costs increased $37,119,000 as the deferral of
current period costs (primarily commissions) totaled $75,317,000.
Amortization of costs deferred totaled $38,198,000. At June 30, 1996, the
company had $269,229,000 of separate account assets compared to $171,881,000
at December 31, 1995. The increase in separate account assets is primarily
due to growth in the company's variable annuity product. At June 30, 1996,
the company had total assets of $10,121,079,000, an increase of 3.5% over
total assets at December 31, 1995.
Liabilities
- -----------
In conjunction with the volume of annuity and insurance sales, and the
resulting increase in business in force, the company's liability for policy
liabilities and accruals increased $423,945,000, or 5.1%, during the first
six months of 1996 and totaled $8,665,855,000 at June 30, 1996. Reserves for
the company's fixed annuity policies increased $401,542,000, or 5.7%, during
this period and totaled $7,431,456,000 at June 30, 1996. Life insurance
reserves increased $19,363,000, or 1.6%, during the first six months of 1996
and totaled $1,208,053,000 at June 30, 1996.
The company incorporates a number of features in its annuity products
designed to reduce early withdrawal or surrender of the policies and to
partially compensate the company for its costs if policies are withdrawn
early. Surrender charge periods on annuity policies currently typically
range from five years to the term of the policy, with 87% of such policies
being issued with a surrender charge period of seven years or more during the
first six months of 1996. 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 for the six months ended June 30, 1996 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
Annuity % of Annuity % of
Surrender Charge % Sales Total Liabilities Total
___________________________________________________________________
(Dollars in thousands)
<S> <C> <C> <C> <C>
No surrender charge $666,362 9.7%
1 to 4 percent 803,099 11.7
5 to 6 percent $17,672 3.5% 992,567 14.5
7 to 9 percent 423,263 83.4 3,149,687 46.0
10 percent and greater 66,218 13.1 1,240,174 18.1
_________________________________________
$507,153 100.0% $6,851,889 100.0%
=========================================
</TABLE>
Deferred income taxes decreased $102,969,000 to $11,946,000 from December 31,
1995 of which $106,206,000 of the decrease relates to the decrease in the
level of unrealized gains on fixed maturity securities. Total consolidated
debt increased $57,900,000 during the first six months of 1996 as the company
issued additional commercial paper. The increase in commercial paper is
offset by $46,818,000 of short-term investments of which $41,000,000 was
utilized to paydown commercial paper maturities in early July. Commercial
paper, issued to offset short-term timing differences in investment related
cash receipts and disbursements (investment smoothing) and to provide for
short-term operating needs, amounted to $116,000,000 at June 30, 1996. Of
this amount, approximately $21,275,000 was issued for investment smoothing
purposes. The company's commercial paper levels will fluctuate throughout
the year as the amounts outstanding for investment smoothing purposes
changes. Other liabilities increased $5,147,000 from year-end 1995 levels
primarily due to an increase in draft accounts payable and mortgage trust
funds, partially offset by decreases in transfer and suspense accounts and
reinsurance payables.
Separate account liabilities increased $97,348,000 to $269,229,000 from
December 31, 1995 primarily due to growth in the company's variable annuity
product. At June 30, 1996, the company had total liabilities of
$9,367,710,000 compared to $8,886,484,000 at December 31, 1995, a 5.4%
increase.
Equity
- ------
At June 30, 1996, stockholders' equity was $753,369,000, or $23.62 per share,
compared to $893,932,000 or $28.14 per common share at year end 1995.
Unrealized appreciation of available for sale fixed maturity securities
increased stockholders' equity by $13,551,000, or $0.42 per share, after
adjustments to deferred acquisition costs and deferred income taxes, at June
30, 1996 compared to an increase of $208,932,000 or $6.58 per share at
December 31, 1995. The ratio of consolidated debt to total capital was 22.3%
(22.6% excluding SFAS No. 115) at June 30, 1996, up from 15.0% (18.8%
excluding SFAS No. 115) at year-end 1995 as a result of the increase in
commercial paper issued for investment smoothing and working capital needs.
Excluding commercial paper issued for investment smoothing purposes, the
ratio of debt to total capital was 20.5% (20.8% excluding SFAS No. 115) at
June 30, 1996. At June 30, 1996, there were 31,896,824 common shares
outstanding compared to 31,769,490 shares at December 31, 1995.
