SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ X ] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended December 31, 1996
Commission file number 0-8590
EQUITABLE OF IOWA COMPANIES
(Exact name of registrant as specified in its charter)
Iowa 42-1083593
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
604 Locust Street, P.O. Box 1635
Des Moines, Iowa 50306
(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number, including area code: (515) 245-6911
Securities Registered Pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Common Stock New York Stock Exchange
____________________________________________________________________________
Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (229.405 of this chapter) is not contained herein, and will
not be contained, to the best of registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. [ ].
The aggregate market value of voting stock (Common Stock) held by nonaffiliates
of the registrant as of February 28, 1997, was $1,700,746,672.
As of February 28, 1997, 32,014,055 shares of Common Stock are issued and
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information contained in registrant's proxy statement for the annual
meeting of shareholders to be held April 24, 1997, is incorporated by
reference into Part III hereof.
PART I
ITEM 1. Business
Overview
Equitable of Iowa Companies ("company"), a Des Moines, Iowa based insurance
holding company organized in 1977, is a provider of individual annuity and
life insurance products, targeting individuals and families throughout the
United States. Through its insurance subsidiaries, Equitable Life Insurance
Company of Iowa ("Equitable Life"), Golden American Life Insurance Company
("Golden American") and USG Annuity & Life Company ("USG"), the company
offers its products in 49 states and the District of Columbia. First Golden
American Life Insurance Company of New York ("First Golden"), a wholly-owned
subsidiary of Golden American, was incorporated on May 24, 1996 and was
capitalized in December 1996. First Golden's primary purpose will be to
offer insurance products in the State of New York, which is the only state
where the company's insurance subsidiaries are not currently licensed. On
January 2, 1997, First Golden became licensed as a life insurance company in
the State of New York and is currently pursuing regulatory product approvals.
Equitable Life was founded in 1867 and is the oldest life insurance company
west of the Mississippi River. The company began actively marketing annuity
products in 1988, principally through USG, which was acquired by the company
in 1988 as a shell organization. Golden American, which offers variable
insurance products, was acquired by the company on August 13, 1996. Both
Equitable Life and USG are rated "A+" (Superior) and Golden American is rated
"A" (Excellent) by A.M. Best. A.M. Best's ratings are directed toward the
protection of policyholders, not investors.
The company has had significant growth in assets over the past few years,
primarily as a result of increased demand for its annuity products and more
recently, the acquisition discussed above. The company's total assets grew
29%, 23% and 24% in 1996, 1995 and 1994, respectively. Industry-wide asset
growth averaged 10% in 1995 and 7% in 1994, based on information compiled by
A.M. Best Co. Inc. The company's total assets at December 31, 1996 were $12.6
billion, compared to $9.8 billion at December 31, 1995. Excluding the impact
of Statement of Financial Accounting Standards ("SFAS") No. 115, the asset
growth rates were 32%, 18% and 24% in 1996, 1995 and 1994, respectively. The
company achieved its growth in assets while generating spreads and an overall
level of profitability that met its objectives.
Strategy
The company's continuing strategy to achieve its growth and profit goals is
to:
- offer a wide portfolio of retirement savings products designed to
appeal to a broad range of customers in the fast-growing retirement
savings market, and provide sales and profit stability under various
market conditions;
- expand and diversify distribution channels for the company's
products and tailor these products to meet specific distributor, as
well as consumer needs;
- provide superior, efficient, cost-effective service to its
policyholders and agents, brokers and other distributors;
- actively seek out growth opportunities, including internal growth
as well as acquisitions;
- maintain high quality ratings;
- issue competitive products with protection from early policy
termination; and
- maintain high quality investments having cash flows consistent with
the characteristics of the company's policy liabilities.
The company believes that, because of its diversified portfolio of annuity
and life insurance products and distribution channels, it is well-positioned
to take advantage of certain demographic and socio-economic trends expected
to increase demand for these types of products. These trends include: an
aging U.S. population that is increasingly concerned about retirement and
estate planning, as well as maintaining their standard of living in
retirement; potential reductions in government and employer-provided benefits
at retirement as well as lower public confidence in the adequacy of those
benefits; and rising health care costs.
The company also believes its financial strength and ratings are important in
attracting customers, and give it a competitive advantage over competitors in
the annuity marketplace. The company intends to manage its business to
preserve its superior financial strength and its current insurance ratings.
The company continues to seek acquisition opportunities. The company is
active in identifying and analyzing transactions that would complement its
core business, provide economies of scale, broaden access to more consumers
or enhance its recently expanded distribution channels.
The company structures its products to contractually protect itself from
early policy termination. The majority of the company's life insurance
products currently sold incorporate a charge for early withdrawal of the cash
value of the policy. In addition, deferred annuity policies sold by the
company include surrender charges, most of which generally decline over time
and apply only during a stated period. Many of the company's annuity
products contain a "market value adjustment" feature which features a higher
surrender charge as interest rates increase and a lower surrender charge as
interest rates decrease.
The company's investment strategy emphasizes current income and high credit
quality. The persistency of the company's products enables it to invest in
longer maturity investments. Longer maturities typically have provided
higher yields than shorter maturities. These higher yields, together with
the overall quality of the investment portfolio, allow the company to
maintain competitive crediting rates on its interest-sensitive products.
Products
The company offers, through its insurance subsidiaries, a portfolio of
annuity and life insurance products designed to meet the needs of its
customers for supplemental retirement income, estate planning and protection
from unexpected death. For all products, the target market is individuals
and families throughout the United States. The company requires that each of
its products be priced to earn an adequate margin between the return to the
policyholder and the return earned by the company on its investments.
Fixed Annuities: Fixed annuities are long-term savings vehicles particularly
attractive to customers over the age of 50 who are planning for retirement
and seeking secure, tax-deferred savings products. The individual annuity
business is a growing segment of the savings and retirement market. Annuity
products currently enjoy an advantage over certain other retirement savings
products, because the payment of federal income taxes on interest credited on
annuity policies is deferred during the accumulation period.
The company offers a variety of fixed annuity products. Single premium
deferred annuities ("SPDAs"), in general, are savings vehicles in which the
policyholder, or annuitant, makes a single premium payment to an insurance
company. The insurance company credits the account of the annuitant with
earnings at an interest rate (the "crediting rate"), which is declared by the
insurance company from time to time and may exceed but may not be lower than
any contractually guaranteed minimum crediting rate. All of the company's
fixed annuities have a minimum guaranteed crediting rate. In late 1995, the
company introduced the multi-year guarantee series ("MYGA"), a SPDA product.
The MYGA product is an alternative to certificates of deposit and features
guaranteed and fixed values. This product allows the customer to pick any
one of six different interest rate guarantee periods which makes it
attractive to the interest rate sensitive customer. Flexible premium
deferred annuities ("FPDAs") are deferred annuities in which the policyholder
may elect to make more than one premium payment.
The company had 276,000 deferred fixed annuity policies in force at December
31, 1996, with an average account balance of $26,100.
At least once each month the company establishes an interest crediting rate
for its new annuity policies. In determining the company's interest crediting
rate on new policies, management considers the competitive position of the
company, prevailing market rates and the profitability of the annuity
product. The company maintains the initial crediting rate for a minimum
period of one year. Thereafter, the company may adjust the crediting rate
not more frequently than once a year (except for the MYGA product series
where rates are fixed for the term selected). In establishing renewal
crediting rates, the company primarily considers the anticipated yield on its
investment portfolio. Interest rates credited on the company's in force
fixed annuity policies ranged from 3.0% to 11.0% at December 31, 1996. All
of the company's fixed annuity products have minimum guaranteed crediting
rates ranging from 3.0% to 4.5% for the life of the policy. At December 31,
1996, 5% of the company's in force fixed annuity policies had rates credited
for a multi-year period.
Certain of the company's annuity policies have a bonus crediting rate for the
first year of the policy, which typically exceeds the annual base crediting
rate by 1.0% to 2.0%. The bonus and the base crediting rates are disclosed
to the policyholders. The expected renewal crediting rate on such policies
is lower than the expected rate on the company's comparable products that do
not have a bonus feature.
The company incorporates a number of features in its annuity products
designed to reduce the early withdrawal or surrender of the policies and to
partially compensate the company for lost investment opportunities and costs
if policies are withdrawn early. Under the terms of the company's policies,
the policyholder is permitted to withdraw all or part of the premium paid
plus the amount credited to their account, less a surrender charge for
withdrawals. Certain of the company's deferred annuity contracts provide for
penalty-free partial withdrawals, typically up to 10% of the accumulation
value annually. Current surrender charge periods on deferred annuity
policies typically range from five years to the term of the policy, with 85%
of such policies being issued with a surrender charge period of seven years
or more during 1996. The average length of the surrender period on the
company's deferred fixed annuity policies issued during 1996 was 8.9 years.
The initial surrender charge on annuity policies generally ranges from 5% to
20% of the premium and decreases over the surrender charge period. At
December 31, 1996, 90% of the company's deferred annuity liabilities were
subject to a surrender charge, while 78% have a surrender charge of 5% or
more.
In 1992, the company introduced a number of fixed annuity products with a
Market Value Adjustment ("MVA") feature, in which a "market value adjustment"
is applied to adjust the accumulation value (either up or down but not below
the amount of the initial premium plus credited interest at a stated rate)
during the surrender charge period. MVA policies accounted for 71% of the
company's fixed deferred annuity sales during 1996 and 41% of fixed deferred
annuity liabilities at December 31, 1996. Notwithstanding policy features,
the withdrawal rates of policyholder funds may be affected by changes in
interest rates.
The company also markets tax-qualified retirement annuities that meet the
requirements of Section 403(b) of the Internal Revenue Code of 1986 ("TSAs")
to employees of public schools and certain other tax-exempt organizations.
Teachers and other school employees purchase TSAs through automatic payroll
deductions. TSA products tend to be purchased by customers who are younger
than purchasers of the company's other annuity products. Therefore, the
company's specialty TSA products tend to incorporate features that are
attractive to customers in this younger age bracket (early 40s to early 50s)
who have a longer period to retirement, such as combining a higher crediting
interest rate with a longer surrender charge period. The company believes
that the market for TSAs is attractive because TSAs broaden its customer base
and provide an ongoing source of renewal premiums. During 1996, the company
derived 10% of its fixed deferred annuity premiums from TSAs and intends to
continue to grow this percentage over time. In addition to TSAs, the company
also sells other tax-qualified retirement annuities for individual retirement
accounts and simplified employee pension plans. Total tax-qualified
retirement fixed deferred annuity premiums totaled $472 million, or 41% of
total 1996 fixed deferred annuity premiums.
In January 1997, the company introduced an equity-indexed annuity which
provides a guaranteed base rate of return with a higher potential return
linked to the performance of a broad based equity index. This product
appeals to customers desiring equity market potential but unwilling to give
up fixed rate guarantees.
Variable Annuities: Variable annuities are long-term savings vehicles in
which policyholder premiums (purchase payments) are recorded and maintained
in a separate account established as a registered unit investment trust. The
company offers three variable annuity products. Equi-Select and PrimElite
were introduced by Equitable Life in October and December 1994, respectively.
The acquisition of Golden American in 1996, which offers the GoldenSelect
variable annuity product, has significantly increased the company's presence
in the variable annuity market. Funds on deposit in Equitable Life's and
Golden American's variable annuity separate and fixed accounts at December
31, 1996 totaled $352,022,000 and $1,449,224,000, respectively.
Each of these products contain two accounts, a separate account and a fixed
account. The separate account invests in an underlying series of mutual
funds as designated by the policyholder. The fixed account offers various
fixed allocations which are credited with fixed rates of interest for the
guarantee periods selected by the policyholder. Policyholders may choose
among several available separate account fund options and transfer monies
between the various options within each product on a tax-deferred basis.
These funds are currently managed by the following 16 portfolio managers:
(1) Zweig Advisors Inc.; (2) T. Rowe Price Associates, Inc.; (3) Chancellor
LGT Asset Management, Inc.; (4) Kayne, Anderson Investment Management, L.P.;
(5) Pilgrim Baxter & Associates, Ltd.; (6) E.I.I. Realty Securities, Inc.;
(7) Van Eck Associates Corporation; (8) Eagle Asset Management, Inc.; (9)
Fred Alger Management, Inc.; (10) Bankers Trust Company; (11) Warburg, Pincus
Counsellors, Inc.; (12) Equitable Investment Services, Inc.; (13)
Massachusetts Financial Services Company; (14) Robertson, Stephens & Company
Investment Management, L.P.; (15) Credit Suisse Asset Management Limited and
(16) Smith Barney Mutual Funds Management, Inc.
Investment risk is borne by the policyholder and the value of the
policyholder's account depends upon the performance of the funds chosen by
the policyholder. Variable annuities provide the company with fee-based
revenues in the form of various charges and fees charged to the
policyholder's account. Revenues include charges for mortality and expense
risk, contract administration and surrender charges. In addition, some
contracts issued prior to October 1995 provide for a distribution fee
collected for a limited number of years after each premium deposit.
Life Insurance Products: The company offers a variety of interest sensitive,
traditional and variable life insurance products.
Interest sensitive life insurance products, including universal life and
fixed premium, current interest life, provide whole life insurance and
adjustable rates of return related to current interest rates. Universal life
policyholders may vary the frequency and size of their premium payments,
although policy benefits may also fluctuate according to such payments.
Through Golden American, the company now offers two variable life products.
Variable life products are fund-linked life products wherein the policyholder
accepts the investment risk in exchange for the potential of a higher rate of
return. Each of these products is funded by a separate account and, if
available, a fixed account. The separate account invests in an underlying
series of mutual funds as designated by the policyholder. Variable life
insurance provides fee based revenues to the company from products charges
for mortality and expense risk, cost of insurance, contract administration,
surrender charges and distribution fees.
Traditional life insurance products include whole life and term life
insurance. Whole life products incorporate a fixed premium schedule and
combine guaranteed insurance protection with a savings feature. Whole life
products cost more than comparable term life insurance coverage when the
policyholder is younger, but less as the policyholder grows older. The
policyholder may borrow against the accumulated cash value, with policy loans
typically available at a rate of interest lower than that available from
other lending sources. The policyholder may also choose to surrender the
policy at any time and receive the accumulated cash value, less any
applicable withdrawal charge, rather than continuing the insurance
protection.
Term life insurance policies provide insurance protection for unexpected
death during the period in which the policy is in force, generally one, five,
ten or twenty years. These products are designed to meet customers' shorter-
term needs because the policies do not have an accumulation feature and no
cash value is built up. Term life premiums are accordingly lower than
certain of the company's other products. The company's current term life
products include annually renewable term and five-year, ten-year and fifteen-
year renewable and convertible term.
To discourage early policy withdrawals and partially compensate the company
for lost investment opportunities and costs if policies are terminated, all
of the company's interest-sensitive policies issued since 1986 have
incorporated withdrawal charges or similar provisions. At December 31, 1996,
26% of the company's life insurance liabilities were subject to such charges.
Reserves: The reserves reflected in the company's Consolidated Financial
Statements are calculated based on generally accepted accounting principles
("GAAP"). These reserves are based upon the company's best estimates of
mortality, persistency, expenses and investment income, with appropriate
provisions for adverse statistical deviation. Reserves for interest-
sensitive products are established at full account value with no reduction
for surrender penalties while the net level premium method is used for all
non-interest-sensitive products. GAAP reserves differ from statutory
reserves due to the use of different assumptions regarding mortality and
interest rates and the introduction of lapse and expense assumptions into the
GAAP reserve calculation. The company's reserves satisfy statutory
requirements.
The following table sets forth certain consolidated information regarding the
development of the company's general and separate account annuity and
insurance business and related liabilities calculated on a GAAP basis for
each of the five previous years. Premiums represent premiums and deposits
received (as adjusted for due and uncollected premiums), and include premiums
on fixed and variable annuities, interest sensitive life and variable life
contracts as well as premiums on traditional products.
(Table following)
PRODUCTS AND SOURCES OF BUSINESS
(Dollars in thousands)
<TABLE>
<CAPTION>
As of and for the year
ended December 31 1996 1995 1994 1993 1992
__________________________________________________________________________________
<S> <C> <C> <C> <C> <C>
First year and single
premiums:
Fixed deferred
annuities and
deposit funds $1,093,343 $1,273,330 $1,547,088 $1,079,413 $856,303
Variable annuities 422,743 68,527 2,849 -- --
Immediate
annuities 102,415 73,790 36,839 25,526 16,013
Universal life and
fixed premium,
current interest
life 34,157 37,594 22,666 15,749 12,733
Traditional par
and nonpar life 697 902 1,097 2,109 971
____________ ____________ ____________ ___________ ___________
Total first-year
and single
premiums $1,653,355 $1,454,143 $1,610,539 $1,122,797 $886,020
============ ============ ============ =========== ===========
Total premiums:
Fixed deferred
annuities and
deposit funds $1,155,357 $1,323,438 $1,580,926 $1,092,446 $868,944
Variable annuities 425,688 68,540 2,849 -- --
Immediate
annuities 102,415 73,790 36,839 25,526 16,013
Universal life and
fixed premium,
current interest
life 88,495 87,165 68,463 59,606 52,171
Traditional par
and nonpar life 39,566 41,838 44,227 46,152 42,016
____________ ____________ ____________ ___________ ___________
Total premiums $1,811,521 $1,594,771 $1,733,304 $1,223,730 $979,144
============ ============ ============ =========== ===========
New life insurance written
(at face amount):
Universal life and
fixed premium,
current interest
life $1,392,026 $1,604,615 $961,112 $785,653 $676,658
Traditional par
and nonpar life 306,885 333,122 456,270 630,923 721,369
____________ ____________ ____________ ___________ ___________
Total new life
insurance
written $1,698,911 $1,937,737 $1,417,382 $1,416,576 $1,398,027
============ ============ ============ =========== ===========
</TABLE>
PRODUCTS AND SOURCES OF BUSINESS - CONTINUED
(Dollars in thousands)
<TABLE>
<CAPTION>
As of and for the year
ended December 31 1996 1995 1994 1993 1992
_______________________________ __________________________________________________
<S> <C> <C> <C> <C> <C>
Life insurance in force
(at face amount) 1:
Universal life and
fixed premium,
current interest
life $8,410,711 $7,604,591 $6,522,156 $5,529,494 $4,983,320
Traditional par
and nonpar life 3,152,646 3,322,854 3,624,784 4,088,387 3,944,006
____________ ____________ ____________ ___________ ___________
Total life
insurance
in force $11,563,357 $10,927,445 $10,146,940 $9,617,881 $8,927,326
============ ============ ============ =========== ===========
Reserves:
Fixed deferred
annuities and
deposit funds $7,359,810 $6,664,849 $5,677,575 $4,353,805 $3,270,808
Variable annuities 1,801,247 76,522 2,802 -- --
Immediate annuities
and supp
contracts 517,353 362,406 216,609 150,943 112,612
Universal life and
fixed premium,
current interest
life 547,375 470,580 410,143 363,470 320,040
Traditional par and
nonpar life 712,296 718,110 722,104 721,596 711,595
____________ ____________ ____________ ___________ ___________
Total reserves $10,938,081 $8,292,467 $7,029,233 $5,589,814 $4,415,055
============ ============ ============ =========== ===========
<FN>
1 Before reduction for ceded reinsurance of: 1996 - $1,541,268; 1995 -
$1,459,523; 1994 - $1,421,608; 1993 - $1,326,020 and 1992 - $1,242,003.