The effects of inflation and changing prices on the company are not material
since insurance assets and liabilities are both primarily monetary and remain
in balance. An effect of inflation, which has been low in recent years, is a
decline in purchasing power when monetary assets exceed monetary liabilities.
LIQUIDITY AND CAPITAL RESOURCES
The liquidity requirements of the company's subsidiaries are met by cash flow
from annuity and insurance premiums, investment income, and maturities of
fixed maturity investments and mortgage loans. The company primarily uses
funds for the payment of annuity and insurance benefits, operating expenses
and commissions, and the purchase of new investments.
The company's home office operations are currently housed in four leased
locations in downtown Des Moines, Iowa. The company has entered into
agreements with a developer to develop and lease a 200,000 square foot office
building in downtown Des Moines, Iowa to house all of the company's home
office operations. The company anticipates an additional $5,000,000 for
computer technology will be spent in 1997 for the new location. In addition,
the company intends to increase its commitment to improve product
development, customer service and operating efficiencies by spending
approximately $7,000,000 per year through 1998 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, investment smoothing purposes and to provide short-
term liquidity. At June 30, 1996 the company had $116,000,000 in commercial
paper notes outstanding, an increase of $57,900,000 from December 31, 1995
due, in part, to investment smoothing discussed above. The company's
commercial paper is rated A1 by Standard and Poor's, D1 by Duff & Phelps
Credit Rating Co., and P2 by Moody's.
To enhance short term liquidity and back up its outstanding commercial paper
notes, the company maintains a line of credit agreement with several banks.
On May 10, 1996, the company amended its agreement to increase the line of
credit to $300,000,000, and extend its term to May 10, 2001. The terms of
the agreement require the company to maintain certain adjusted consolidated
tangible net worth levels. "Adjusted consolidated tangible net worth" is
defined as consolidated stockholders' equity, adjusted to exclude the effects
of SFAS No. 115, less intangible assets. The most restrictive covenant
requires the company maintain adjusted consolidated tangible net worth equal
to or in excess of the sum of (1) $490,000,000, plus (2) 50% of consolidated
net income from January 1, 1995 to the end of the most recent quarter, plus
(3) net proceeds from the issuance of capital stock from January 1, 1995 to
the end of the most recent quarter. At June 30, 1996, $172,343,000 of
retained earnings were free of restrictions and could be distributed to the
companies public stockholders.
Since Equitable of Iowa Companies is a holding company, funds required to
meet its debt service requirements, dividend payments and other expenses are
primarily provided by its subsidiaries. The ability of the company's
insurance subsidiaries to pay dividends and other distributions to the
company is regulated by state law. Iowa law provides that an insurance
company may pay dividends, without prior approval of the Commissioner of
Insurance if, together with all dividends or distributions made during the
preceding twelve month period, the dividends would not exceed the greater of
(a) 10% of the insurer's statutory surplus as of the December 31st next
preceding; or (b) the statutory net gain from operations for the twelve month
period ending as of the next preceding December 31st. In addition, the law
provides that the insurer may only make dividend payments to its shareholders
from its earned surplus (i.e., its surplus as regards policyholders less paid-
in and contributed surplus). Equitable Life could pay dividends to the
company without prior approval of the Iowa Commissioner of Insurance of
approximately $85,758,000 during the remainder of 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 annuity and insurance business
requires increased amounts of capital and surplus for the company's insurance
operations. Historically, the company has funded growth in its insurance
operations internally through the retention of earnings. Increased levels of
growth in recent years have required capital contributions in excess of
amounts generated by operating activities. In 1993 the company completed a
primary stock offering to the public and contributed $70,000,000 of the
proceeds from the offering to its insurance operations. In February 1995,
the company issued $100,000,000 of 8.5% notes, maturing on February 15, 2005,
receiving net proceeds of $98,812,000, after expenses. The company
contributed $50,000,000 of the proceeds to its insurance subsidiaries and
applied the remaining net proceeds to the repayment of outstanding commercial
paper notes. Future growth in the company's insurance operations, internally
or through acquisitions, may require additional capital although the company
believes it has sufficient resources to support growth in operations for the
next few years. The company's primary sources of capital are the retention
of earnings and the issuance of additional securities.
In order to provide the flexibility to respond promptly to capital needs as
opportunities or needs arise, the company has available an effective
universal shelf registration on Form S-3 with the Securities and Exchange
Commission with respect to $300,000,000 of securities, including any
combination of debt securities, common stock and preferred stock, of which
$175,000,000 remains to be issued. Securities may be issued and sold upon
such terms and conditions and at such time or times as may be later
determined. Any such offering will be made only by means of a prospectus.
Pursuant to this shelf registration, during July 1996, the company received
net proceeds of approximately $120,000,000 after estimated fees and expenses,
from issuing $125,000,000 of 8.70% Trust Originated Preferred Securities
maturing in 2026. The proceeds from the sale of the securities will be
utilized to fund the pending acquisition of BT Variable, Inc.
On May 3, 1996, Equitable of Iowa Companies signed a definitive agreement to
purchase all of the outstanding stock of BT Variable, Inc., a Delaware
corporation, including its wholly-owned subsidiaries, Golden American Life
Insurance Company ("Golden American") and Directed Services, Inc. (a broker-
dealer). Total consideration is approximately $144,000,000 in cash, which
includes the repayment of $51,000,000 in debt. The transaction, which is
subject to customary closing conditions and regulatory approvals, is expected
to close in August, 1996. Golden American is a Delaware domiciled life
insurance company specializing in the issuance of variable annuities with
assets of $1,300,000,000 at March 31, 1996. Through the first quarter ended
March 1996, Golden American collected $116,000,000 of variable annuity and
life premiums and reported net income of $1,000,000.
The company's insurance subsidiaries operate under the regulatory scrutiny of
each of the state insurance departments supervising business activities in
the states where each company is licensed. The company is not aware of any
current recommendations by these regulatory authorities which, if they were
to be implemented, would have a material effect on the company's liquidity,
capital resources or operations.
INSURANCE INDUSTRY ISSUES
The company's insurance subsidiaries are assessed contributions by life and
health guaranty associations in almost all states to indemnify policyholders
of failed companies. In several states the company may reduce premium taxes
paid to recover a portion of assessments paid to the states' guaranty fund
association. This right of "offset" may come under review by the various
states, and the company cannot predict whether and to what extent legislative
initiatives may affect this right to offset. Also, some state guaranty
associations have adjusted the basis by which they assess the cost of
insolvencies to individual companies. The company believes that its reserve
for future guaranty fund assessments is sufficient to provide for assessments
related to known insolvencies. This reserve is based upon management's
current expectation of the availability of this right of offset and state
guaranty fund assessment bases. However, changes in the basis whereby
assessments are charged to individual companies and changes in the
availability of the right to offset assessments against premium tax payments
could materially affect the company's results.
Currently, the company's insurance subsidiaries are subject to regulation and
supervision by the states in which they are admitted to transact business.
State insurance laws generally establish supervisory agencies with broad
administrative and supervisory powers related to granting and revoking
licenses to transact business, establishing guaranty fund associations,
licensing agents, market conduct, approving policy forms, regulating premium
rates for some lines of business, establishing reserve requirements,
prescribing the form and content of required financial statements and
reports, determining the reasonableness and adequacy of statutory capital and
surplus and regulating the type and amount of investments permitted.
The insurance regulatory framework continues to be scrutinized by various
states, the federal government and the NAIC. The NAIC, in conjunction with
state regulators, has been reviewing existing insurance laws and regulations.
A committee of the NAIC 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 than 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 adopted Guideline XXXIII in 1995 which requires the company to
increase annuity reserves in its statutory financial statements by
approximately $24,000,000. The company has received approval from the Iowa
and Oklahoma insurance departments for a three year phase-in. The 1995
statutory statements included an increase in annuity reserves of
approximately $8,100,000 pursuant to the requirements of the guideline. The
quarterly statutory financial statements include an increase in annuity
reserves of approximately $3,171,000 pursuant to the requirements of the
guideline for the six months ended June 30, 1996. The guideline has no
effect on financial statements prepared in accordance with GAAP.