Sales are not concentrated in any geographical area, nor are assets and
profitability separately attributed to geographical areas. The state from
which the most annuity and life premiums were received during the last five
years was California: 1996 - 15.3%; 1995 - 17.0%; 1994 - 20.9%; 1993 - 15.9%
and 1992 - 11.6%.
Premiums include Golden American Life Insurance Company since its acquisition
on August 13, 1996.
</TABLE>
Marketing and Distribution
The company expanded and diversified its marketing and distribution system
during 1996. Broad-based distribution networks are key to realizing a
growing share of the retirement savings marketplace. In addition to
increasing the number of independent insurance agents, the company expanded
its institutional marketing and distribution channel. In 1996, on a pro
forma combined basis, independent and career insurance agents accounted for
62% of sales, broker/dealers accounted for 32% of sales, and banks or
financial institutions accounted for 6% of sales.
The diversification of the company's marketing and distribution corresponds
to the diversification of products sold. Insurance agents sell a majority of
the company's fixed annuity and life insurance products, and many are also
registered to sell the company's variable products as registered
representatives of various broker/dealers. Broker/dealers account for the
majority of variable annuity sales, and the company anticipates increased
variable life insurance and fixed annuity sales through this distribution
network. Banks sell both fixed and variable products, and accounted for
approximately 9% of total fixed annuity sales in 1996.
Agent Marketing: Products are marketed through over 60,000 independent
insurance agents and nearly 500 career insurance agents. Since 1992, the
company has offered certain life insurance products through its independent
insurance brokerage agents and certain annuity products through its career
agents and other producers. The company currently offers a full range of
products through both independent and career agents.
The company, in expanding its independent insurance brokerage agent network,
relies primarily on national and regional wholesale marketing organizations
to market its products and to recruit agents and other producers. The
organizations typically recruit agents for the company by advertising its
products and commission structure through direct mail advertising and through
seminars for insurance agents and brokers. Certain of the marketing
organizations with which the company has a relationship are specialty
organizations that have a marketing expertise or a distribution system
relating to a particular product, such as TSA policies. The company believes
that use of wholesale marketing organizations is a cost-effective means of
recruiting capable agents and brokers, and advertising its products. These
organizations bear most of the costs incurred in marketing the company and
its products. The company compensates the marketing organization by paying
it a percentage of the commissions earned on new annuity and insurance
policies generated by the agents recruited by the organizations. The company
generally does not enter into exclusive arrangements with these marketing
organizations.
The company also utilizes a career insurance agent system to sell its
individual annuity and life insurance policies. The company provides career
agents with a professional support program that includes a competitive
benefits package, ongoing training, assistance in professional certification,
and advertising and advanced sales support. In addition, the company
provides conferences and seminars designed to motivate and train its career
agents.
Institutional Marketing: The acquisition of Golden American provided access
to thousands of registered representatives through agreements with national
or regional stock and independent brokerage firms. Additionally, over 1,250
registered representatives are licensed through Locust Street Securities,
Inc., the company's wholly owned broker/dealer. The company has 67 active
agreements with banking institutions around the country.
The company, in expanding its institutional marketing and distribution
network, relies primarily on its wholesaling teams. Members of wholesaling
teams are company employees who call on and develop important relationships
with national and regional stock brokerage firms, banking institutions, and
financial planners. Relationships have been established with many regional
brokerage firms and banks as well as with several national financial
institutions, such as Smith Barney, Paine Webber and Primerica Financial
Services. The company's intensified effort to maintain and build
relationships with financial institutions are key to increasing sales and
market share, especially in the variable product market, which has
experienced the most growth in the retirement savings industry over the past
several years.
Marketing Opportunities: In January 1997, the company received a certificate
of authority to do business in New York by establishing First Golden American
Life Insurance Company of New York, a subsidiary of Golden American. The New
York marketing effort will begin with sales of variable products, which
currently await regulatory approvals. In the future, the company also plans
to seek authority to offer fixed annuities in New York. Entry into this
market provides considerable growth opportunities for the company as New York
accounts for approximately 10 percent of the total national annuity market.
Continued emphasis is placed on providing top-notch service to both
distributors and consumers of retirement savings products. The company
employs marketing personnel and customer service representatives who respond
by telephone to questions from its marketing and distribution force regarding
the company and its products. The company believes the service it provides
to marketers and distributors helps establish a relationship between the
company and its sales force, and that such interaction also provides
marketing opportunities.
Ratings
A. M. Best, an independent insurance industry rating organization, assigns
fifteen letter ratings to insurance companies. A. M. Best's ratings currently
range from "A++" to "F" and some insurance companies are not rated. A. M.
Best performs a quantitative and qualitative evaluation for each company it
rates. The quantitative evaluation compares a company's performance to
industry standards established by A. M. Best in three areas: profitability,
leverage or capitalization, and liquidity. The qualitative evaluation
examines nine factors for each company: spread of risk, quality and
appropriateness of the reinsurance program, quality and diversification of
assets, adequacy of policy or loss reserves, adequacy of surplus, capital
structure, management's experience and objectives, market presence, and
policyholders' confidence. A. M. Best also may review other qualitative
factors. Publications of A. M. Best indicate that "A+" and "A++" ratings are
assigned to those companies which, in A. M. Best's opinion, have demonstrated
superior overall performance when compared to the standards established by A.
M. Best and generally have a very strong ability to meet their policyholder
obligations over a long period of time. Publications of A. M. Best indicate
that A ratings are assigned to those companies which have demonstrated
excellent overall performance in compared to standards established by A. M.
Best's and have a strong ability to meet their obligations to policyholders
over a long period of time. A. M. Best's ratings are directed toward the
protection of policyholders, not investors.
Equitable Life has received A. M. Best's quality rating of "A+" (Superior)
(or comparable rating) since the ratings were established in 1905. USG has
also received A. M. Best's rating of "A+" (Superior), which was based on the
consolidated financial condition and operating performance of USG and its
parent, Equitable Life. Golden American's A.M. Best rating was raised to "A"
(Excellent) from "A-" (Excellent) following the August 13, 1996 acquisition,
which was based on the overall benefit of combining the strengths of Golden
American and the Equitable of Iowa group of insurers.
Underwriting
Substantially all of the life insurance policies written by the company's
insurance subsidiaries are individually underwritten, although standardized
underwriting procedures have been adopted for certain coverages. The company
uses information from a prospective policyholder's application, and in some
cases, inspection reports, doctors' statements or medical examinations, to
determine whether a policy should be issued as applied for, issued at a
higher premium because of unfavorable factors, or rejected. In addition, the
company may request medical examinations from any applicant, regardless of
age and amount of insurance, if information obtained from the application or
other sources indicates an examination is advisable before determining to
underwrite the risk. The company requires medical examinations for
applicants for insurance in excess of prescribed amounts. Underwriting with
respect to annuities is minimal.
Investments
The company's investment philosophy emphasizes the careful underwriting of
credit risk, identifying relative values within a range of investment
choices, providing liquidity to meet operating needs and maximizing current
income. As part of its objective of effective asset-liability management,
the company conducts computer simulations which model its assets and
liabilities under a wide variety of interest rate scenarios. Based on the
results of these computer simulations, the company's investment portfolio has
been structured to maintain a desired investment spread between the yield on
portfolio assets and the rate credited on its reserves and to match the cash
flows of the investments with the policy liabilities.
Competition
The insurance and annuity business is highly competitive with numerous
companies offering similar products through comparable marketing and
distribution systems. Companies typically compete for policyholders on the
basis of benefit rates, financial strength and customer service and compete
for agents and brokers on the basis of commissions, financial strength and
customer service. See Item 7, Management's Discussion and Analysis of
Financial Condition and Results of Operations - Insurance Industry Issues.
Regulation
The company's life insurance operations are conducted in a highly regulated
environment. Each of the company's insurance subsidiaries is subject to the
insurance laws of the state in which it is organized and of the other
jurisdictions in which it transacts business. The primary regulators of the
company's insurance operations are the Commissioner of Insurance for the
State of Iowa for Equitable Life, the Commissioner of Insurance for the State
of Oklahoma for USG and the Commissioner of Insurance for the State of
Delaware for Golden American. Additionally, with the licensing of First
Golden American Life Insurance Company of New York in January 1997, First
Golden is now subject to regulation of the Superintendent of Insurance for
the State of New York. See Item 7, Management's Discussion and Analysis of
Financial Condition and Results of Operations - Insurance Industry Issues.
Other Operations
Equitable Investment Services, Inc. ("EISI"), a wholly owned subsidiary of
the company, manages the company's $9.6 billion investment portfolio and
serves as investment advisor to the Equi-Select Series Trust mutual fund
portfolios underlying the company's variable annuity product. EISI also acts
as a fund manager for several fund options related to Equi-Select and
GoldenSelect variable products offered by the company. EISI is a registered
investment advisor under the Investment Company Act of 1940.
Equitable of Iowa Securities Network, Inc. ("EISN"), a wholly owned
subsidiary of the company, is a broker/dealer registered under the Securities
Exchange Act of 1934. EISN serves as the principal distributor of the
company's Equi-Select and PrimElite variable annuity products.
Locust Street Securities, Inc. ("LSSI"), a wholly owned subsidiary of the
company, markets mutual funds, variable annuities, tax-exempt bond funds and
investment oriented products of other companies primarily through Equitable
Life career agents. Founded in 1968, LSSI also contracts with agents of
other companies to be a wholesaler of broker/dealer products. LSSI has a
distribution network of approximately 1,250 representatives in 48 states.
LSSI is a broker/dealer registered under the Securities Exchange Act of 1934.
Directed Services, Inc. ("DSI"), a wholly owned subsidiary of the company's
wholly owned subsidiary, EIC Variable, Inc., distributes variable insurance
products issued by Golden American. DSI is also the investment manager of
The GCG Trust and the separate accounts of Golden American. DSI is party to
sales agreements with numerous organizations, two of which sell substantially
all of the insurance products distributed by DSI. DSI is a broker/dealer
registered under the Securities Exchange Act of 1934 and is also a registered
investment adviser under the Investment Advisers Act of 1940.
Employees
At December 31, 1996, the company had 642 full-time and 34 part-time
employees. The company provides its employees with a comprehensive range of
benefit programs. The company believes that its employee relations are
excellent.
ITEM 2. Properties
The company's business operations are performed in leased facilities located
at 604 Locust Street, 699 Walnut Street, 700 Locust Street and 312 Eighth
Street in Des Moines, Iowa and at 1001 Jefferson Street in Wilmington,
Delaware. In addition, the company has leased a facility at 230 Park Avenue
in New York to carry on business through First Golden American Life Insurance
Company of New York, licensed in January 1997. All owned properties consist
of real estate held for investment purposes or acquired through foreclosure.
Property and equipment primarily represent leasehold improvements at the
company's headquarters and at various agency offices, office furniture and
equipment and capitalized computer software and are not considered to be
significant to the company's overall operations. Property and equipment are
reported at cost less allowances for depreciation. The company believes that
its present facilities are adequate for its current needs, but has entered
into agreements with a developer to develop and lease a 200,000 square foot
office building in downtown Des Moines, Iowa to house its Des Moines based
operations with occupancy to begin in the third quarter of 1997.
ITEM 3. Legal Proceedings
As previously reported, the company and certain of its subsidiaries are
defendants in class action lawsuits filed in the United States District Court
for the Middle District of Florida, Tampa Division, in February, 1996 and in
the Court of Common Pleas of Allegheny County, Pennsylvania in June 1996.
The suits claim unspecified damages as a result of alleged improper life
insurance sales practices. The company believes the allegations are without
merit. The suits are in the discovery and procedural stages and have not yet
been certified as class actions. The company intends to defend the suits
vigorously. The amount of any liability which may arise as a result of these
suits, if any, cannot be reasonably estimated and no provision for loss has
been made in the company's financial statements. The company had also been a
party to a similar previously reported class action lawsuit filed in Iowa
which has now been dismissed.
As previously reported, on December 15, 1995, USG received a Notice of
Intention to Arbitrate a dispute with one of its insurance brokerage agencies
before the American Arbitration Association regarding the payment of certain
commissions. The matter was submitted to arbitration and the determination of
the arbitration panel was that the company must pay, over time, commissions
in amounts that are not material.
In the ordinary course of business, the company and its subsidiaries are also
engaged in certain other litigation, none of which management believes is
material.
ITEM 4. Submission of Matters to a Vote of Security Holders
None.
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters.
Stock Symbols
The company's common stock is quoted on the New York Stock Exchange with a
stock symbol of EIC.
The company's company-obligated, mandatorily-redeemable preferred securities
of its subsidiary, Equitable of Iowa Companies Capital Trust are quoted on
the New York Stock Exchange with a stock symbol of EIC PrT.
Quarterly Stock Quotations
The following table shows the range of high and low closing and quarter end
closing sales prices per share of Common Stock of the company for the periods
indicated as reported on the New York Stock Exchange.
<TABLE>
<CAPTION> Quarter
High Low End Close
_________________________________________
<S> <C> <C> <C>
1995
_____
First Quarter 33-7/8 27-3/4 33-7/8
Second Quarter 37-3/8 32-5/8 32-7/8
Third Quarter 38-1/4 31-3/8 37
Fourth Quarter 37-1/4 31-7/8 32-1/8
1996
_____
First Quarter 39-7/8 33-1/4 35-3/4
Second Quarter 39 33 35-1/2
Third Quarter 41-1/2 34-1/2 41-1/2
Fourth Quarter 46 41-7/8 45-7/8
1997
_____
First Quarter (as
of February 21, 1997) 52-3/4 44-3/8 51-1/4
</TABLE>
Number of Holders of Record
The number of holders of record of common stock was 919 at February 21, 1997.
Dividends
Cash dividends are paid quarterly, at an amount determined by the Board of
Directors. The company's bank credit arrangements restrict the amount of
dividends paid annually on its common stock. Also, insurance regulations
restrict the amount of dividends that can be paid to the company by Equitable
Life and Golden American. See Note 1 to the Consolidated Financial
Statements and Item 7, Management's Discussion and Analysis - Liquidity and
Capital Resources.
Dividends paid per share of common stock, were $0.585 in 1996 and $0.525 in
1995.
Transfer Agent and Registrar
Boatmen's Trust Company, 510 Locust, St. Louis, Missouri 63101.
ITEM 6. Selected Financial Data
The following table sets forth a consolidated summary of selected financial
data for the company and its subsidiaries (all significant intercompany
accounts have been eliminated) for each of the last ten years. In this table
the year ended December 31, 1987 has been restated to reflect the
implementation of SFAS No. 97 in 1988. In addition, the years ended December
31, 1987 through 1991 have been restated to reflect the sale of Younkers,
Inc. in 1992 and treatment of that entity as a discontinued operation. This
summary should be read in conjunction with the related consolidated financial
statements and notes thereto.
(Table following)
SELECTED FINANCIAL DATA
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
As of and for the year
ended December 31 1996 1995 1994 1993 1992
_________________________________________________________________________________
<S> <C> <C> <C> <C> <C>
Consolidated results:
Revenues $868,675 $764,862 $651,660 $572,968 $458,374
Operating income 1 114,901 100,747 88,212 68,911 49,309
Income from continuing
operations 2 123,161 84,890 98,284 87,156 57,260
Net income 3 123,161 84,890 98,284 87,156 54,506
Per share data: 4
Operating income 1 $3.60 $3.18 $2.79 $2.33 $1.72
Income from continuing
operations 2 3.86 2.68 3.11 2.95 1.99
Net income 3 3.86 2.68 3.11 2.95 1.90
Consolidated financial
position:
Assets $12,569,679 $9,772,846 $7,965,593 $6,431,435 $5,066,874
Excluding SFAS
No. 115 5 12,449,614 9,450,412 7,992,086 6,431,435 5,066,874
Debt 204,600 158,100 90,450 84,214 89,508
Company-obligated,
mandatorily-redeemable
preferred
securities 125,000 -- -- -- --
Stockholders' equity 895,799 893,932 587,330 527,962 373,801
Excluding SFAS
No. 115 5 819,412 685,000 613,823 527,962 373,801
Common stock data: 4
Dividends per share $0.585 $0.525 $0.465 $0.405 $0.35
Book value per share 28.00 28.14 18.54 16.76 12.89
Excluding SFAS
No. 115 5 25.62 21.56 19.38 16.76 12.89
Price range 33.00-46.00 27.75-38.25 26.88-39.13 20.88-39.00 9.63-22.50
Closing price 45.88 32.13 28.25 33.88 22.50
Shares outstanding
at year end 31,988,410 31,769,490 31,677,891 31,504,586 28,994,640
Average shares
outstanding
during year 31,904,734 31,709,032 31,612,675 29,540,274 28,688,660
</TABLE>
SELECTED FINANCIAL DATA - CONTINUED
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
As of and for the year
ended December 31 1996 1995 1994 1993 1992
_________________________________________________________________________________
<S> <C> <C> <C> <C> <C>
Ratios and other data:
Return on assets -
operating income 1 1.0% 1.1% 1.2% 1.2% 1.1%
Excluding SFAS
No. 115 5 1.1% 1.2% 1.2% 1.2% 1.1%
Return on equity -
operating income 1 12.8% 13.6% 15.8% 15.3% 15.2%
Excluding SFAS
No. 115 5 15.3% 15.5% 15.5% 15.3% 15.2%
Return on equity -
net income 13.8% 11.5% 17.6% 19.3% 15.6%
Excluding SFAS
No. 115 5 16.4% 13.1% 17.2% 19.3% 15.6%
Year-end debt to
total capital 16.7% 15.0% 13.3% 13.8% 19.3%
Excluding SFAS
No. 115 5 17.8% 18.8% 12.8% 13.8% 19.3%
Year-end price to
operating income 1 12.7x 10.1x 10.1x 14.5x 13.1x
Year-end price to
book value 1.6x 1.1x 1.5x 2.0x 1.7x
Excluding SFAS
No. 115 5 1.8x 1.5x 1.5x 2.0x 1.7x
Year-end total market
capitalization $1,467,468 $1,020,595 $894,900 $1,067,218 $652,379
<FN>
1 Operating income equals income from continuing operations before cumulative
effect of change in accounting principles, excluding, net of related income
taxes, prepayment gains on mortgages and mortgage-backed securities, realized
gains or losses and related amortization of deferred policy acquisition
costs. Operating income excludes the after-tax income effect of special
reserve accruals for future guaranty fund assessments totaling $23,400,000
($(0.74) per share) in 1995 and $10,259,000 ($(0.36) per share) in 1991.
2 Excludes the cumulative effect of changes in the method of accounting for
postretirement benefits (1992) and deferred income taxes (1991) and
participating business (1988).
3 Includes the cumulative effect of changes in the method of accounting for
postretirement benefits of $(4,678,000) ($(0.16) per share) in 1992 and
deferred income taxes of $9,444,000 ($0.34 per share) in 1991 and
participating line of business of $11,555,000 ($0.35 per share) in 1988.
4 Share and per share amounts have been restated to reflect the 2-for-1 stock
splits as of May 12, 1993 and May 14, 1992 and the reversion of Class A and
Class B stock to one class of common stock as of May 1, 1992.
5 Excludes the effect of unrealized appreciation (depreciation) of fixed
maturity securities designated as available for sale under SFAS No. 115
and related adjustments to deferred income taxes and deferred policy
acquisition costs.