There has been increased scrutiny by insurance regulators and the insurance
industry itself of insurance sales and marketing activities. New rules for
life insurance illustrations have been proposed for adoption in 1996 and an
NAIC committee has begun to work on the issue of annuity illustrations. The
company has conducted a thorough review of its sales and marketing process
and continues to emphasize its compliance efforts.
Legislative and regulatory initiatives regarding changes in the regulation of
banks and other financial services businesses and restructuring of the
federal income tax system could, if adopted and depending on the form they
take, have an adverse impact on the company by altering the competitive
environment for its products. The outcome and timing of any such changes
cannot be anticipated at this time, but the company will continue to monitor
developments in order to respond to any opportunities or increased
competition that may occur.
RECENT DEVELOPMENTS
As previously reported, the company and certain of its subsidiaries are
defendants in class action lawsuits filed in the 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. A similar class action
law suit has recently been filed against a subsidiary of the Company in
the Court of Common Pleas of Allegheny County, Pennsylvania. The three suits
claim unspecified damages as a result of alleged improper life insurance
sales practices. The company believes the allegations are without merit.
The company is awaiting an order of dismissal in the Iowa suit. The Iowa
Court has agreed to dismiss that action pursuant to the application of the
Plaintiff and as agreed to by the company. The remaining 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
company's financial statements.
As previously reported, on December 15, 1995, USG received a Notice of
Intention to Arbitrate a dispute with one of its insurance brokerage agencies
before the American Arbitration Association. 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
and underwriting of insurance products, which may affect the competitive
environment for the company's products.
4. Consummation of the Golden American acquisition.
5. Factors affecting the performance of the company and Golden American,
including, but not limited to, interest rates, stock market performance,
tax and regulatory changes, investment performance of the underlying
portfolios of the variable annuity product, variable annuity product
design and sales volume by significant sellers of Golden American's
variable annuities.
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
As previously reported, the company and certain of its subsidiaries
are defendants in class action lawsuits filed in the 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. A similar class action law suit has recently been filed against
a subsidiary of the Company in the Court of Common Pleas of Allegheny
County, Pennsylvania. The three suits claim unspecified damages as
a result of alleged improper life insurance sales practices. The
company believes the allegations are without merit. The company is
awaiting an order of dismissal in the Iowa suit. The Iowa Court has
agreed to dismiss that action pursuant to the application of the
Plaintiff and as agreed to by the company. The remaining suits are in
the early discovery and procedural stages and have not yet been
certified as class action. The company intends to defend the suits
vigorously. The amount of any liability which may arise as a result
of these suits, if any cannot be reasonably estimated and no provision
for loss has been made in the company's financial statements.
As previously reported, on December 15, 1995, USG received a Notice
of Intention to Arbitrate a dispute with one of its insurance
brokerage agencies before the American Arbitration Association. 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 reason-
ably 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.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The annual meeting of the Company was held on April 25,
1996.
(c)(i) Election of three directors to the Company's Board of
Directors with the following voting results:
Against or Broker
For Withheld Non-Votes
--- ---------- ---------
Jack D. Rehm 26,515,977 33,167 0
Hans F.E. Wachtmeister 26,386,685 45,167 0
Richard S. White 26,520,027 33,167 0
(ii) Approval of the Company's 1996 Non-Employee Director's Stock
Option Plan.
Against or Broker
For Withheld Abstentions Non-Votes
--- ---------- ----------- ---------
24,597,612 1,790,855 122,920 0
(iii) Approval of the appointment of Ernst & Young LLP as auditors
for the Company for the year 1996.
Against or Broker
For Withheld Abstentions Non-Votes
--- ---------- ----------- ---------
26,487,843 8,279 15,265 0
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
A list of exhibits included as part of this report is set forth
in the Exhibit Index which immediately precedes such exhibits
and is hereby incorporated by reference herein.
(b) The following report on Form 8-K was filed during the quarter
ended June 30, 1996:
(i) The Company's report on Form 8-K filed on May 3, 1996.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
DATE: August 2, 1996 EQUITABLE OF IOWA COMPANIES
By /s/ Paul E. Larson
______________________________________
Executive Vice President and CFO
(Principal Financial Officer)
By /s/ David A. Terwilliger
______________________________________
Vice President and Controller
(Principal Accounting Officer)
INDEX
Exhibits to Form 10-Q
Six Months ended June 30, 1996
EQUITABLE OF IOWA COMPANIES
3 Articles of Incorporation and By-Laws
(a) Restated Articles of Incorporation as amended through
April 29, 1993, filed as Exhibit 3(a) to Form 10-Q for
the period ended June 30, 1993, is incorporated by
reference
(b) Amended and restated By-Laws filed as Exhibit 2 to
Form 8-K dated November 11, 1991, is incorporated by
reference
4 Instruments Defining the Rights of Security Holders, Including Indentures
(a) Letter Agreement to furnish Commission upon request copies
of other long-term debt instruments
(b)(i) Rights Agreement filed as Exhibit 1 to Form 8-K dated
April 30, 1992, is incorporated by reference
(ii) First amendment to Rights Agreement changing Rights Agent
filed as Exhibit 4(b)(ii) to Form 10-Q for the period
ended September 30, 1992, is incorporated by reference
(iii) Second amendment to Rights Agreement dated April 29, 1993,
adjusting Purchase Price filed as Exhibit 2.2 to Form
8-A/A dated May 13, 1993, is incorporated by reference
(c)(i) Indenture dated as of January 17, 1995 by and between Equitable
of Iowa Companies and The First National Bank of Chicago, as
Trustee, relating to the company's $100,000,000 of 8.5% Notes
due 2005 (incorporated by reference from Exhibit 4.1 to the
company's Registration Statement on Form S-3 Registration No.
33-57343 filed January 18, 1995)
(ii) Form of Global 8.5% Note dated February 22, 1995 due February
15, 2005 in the principal amount of $100,000,000 (incorporated
by reference from Exhibit 4.3 to the company's Report on Form
8-K filed February 15, 1995)
(iii) Form of First Supplemental Indenture dated July 18, 1996,
including therein the Form of Subordinated Deferrable Interest
Debenture, relating to the company's $128,866,000 of 8.70%
Subordinated Deferrable Interest Debentures (incorporated by
reference from Exhibit 4.7.1 to the company's Report on Form
8-K filed July 3, 1996)
(d) Certificate of Trust of Equitable of Iowa Companies Capital
Trust (incorporated by reference from Exhibit 4.8 to the
company's Registration Statement on Form S-3 Registration No.
333-1909 filed March 22, 1996)
(e)(i) Declaration of Trust of Equitable of Iowa Companies Capital
Trust (incorporated by reference from Exhibit 4.9 to the
company's Registration Statement on Form S-3 Registration No.
333-1909 filed March 22, 1996)
INDEX
Exhibits to Form 10-Q
Six Months ended June 30, 1996
EQUITABLE OF IOWA COMPANIES
(ii) Form of First Amendment to Declaration of Trust of Equitable
of Iowa Companies Capital Trust dated July 18, 1996, including
therein the form of Preferred Securities, relating to
$125,000,000 of Trust Originated Preferred Securities issued
by Equitable of Iowa Companies Capital Trust (incorporated by
reference from Exhibit 4.9.1 to the company's Report on Form
8-K filed July 3, 1996)
(f) Form of Preferred Securities Guarantee Agreement by Equitable
of Iowa Companies dated July 18, 1996 relating to $125,000,000
of Trust Originated Preferred Securities issued by Equitable of
Iowa Companies Capital Trust (incorporated by reference from
Exhibit 4.10 to the company's Report on Form 8-K filed July 3,
1996)
10 Material Contracts
(a) Executive compensation plans and arrangements *
(i) Restated Executive Severance Pay Plan filed as Exhibit
10(a) 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
(vii) Restated and Amended Key Employee Incentive Plan 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 reference
INDEX
Exhibits to Form 10-Q
Six Months ended June 30, 1996
EQUITABLE OF IOWA COMPANIES
(ix) 1996 Non-Employee Directors' Stock Option Plan filed as Exhibit
A of Registrant's Proxy Statement dated April 25, 1996, is
incorporated by reference
* Management contracts or compensation plans required to
be filed as an Exhibit pursuant to Item 14(c) of Form
10(K).