</TABLE>
SELECTED FINANCIAL DATA
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
As of and for the year
ended December 31 1991 1990 1989 1988 1987
_________________________________________________________________________________
<S> <C> <C> <C> <C> <C>
Consolidated results:
Revenues $400,289 $340,750 $273,230 $198,008 $202,282
Operating income 1 40,121 35,636 24,399 16,410 14,303
Income from continuing
operations 2 24,740 20,772 26,083 16,819 21,233
Net income 3 40,530 23,204 20,609 36,668 26,071
Per share data: 4
Operating income 1 $1.42 $1.26 $0.85 $0.49 $0.40
Income from continuing
operations 2 0.87 0.74 0.91 0.50 0.60
Net income 3 1.43 0.82 0.72 1.10 0.73
Consolidated financial
position:
Assets $4,231,361 $3,652,687 $2,896,253 $1,969,674 $1,688,091
Excluding SFAS
No. 115 5 4,231,361 3,652,687 2,896,253 1,969,674 1,688,091
Debt 95,602 107,920 103,926 54,231 25,500
Company-obligated,
mandatorily-redeemable
preferred
securities -- -- -- -- --
Stockholders' equity 322,780 285,026 270,106 276,610 248,046
Excluding SFAS
No. 115 5 322,780 285,026 270,106 276,610 248,046
Common stock data: 4
Dividends per share $0.32 $0.29 $0.27 $0.25 $0.23
Book value per share 11.35 10.05 9.67 8.37 7.35
Excluding SFAS
No. 115 5 11.35 10.05 9.67 8.37 7.35
Price range 4.25-10.88 3.38-8.00 5.50-9.06 4.69-5.63 4.00-6.75
Closing price 10.50 4.25 7.81 5.50 4.25
Shares outstanding
at year end 28,428,176 28,366,588 27,937,600 33,061,656 33,765,720
Average shares
outstanding
during year 28,392,860 28,349,760 28,777,192 33,259,548 35,495,744
</TABLE>
SELECTED FINANCIAL DATA - CONTINUED
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
As of and for the year
ended December 31 1991 1990 1989 1988 1987
_________________________________________________________________________________
<S> <C> <C> <C> <C> <C>
Ratios and other data:
Return on assets -
operating income 1 1.0% 1.1% 1.0% 0.9% 0.9%
Excluding SFAS
No. 115 5 1.0% 1.1% 1.0% 0.9% 0.9%
Return on equity -
operating income 1 15.4% 16.1% 12.5% 9.1% 8.2%
Excluding SFAS
No. 115 5 15.4% 16.1% 12.5% 9.1% 8.2%
Return on equity -
net income 13.3% 8.4% 7.5% 14.0% 10.3%
Excluding SFAS
No. 115 5 13.3% 8.4% 7.5% 14.0% 10.3%
Year-end debt to
total capital 22.8% 27.5% 27.8% 16.4% 9.3%
Excluding SFAS
No. 115 5 22.8% 27.5% 27.8% 16.4% 9.3%
Year-end price to
operating income 1 7.4x 3.4x 9.2x 11.2x 10.6x
Year-end price to
book value 0.9x 0.4x 0.8x 0.7x 0.6x
Excluding SFAS
No. 115 5 0.9x 0.4x 0.8x 0.7x 0.6x
Year-end total market
capitalization $298,496 $120,558 $218,263 $181,839 $143,504
<FN>
1 Operating income equals income from continuing operations before cumulative
effect of change in accounting principles, excluding, net of related income
taxes, prepayment gains on mortgages and mortgage-backed securities, realized
gains or losses and related amortization of deferred policy acquisition
costs. Operating income excludes the after-tax income effect of special
reserve accruals for future guaranty fund assessments totaling $23,400,000
($(0.74) per share) in 1995 and $10,259,000 ($(0.36) per share) in 1991.
2 Excludes the cumulative effect of changes in the method of accounting for
postretirement benefits (1992) and deferred income taxes (1991) and
participating business (1988).
3 Includes the cumulative effect of changes in the method of accounting for
postretirement benefits of $(4,678,000) ($(0.16) per share) in 1992 and
deferred income taxes of $9,444,000 ($0.34 per share) in 1991 and
participating line of business of $11,555,000 ($0.35 per share) in 1988.
4 Share and per share amounts have been restated to reflect the 2-for-1 stock
splits as of May 12, 1993 and May 14, 1992 and the reversion of Class A and
Class B stock to one class of common stock as of May 1, 1992.
5 Excludes the effect of unrealized appreciation (depreciation) of fixed
maturity securities designated as available for sale under SFAS No. 115
and related adjustments to deferred income taxes and deferred policy
acquisition costs.
</TABLE>
ITEM 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The purpose of this section is to discuss and analyze the company's
consolidated results of operations, financial condition and liquidity and
capital resources. This analysis should be read in conjunction with the
consolidated financial statements and related notes which appear elsewhere in
this report. The company reports financial results on a consolidated basis.
The consolidated financial statements include the accounts of the company and
its subsidiaries, all of which are wholly owned at December 31, 1996. The
company's primary subsidiaries are Equitable Life Insurance Company of Iowa
("Equitable Life"), Golden American Life Insurance Company ("Golden
American") and USG Annuity & Life Company ("USG").
RESULTS OF OPERATIONS
Acquisition
On August 13, 1996, Equitable of Iowa Companies ("Equitable") acquired all of
the outstanding capital stock of BT Variable, Inc. ("BT Variable") and its
wholly-owned subsidiaries, Golden American and Directed Services, Inc.
("DSI") for $144,000,000. Golden American is a Delaware stock life insurance
company and DSI is a New York corporation and registered broker/dealer and
investment adviser. The purchase price consisted of $93,000,000 in cash paid
to Whitewood Properties Corporation (parent of BT Variable) and $51,000,000
in cash paid to Bankers Trust (parent of Whitewood) to retire certain debt
owed by BT Variable to Bankers Trust. The funds used in completing the
acquisition were obtained primarily through a recent offering of securities
undertaken by Equitable of Iowa Companies Capital Trust (the "Trust"), an
affiliate of Equitable, the proceeds of which were loaned to Equitable in
exchange for subordinated debentures issued by Equitable to the Trust.
Additional funds were provided by reducing short-term investments of
Equitable and its insurance subsidiaries. Funds provided by Equitable's
insurance subsidiaries were transferred to Equitable in the form of dividends
paid.
The acquisition was accounted for as a purchase and, accordingly, 1996
results of operations include the operations of BT Variable and its
subsidiaries, Golden American and DSI, from the date of acquisition. Prior
periods do not include the operations of BT Variable. Certain additional
information has been provided in this discussion on a pro forma combined
basis, as if the operations of BT Variable had been included in prior
periods, to assist the reader in assessing the operations and prospects of
the company as it is currently comprised. The following table includes
premiums of Golden American since its acquisition on August 13, 1996.
Premiums
<TABLE>
<CAPTION>
Percentage Percentage
Year ended December 31 1996 Change 1995 Change 1994
_______________________________________________________________________________
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Fixed annuity premiums $1,257,772 (10.0)% $1,397,228 (13.6)% $1,617,765
Variable annuity premiums:
Separate account 306,364 364.3 65,987 2,249.8 2,808
Fixed account 119,324 4,574.2 2,553 6,085.9 41
_______________________________________________________
Total variable annuity
premiums 425,688 521.1 68,540 2,305.4 2,849
_______________________________________________________
Total annuity premiums 1,683,460 14.9 1,465,768 (9.6) 1,620,614
Life insurance premiums:
First year and single
premiums 34,855 (9.5) 38,495 62.0 23,763
Renewal premiums 93,206 3.0 90,508 1.8 88,927
_______________________________________________________
Total life insurance
premiums 128,061 (0.7) 129,003 14.5 112,690
_______________________________________________________
Total premiums $1,811,521 13.6% $1,594,771 (8.0)% $1,733,304
=======================================================
</TABLE>
Total annuity and life insurance premiums increased 13.6% to $1,811,521,000
in 1996 compared to a decrease of 8.0% to $1,594,771,000 in 1995 from
$1,733,304,000 in 1994. Fixed annuity premiums decreased 10.0% in 1996
compared to a decrease of 13.6% in 1995 from 1994 due to continued
contraction in the fixed annuity marketplace. Variable annuity premiums
continue to reflect strong growth, with a 521.1% increase in 1996 compared to
2,305.4% increase in 1995 from 1994. This increase is due, in part, to the
August 13, 1996 acquisition of Golden American, recent strong market returns,
and the company's marketing efforts. Golden American reported variable
annuity premiums of $169,259,000 and variable life premiums of $3,619,000
from August 14 to December 31, 1996. Equitable Life introduced its variable
annuity product in the fourth quarter of 1994. Variable annuities have grown
as a percentage of the company's total premiums due to market conditions
which have made products with variable returns relatively more attractive
than products with fixed returns, expansion of variable product offerings and
growth and diversification of distribution channels. As a result, variable
annuity premiums have grown to 23.5% of total premiums in 1996, compared to
0.2% in 1994. During the same period, fixed annuity premiums have declined
to 69.4% of total premiums in 1996, compared to 93.3% in 1994, while life
insurance premiums have remained at approximately 7% of total premiums.
Based on preliminary estimates from Life Insurance Marketing and Research
Association ("LIMRA") data, fixed annuity premiums for the industry appear to
have fallen an average of 27% for the year ended December 31, 1996, while the
company's fixed annuity premiums were off 10% for the same period. The
decrease in fixed annuity premiums during 1996 reflects the impact of a
relatively low interest rate environment, flat yield curve and strong stock
market returns. In such an environment, the returns provided by variable
annuities and mutual funds are relatively more attractive than fixed annuity
returns, placing pressure on fixed annuity sales. The acquisition of Golden
American has complemented and significantly enhanced the company's existing
variable annuity business. As a result of the acquisition, the company has
expanded the distribution of its variable products, and plans to continue
this expansion 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 achieved with
the acquisition of Golden American, expansion and diversification of
distribution channels, its commitment to customer service, the quality of its
investment portfolio, competitive pricing and its overall financial strength
will continue to attract consumers to its annuity products as consumers seek
a secure return on their retirement savings. The diversity of products and
distribution channels the company now offers is intended to improve the
stability of sales under a variety of market conditions. Insurance agents
and broker/dealers are attracted to sell the company's products by several
factors, including the company's diversified product portfolio, competitive
commissions, rapid policy issuance and weekly commission payments.
The table above includes premiums for Golden American since August 13, 1996.
As a result, the premiums provide insight into the reported results of
operations. However, the significant increase in variable annuity premiums
is primarily attributable to the acquisition of Golden American and
significant growth in sales of Equitable Life's variable annuity products.
The following table is provided on a pro forma combined basis including
Golden American premiums for each of the years ended December 31, 1996, 1995
and 1994.
Pro forma premiums
<TABLE>
<CAPTION>
Percentage Percentage
Year ended December 31 1996 Change 1995 Change 1994
_______________________________________________________________________________
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Fixed annuity premiums $1,257,772 (10.0)% $1,397,206 (13.6)% $1,617,765
Variable annuity premiums:
Equitable Life 256,430 274.1 68,540 2,305.4 2,849
Golden American 427,630 286.7 110,587 (63.7) 304,837
_______________________________________________________
Total variable annuity
premiums 684,060 281.9 179,127 (41.8) 307,686
_______________________________________________________
Total annuity premiums 1,941,832 23.2 1,576,333 (18.1) 1,925,451
Life insurance premiums:
Equitable Life & USG 124,442 (3.5) 129,003 14.5 112,690
Golden American 14,125 176.2 5,114 41.1 3,624
_______________________________________________________
Life insurance premiums 138,567 3.3 134,117 15.3 116,314
_______________________________________________________
Total premiums $2,080,399 21.6% $1,710,450 (16.2)% $2,041,765
=======================================================
</TABLE>
On a pro forma combined basis, total annuity and life insurance premiums
increased 21.6% to $2,080,399,000 in 1996 compared to a decrease of 16.2% to
$1,710,450,000 in 1995 from $2,041,765,000 in 1994. Fixed annuity premiums
declined for the reasons cited above. Equitable Life introduced its variable
annuity product in the fourth quarter of 1994 and premiums from this product
have grown dramatically over the last two years although year over year
percentage increases have declined due to increases in the amount of in force
attributable to this product. Sales of Golden American's variable annuities
declined in 1995 primarily due to poor performance of the underlying
investment funds. During 1995, the fund offerings underlying Golden
American's variable products were improved and a fixed account option was
added. These changes have contributed to the significant growth in Golden
American's variable annuity premiums from 1995 to 1996. The company expects
variable annuity premiums to continue to grow as it expands and diversifies
its product offerings and distribution channels, but year over year
percentage increases will decline as the amount of variable annuities in
force increases. Equitable Life and USG offer interest-sensitive and
traditional life insurance products. Golden American offers only variable
products, including variable life insurance, and sales of this product are
impacted by many of the same factors as variable annuities, including a
strong stock market, low interest rates and a flat yield curve. On a pro
forma combined basis, fixed annuities accounted for 60.4% of total premiums,
variable annuities accounted for 32.9% and life insurance accounted for 6.7%
during 1996. Premiums, net of reinsurance, for variable annuity and variable
life products from significant sellers on a pro forma combined basis for the
year ended December 31, 1996 are as follows: Paine Webber, $136,000,000 or
19%; Smith Barney, $162,000,000 or 23%; Locust Street Securities, Inc., an
affiliate, $86,000,000 or 12%; and Primerica Financial Services, $69,000,000
or 10%.
Revenues
<TABLE>
<CAPTION>
Percentage Percentage
Year ended December 31 1996 Change 1995 Change 1994
_______________________________________________________________________________
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Annuity and interest
sensitive life
product charges $71,406 38.7% $51,466 17.6% $43,767
Traditional life insurance
premiums 39,566 (8.9) 43,425 (6.1) 46,265
Net investment income 715,579 11.6 641,094 22.3 524,411
Realized gains on
investments 16,255 70.7 9,524 (51.7) 19,697
Other income 25,869 33.7 19,353 10.5 17,520
_______________________________________________________
$868,675 13.6% $764,862 17.4% $651,660
=======================================================
</TABLE>
Total revenues increased 13.6% to $868,675,000 in 1996 compared to an
increase of 17.4% to $764,862,000 in 1995 from $651,660,000 in 1994. Annuity
and interest sensitive life insurance product charges increased 38.7% in 1996
compared to an increase of 17.6% in 1995. Excluding Golden American, annuity
and interest sensitive life product charges increased 21.7% in 1996. These
product charges consist primarily of cost of insurance charges, policy
administrative charges and surrender charges that increase as the company's
policyholder liabilities, including variable separate account liabilities,
grow. In addition, withdrawals and surrenders of the company's annuity
products which contain a "market value adjustment" feature generate greater
surrender charge income as interest rates increase and lower surrender charge
income as interest rates decrease. Surrender charge income allows the company
to recover a portion of the expenses incurred to generate policy sales and
partially offsets the amortization of deferred policy acquisition costs
related to surrendered policies. Premiums from traditional life insurance
products, which are included in revenue, decreased 8.9% in 1996 compared to a
decrease of 6.1% in 1995 as a result of the company's continued emphasis on
the more popular universal life and fixed premium, current interest life
insurance products (for which premiums are not included in revenues).
Net investment income increased 11.6% to $715,579,000 in 1996 compared to an
increase of 22.3% to $641,094,000 in 1995 from $524,411,000 in 1994 as
increases resulting from growth in invested assets were partially offset by a
decline in portfolio yield. Excluding Golden American, net investment income
increased 10.7% in 1996. The effective average annual yield on assets
invested to support policy accounts for interest-sensitive products,
including annuities, universal life-type policies and participating life
policies, was 8.46% in 1996 compared to 8.60% in 1995 and 8.62% in 1994. The
company's total investment portfolio, excluding policy loans, had a yield at
amortized cost of 8.2% at December 31, 1996 compared to 8.3% at December 31,
1995 and 1994. During 1996, the company had realized gains on the disposal
of investments, which were generated primarily from calls and repayments of
fixed maturities, of $16,255,000 compared to realized gains of $9,524,000 in
1995 and $19,697,000 in 1994.
Other income increased 33.7% to $25,869,000 in 1996 compared to an increase
of 10.5% to $19,353,000 in 1995 from $17,520,000 in 1994. These increases
are primarily attributable to higher income from sales of investment products
by the company's broker/dealer operations and advisory fees related to
management of the company's variable products. These increases are partially
offset by higher commissions paid to registered representatives and
accounting, custodial and administrative expenses of variable products
operations included in other expenses below, and thus had a minimal impact on
income.
Expenses
Total insurance benefits and expenses increased 4.0% to $638,210,000 in 1996
compared to an increase of 27.3% to $613,905,000 in 1995 from $482,499,000 in
1994. Interest credited to fixed annuity and interest sensitive life account
balances increased 13.7% to $443,443,000 in 1996 compared to an increase of
21.8% to $390,039,000 in 1995 from $320,312,000 in 1994 as a result of higher
account balances associated with those products. Excluding Golden American,
interest credited to fixed annuity and interest sensitive life account
balances increased 12.2% in 1996. The amortization of financial instruments
purchased for the company's hedging program during the second quarter
increased interest credited to account balances by $3,081,000 during 1996.
See further discussion of the hedging program in the Financial Instruments -
Risk Management section below.
The company's policy is to change rates credited to policy accounts as the
company's investment portfolio yield changes. Most of the company's interest
sensitive products, including fixed annuities, interest sensitive life
policies and participating policies, allow for interest rate adjustments at
least annually. The company also sells deferred annuities with multi-year
interest rate guarantees. The design of these products makes them more
competitive with savings alternatives such as certificates of deposit. As a
result, sales of these products have grown as sales through banks and
financial institutions have grown. The 1996 sales of these products totaled
approximately $260,000,000 and policy reserves were $361,994,000, or 5%, of
fixed annuity reserves, at December 31, 1996. The following table summarizes
the effective annual yield on assets invested to support policy accounts for
interest-sensitive products, the average interest rate credited to those
products and the interest spread for the years ended December 31, 1996, 1995
and 1994. Yield on assets and cost of funds are estimated by calculating the
weighted average of the twelve month end values for those items. Golden
American is included in the tables below for periods since its acquisition by
the company.
<TABLE>
<CAPTION>
Years ended December 31, Yield on Credited Interest
1996, 1995 and 1994 Assets Rate Spread
_______________________________________________________________________________
<S> <C> <C> <C>
Average base rate (excluding first year bonus):
1996 8.46% 5.55% 2.91%
1995 8.60 5.71 2.89
1994 8.62 5.80 2.82
Average total (including first year bonus):
1996 8.46 5.81 2.65
1995 8.60 6.08 2.52
1994 8.62 6.25 2.37
</TABLE>
At December 31, 1996 and 1995, the effective annual yield on assets, credited
rate and interest spread were as follows:
<TABLE>
<CAPTION>
Yield on Credited Interest
December 31, 1996 and 1995 Assets Rate Spread
_______________________________________________________________________________
<S> <C> <C> <C>
Base rate (excluding first year bonus):
1996 8.38% 5.55% 2.83%
1995 8.58 5.63 2.95
Total (including first year bonus):
1996 8.38 5.75 2.63
1995 8.58 5.93 2.65
</TABLE>
The base interest credited rate represents the average interest rate credited
to policy accounts for interest sensitive products, including annuities,
interest sensitive life policies and participating policies. The total
interest credited rate includes first year bonus interest credited to certain
policies.
Death benefits on traditional life products and benefit claims incurred in
excess of account balances decreased 13.1% to $32,209,000 in 1996 compared to
an increase of 12.3% to $37,073,000 in 1995 from $33,020,000 in 1994. 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 compared to 1995 by approximately $4,405,000 and less favorable in
1995 compared to 1994 by $1,409,000. Other benefits decreased 49.0% to
$21,261,000 in 1996 compared to an increase of 27.1% to $41,661,000 in 1995
from $32,780,000 in 1994. The decrease in other benefits in 1996 is
primarily attributable to the coinsurance of a small block of disability
income business in 1995 which affected only the 1995 amount. The 1995
increase in other benefits caused by the coinsurance was offset by a
corresponding reduction in future policy benefits and, therefore, had only a
minor impact on net income in 1995.
Commissions decreased 4.4% to $139,705,000 in 1996 compared to a decrease of
7.0% to $146,069,000 in 1995 from $157,028,000 in 1994. Excluding Golden
American, commissions decreased 11.1% in 1996. Insurance taxes decreased
82.3% to $8,063,000 in 1996 compared to an increase of 356.5% to $45,472,000
in 1995 from $9,961,000 in 1994. Increases and decreases in commissions and
insurance taxes are generally related to changes in the level of annuity
sales. Insurance taxes reported in 1995 included a special reserve accrual
for future guaranty fund assessments totaling $36,000,0000. Excluding this
amount, insurance taxes decreased 14.9% from 1995 to 1996. Most costs
incurred as the result of new sales have been deferred, thus having very
little impact on current earnings.
General expenses increased 33.1% to $54,358,000 in 1996 compared to a
decrease of 5.7% to $40,855,000 in 1995 from $43,328,000 in 1994. The
decrease in general expenses from 1994 to 1995 resulted from the
restructuring of the company's career agent contracts and compensation which
eliminated certain fixed costs that were included in general expenses in
1994. As a result of this change, agent compensation related to most of the
company's fixed annuity and life insurance sales is in the form of
commissions which vary directly with sales production levels. The increase
in 1996 is primarily attributable to the acquisition of Golden American.
Excluding Golden American, general expenses increased 18.6% in 1996. Golden
American uses a network of wholesalers to distribute its products and the
salaries of these wholesalers are included in general expenses. The portion
of these salaries and related expenses which vary with sales production
levels are deferred, thus having little impact on current earnings.
Management expects general expenses to increase substantially in 1997 as a
result of the inclusion of Golden American operations for the full year and
the emphasis on expanding the salaried wholesaler distribution network.
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 December 31, 1996, all policies originally issued from 1988 through
December 1991 with a five year interest guarantee represent approximately
1.1% ($77 million) of the company's fixed annuity liabilities. The company
has implemented a hedging program which uses certain derivative instruments
(interest rate caps and swaptions) to reduce the negative effect of increased
withdrawal activity which may result from extreme increases in interest rates
(see further discussion of the hedging program in the financial instruments
section below).
The following table summarizes the annual annuity withdrawal rates and the
life insurance lapse ratios for the years ended December 31, 1996, 1995 and
1994.
<TABLE>
<CAPTION>
Year ended December 31 1996 1995 1994
_______________________________________________________________________________
<S> <C> <C> <C>
Annuity withdrawals 8.9% 8.2% 9.0%
Annuity withdrawals, excluding withdrawals
of policies for which the five year
interest guarantee and five year
surrender charge have expired 8.8 7.4 6.1
Life insurance lapse ratio 7.6 8.4 7.4
</TABLE>
The withdrawal ratio for the company's annuity products is calculated by
dividing aggregate surrenders and withdrawals by beginning of period account
balances. The company's annual lapse ratio for life insurance is measured in
terms of face amount and uses A.M. Best's formula.
The company currently has fixed annuity products available for sale through
stockbrokers. Prior to the second quarter of 1995, the company had not
actively solicited fixed annuity sales through stockbrokers since 1989. The
variable products sold through Golden American are primarily sold by
stockbrokers. The company plans to continue to expand its distribution
channels to include stockbrokers, banks and other financial institutions in
addition to its current independent and career agency distribution channels.
The amortization of deferred policy acquisition costs increased 9.7% to
$79,550,000 in 1996 compared to an increase of 42.5% to $72,537,000 in 1995
from $50,921,000 in 1994. Increases in amortization of deferred acquisition
costs related to operating earnings are the result of increases in the
deferred policy acquisition cost asset (before adjustment to reflect the
impact of SFAS No. 115) as costs of generating sales of the company's
products are deferred and amortized in later periods. Also, higher
withdrawals and surrenders of the company's products have accelerated the
amortization of deferred acquisition costs related to those products although
surrender charges assessed on certain withdrawals offset some of the earnings
impact of this accelerated amortization. Amortization related to realized
gains continues to decline as a result of the decrease in realized and
prepayment gains from assets backing fixed annuity and interest sensitive
life insurance liabilities.
<TABLE>
<CAPTION>
Percentage Percentage
Year ended December 31 1996 Change 1995 Change 1994
_______________________________________________________________________________
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Amortization related to:
Operating income $74,671 11.1% $67,183 50.3% $44,711
Realized gains 4,879 (8.9) 5,354 (13.8) 6,210
_______________________________________________________
Total amortization $79,550 9.7% $72,537 42.5% $50,921
=======================================================
</TABLE>
As a part of the acquisition of Golden American, $85,796,000 of the cost was
allocated to the right to receive future cash flows from the insurance
contracts existing with Golden American at the date of acquisition. This
allocated cost represents the present value of in force acquired ("PVIF")
which reflects the value of those purchased policies calculated by
discounting the actuarially determined expected future cash flows at the
discounted rate determined by the company. Amortization of PVIF totaled
$2,745,000 in 1996. Based on current conditions and assumptions as to the
impact of future events on acquired policies in force, amortization of PVIF
is expected to be approximately $9,700,000 in 1997, $10,100,000 in 1998,
$9,200,000 in 1999, $7,900,000 in 2000 and $6,800,000 in 2001.
The acquisition of Golden American was accounted for as a purchase resulting
in a new basis of accounting, reflecting estimated fair values for assets and
liabilities at the acquisition date. Goodwill of $39,254,000 has been
established for the excess of the acquisition cost over the fair value of net
assets acquired. The acquisition cost is preliminary with respect to the
final settlement of taxes with Bankers Trust and estimated expenses and, as a
result, goodwill may change. Amortization of goodwill during the period from
the acquisition date to December 31, 1996 totaled $589,000. Amortization of
goodwill attributed to licenses acquired in conjunction with the purchase of
USG totaled $74,000 in 1996 and 1995. Goodwill resulting from the
acquisition of Golden American is being amortized on a straight-line basis
over 25 years and is expected to total $1,570,000 annually.
Other expenses increased 146.1% to $21,340,000 in 1996 compared to a decrease
of 13.6% to $8,672,000 in 1995 from $10,035,000 in 1994. The increase in
other expenses resulted from increased commissions paid to registered
representatives selling investment products through the company's
broker/dealer operations and accounting, custodial and administrative
expenses of variable products operations.
On July 23, 1996, Equitable of Iowa Companies Capital Trust ("the Trust"), a
consolidated, wholly-owned subsidiary of the company issued $125,000,000 of
8.70% Trust Originated Preferred Securities (see Liquidity and Capital
Resources section below for a discussion of this transaction). Pre-tax
distributions to the holders of these company-obligated, mandatorily-
redeemable preferred securities totaled $4,833,000 in 1996.
Income
Operating income (income excluding realized gains and losses, commercial
mortgage and mortgage-backed securities prepayment gains, related
amortization of deferred policy acquisition costs ("DPAC") and the 1995
special reserve accrual for future guaranty fund assessments, net of related
income taxes) increased 14.0% in 1996 compared to an increase of 14.2% in
1995. Net income increased 45.1% in 1996 compared to a decrease of 13.6% in
1995. A breakdown of income is as follows:
<TABLE>
<CAPTION>
Year ended December 31 1996 1995 1994
________________________________________________________________________________
$ Per Share $ Per Share $ Per Share
_________ ________ _________ _________ _________ _________
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C>
Operating income $114,901 $3.60 $100,747 $3.18 $88,212 $2.79
Realized gains (net of
tax):
Gains realized on dis-
posal of investments 10,566 0.33 6,293 0.20 12,953 0.41
Commercial mortgage
and mortgage-backed
securities prepayment
gains 866 0.03 4,730 0.15 1,156 0.04
Realized gains related
amortization of
DPAC (3,172) (0.10) (3,480) (0.11) (4,037) (0.13)
__________________________________________________________
8,260 0.26 7,543 0.24 10,072 0.32
Guaranty fund
accrual -- -- (23,400) (0.74) -- --
__________________________________________________________
Net income $123,161 $3.86 $84,890 $2.68 $98,284 $3.11
==========================================================
</TABLE>
Average shares outstanding totaled 31,904,734 in 1996 compared to 31,709,032
in 1995 and 31,612,675 in 1994.
In 1996, the acquisition of Golden American diluted earnings by 8 cents per
share, including operations of BT Variable and subsidiaries for the period
August 13, 1996 through December 31, 1996 and related financing costs. The
acquisition is currently expected to dilute 1997 operating earnings per share
by 6 to 10 cents per share. Subsequent to 1997 the acquisition is expected
to have a positive impact on earnings per share as opportunities are
available to market fixed products through Golden American's distribution
channels, expand the distribution of variable products and achieve expense
efficiencies. See "Cautionary Statement Regarding Forward-Looking
Statements" below.
FINANCIAL CONDITION
Investments
The financial statement carrying value of the company's total investments
grew 10.9% (7.3% excluding Golden American) in 1996. The amortized cost
basis of the company's total investment portfolio grew 14.8% (11.0% excluding
Golden American) during the same period. Effective December 1, 1995, all of
the company's investments, other than mortgage loans and real estate, are
carried at fair 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 fixed annuity and
insurance products and the acquisition of Golden American. The company
manages the growth of its insurance operations in order to maintain adequate
capital ratios.
Investment Portfolio Summary: To support the company's fixed annuities and
life insurance products, cash flow was invested primarily in fixed maturity
securities. At December 31, 1996, the company's investment portfolio was
comprised of the following:
<TABLE>
<CAPTION>
Yield at
Amortized % of Estimated % of Amortized
Cost Total Fair Value Total Cost
____________________________________________________
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Investment cash and
short-term investments $36,187 0.4% $36,187 0.4% 5.7%
Governments and agency
mortgage-backed
securities 438,403 4.7 451,740 4.7 7.9
Conventional mortgage-
backed securities 2,355,036 25.1 2,351,703 24.5 7.9
Investment grade
corporate securities 4,031,114 43.0 4,197,158 43.8 8.1
Below-investment grade
corporate securities 733,182 7.8 731,363 7.6 9.1
Mortgage loans 1,720,114 18.4 1,739,443 18.1 8.3
____________________________________________________
Total cash and fixed
income investments 9,314,036 99.4 9,507,594 99.1 8.2
Equity securities 48,857 0.5 77,181 0.8 8.0
Real estate 8,613 0.1 8,613 0.1 3.5
____________________________________________________
Total investments $9,371,506 100.0% $9,593,388 100.0% 8.2%
====================================================
<FN>
Estimated fair values of publicly traded securities are as reported by
an independent pricing service. Fair values of conventional mortgage-
backed securities not actively traded in a liquid market are estimated
using a third party pricing system. This pricing system uses a matrix
calculation assuming a spread over U.S. Treasury bonds based upon the
expected average lives of the securities. Fair 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 fair values of redeemable preferred stocks
are as reported by the National Association of Insurance Commissioners
("NAIC"). Fair values of mortgage loans on real estate are estimated by
discounting expected cash flows, using interest rates currently being
offered for similar loans. Estimated fair values of equity securities
are based on the latest quoted market prices or conversion value, if
applicable. Estimated fair values of the company's investment in its
registered separate accounts, included in equity securities, are based
upon the quoted fair value of the securities comprising the individual
portfolios underlying the separate account. Fair value of owned real
estate is estimated to be equal to, or in excess of, carrying value
based upon appraised values.
</TABLE>
Fixed Maturity Securities: At December 31, 1996, the ratings assigned by
Standard & Poor's Corporation ("Standard & Poor's") to the individual
securities in the company's fixed maturities portfolio are summarized as
follows:
<TABLE>
<CAPTION>
Amortized % of Estimated % of
Cost Total Fair Value Total
_______________________________________________
(Dollars in thousands)
<S> <C> <C> <C> <C>
RATINGS ASSIGNED BY
STANDARD & POOR'S:
U.S. governments, agencies
& AAA Corporates $2,755,730 36.6% $2,765,217 35.7%
AA+ to AA- 395,060 5.2 408,415 5.3
A+ to A- 2,101,886 27.8 2,201,449 28.4
BBB+ to BBB- 1,446,682 19.1 1,494,742 19.3
BB+ to BB- 627,814 8.3 632,188 8.2
B+ to B- 115,733 1.5 112,809 1.5
Issues not rated by S&P
(by NAIC rating):
Rated 1 (AAA to A-) 55,507 0.7 58,061 0.8
Rated 2 (BBB+ to BBB-) 21,409 0.3 22,036 0.3
Rated 3 (BB+ to BB-) 28,382 0.4 29,328 0.4
Rated 5 (CCC+ to C) 8,916 0.1 7,331 0.1
Redeemable preferred stock 616 0.0 388 0.0
_______________________________________________
Total fixed maturities $7,557,735 100.0% $7,731,964 100.0%
===============================================
</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 "available for sale", "held to
maturity", or "trading". SFAS No. 115 significantly restricts a company's
ability to sell securities in the held to maturity category without raising
questions about the appropriateness of its accounting policy for such
securities. Classification of securities as held to maturity, therefore,
limits a company's ability to manage its investment portfolio in many
circumstances. For example, a company would be prohibited from accepting a
tender offer or responding to an anticipated decline in the credit quality of
assets in a particular industry when the security is categorized as held to
maturity. Additionally, a company is unable to adjust its portfolio to take
advantage of tax planning opportunities or economic changes that would assist
in asset liability management. Thus a company's ability to maintain the
appropriate flexibility to make optimal investment decisions is significantly
restricted if it classifies securities as held to maturity.
In response to this opportunity, the company reclassified 100% of the
securities in its "held to maturity" category to "available for sale" on
December 1, 1995 to maximize investment flexibility. As a result of this
reclassification, the net unrealized investment gain component of
shareholders' equity increased by $138,795,000 on December 1, 1995 (net of
deferred taxes of $74,735,000 and an adjustment of $96,068,000 to deferred
policy acquisition costs) to reflect the net unrealized investment gains on
securities classified as available for sale that were previously classified
as held to maturity. The company is not, however, precluded from classifying
securities as held to maturity in the future. While it is not the company's
current practice to engage in active management of the fixed maturities
securities portfolio such that significant sales would occur, the inability
to respond to prudent financial management decisions necessitated this
change.
SFAS No. 115 requires the carrying value of fixed maturity securities
classified as available for sale to be adjusted for changes in market value,
primarily caused by interest rates. While other related accounts are
adjusted as discussed above, the insurance liabilities supported by these
securities are not adjusted under SFAS No. 115, thereby creating volatility
in shareholders' equity as interest rates change. As a result, the company
expects that its shareholders' equity will be exposed to incremental
volatility due to changes in market interest rates and the accompanying
changes in the reported value of securities classified as available for sale,
with equity increasing as market interest rates decline and, conversely,
decreasing as market interest rates rise.
Due to this potential for distortion in shareholders' equity, fair value
disclosure is provided in Note 5 of the accompanying Consolidated Financial
Statements. SFAS No. 107, "Disclosures about Fair Value of Financial
Instruments" requires disclosure of fair values for selected financial
instruments but does not require disclosure of fair value of life insurance
liabilities. Although the company's life insurance liabilities are
specifically exempted from this disclosure requirement, estimated fair value
disclosure of these liabilities is provided in an effort to more properly
reflect changes in shareholders' equity from fluctuations in interest rates.
On December 31, 1996, fixed income securities with an amortized cost of
$7,557,735,000 and an estimated fair value of $7,731,964,000 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 $76,387,000, or $2.38 per share at December
31, 1996.
Net unrealized appreciation of fixed maturity securities of $174,229,000 was
comprised of gross appreciation of $270,742,000 and gross depreciation of
$96,513,000.
The percentage of the company's portfolio invested in below investment grade
securities increased during 1996. At December 31, 1996, the amortized cost
value of the company's total investment in below investment grade securities
consisted of investments in 93 issuers totaling $733,182,000, or 7.8%, 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
its investment portfolio. At December 31, 1996, the yield at amortized cost
on the company's below investment grade portfolio was 9.1% compared to 8.1%
for the company's investment grade corporate bond portfolio. The company
estimates that the fair value of its below investment grade portfolio was
$731,363,000, or 99.8% of amortized cost value, at December 31, 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.
At December 31, 1996, no fixed maturity securities were deemed to have
impairments in value that are other than temporary.
The company's fixed maturity investment portfolio had a combined yield at
amortized cost of 8.1% at December 31, 1996 and 8.3% at December 31, 1995.
Equity Securities: At December 31, 1996, the company owned equity securities
with a combined cost of $48,857,000 and an estimated fair value of
$77,181,000. Gross appreciation of equity securities totaled $28,559,000 and
gross depreciation totaled $235,000. Equity securities are primarily
comprised of the company's investment in shares of the mutual funds
underlying the company's registered separate accounts and an investment in a
real estate investment trust. The company's investment in the real estate
investment trust had an estimated fair value of $61,339,000 and a cost basis
of $35,024,000 at December 31, 1996. The estimated fair value of the
company's investment is based upon conversion value. Conversion value is
derived from the quoted market value of the publicly traded security into
which the company's investment can be converted and the issuer's cash flow
from operations. As such, changes in operating cash flows or the quoted
market price of the issuer may result in significant volatility in the
estimated fair value of the company's investment.
Mortgage Loans: Mortgage loans make up approximately 18.4% of the company's
investment portfolio. 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 $1,720,114,000 from
$1,169,456,000 during 1996. The company's mortgage loan portfolio, excluding
farm loans, includes 561 loans with an average size of $3,066,000 and average
seasoning of 3.6 years if weighted by the number of loans, and 1.9 years if
weighted by mortgage loan carrying values. The company's mortgage loans are
typically secured by occupied buildings in major metropolitan locations and
not speculative developments, and are diversified by type of property and
geographic location. At December 31, 1996, the yield on the company's
mortgage loan portfolio was 8.3%.
Distribution of these loans by type of collateral is as follows:
<TABLE>
<CAPTION>
% of
# of Carrying Mortgage
Loans Value Portfolio
_______________________________________
(Dollars in thousands)
<S> <C> <C> <C>
COLLATERAL BREAKDOWN
_____________________
Multi-family residential 98 $339,087 19.7%
Industrial 207 499,612 29.0
Office buildings 111 380,081 22.1
Retail 137 473,830 27.6
Farm 3 90 0.0
Other 8 27,414 1.6
_______________________________________
Total 564 $1,720,114 100.0%
=======================================
</TABLE>
Distribution of these loans by geographic breakdown is as follows:
<TABLE>
<CAPTION>
% of
# of Carrying Mortgage
Loans Value Portfolio
_______________________________________
(Dollars in thousands)
<S> <C> <C> <C>
GEOGRAPHIC BREAKDOWN
____________________
New England 5 $21,271 1.2%
Middle Atlantic 76 265,801 15.5
South Atlantic 88 293,093 17.1
East North Central 114 378,872 22.0
West North Central 70 220,658 12.8
East South Central 19 67,243 3.9
West South Central 33 91,828 5.3
Mountain 37 108,691 6.3
Pacific 122 272,657 15.9
_______________________________________
Total 564 $1,720,114 100.0%
=======================================
</TABLE>
At December 31, 1996, one mortgage loan with a carrying value of $41,000 was
delinquent by 90 days or more. The company does not expect to incur material
losses from its mortgage loan portfolio because of the historically low
default rate in the company's mortgage loan portfolio and because the company
has been able to recover 99% of the principal amount of problem mortgages
that have been resolved in the last three years.
Real Estate: At December 31, 1996, the company owned real estate totaling
$8,613,000, including properties acquired through foreclosure valued at
$5,322,000.
At December 31, 1996, the company had no investments in default. The company
estimates its total investment portfolio, excluding policy loans, had a fair
value equal to 102.4% of amortized cost value for accounting purposes at
December 31, 1996.
Financial Instruments - Risk Management
Hedging Program: During the second quarter of 1996, the company implemented
a hedging program under which certain derivative financial instruments,
interest rate caps and cash settled put swaptions ("instruments"), were
purchased to reduce the negative effects of potential increases in withdrawal
activity related to the company's annuity liabilities which may result from
extreme increases in interest rates. The company purchased instruments, all
during the second quarter, with notional amounts totaling approximately
$600,000,000 in interest rate caps and $1,300,000,000 in cash settled put
swaptions, all of which were outstanding at December 31, 1996. The company
paid approximately $21,100,000 in premiums for these instruments. The cost of
this program has been incorporated into the company's product pricing. The
instruments do not require any additional payments by the company.
The agreements for these instruments entitle the company to receive payments
from the instruments' counterparties on future reset dates if interest rates,
as specified in the agreements, rise above a specified fixed rate (9.0% and
9.5%). The amount of such payments to be received by the company for the
interest rate caps, if any, will be calculated by taking the excess of the
current applicable rate over the specified fixed rate, and multiplying this
excess by the notional amount of the caps. Payments on cash settled put
swaptions are also calculated based upon the excess of the current applicable
rate over the specified fixed rate multiplied by the notional amount. The
product of this rate differential times the notional amount is assumed to
continue for a series of defined future semi-annual payment dates and the
resulting hypothetical payments are discounted to the current payment date
using the discount rate defined in the agreement. Any payments received from
the counterparties will be recorded as an adjustment to interest credited.
The following table summarizes the contractual maturities of notional amounts
by type of instrument at December 31, 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>
Any unrealized gain or loss on the instruments is off-balance sheet and,
therefore, is not reflected in the financial statements. The following table
summarizes the amortized cost, gross unrealized gains and losses and
estimated fair value on these instruments as of December 31, 1996:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
December 31, 1996 Cost Gains Losses Value
_______________________________________________________________________________
(Dollars in thousands)
<S> <C> <C> <C> <C>
Interest rate caps $5,164 ($1,456) $3,708
Cash settled put swaptions 12,877 $65 (2,570) 10,372
_________________________________________________
Total $18,041 $65 ($4,026) $14,080
=================================================
</TABLE>
The decline in fair value from amortized cost reflects changes in interest
rates and market conditions since the time of purchase.
Exposure to Loss - Counterparty Nonperformance: The company is exposed to
the risk of losses in the event of nonperformance by the counterparties of
these instruments. Losses recorded in the company's financial statements in
the event of nonperformance will be limited to the unamortized premium
(remaining amortized cost) paid to purchase the instrument because no
additional payments are required by the company on these instruments after
the initial premium. Counterparty nonperformance would result in an economic
loss if interest rates exceeded the specified fixed rate. Economic losses
would be measured by the net replacement cost, or estimated fair value, for
such instruments. The estimated fair value is the average of quotes obtained
from related and unrelated counterparties. The company limits its exposure
to such losses by: diversification among counterparties, limiting exposure to
any individual counterparty based upon that counterparty's credit rating, and
limiting its exposure by instrument type to only those instruments that do
not require future payments. For purposes of determining risk exposure to
any individual counterparty, the company evaluates the combined exposure to
that counterparty on both a derivative financial instruments' level and on
the total investment portfolio credit risk and reports its exposure to senior
management at least monthly. The maximum potential economic loss (the cost
of replacing an instrument or the net replacement value) due to
nonperformance of the counterparties will increase or decrease during the
life of the instruments as a function of maturity and market conditions.
The company determines counterparty credit quality by reference to ratings
from independent rating agencies. As of December 31, 1996, the ratings
assigned by Standard & Poor's Corporation by instrument with respect to the
net replacement value (fair value) of the company's instruments was as
follows:
<TABLE>
<CAPTION>
December 31, 1996 Net Replacement Value
_____________________________________________________________________________
(Dollars in thousands) Interest Cash Settled
Rate Caps Put Swaptions Total
______________________________________________
<S> <C> <C> <C>
Counterparties credit quality:
AAA $2,447 $5,363 $7,810
AA- 1,261 2,828 4,089
A+ -- 2,181 2,181
______________________________________________
Total $3,708 $10,372 $14,080
==============================================
</TABLE>
Other assets
Accrued investment income increased $12,457,000 during 1996 due to an
increase in new fixed income investments and in the overall size of the
portfolio. Deferred policy acquisition costs increased $178,979,000 over
year-end 1995 levels. Excluding the adjustment to reflect the impact of SFAS
No. 115, deferred policy acquisition costs increased $88,203,000 as the
deferral of current period costs, primarily commissions incurred to generate
insurance and annuity sales, totaled $167,753,000. Amortization of costs
deferred totaled $79,550,000.
Present value of in force acquired was established as a result of the recent
acquisition of variable annuity and life insurance business in force on
Golden American. At December 31, 1996, PVIF was $83,051,000 and amortization
totaled $2,745,000 for the period from August 14, 1996 through December 31,
1996.
Intangible assets increased $43,087,000 during 1996. Goodwill totaling
$39,254,000, representing the excess of the acquisition cost over the fair
value of net assets acquired in conjunction with the purchase of Golden
American, was established in 1996. In addition, the costs of issuing the
company's Trust Originated Preferred Securities totaling $4,695,000 were
capitalized in 1996. Amortization of intangible assets totaled $896,000
during 1996, including $233,000 reported in interest expense.
Other assets increased $34,332,000 during 1996. Included in this increase is
the unamortized cost of interest rate caps and cash settled put swaptions
purchased to hedge the company's annuity liabilities totaling $18,041,000.
Also included in this increase are various assets of Golden American and DSI
totaling $2,568,000, an increase in prepaid pension costs of $2,640,000 and
increases in capitalized guaranty fund assessments of $5,064,000.
At December 31, 1996, the company had $1,657,879,000 of separate account
assets compared to $171,881,000 at December 31, 1995. The increase in
separate account assets is due to the acquisition of Golden American and
growth in Equitable Life's variable annuity product. Golden American had
separate account assets of $1,207,247,000 at December 31, 1996.
At December 31, 1996, the company had total assets of $12,569,679,000, an
increase of 28.6% over total assets at December 31, 1995. The company's goal
remains to grow assets at a three year average growth rate of 20%, excluding
the impact of SFAS No. 115. See "Cautionary Statement Regarding Forward-
Looking Statements" below. This three year average was 25% and 23% in 1996
and 1995, respectively.
Liabilities
In conjunction with the volume of annuity and insurance sales, the
acquisition of Golden American and the resulting increase in business in
force, the company's liability for policy liabilities and accruals increased
$1,173,503,000, or 14.2%, during 1996 and totaled $9,415,413,000 at December
31, 1996.
Reserves for the company's annuity contracts and life insurance policies,
including separate account reserves for variable contracts, as of December
31, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1996 % of 1995 % of
December 31, Reserve Total Reserve Total
________________________________________________________________________________
(Dollars in thousands)
<S> <C> <C> <C> <C>
Fixed deferred annuities and
deposit funds $7,359,810 67.3% $6,664,849 80.4%
Variable annuities 1,801,247 16.5 76,522 0.9
Immediate annuities and supple-
mental contracts 517,353 4.7 362,406 4.4
Universal life and fixed premium
current interest life 547,375 5.0 470,580 5.7
Traditional par and nonpar life 712,296 6.5 718,110 8.6
_______________________________________________
Total Reserves $10,938,081 100.0% $8,292,467 100.0%
===============================================
</TABLE>
Reserves for the company's annuity contracts, including separate account
reserves for variable contracts, increased $2,574,633,000, or 36.2%, to
$9,678,410,000. Life insurance reserves, including separate account reserves
for variable life policies, increased $70,981,000, or 6.0%, to
$1,259,671,000. At December 31, 1996, Golden American had reserves of
$1,492,064,000. Excluding Golden American, reserves increased 13.9% in 1996.
The company incorporates a number of features in its annuity products
designed to reduce the early withdrawal or surrender of the policies and to
partially compensate the company for its costs if policies are withdrawn
early. Current surrender charge periods on fixed annuity policies typically
range from 5 years to the term of the policy. During 1996, 85% of such
policies issued by Equitable Life and USG had a surrender charge period of
seven years or more. The initial surrender charge on Equitable Life and USG
fixed 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 fixed annuity
liabilities and sales at and for the year ended December 31, 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
Fixed Fixed
Annuity % of Annuity % of
Surrender Charge % Sales Total Liabilities Total
____________________________________________________________________________
(Dollars in thousands)
<S> <C> <C> <C> <C>
No surrender charge $686,761 9.5%
1 to 4 percent 881,604 12.2
5 to 6 percent $103,619 9.5% 1,219,719 16.9
7 to 9 percent 858,109 78.5 3,149,717 43.7
10 percent and greater 131,615 12.0 1,276,121 17.7
____________________________________________
$1,093,343 100.0% $7,213,922 100.0%
============================================
</TABLE>
Deferred income taxes decreased $69,234,000 during 1996 and totaled
$45,681,000 at December 31, 1996, including $43,678,000 ($113,503,000 at
December 31, 1995) of deferred taxes recorded as a result of unrealized gains
of $174,229,000 on fixed maturity securities designated as available for
sale. Total consolidated debt increased $46,500,000 during 1996 as the
company issued additional commercial paper. Commercial paper, issued to
offset short-term timing differences in investment related cash receipts and
disbursements (investment smoothing) and to provide for short-term operating
needs, amounted to $104,600,000 at December 31, 1996. At December 31, 1996,
none of the commercial paper was issued for investment smoothing purposes.
Other liabilities increased $33,201,000 from year-end 1995 levels primarily
due to an increase in draft accounts payable, mortgage trust funds and
transfer and suspense accounts.
Separate account liabilities increased $1,485,998,000 to $1,657,879,000 from
December 31, 1995 due to the acquisition of Golden American and growth in
Equitable Life's variable annuity product. Separate account liabilities
attributable to Golden American totaled $1,207,247,000 at December 31, 1996.
At December 31, 1996, the company had total liabilities of $11,548,880,000
compared to $8,878,914,000 at December 31, 1995, a 30.1% increase.
Preferred Securities
On July 23, 1996, the Trust, a consolidated, wholly-owned subsidiary of the
company, issued $125,000,000 of 8.70% Trust Originated Preferred Securities
(see Liquidity and Capital Resources section below). The net proceeds of this
offering were used to fund, in part, the acquisition of BT Variable, Inc.
Equity
At December 31, 1996, stockholders' equity was $895,799,000, or $28.00 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 $76,387,000, or $2.38 per share,
after adjustments to deferred acquisition costs and deferred income taxes, at
December 31, 1996. At December 31, 1995, unrealized depreciation of available
for sale fixed maturity securities, net of adjustments, increased
stockholders' equity by $208,932,000, or $6.58 per share. The ratio of
consolidated debt to total capital was 16.7% (17.8% excluding SFAS No. 115)
at December 31, 1996, up from 15.0% (18.8% excluding SFAS No. 115) at year
end 1995. The higher ratio is due to the issuance of additional commercial
paper during 1996. At December 31, 1996, there were 31,988,410 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, a leased location in Wilmington,
Delaware and a leased location in New York, New York. 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 the
company's Des Moines based home office operations. The company anticipates
an additional $3,000,000 to $4,000,000 for fixed assets will be spent in 1997
for the new location. In total, the company intends to increase its
commitment to improve product development, customer service and operating
efficiencies by spending approximately $8,000,000 to $11,000,000 per year
over the next three years on capital needs, primarily for information
technology, as compared to the approximately $5,400,000 spent in 1996
($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 and to provide short term
liquidity. At December 31, 1996, the company had $104,600,000 in commercial
paper notes outstanding, an increase of $46,500,000 from December 31, 1995.
The company's commercial paper is rated A-1 by Standard and Poor's, D-1 by
Duff & Phelps Credit Rating Co. and P-2 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 December 31, 1996, $303,660,000 of
retained earnings were free of restrictions and could be distributed to the
company's public stockholders.
Since Equitable of Iowa Companies is a holding company, funds required to
meet its debt service requirements, dividend payments and other expenses are
primarily provided by its subsidiaries. On August 12, 1996, Equitable Life
paid a dividend of $24,000,000 to provide additional funding for the
acquisition of Golden American. The ability of Equitable Life and Golden
American to pay dividends to the parent company is restricted because prior
approval of insurance regulatory authorities is required for payment of
dividends to the stockholder which exceed an annual limitation. During 1997,
Equitable Life and Golden American could pay dividends to the parent company
of approximately $95,363,000 and $2,186,000, respectively, without prior
approval of statutory authorities. 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 February 1995, the company
issued $100,000,000 of 8.5% notes, maturing on February 15, 2005, receiving
net proceeds totaling $98,812,000, after expenses. The company contributed
$50,000,000 of the proceeds to its insurance subsidiaries to support the
internal growth of these subsidiaries and applied the remaining net proceeds
to the repayment of outstanding commercial paper notes.
In order to provide the flexibility to respond promptly to capital needs as
opportunities or needs arise, the company has available an effective
universal shelf registration on Form S-3 with the Securities and Exchange
Commission with respect to $300,000,000 of securities, including any
combination of debt securities, common stock and preferred stock, of which
$175,000,000 remains to be issued. Securities may be issued and sold upon
such terms and conditions and at such time or times as may be later
determined. Any such offering will be made only by means of a prospectus.
Pursuant to this shelf registration, on July 23, 1996, the Trust, a
consolidated, wholly-owned subsidiary of Equitable, issued $125,000,000 of
its 8.70% Trust Originated Preferred Securities (the "Preferred Securities").
Concurrent with the issuance of the Trust's Preferred Securities, Equitable
issued to the Trust $128,866,000 in principal amount of its 8.70%
Subordinated Deferrable Interest Debentures (the "Debt Securities") due July
30, 2026. The sole assets of the Trust are and will remain the Debt
Securities and any accrued interest thereon. The interest and other payment
dates on the Debt Securities correspond to the distribution and other payment
dates on the Preferred Securities. The Debt Securities mature on July 30,
2026, with an option to extend the maturity an additional 19 years, and are
redeemable by Equitable, in whole or in part, beginning July 30, 2001. The
Preferred Securities will mature or be called simultaneously with the Debt
Securities. The Preferred Securities have a liquidation value of $25 per
Preferred Security plus accrued and unpaid distributions. As of December 31,
1996, 5,000,000 shares of Preferred Securities were outstanding.
Equitable has obligations under the Debt Securities, the Preferred Securities
Guarantee Agreement, the Declaration of Trust, as amended, and the Indenture,
as amended by the First Supplemental Indenture. These obligations, when
considered together, constitute a full and unconditional guarantee by
Equitable of the Trust's obligations under the Preferred Securities. Net
proceeds of approximately $120,305,000 from the issuance of $125,000,000 of
Preferred Securities were used to fund, in part, the acquisition of BT
Variable, a New York Corporation which owns all the outstanding capital stock
of Golden American and DSI.
As discussed in the Results of Operations section above, on August 13, 1996,
Equitable acquired all of the outstanding capital stock of BT Variable from
Whitewood, pursuant to the terms of the Purchase Agreement dated as of May 3,
1996 between Equitable and Whitewood. In exchange for the outstanding capital
stock of BT Variable, Equitable paid the sum of $93,000,000 in cash to
Whitewood in accordance with the terms of the Purchase Agreement. Equitable
also paid the sum of $51,000,000 in cash to Bankers Trust to retire certain
debt owed by BT Variable to Bankers Trust pursuant to a revolving credit
arrangement. The funds used in completing the acquisition were obtained
primarily through a recent offering of securities undertaken by the Trust,
the proceeds of which were loaned to Equitable in exchange for subordinated
debentures issued by Equitable to the Trust. Additional funds were provided
by reducing short-term investments of Equitable and its insurance
subsidiaries. Funds provided by Equitable's insurance subsidiaries were
transferred to Equitable in the form of dividends paid. Subsequent to the
acquisition, the name BT Variable, Inc. was changed to EIC Variable, Inc.
("EIC Variable").
The company intends to continue growing its insurance operations, either
internally or through acquisition, and has established a goal of achieving
average annual asset growth excluding SFAS No. 115, as measured over the
preceding three years, of at least 20%. See "Cautionary Statement Regarding
Forward-Looking Statements" below. Future growth in the company's insurance
operations may require additional capital. As discussed above, the company
has available an effective universal shelf registration on Form S-3 which
will enable the company to issue up to $175,000,000 of securities to support
such growth. Sources of additional capital include the retention of earnings
and the additional issuance of securities.
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, known
insolvencies and state guaranty fund assessment bases. However, changes in
the basis whereby assessments are charged to individual companies and changes
in the availability of the right to offset assessments against premium tax
payments could materially affect the company's results.
Currently, the company's insurance subsidiaries are subject to regulation and
supervision by the states in which they are admitted to transact business.
State insurance laws generally establish supervisory agencies with broad
administrative and supervisory powers related to granting and revoking
licenses to transact business, establishing guaranty fund associations,
licensing agents, market conduct, approving policy forms, regulating premium
rates for some lines of business, establishing reserve requirements,
prescribing the form and content of required financial statements and
reports, determining the reasonableness and adequacy of statutory capital and
surplus and regulating the type and amount of investments permitted.
The insurance regulatory framework continues to be scrutinized by various
states, the federal government and the NAIC. The NAIC, in conjunction with
state regulators, has been reviewing existing insurance laws and regulations.
A committee of the NAIC proposed changes in the regulations governing
insurance company investments and holding company investments in subsidiaries
and affiliates which were adopted by the NAIC as model laws in 1996. The
company does not presently anticipate any material adverse change in its
business as a result of these changes.
A task force of the NAIC is currently undertaking a project to codify a
comprehensive set of statutory insurance accounting rules and regulations.
This project is not expected to be completed earlier than 1998. 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.
In 1995, the NAIC adopted Guideline XXXIII, which, based upon liabilities at
December 31, 1996, requires the company to increase annuity reserves in its
statutory financial statements by approximately $23,000,000. The company has
received approval from the Iowa and Oklahoma insurance departments for a
three year phase in. The 1996 and 1995 statutory financial statements
include an increase in fixed annuity reserves of approximately $7,200,000 and
$8,100,000, respectively, pursuant to the requirements of the guideline. The
guideline has no effect on financial statements prepared in accordance with
GAAP.
There has been increased scrutiny by insurance regulators and the insurance
industry itself of insurance sales and marketing activities. New rules for
life insurance illustrations have been adopted as a model regulation by the
NAIC. Many states have adopted the regulation effective January 1, 1997, and
an NAIC committee has begun to work on the issue of annuity marketing. The
company conducts an ongoing 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.
ACCOUNTING AND LEGAL DEVELOPMENTS
Derivatives: On June 20, 1996, the FASB issued an exposure draft of its
Proposed Statement of Financial Accounting Standards "Accounting for
Derivative and Similar Financial Instruments and Hedging Activities". This
proposed standard, if adopted in the form presented in the exposure draft,
would establish accounting and reporting standards for derivative and other
similar financial instruments and for hedging activities which are
significantly different than practices currently used by the company and
others. The proposed standard would require the recognition of all
derivatives in the statement of financial condition and would require that
these instruments be measured at fair value. Changes in the fair value of the
derivative would be recorded in the enterprise's Statement of Income in the
period of change. If certain conditions are met, a derivative may be
designated as (1) a fair value hedge, (2) a cash flow hedge, or (3) a foreign
currency hedge. Changes in fair value of derivatives designated as fair
value hedges would be recognized in earnings in the period of change along
with the offsetting gain or loss on the hedged item. For a derivative
designated as a cash flow hedge, the gain or loss from changes in fair value
would be reported as a component of other comprehensive income (see below)
outside of earnings in the period of change and recognized in earnings on the
projected date of the forecasted transaction. Changes in fair value of
foreign currency hedges would also be reported in other comprehensive income
to the extent they offset foreign currency transaction gain or loss. Any
excess gain or loss from changes in fair value of the foreign currency hedge
would be recognized in earnings. In most cases, the criteria which must be
met to qualify for "hedge" treatment are very restrictive and would preclude
many common hedging practices in use today. Because of this concern, and the
significant volatility in earnings and stockholders' equity which would
result from application of the accounting required by the proposed standard,
FASB received a large number of comment letters regarding this proposal, most
of which were critical of the approach proposed by FASB. As a result of this
and other aspects of FASB's procedural requirements for adoption of a new
SFAS, FASB is considering various modifications to the accounting and
reporting requirements proposed in the exposure draft. The impact on the
company's financial statements of any change in accounting for derivatives
cannot be estimated until the final form of such requirements is known.
On January 28, 1997, the Securities and Exchange Commission ("SEC") adopted
new disclosure rules for derivative financial instruments. The new rules
require expanded disclosure of accounting policies for derivatives in
footnotes to financial statements, as well as disclosure of quantitative and
qualitative information concerning market risk of derivatives and other
financial instruments to be presented outside the financial statements.
Quantitative disclosures regarding market risk sensitive instruments may be
presented as a: 1) tabular presentation of fair value information and
contract terms, 2) a sensitivity analysis presenting potential losses in
future earnings, fair values or cash flows from hypothetical changes in
market rates and prices, or 3) a value at risk presentation of the potential
loss in future earnings, fair values or cash flows from market movements over
a stated period of time and related probability of such loss. The company
will be required to provide the new disclosures for the first time in its
financial statements and Form 10K for the period ended December 31, 1998,
although the SEC has indicated it expects the expanded accounting policy
disclosures in current filings. The company has provided disclosures in its
footnotes and Management's Discussion and Analysis which comply with the
accounting policy disclosure requirements in addition to much of the required
quantitative disclosures. The company is analyzing the rules for additional
requirements and will provide required disclosures no later than in its
December 31, 1998 financial statements.
Guaranty Fund Assessments: On December 5, 1996, the American Institute of
CPAs ("AICPA") issued an exposure draft of its Proposed Statement of Position
on "Accounting for Guaranty-Fund Assessments". This proposed standard
provides: (1) guidance for determining when an insurance enterprise should
recognize a liability for guaranty fund and other assessments; (2) guidance
on how to measure the liability and allows discounting the liability, if the
amount and timing of the cash payments are fixed and reliably determinable;
(3) criteria for when an asset may be recognized for a portion or all of the
assessment liability or paid assessment that can be recovered through premium
tax offsets or policy surcharges; and (4) requirements for disclosure of
certain information. The company's liability established for guaranty fund
assessments and related premiums tax offset at December 31, 1996 is
undiscounted and adequately reserves for guaranty fund assessments based upon
the Proposal as currently written.
Comprehensive Income: On June 20, 1996, the FASB issued an exposure draft of
its Proposed Statement of Financial Accounting Standards "Reporting
Comprehensive Income". Comprehensive income is defined as "the change in
equity of a business enterprise during a period from transactions and other
events and circumstances from nonowner sources. It includes all changes in
equity during a period except those resulting from investments by owners and
distributions to owners". Comprehensive income would be reported in either
one or two statements of financial performance and an enterprise would be
required to report an amount representing total comprehensive income as well
as a per share amount for that total. In addition to items currently
reported in net income, comprehensive income would include in other
comprehensive income such items as changes in fair value of fixed maturity
securities designated as available for sale, changes in fair value of
derivatives designated as cash flow or foreign currency hedges and
unrecognized assets or liabilities of pension plans pursuant to SFAS No. 87.
This proposed standard is not expected to change the company's reported net
income but would increase the prominence of changes in the items listed above
to be perceived as equivalent to net income. This proposal is expected to
cause increased volatility in stockholders' equity primarily due to
fluctuations in the fair value of derivatives not currently reflected in
equity. In January 1997, FASB decided not to require the presentation of
comprehensive income in a separate statement that would treat comprehensive
income as a measure of performance similar to the income statement. Instead,
FASB is considering placing comprehensive income in the existing statement of
stockholders' equity. The requirement to present comprehensive income per
share has also been dropped.
Litigation: As previously reported, the company and certain of its
subsidiaries are defendants in class action lawsuits filed in the United
States District Court for the Middle District of Florida, Tampa Division, in
February, 1996 and in the Court of Common Pleas of Allegheny County,
Pennsylvania in June 1996. The suits claim unspecified damages as a result
of alleged improper life insurance sales practices. The company believes the
allegations are without merit. The suits are in the discovery and procedural
stages and have not yet been certified as class actions. The company intends
to defend the suits vigorously. The amount of any liability which may arise
as a result of these suits, if any, cannot be reasonably estimated and no
provision for loss has been made in the company's financial statements. The
company had also been a party to a similar previously reported class action
lawsuit filed in Iowa which has now been dismissed.
In the ordinary course of business, the company and its subsidiaries are also
engaged in certain other litigation, none of which management believes is
material.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Any forward-looking statement contained herein or in any other oral or
written statement by the company or any of its officers, directors or
employees is qualified by the fact that actual results of the company may
differ materially from any such statement due to the following important
factors, among other risks and uncertainties inherent in the company's
business:
1. Prevailing interest rate levels, which may affect the ability of the
company to sell its products, the market value of the company's
investments and the lapse ratio of the company's policies,
notwithstanding product design features intended to enhance persistency
of the company's products.
2. Changes in the federal income tax laws and regulations which may affect
the relative tax advantages of the company's products.
3. Changes in the regulation of financial services, including bank sales and
underwriting of insurance products, which may affect the competitive
environment for the company's products.
4. Other factors affecting the performance of the company, including, but
not limited to, market conduct claims and other litigation (including the
matters described above in "Accounting and Legal Developments -
Litigation" section), insurance industry insolvencies, stock market
performance, investment performance of the underlying portfolios of the
variable products, variable product design and sales volume by
significant sellers of the company's variable products.
ITEM 8. Financial Statements and Supplementary Data
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
December 31 1996 1995
_______________________________________________________________________________
<S> <C> <C>
ASSETS
Investments:
Fixed maturities, available for sale,
at fair value (cost: 1996 - $7,557,735;
1995 - $6,884,837) $7,731,964 $7,352,211
Equity securities, at fair value (cost: 1996 -
$48,857; 1995 - $49,789) 77,181 50,595
Mortgage loans on real estate 1,720,114 1,169,456
Real estate, less allowances for depreciation
of $4,588 in 1996 and $4,804 in 1995 8,613 13,960
Policy loans 190,487 182,423
Short-term investments 37,922 39,234
_____________ ___________
Total investments 9,766,281 8,807,879
Cash and cash equivalents 18,201 10,730
Securities and indebtedness of related parties 8,305 6,185
Accrued investment income 135,291 122,834
Notes and other receivables 22,464 32,410
Deferred policy acquisition costs 733,158 554,179
Present value of in force acquired 83,051 --
Property and equipment, less allowances for
depreciation of $13,835 in 1996 and $9,761 in 1995 10,465 8,039
Current income taxes recoverable 5,424 6,968
Intangible assets, less accumulated amortization
of $1,579 in 1996 and $683 in 1995 46,726 3,639
Other assets 82,434 48,102
Separate account assets 1,657,879 171,881
_____________ ___________
Total assets $12,569,679 $9,772,846
============= ===========
</TABLE>
See accompanying notes.
CONSOLIDATED BALANCE SHEETS - CONTINUED
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
December 31 1996 1995
_______________________________________________________________________________
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Policy liabilities and accruals:
Future policy benefits:
Annuity and interest sensitive life products $8,675,175 $7,500,494
Traditional life insurance products 712,296 718,110
Unearned revenue reserve 20,461 14,326
Other policy claims and benefits 7,481 8,980
_____________ ___________
9,415,413 8,241,910
Other policyholders' funds:
Advance premiums and other deposits 597 691
Accrued dividends 12,807 12,715
_____________ ___________
13,404 13,406
Deferred income taxes 45,681 114,915
Commercial paper notes 104,600 58,100
Long-term debt 100,000 100,000
Other liabilities 211,903 178,702
Separate account liabilities 1,657,879 171,881
_____________ ___________
11,548,880 8,878,914
Commitments and contingencies
Company-obligated, mandatorily-redeemable 8.70%
preferred securities, due 2026, of its subsidiary,
Equitable of Iowa Companies Capital Trust, holding
solely debt securities of the company 125,000 --
Stockholders' equity:
Serial preferred stock, without par value -
authorized 2,500,000 shares -- --
Common stock, without par value (stated value
$1.00 per share) - authorized 70,000,000 shares
in 1996 and 1995, issued and outstanding 31,988,410
shares in 1996 and 31,769,490 in 1995 31,988 31,769
Additional paid-in capital 85,140 80,100
Unrealized appreciation (depreciation) of securities
at fair value 104,711 209,738
Retained earnings 678,219 573,799
Unearned compensation (deduction) (4,259) (1,474)
_____________ ___________
Total stockholders' equity 895,799 893,932
_____________ ___________
Total liabilities and stockholders' equity $12,569,679 $9,772,846
============= ===========
</TABLE>
See accompanying notes.
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Year ended December 31 1996 1995 1994
_______________________________________________________________________________
<S> <C> <C> <C>
Revenues:
Annuity and interest sensitive life
product charges $71,406 $51,466 $43,767
Traditional life insurance premiums 39,566 43,425 46,265
Net investment income 715,579 641,094 524,411
Realized gains on investments 16,255 9,524 19,697
Other income 25,869 19,353 17,520
___________ ___________ ___________
868,675 764,862 651,660
Insurance benefits and expenses:
Annuity and interest sensitive life benefits:
Interest credited to account balances 443,443 390,039 320,312
Benefit claims incurred in excess of
account balances 7,892 10,396 8,877
Traditional life insurance benefits 45,578 68,338 56,923
Increase (decrease) in future
traditional policy benefits (1,243) (6,867) 3,350
Distributions to participating
policyholders 25,209 25,125 24,988
Underwriting, acquisition and
insurance expenses:
Commissions 139,705 146,069 157,028
General expenses 54,358 40,855 43,328
Insurance taxes 8,063 45,472 9,961
Policy acquisition costs deferred (167,753) (178,133) (193,263)
Amortization:
Deferred policy acquisition costs 79,550 72,537 50,921
Present value of in force acquired 2,745 -- --
Goodwill 663 74 74
___________ ___________ ___________
638,210 613,905 482,499
Interest expense 14,130 13,779 7,882
Other expenses 21,340 8,672 10,035
___________ ___________ ___________
673,680 636,356 500,416
___________ ___________ ___________
194,995 128,506 151,244
Income taxes 66,914 43,633 52,921
___________ ___________ ___________
128,081 84,873 98,323
Equity income (loss), net of related
income taxes (87) 17 (39)
___________ ___________ ___________
Net income before distributions on
company-obligated, mandatorily-
redeemable preferred securities 127,994 84,890 98,284
</TABLE>
See accompanying notes.
CONSOLIDATED STATEMENTS OF INCOME - CONTINUED
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Year ended December 31 1996 1995 1994
_______________________________________________________________________________
<S> <C> <C> <C>
Distributions on company-obligated,
mandatorily-redeemable preferred
securities of subsidiary, Equitable
of Iowa Companies Capital Trust,
holding solely debt securities of the
company ($4,833) -- --
___________ ___________ ___________
Net income $123,161 $84,890 $98,284
=========== =========== ===========
Net income per common share $3.86 $2.68 $3.11
=========== =========== ===========
</TABLE>
See accompanying notes.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Unreal-
ized
Appre
ciation
(Depre
ciation) Unearned
Addi- of Compen- Total
tional Securities sation Stock-
Common Paid-In at Fair Retained (Deduc- holders'
Stock Capital Value Earnings tion) Equity
________ ________ __________ _________ ________ _________
<S> <C> <C> <C> <C> <C> <C>
Balance at January
1, 1994 $31,505 $75,841 ($167) $422,093 ($1,310) $527,962
Cumulative effect
of change in
accounting principle
regarding fixed
maturity
securities -- -- 22,516 -- -- 22,516
Net income for
1994 -- -- -- 98,284 -- 98,284
Unrealized
depreciation
of securities
at fair value -- -- (49,215) -- -- (49,215)
Issuance of 165,452
shares of common
stock under stock
incentive plans, net
of amortization and
related income tax
benefit 165 2,623 -- -- (455) 2,333
Issuance of shares
of common stock
under dividend
reinvestment plan 8 219 -- -- -- 227
Other -- (22) -- -- -- (22)
Cash
dividends -- -- -- (14,755) -- (14,755)
________ ________ __________ _________ ________ _________
Balance at Decem-
ber 31, 1994 31,678 78,661 (26,866) 505,622 (1,765) 587,330
</TABLE>
See accompanying notes.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY - CONTINUED
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Unreal-
ized
Appre
ciation
(Depre
ciation) Unearned
Addi- of Compen- Total
tional Securities sation Stock-
Common Paid-In at Fair Retained (Deduc- holders'
Stock Capital Value Earnings tion) Equity
________ ________ __________ _________ ________ _________
<S> <C> <C> <C> <C> <C> <C>
Net income for
1995 -- -- -- $84,890 -- $84,890
Unrealized
appreciation
of securities
at fair value -- -- $236,604 -- -- 236,604
Issuance of 64,131
shares of common
stock under stock
incentive plans, net
of amortization and
related income tax
benefit $64 $523 -- -- $291 878
Issuance of shares
of common stock
under employee
purchase and
dividend re-
investment plan 27 916 -- -- -- 943
Cash
dividends -- -- -- (16,713) -- (16,713)
________ ________ __________ _________ ________ _________
Balance at Decem-
ber 31, 1995 31,769 80,100 209,738 573,799 (1,474) 893,932
</TABLE>
See accompanying notes.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY - CONTINUED
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Unreal-
ized
Appre
ciation
(Depre
ciation) Unearned
Addi- of Compen- Total
tional Securities sation Stock-
Common Paid-In at Fair Retained (Deduc- holders'
Stock Capital Value Earnings tion) Equity
________ ________ __________ _________ ________ _________
<S> <C> <C> <C> <C> <C> <C>
Net income for
1996 -- -- -- $123,161 -- $123,161
Unrealized
depreciation
of securities
at fair value -- -- ($105,027) -- -- (105,027)
Issuance of 191,806
shares of common
stock under stock
incentive plans, net
of amortization and
related income tax
benefit $192 $4,015 -- -- ($2,785) 1,422
Issuance of shares
of common stock
under employee
purchase and
dividend re-
investment plan 27 1,025 -- -- -- 1,052
Cash
dividends -- -- -- (18,741) -- (18,741)
________ ________ __________ _________ ________ _________
Balance at Decem-
ber 31, 1996 $31,988 $85,140 $104,711 $678,219 ($4,259) $895,799
======== ======== ========== ========= ======== =========
</TABLE>
See accompanying notes.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
Year ended December 31 1996 1995 1994
_______________________________________________________________________________
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $123,161 $84,890 $98,284
Adjustments to reconcile net income to
net cash provided by operations:
Adjustments related to annuity and
interest sensitive life products:
Interest credited to account balances 440,362 390,039 320,312
Charges for mortality and
administration (72,165) (54,308) (46,280)
Change in unearned revenues 3,290 (293) (449)
Increase (decrease) in traditional life
policy liabilities and accruals (3,582) 2,758 3,750
Decrease in other policyholders' funds (2) (756) (130)
Increase in accrued investment income (9,190) (16,875) (13,486)
Policy acquisition costs deferred (167,753) (178,133) (193,263)
Amortization of deferred policy
acquisition costs 79,550 72,537 50,921
Amortization of present value of in
force acquired 2,745 -- --
Change in other assets, other
liabilities, and accrued income taxes (12,750) 43,227 28,564
Provision for depreciation and
amortization 2,769 (7,909) 260
Provision for deferred income taxes 591 (216) 13,211
Share of losses (equity in earnings)
of related parties 133 (27) 51
Realized gains on investments (16,255) (9,524) (19,697)
___________ ___________ ___________
Net cash provided by operating
activities 370,904 325,410 242,048
INVESTING ACTIVITIES
Sale, maturity or repayment of investments:
Fixed maturities - available for sale 572,617 145,173 204,847
Fixed maturities - held for investment -- 203,395 286,844
Equity securities 16,358 6,572 --
Mortgage loans on real estate 48,792 56,774 47,960
Real estate 7,414 2,030 5,662
Policy loans 32,432 28,436 30,397
Short-term investments - net 19,936 11,741 16,644
___________ ___________ ___________
697,549 454,121 592,354
Acquisition of investments:
Fixed maturities - available for sale (1,050,148) (943,285) (181,303)
Fixed maturities - held for investment -- (59,759) (1,422,409)
Equity securities (14,528) (32,097) (23,101)
Mortgage loans on real estate (599,823) (612,449) (314,255)
Real estate (710) (1,018) (876)
Policy loans (36,497) (34,411) (29,996)
___________ ___________ ___________
(1,701,706) (1,683,019) (1,971,940)
</TABLE>
See accompanying notes.
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
(Dollars in thousands)
<TABLE>
<CAPTION>
Year ended December 31 1996 1995 1994
________________________________________________________________________________
<S> <C> <C> <C>
INVESTING ACTIVITIES - CONTINUED
Disposal of investments accounted for
by the equity method $815 $498 $489
Additions to investments accounted for
by the equity method (2,500) -- (1,376)
Repayments of notes receivable 200 1,317 223
Issuance of notes receivable -- -- (2,438)
Sales of property and equipment 177 109 282
Purchase of a subsidiary, net of
cash acquired (137,046) -- --
Purchases of property and equipment (5,729) (3,397) (3,052)
___________ ___________ ___________
Net cash used in investing activities (1,148,240) (1,230,371) (1,385,458)
FINANCING ACTIVITIES
Issuance (repayment) of commercial
paper - net 46,500 (32,350) 56,450
Issuance of company-obligated, mandatorily-
redeemable preferred securities 125,000 -- --
Issuance of long-term debt -- 100,000 --
Repayment of long-term debt -- -- (50,214)
Receipts from annuity and interest
sensitive life policies credited to
policyholder account balances 1,613,737 1,691,189 1,746,108
Return of policyholder account balances
on annuity and interest sensitive life
policies (982,007) (835,893) (586,762)
Issuance of stock under stock plans 318 (3,216) 67
Cash dividends paid (18,741) (16,713) (14,755)
___________ ___________ ___________
Net cash provided by financing
activities 784,807 903,017 1,150,894
___________ ___________ ___________
Increase (decrease) in cash and cash
equivalents 7,471 (1,944) 7,484
Cash and cash equivalents at beginning
of year 10,730 12,674 5,190
___________ ___________ ___________
Cash and cash equivalents at end of year $18,201 $10,730 $12,674
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest $14,073 $10,192 $7,650
Income taxes 63,125 32,158 61,834
Noncash investing and financing activities:
Foreclosure of mortgage loans and notes
receivable, including taxes and costs
capitalized ($15) in 1996 690 -- 250
</TABLE>
See accompanying notes.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
1. SIGNIFICANT ACCOUNTING POLICIES
__________________________________________________________________________
Consolidation
The consolidated financial statements include the company and its
subsidiaries. The principal subsidiaries are Equitable Life Insurance
Company of Iowa ("Equitable Life"), Golden American Life Insurance Company
("Golden American") and USG Annuity & Life Company ("USG"). At December 31,
1996 and 1995, all subsidiaries are wholly owned (see Note 7 regarding
purchase of Golden American). All significant intercompany accounts and
transactions have been eliminated.
Organization
Equitable Life, Golden American and USG offer various insurance products
including deferred and immediate fixed annuities, variable annuities and
interest sensitive, traditional and variable life insurance. These products
are marketed by the company's career agency force, independent insurance
agents, broker/dealers (including brokerage firms) and financial institutions.
The company's primary customers are individuals.
Investments
Fixed maturities: Effective January 1, 1994, the company adopted Statement
of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain
Investments in Debt and Equity Securities". Pursuant to SFAS No. 115, fixed
maturity securities are designated as either "available for sale", "held for
investment" or "trading". Sales of fixed maturities designated as "available
for sale" are not restricted by SFAS No. 115. Available for sale securities
are reported at fair 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, present value of in force
acquired, policy reserves and deferred income taxes. At December 31, 1996
and 1995, all of the company's fixed maturity securities are designated as
available for sale although the company is not precluded from designating
fixed maturity securities as held for investment or trading at some future
date. Securities that the company has the positive intent and ability to hold
to maturity are designated as "held for investment". Held for investment
securities are reported at cost adjusted for amortization of premiums and
discounts. Changes in the fair value of these securities, except for declines
that are other than temporary, are not reflected in the company's financial
statements. Sales of securities designated as held for investment are
severely restricted by SFAS No. 115. Securities that are bought and held
principally for the purpose of selling them in the near term are designated
as trading securities. Unrealized gains and losses on trading securities are
included in current earnings. Transfers of securities between categories are
restricted and are recorded at fair value at the time of the transfer.
Securities that are determined to have a decline in value that is other than
temporary are written down to estimated fair value which becomes the security's
new cost basis by a charge to realized losses in the company's Statement of
Income. Premiums and discounts are amortized/accrued utilizing the scientific
interest method which results in a constant yield over the security's expected
life. Amortization/accrual of premiums and discounts on mortgage-backed
securities incorporates a prepayment assumption to estimate the securities'
expected lives.
Equity securities: Equity securities (common and non-redeemable preferred
stocks) are reported at estimated fair value if readily marketable or
conversion value, if applicable, 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: 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: 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 at or before the foreclosure date. The carrying value of these
assets is subject to review when events or circumstances indicate an
impairment might exist. If the estimated undiscounted cash flows is less
than the carrying amount of the assets, an impairment in value is deemed to
exist and an impairment loss is recognized. The carrying value of the asset
is written down to an amount representing the sum of the estimated
undiscounted cash flows which becomes the asset's new cost basis.
Other investments: 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.
Fair values: Estimated fair values, as reported herein, of publicly traded
fixed maturity securities are as reported by an independent pricing service.
Fair values of conventional mortgage-backed securities not actively traded in
a liquid market are estimated using a third party pricing system. This
pricing system uses a matrix calculation assuming a spread over U.S. Treasury
bonds based upon the expected average lives of the securities. Fair 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 fair values of redeemable preferred stocks are as
reported by the National Association of Insurance Commissioners ("NAIC").
Estimated fair values of equity securities are based on the latest quoted
market prices or conversion value, if applicable. Estimated fair values of
the company's investment in its registered separate accounts are based upon
the quoted fair value of the securities comprising the individual portfolios
underlying the separate accounts. Fair values of equity securities which are
not readily marketable, are estimated based upon values which are
representative of the fair 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.
Financial Instruments
Interest rate caps and cash settled put swaptions ("instruments") are
reported at amortized cost and included in other assets. These 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. All outstanding instruments
are designated as hedges and, therefore, are not reported at fair value.
Premiums paid to purchase these instruments are deferred and amortized over
the term of the instruments on a straight-line basis. The instruments do not
require any additional payments by the company. Any payments received in
accordance with the terms of the instruments are recorded as an adjustment to
interest credited. Unrealized gains and losses on these instruments and
related assets or liabilities will not be recorded in income until realized.
Cash and Cash Equivalents
For purposes of the consolidated statement of cash flows, the company
considers all demand deposits and interest-bearing accounts not related to
the investment function to be cash equivalents. All interest-bearing
accounts classified as cash equivalents have original maturities of three
months or less.
Deferred Policy Acquisition Costs
Certain costs of acquiring new insurance business, principally commissions
and other expenses related to the production of new business, have been
deferred. For annuity and interest sensitive life products, such costs are
amortized generally in proportion to the present value (using the assumed
crediting rate) of expected gross profits. This amortization is adjusted
retrospectively, or "unlocked", when the company revises its estimate of
current or future gross profits to be realized from a group of products. For
traditional life insurance products, such costs are amortized over the
premium-paying period of the related policies in proportion to premium
revenues recognized, using principally the same assumptions for interest,
mortality and withdrawals that are used for computing liabilities for future
policy benefits subject to traditional "lock-in" concepts. Deferred policy
acquisition costs are adjusted to reflect the pro-forma impact of unrealized
gains and losses on fixed maturity securities the company has designated as
"available for sale" under SFAS No. 115.
Present Value of In Force Acquired
A portion of the cost for the Golden American acquisition was allocated to
the right to receive future cash flows from the insurance contracts existing
with Golden American at the date of acquisition. This allocated cost
represents the present value of in force acquired ("PVIF") which reflects the
value of those purchased policies calculated by discounting the expected
future cash flows at the discount rate determined by the company. The expected
future cash flows used to determine the PVIF are based on actuarially
determined projected net cash flows from the policies in force acquired from
Golden American. Interest is imputed on the unamortized balance of PVIF at
rates of 7.70% to 7.80%. Amortization of PVIF is charged to expense in
proportion to expected gross profits. This amortization is adjusted
retrospectively, or "unlocked", when the company revises its estimate of
current or future gross profits to be realized from the insurance contracts
acquired. PVIF is adjusted to reflect the pro forma impact of unrealized
gains (losses) on available for sale fixed maturity securities.
Property and Equipment
Property and equipment primarily represent leasehold improvements at the
company's headquarters and at various agency offices, office furniture and
equipment and capitalized computer software and are not considered to be
significant to the company's overall operations. Property and equipment are
reported at cost less allowances for depreciation. Depreciation expense is
computed primarily on the basis of the straight-line method over the estimated
useful lives of the assets.
Intangible Assets
Intangible assets include goodwill established with the purchase of Golden
American, the value of various licenses acquired with the purchase of USG and
capitalized costs related to the company's mandatorily-redeemable preferred
securities, lines of credit and long-term debt. Goodwill, related to the
purchase of Golden American, is being amortized over twenty-five years.
Intangible assets related to insurance licenses are being amortized over
forty years. Capitalized line of credit costs are being amortized over the
term of the underlying line of credit agreement. Debt issuance costs and
issue costs associated with the company-obligated, mandatorily-redeemable
preferred securities are being amortized over the term of the instruments,
ten years and thirty years, respectively. All intangible assets are being
amortized on a straight-line basis.
Future Policy Benefits
Future policy benefits for fixed annuity and interest sensitive life
products, are established utilizing the retrospective deposit accounting
method. Policy reserves represent the premiums received plus accumulated
interest, less mortality and administration charges. Interest credited to
these policies ranged from 3.00% to 11.00% during 1996, 3.35% to 11.35% during
1995 and 3.50% to 11.35% during 1994.
The unearned revenue reserve primarily reflects the unamortized balance of
the excess of first year administration charges over renewal period
administration charges (policy initiation fees) on fixed annuity and interest
sensitive life products and unearned distribution fees discussed below. These
excess charges have been deferred and are being recognized in income over the
period benefited using the same assumptions and factors used to amortize
deferred policy acquisition costs.
The liability for future policy benefits for traditional life insurance
products has been calculated on a net-level premium basis. Interest
assumptions range from 2.75% for 1956 and prior issues to a 9.00% level,
graded to 6.00% after twenty years for current issues. Mortality, morbidity
and withdrawal assumptions generally are based on actual experience. These
assumptions have been modified to provide for possible adverse deviation from
the assumptions. Future dividends for participating business (which accounted
for 1.5% of premiums and 8.5% of life insurance in force in 1996) are provided
for in the liability for future policy benefits.
Separate Accounts
Assets and liabilities of the separate accounts reported in the accompanying
balance sheets represent funds that are separately administered principally
for variable annuity and variable life contracts, as well as, the company's
defined pension benefit plan assets and liabilities. Contractholders, rather
than the company, bear the investment risk for variable products. At the
direction of the contractholders, the separate accounts invest the premiums
from the sale of variable annuity and variable life products in shares of
specified mutual funds. The assets and liabilities of the separate accounts
are clearly identified and segregated from other assets and liabilities of the
company. The portion of the separate account assets applicable to variable
annuity and variable life contracts cannot be charged with liabilities arising
out of any other business the company may conduct.
Variable separate account assets carried at fair value of the underlying
investments generally represent contractholder investment values maintained
in the accounts. Variable separate account liabilities represent account
balances for the variable annuity and variable life contracts invested in the
separate accounts. The company's separate account assets and liabilities for
its pension plan represent the estimated fair values of the pension plan
assets and associated liabilities. Net investment income and realized and
unrealized capital gains and losses related to separate account assets are
not reflected in the accompanying Statement of Income.
Product charges recorded by the company from variable annuity and variable
life products consist of charges applicable to each contract for mortality
and expense risk, cost of insurance, contract administration and surrender
charges. In addition, some variable annuity and all variable life contracts
provide for a distribution fee collected for a limited number of years after
each premium deposit. Revenue recognition of collected distribution fees is
amortized over the life of the contract in proportion to its expected gross
profits. The balance of unrecognized revenue related to the distribution
fees is reported as an unearned revenue reserve. The company also receives
investment advisory and investment management fees from the mutual funds
underlying its variable products which is recorded in other income.
Recognition of Premium Revenues and Costs
Revenues for fixed annuity and interest sensitive life products consist of
policy charges for the cost of insurance, policy administration charges,
amortization of policy initiation fees and surrender charges assessed against
policyholder account balances during the period. Expenses related to these
products include interest credited to policyholder account balances and
benefit claims incurred in excess of policyholder account balances.
Traditional life insurance premiums are recognized as revenues over the
premium-paying period. Future policy benefits and policy acquisition costs
are associated with the premiums as earned by means of the provision for
future policy benefits and amortization of deferred policy acquisition costs.
Deferred Income Taxes
Deferred tax assets or liabilities are computed based on the difference
between the financial statement and income tax bases of assets and liabilities
using the enacted marginal tax rate. Deferred tax assets or liabilities are
adjusted to reflect the pro forma impact of unrealized gains and losses on
equity securities and fixed maturity securities the company has designated as
available for sale under SFAS No. 115. Changes in deferred tax assets or
liabilities resulting from this SFAS No. 115 adjustment are charged or
credited directly to stockholders' equity. Deferred income tax expenses or
credits reflected in the company's Statements of Income are based on the
changes in the deferred tax asset or liability from period to period
(excluding the SFAS No. 115 adjustment).
Net Income per Share of Common Stock
Net income per share is based on the weighted average number of shares of
common stock outstanding during each year (1996 - 31,904,734; 1995 -
31,709,032 and 1994 - 31,612,675). Employee stock options have not been
included in the net income per share computations because their effect is not
material.
Dividends per Share of Common Stock
For the years ended December 31, 1996, 1995 and 1994, the company paid
dividends per share of $0.585, $0.525 and $0.465, respectively.
Dividend Restrictions
The company's ability to pay dividends to its stockholders is restricted by
certain debt covenants. The most restrictive covenant requires the company to
maintain tangible net worth equal to the sum of $490,000,000 plus proceeds
from any issuance of capital stock plus one-half of net income recognized
subsequent to January 1, 1995. At December 31, 1996, retained earnings
available for dividends aggregated $303,660,000.
The ability of Equitable Life and Golden American to pay dividends to the
parent company is restricted because prior approval of insurance regulatory
authorities is required for payment of dividends to the stockholder which
exceed an annual limitation. During 1997, Equitable Life and Golden American
could pay dividends to the parent company of approximately $95,363,000 and
$2,186,000, respectively, without prior approval of statutory authorities.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the preparation period.
Actual results could differ from those estimates.
Management is required to utilize historical experience and assumptions about
future events and circumstances in order to develop estimates of material
reported amounts and disclosures. Included among the material (or potentially
material) reported amounts and disclosures that require extensive use of
estimates and assumptions are (1) estimates of fair values of investments in
securities and other financial instruments, as well as fair values of
policyholder liabilities, (2) policyholder liabilities, (3) deferred policy
acquisition costs and present value of in force acquired, (4) fair values of
assets received and liabilities assumed in acquisition transactions, (5) net
assets for pension and liabilities for postretirement benefits, (6) asset
valuation allowances, (7) guaranty fund assessment accruals, (8) deferred tax
benefits (liabilities) and (9) estimates for commitments and contingencies
including legal matters, if a liability is anticipated and can be reasonably
estimated. Estimates and assumptions regarding all of the preceding are
inherently subject to change and are reassessed periodically. Changes in
estimates and assumptions could materially impact the financial statements.
Reclassification
Certain amounts in the 1995 and 1994 financial statements have been
reclassified to conform to the 1996 financial statement presentation.
2. BASIS OF FINANCIAL REPORTING - LIFE INSURANCE OPERATIONS
__________________________________________________________________________
The financial statements of the life insurance subsidiaries differ from
related statutory financial statements principally as follows: (1) acquisition
costs of acquiring new business are deferred and amortized over the life of
the policies rather than charged to operations as incurred, (2) an asset
representing the present value of future cash flows from insurance contracts
acquired was established as a result of an acquisition and is being amortized
and charged to expense, (3) future policy benefit reserves for annuity and
interest sensitive life products are based on full account values, rather than
the greater of cash surrender value or amounts derived from discounting
methodologies utilizing statutory interest rates, (4) future policy benefit
reserves on traditional life insurance products are based on reasonable
assumptions of expected mortality, interest and withdrawals which include a
provision for possible unfavorable deviation from such assumptions, which may
differ from reserves based upon statutory mortality rates and interest, (5)
reserves are reported before reduction for reserve credits related to
reinsurance ceded and a receivable is established, net of an allowance for
uncollectible amounts, for these credits rather than presented net of these
credits, (6) fixed maturity investments are designated as "available for sale"
and valued at fair value with unrealized appreciation/depreciation, net of
adjustments to deferred income taxes (if applicable), deferred policy
acquisition costs, and present value of in force acquired, credited/charged
directly to stockholders' equity rather than valued at amortized cost, (7) the
carrying value of fixed maturity securities is reduced to fair value by a
charge to realized losses in the statements of income when declines in
carrying value are judged to be other than temporary, rather than through the
establishment of a formula-determined statutory investment reserve (carried as
a liability), changes in which are charged directly to surplus, (8) deferred
income taxes are provided for the difference between the financial statement
and income tax bases of assets and liabilities, (9) net realized gains or
losses attributed to changes in the level of interest rates in the market are
recognized when the sale is completed rather than deferred and amortized over
the remaining life of the fixed maturity security or mortgage loan, (10) gains
arising from sale lease-back transactions are deferred and amortized over the
life of the lease rather than recognized in the period of sale, (11) a
liability is established for anticipated guaranty fund assessments, net of
related anticipated premium tax credits, rather than capitalized when assessed
and amortized in accordance with procedures permitted by insurance regulatory
authorities, (12) a prepaid pension cost asset established in accordance with
SFAS No. 87, "Employers' Accounting for Pensions", agents' balances and
certain other assets designated as "non-admitted assets" for statutory
purposes are reported as assets rather than being charged to surplus, (13)
revenues for annuity and interest sensitive life products consist of policy
charges for the cost of insurance, policy administration charges, amortization
of policy initiation fees and surrender charges assessed rather than premiums
received, (14) expenses for postretirement benefits other than pensions are
recognized for all qualified employees rather than for only vested and fully-
eligible employees, and the accumulated postretirement benefit obligation for
years prior to adoption of SFAS No. 106, "Employers' Accounting for
Postretirement Benefits Other than Pensions" was recognized as a cumulative
effect of change in accounting method rather than deferred and amortized over
twenty years, (15) assets and liabilities are restated to fair values when a
change in ownership occurs, with provisions for goodwill and other intangible
assets, rather than continuing to be presented at historical cost, and (16)
amortization of the cost of financial instruments purchased in conjunction
with the company's hedging program are recorded in interest credited rather
than as a deduction from net investment income.
Net income for Equitable Life, USG and Equitable American Insurance Company
as determined in accordance with statutory accounting practices was
$96,841,000 in 1996, $87,179,000 in 1995 and $61,421,000 in 1994. Net income
(loss) for Golden American as determined in accordance with statutory
accounting practices was $(9,188,000) in 1996, $(4,117,000) in 1995 and
$(11,260,000) in 1994. Total combined statutory capital and surplus,
including Golden American in 1996 and 1995, was $647,746,000 at December 31,
1996 and $599,175,000 at December 31, 1995.
3. INVESTMENT OPERATIONS
__________________________________________________________________________
Investment Results
Major categories of net investment income are summarized below:
<TABLE>
<CAPTION>
Year ended December 31 1996 1995 1994
______________________________________________________________________________
(Dollars in thousands)
<S> <C> <C> <C>
Fixed maturities $581,863 $558,903 $478,436
Equity securities 3,183 1,255 303
Mortgage loans on real estate 125,347 76,382 39,117
Real estate 2,588 2,747 3,696
Policy loans 10,492 10,049 9,788
Short-term investments 1,837 1,275 886
Other - net 1,000 996 801
___________ ___________ ___________
726,310 651,607 533,027
Less investment expenses (10,731) (10,513) (8,616)
___________ ___________ ___________
Net investment income $715,579 $641,094 $524,411
=========== =========== ===========
</TABLE>
Realized gains (losses) on investments are as follows:
<TABLE>
<CAPTION>
Realized*
Year ended December 31 1996 1995 1994
______________________________________________________________________________
(Dollars in thousands)
<S> <C> <C> <C>
Fixed maturities:
Available for sale $13,599 ($3,401) $7,417
Held for investment -- 9,330 11,364
Equity securities 869 912 --
Mortgage loans on real estate -- -- (62)
Real estate 1,218 (161) 7
Equity investments 569 2,844 971
___________ ___________ ___________
Realized gains on investments $16,255 $9,524 $19,697
=========== =========== ===========
<FN>
*See Note 8 for the income tax effects attributable to realized gains and
losses on investments.
</TABLE>
The change in unrealized appreciation (depreciation) on securities at fair
value is as follows:
<TABLE>
<CAPTION>
Unrealized
Year ended December 31 1996 1995 1994
______________________________________________________________________________
(Dollars in thousands)
<S> <C> <C> <C>
Fixed maturities:
Available for sale ($293,145) $507,971 ($40,597)
Held for investment -- 334,708 (663,840)
Equity securities 27,518 1,179 (206)
___________ ___________ ___________
Unrealized appreciation (depre-
ciation) of securities ($265,627) $843,858 ($704,643)
=========== =========== ===========
</TABLE>
Fixed Maturity and Equity Securities
Effective January 1, 1994, the company adopted SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities". SFAS No. 115 requires
companies to classify their securities as "held to maturity", "available for
sale" or "trading".
On November 15, 1995, the Financial Accounting Standards Board ("FASB")
issued a special report allowing companies an opportunity to reassess the
classification of their securities holdings pursuant to SFAS No. 115. In
response to this opportunity, the company reclassified 100% of the securities
in its "held to maturity" category to "available for sale" on December 1, 1995
to maximize investment flexibility. As a result of this reclassification,
securities with combined cost totaling $5,250,921,000 and estimated fair value
of $5,560,519,000 were transferred from the company's held for investment
portfolio to its available for sale portfolio. This transfer caused the net
unrealized investment gain component of stockholders' equity to increase by
$138,795,000 (net of deferred income taxes of $74,735,000 and an adjustment of
$96,068,000 to deferred policy acquisition costs). The company is not,
however, precluded from classifying securities as held to maturity in the
future.
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.
Due to this potential for distortion in stockholders' equity, fair value
disclosure is provided in Note 5. SFAS No. 107, "Disclosures about Fair Value
of Financial Instruments" requires disclosure of fair values for selected
financial instruments but does not require disclosure of fair value of life
insurance liabilities. Although the company's life insurance liabilities are
specifically exempted from this disclosure requirement, estimated fair value
disclosure of these liabilities is provided in an effort to more properly
reflect changes in stockholders' equity from fluctuations in interest rates.
At December 31, 1996 and 1995, the amortized cost, gross unrealized gains and
losses and estimated fair value of the company's fixed maturity securities,
all of which are designated as available for sale, are as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
December 31, 1996 Cost Gains Losses Value
________________________________________________________________________________
(Dollars in thousands)
<S> <C> <C> <C> <C>
U.S. government and
governmental agencies
and authorities:
Mortgage-backed securities $322,244 $9,796 ($1,002) $331,038
Other 90,456 2,127 (1,424) 91,159
States, municipalities,
and political
subdivisions 15,131 1,134 -- 16,265
Foreign governments 10,572 2,706 -- 13,278
Public utilities 1,241,270 41,270 (15,796) 1,266,744
Investment grade
corporate 2,789,228 157,554 (16,755) 2,930,027
Below investment grade
corporate 733,182 14,230 (16,049) 731,363
Mortgage-backed
securities 2,355,036 41,925 (45,258) 2,351,703
Redeemable preferred
stocks 616 -- (229) 387
___________ ___________ ___________ ___________
Total $7,557,735 $270,742 ($96,513) $7,731,964
=========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
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 $6,884,837 $491,625 ($24,251) $7,352,211
=========== =========== =========== ===========
</TABLE>
At December 31, 1996, net unrealized investment gains on fixed maturity
securities designated as available for sale totaled $174,229,000. This
appreciation caused an increase in stockholders' equity of $76,387,000 at
December 31, 1996 (net of deferred income taxes of $54,164,000 and an
adjustment of $43,678,000 to deferred policy acquisition costs). At December
31, 1995, net unrealized investment gains on fixed maturity securities
designated as available for sale totaled $467,375,000. This appreciation
caused an increase in stockholders' equity of $208,932,000 at December 31,
1995 (net of deferred income taxes of $113,503,000 and an adjustment of
$144,940,000 to deferred policy acquisition costs). No fixed maturity
securities were designated as held for investment or trading at December 31,
1996 or 1995. Short-term investments, all with maturities of 30 days or less,
have been excluded from the above schedules. Amortized cost approximates fair
value for these securities.
At December 31, 1996, net unrealized appreciation of equity securities of
$28,324,000 was comprised of gross unrealized appreciation of $2,244,000 on
the company's investment in Equitable Life's registered separate account,
gross unrealized appreciation of $26,315,000 on an investment in a real estate
investment trust and gross unrealized depreciation of $235,000 on other equity
securities. The company's investment in the real estate investment trust had
an estimated fair value of $61,339,000 and a cost basis of $35,024,000 at
December 31, 1996. The estimated fair value of the company's investment is
based upon conversion value. Conversion value is derived from the quoted
market value of the publicly traded security into which the company's
investment can be converted and the issuer's cash flow from operations. As
such, changes in operating cash flows or the quoted market price of the issuer
may result in significant volatility in the estimated fair value of the
company's investment.
The amortized cost and estimated fair value of fixed maturity securities,
designated as available for sale, by contractual maturity, at December 31,
1996, 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 Fair
December 31, 1996 Cost Value
__________________________________________________________________________
(Dollars in thousands)
<S> <C> <C>
Due within one year $27,802 $28,030
Due after one year through five years 323,053 329,717
Due after five years through ten years 2,021,841 2,076,997
Due after ten years 2,507,759 2,614,479
___________ ___________
4,880,455 5,049,223
Mortgage-backed securities 2,677,280 2,682,741
___________ ___________
Total $7,557,735 $7,731,964
=========== ===========
</TABLE>
An analysis of sales, maturities and principal repayments of the company's
fixed maturities portfolio for the years ended December 31, 1996, 1995 and
1994 is as follows:
<TABLE>
<CAPTION>
Gross Gross Proceeds
Amortized Realized Realized from
Cost Gains Losses Sale
________________________________________________________________________________
(Dollars in thousands)
<S> <C> <C> <C> <C>
Year ended December 31, 1996:
Scheduled principal repayments,
calls and tenders $291,257 $11,866 ($315) $302,808
Sales 267,761 3,576 (1,528) 269,809
___________ _________ _________ ___________
Total $559,018 $15,442 ($1,843) $572,617
=========== ========= ========= ===========
Year ended December 31, 1995:
Scheduled principal repayments,
calls and tenders (available
for sale only):
Available for sale $59,935 $319 ($19) $60,235
Held for investment 172,082 5,279 (274) 177,087
Sales:
Available for sale 82,837 2,104 (3) 84,938
Held for investment 21,983 4,325 -- 26,308
___________ _________ _________ ___________
Total $336,837 $12,027 ($296) $348,568
=========== ========= ========= ===========
Year ended December 31, 1994:
Scheduled principal repayments,
calls and tenders (available
for sale only):
Available for sale $167,285 $4,877 ($11) $172,151
Held for investment 275,480 11,389 (25) 286,844
Sales:
Available for sale 29,526 3,184 (14) 32,696
___________ _________ _________ ___________
Total $472,291 $19,450 ($50) $491,691
=========== ========= ========= ===========
</TABLE>
Mortgage-backed Securities
The amortized cost and estimated fair value of mortgage-backed securities,
which comprise 35% of the company's investment in fixed maturity securities
at December 31, 1996, by type, are as follows:
<TABLE>
<CAPTION>
Estimated
Fair
December 31, 1996 Cost Value
______________________________________________________________________________
(Dollars in thousands)
<S> <C> <C>
Mortgage-backed securities:
Government and agency guaranteed pools:
Very accurately defined maturities $17,344 $17,987
Planned amortization class 70,308 74,081
Targeted amortization class 29,336 29,051
Sequential pay 94,738 94,674
Pass through 110,518 115,245
Private Label CMOs and REMICs:
Very accurately defined maturities 30,654 31,439
Planned amortization class 25,569 26,889
Targeted amortization class 435,801 426,698
Sequential pay 1,801,006 1,803,582
Mezzanines 37,685 37,835
Private placements and subordinate issues 24,321 25,260
___________ ___________
Total mortgage-backed securities $2,677,280 $2,682,741
=========== ===========
</TABLE>
During periods of significant interest rate volatility, the mortgages
underlying mortgage-backed securities may prepay more quickly or more slowly
than anticipated. If the principal amount of such mortgages are prepaid
earlier than anticipated during periods of declining interest rates,
investment income may decline due to reinvestment of these funds at lower
current market rates. If principal repayments are slower than anticipated
during periods of rising interest rates, increases in investment yield may
lag behind increases in interest rates because funds will remain invested at
lower historical rates rather than reinvested at higher current rates. To
mitigate this prepayment volatility, the company invests primarily in
intermediate tranche collateralized mortgage obligations ("CMOs"). CMOs are
pools of mortgages that are segregated into sections, or tranches, which
provide sequential retirement of bonds rather than a pro-rata share of
principal return in the pass-through structure. The company owns no "interest
only" or "principal only" mortgage-backed securities. Further, the company
has not purchased obligations at significant premiums, thereby limiting
exposure to loss during periods of accelerated prepayments. At December 31,
1996, unamortized premiums on mortgage-backed securities totaled $4,805,000
and unaccrued discounts on mortgage-backed securities totaled $53,047,000.
Other Investment Information
Investment Valuation Analysis: The company analyzes its investment portfolio
at least quarterly in order to determine if the carrying value of any of its
investments has been impaired. The carrying value of debt and equity
securities is written down to fair value by a charge to realized losses when
an impairment in value appears to be other than temporary. During 1996, no
investments were identified as having an impairment other than temporary.
During 1995, the company identified two below investment grade securities as
having impairments in value that were other than temporary. As a result of
those determinations, the company recognized pre-tax losses of $5,802,000 to
reduce the carrying value of the securities to their estimated fair value.
These securities were subsequently sold resulting in realized gains totaling
$1,200,000 during 1995. During 1994, the company recognized a pre-tax loss of
$619,000 to reduce the carrying value of one fixed maturity security to its
estimated fair value.
At December 31, 1996, one mortgage loan with a carrying value of $41,000 was
delinquent by 90 days or more.
The carrying value of investments which have been non-income producing for
the years ending December 31, 1996 and 1995, totaled $239,000 related to a
real estate property.
Investments on Deposit: At December 31, 1996, affidavits of deposits
covering bonds with a par value of $1,787,087,000 (1995 - $1,693,573,000),
mortgage loans with an unpaid principal balance of $402,911,000 (1995 -
$304,729,000) and policy loans with an unpaid balance of $164,659,000 (1995 -
$167,844,000) were on deposit with state agencies to meet regulatory
requirements. In addition, at December 31, 1996, pursuant to a reinsurance
agreement, the company had investments with a carrying value of $56,314,000
(1995 - $63,664,000) and estimated market values of $53,833,000 (1995 -
$64,350,000) deposited in a trust for the benefit of the ceding company.
Investment Diversifications: The company's investment policies related to
its investment portfolio require diversification by asset type, company and
industry and set limits on the amount which can be invested in an individual
issuer. Such policies are at least as restrictive as those set forth by
regulatory authorities. Fixed maturity investments included investments in
various non-governmental mortgage-backed securities (30% in 1996, 33% in 1995),
public utilities (17% 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, 32% in 1995), industrial buildings (29% in 1996, 26% in 1995), multi-
family residential buildings (20% in 1996, 24% in 1995) and office buildings
(22% in 1996, 17% in 1995). Equity securities (which represents 0.8% of the
company's investments) consist primarily of investments in the company's
registered separate accounts and an investment of $61,339,000 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 December 31, 1996.
4. FINANCIAL INSTRUMENTS - RISK MANAGEMENT
__________________________________________________________________________
Hedging Program: During the second quarter of 1996, the company implemented
a hedging program under which certain derivative financial instruments,
interest rate caps and cash settled put swaptions ("instruments"), were
purchased to reduce the negative effects of potential increases in withdrawal
activity related to the company's annuity liabilities which may result from
extreme increases in interest rates. The company purchased instruments, all
during the second quarter, with notional amounts totaling approximately
$600,000,000 in interest rate caps and $1,300,000,000 in cash settled put
swaptions all of which were outstanding at December 31, 1996. The company
paid approximately $21,100,000 in premiums for these instruments. The cost of
this program has been incorporated into the company's product pricing. The
instruments do not require any additional payments by the company.
The agreements for these instruments entitle the company to receive payments
from the instruments' counterparties on future reset dates if interest rates,
as specified in the agreements, rise above a specified fixed rate (9.0% and
9.5%). The amount of such payments to be received by the company for the
interest rate caps, if any, will be calculated by taking the excess of the
current applicable rate over the specified fixed rate, and multiplying this
excess by the notional amount of the caps. Payments on cash settled put
swaptions are also calculated based upon the excess of the current applicable
rate over the specified fixed rate multiplied by the notional amount. The
product of this rate differential times the notional amount is assumed to
continue for a series of defined future semi-annual payment dates and the
resulting hypothetical payments are discounted to the current payment date
using the discount rate defined in the agreement. Any payments received from
the counterparties will be recorded as an adjustment to interest credited.
The following table summarizes the contractual maturities of notional
amounts by type of instrument at December 31, 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>
Accounting Treatment: Premiums paid to purchase these instruments are
deferred and included in other assets. Premiums are amortized and included in
interest credited to account balances over the term of the instruments on a
straight-line basis. The company has recorded amortization of $3,081,000 for
1996. Unrealized gains and losses on these instruments and related assets or
liabilities will not be recorded in income until realized. The Financial
Accounting Standards Board ("FASB") and the Securities and Exchange Commission
are evaluating the accounting and disclosure requirements for these
instruments. The SEC amended its derivative disclosures rules in January of
1997 requiring additional qualitative and quantitative disclosures by December
31, 1997. FASB has issued an exposure draft titled "Accounting for
Derivative and Similar Financial Instruments and for Hedging Activities"
which, if adopted as a statement of Financial Accounting Standards in its
current form, would require the company to change its accounting treatment for
these instruments. The requirements of any final standard which may result
from this exposure process are not known at this time and, therefore, the
impact of such a standard on the company's financial statements cannot be
determined at this time.
Any unrealized gain or loss on the instruments is off-balance sheet and
therefore, is not reflected in the financial statements. The following table
summarizes the amortized cost, gross unrealized gains and losses and estimated
fair value on these instruments as of December 31, 1996:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
December 31, 1996 Cost Gains Losses Value
_______________________________________________________________________________
(Dollars in thousands)
<S> <C> <C> <C> <C>
Interest rate caps $5,164 ($1,456) $3,708
Cash settled put swaptions 12,877 $65 (2,570) 10,372
_________________________________________________
Total $18,041 $65 ($4,026) $14,080
=================================================
</TABLE>
The decline in fair value from amortized cost reflects changes in interest
rates and market conditions since time of purchase.
Exposure to Loss - Counterparty Nonperformance: The company is exposed to
the risk of losses in the event of nonperformance by the counterparties of
these instruments. Losses recorded in the company's financial statements in
the event of nonperformance will be limited to the unamortized premium
(remaining amortized cost) paid to purchase the instrument because no
additional payments are required by the company on these instruments after
the initial premium. Counterparty nonperformance would result in an economic
loss if interest rates exceeded the specified fixed rate. Economic losses
would be measured by the net replacement cost, or estimated fair value, for
such instruments. The estimated fair value is the average of quotes obtained
from related and unrelated counterparties. The company limits its exposure to
such losses by: diversification among counterparties, limiting exposure to any
individual counterparty based upon that counterparty's credit rating, and
limiting its exposure by instrument type to only those instruments that do not
require future payments. For purposes of determining risk exposure to any
individual counterparty, the company evaluates the combined exposure to that
counterparty on both a derivative financial instruments' level and on the
total investment portfolio credit risk and reports its exposure to senior
management at least monthly. The maximum potential economic loss (the cost of
replacing an instrument or the net replacement value) due to nonperformance of
the counterparties will increase or decrease during the life of the
instruments as a function of maturity and market conditions.
The company determines counterparty credit quality by reference to ratings
from independent rating agencies. As of December 31, 1996, the ratings
assigned by Standard & Poor's Corporation by instrument with respect to the
net replacement value (fair value) of the company's instruments was as follows:
<TABLE>
<CAPTION>
December 31, 1996 Net Replacement Value
_____________________________________________________________________________
(Dollars in thousands) Interest Cash Settled
Rate Caps Put Swaptions Total
______________________________________________
<S> <C> <C> <C>
Counterparties credit quality:
AAA $2,447 $5,363 $7,810
AA- 1,261 2,828 4,089
A+ -- 2,181 2,181
______________________________________________
Total $3,708 $10,372 $14,080
==============================================
</TABLE>
5. FAIR VALUES OF FINANCIAL INSTRUMENTS
__________________________________________________________________________
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments"
requires disclosure of estimated fair value of all financial instruments,
including both assets and liabilities recognized and not recognized in a
company's balance sheet, unless specifically exempted. SFAS No. 119,
"Disclosure about Derivative Financial Instruments and Fair Value of Financial
Instruments" requires additional disclosures about derivative financial
instruments. Most of the company's investments, insurance liabilities and
debt, as well as off-balance-sheet items such as loan guarantees, fall within
the standards' definition of a financial instrument. Although the company's
life insurance liabilities are specifically exempted from this disclosure
requirement, estimated fair value disclosure of these liabilities is also
provided in order to make the disclosures more meaningful. Accounting,
actuarial and regulatory bodies are continuing to study the methodologies to
be used in developing fair value information, particularly as it relates to
liabilities for insurance contracts. Accordingly, care should be exercised
in deriving conclusions about the company's business or financial condition
based on the information presented herein.
The company closely monitors the level of its insurance liabilities, the
level of interest rates credited to its interest-sensitive products and the
assumed interest margin provided for within the pricing structure of its other
products. These amounts are taken into consideration in the company's overall
management of interest rate risk, which attempts to minimize exposure to
changing interest rates through the matching of investment cash flows with
amounts expected to be due under insurance contracts. As discussed below, the
company has used discount rates in its determination of fair values for its
liabilities which are consistent with market yields for related assets. The
use of the asset market yield is consistent with management's opinion that the
risks inherent in its asset and liability portfolios are similar. This
assumption, however, might not result in values that are consistent with those
obtained through an actuarial appraisal of the company's business or values
that might arise in a negotiated transaction.
The following compares carrying values as shown for financial reporting
purposes with estimated fair values.
<TABLE>
<CAPTION>
December 31 1996 1995
________________________________________________________________________________
(Dollars in thousands)
Estimated Estimated
Carrying Fair Carrying Fair
Value Value Value Value
____________ ____________ ___________ ___________
<S> <C> <C> <C> <C>
ASSETS
Balance sheet financial assets:
Fixed maturities
available for sale $7,731,964 $7,731,964 $7,352,211 $7,352,211
Equity securities 77,181 77,181 50,595 50,595
Mortgage loans on real
estate 1,720,114 1,739,443 1,169,456 1,245,128
Short-term investments 37,922 37,922 39,234 39,234
Cash and cash equivalents 18,201 18,201 10,730 10,730
Notes and other
receivables 143,490 143,490 137,141 137,141
Separate account assets 1,657,879 1,657,879 171,881 171,881
____________ ____________ ___________ ___________
11,386,751 11,406,080 8,931,248 9,006,920
Deferred policy acquisition
costs 733,158 -- 554,179 --
Present value of in force
acquired 83,051 -- -- --
Intangible assets 46,726 -- 3,639 --
Prepaid pension and other
postretirement benefits 25,899 27,989 24,209 23,634
Derivative financial
instruments 18,041 14,080 -- --
Non-financial assets 61,264 61,264 49,959 49,959
____________ ____________ ___________ ___________
Total assets $12,354,890 $11,509,413 $9,563,234 $9,080,513
============ ============ =========== ===========
</TABLE>
<TABLE>
<CAPTION>
December 31 1996 1995
________________________________________________________________________________
(Dollars in thousands)
Estimated Estimated
Carrying Fair Carrying Fair
Value Value Value Value
____________ ____________ ___________