11 Statement re: Computation of Per Share Earnings
21 Subsidiaries List
23 Consent of Experts and Counsel
(a) Consent of independent auditors (not required)
(b) Consent of counsel (not required)
27 Financial Data Schedule (electronic filing only)
99 Additional Exhibits
Independence Policy filed as an Exhibit to Form 8-K dated November
11, 1991, is incorporated by reference
Exhibit 4(a)
August 2, 1996
Securities and Exchange Commission
450 5th Street NW
Washington, DC 20549
Ladies/Gentlemen:
The company agrees to furnish the Commission upon request copies of the
following long-term debt instruments:
1. Credit Agreement between Equitable of Iowa Companies and Morgan
Guaranty Trust Company of New York, as Agent, and the Bank of New
York, as Administrative Agent, and participating banks, dated May
10, 1996, re: line of credit in amount of $300,000,000.
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 $25,285,005
due through August 19, 1996.
Very truly yours,
/s/ John A. Merriman
John A. Merriman
General Counsel/Secretary
Equitable of Iowa Companies
EQUITABLE OF IOWA COMPANIES
Consolidated Net Income Per Share Computation
Exhibit 11
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
___________ ___________ ___________ ___________
1996 1995 1996 1995
___________ ___________ ___________ ___________
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C>
Primary:
Net income $31,772 $26,620 $61,977 $50,414
=========== =========== =========== ===========
Average shares
outstanding 31,888,206 31,677,568 31,852,453 31,670,536
=========== =========== =========== ===========
Net income per share $1.00 $0.84 $1.95 $1.59
=========== =========== =========== ===========
Fully diluted:
Net income $31,772 $26,620 $61,977 $50,414
=========== =========== =========== ===========
Average shares
outstanding 31,888,206 31,677,568 31,852,453 31,670,536
Add: Net effect of dilutive
stock options - based on
the treasury stock method
using period-end market
price, if higher than
average market
price 377,466 485,521 384,218 449,399
___________ ___________ ___________ ___________
Total 32,265,672 32,163,089 32,236,671 32,119,935
=========== =========== =========== ===========
Net income per share $0.99 $0.83 $1.92 $1.57
=========== =========== =========== ===========
<FN>
Note: This computation is required by Regulation S-K Item 601 and is filed
as an Exhibit under 6(a) of Form 10-Q. Fully diluted earnings per
share calculated above has not been presented on the face of the
company's Consolidated Statements of Income because dilution is less
than three percent and, therefore, presentation is not required by
Accounting Principles Board Opinion No. 15.
</TABLE>
Exhibit 21
The company's subsidiaries are:
Name State of Organization
------------------------------------------ -----------------------
Equitable Life Insurance Company of Iowa Iowa corporation
Equitable Investment Services, Inc. Iowa corporation
Equitable of Iowa Securities Network, Inc. Iowa corporation
Locust Street Securities, Inc. Iowa corporation
Equitable of Iowa Companies Capital Trust Delaware business trust
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.
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FORM THE CONSOLIDATED
STATEMENTS OF INCOME AND CONSOLIDATED BALANCE SHEETS (UNAUDITED) AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<EXCHANGE-RATE> 1
<DEBT-HELD-FOR-SALE> 7,017,874
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 52,468
<MORTGAGE> 1,537,827
<REAL-ESTATE> 14,273
<TOTAL-INVEST> 8,850,804
<CASH> 8,002
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 729,008
<TOTAL-ASSETS> 10,121,079
<POLICY-LOSSES> 8,639,509
<UNEARNED-PREMIUMS> 17,155
<POLICY-OTHER> 9,191
<POLICY-HOLDER-FUNDS> 13,261
<NOTES-PAYABLE> 216,000
0
0
<COMMON> 31,897
<OTHER-SE> 721,472
<TOTAL-LIABILITY-AND-EQUITY> 10,121,079
19,898
<INVESTMENT-INCOME> 348,266
<INVESTMENT-GAINS> 11,318
<OTHER-INCOME> 39,656
<BENEFITS> 255,989
<UNDERWRITING-AMORTIZATION> 38,198
<UNDERWRITING-OTHER> 13,269
<INCOME-PRETAX> 95,777
<INCOME-TAX> 33,686
<INCOME-CONTINUING> 61,977
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 61,977
<EPS-PRIMARY> 1.95
<EPS-DILUTED> 1.92
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
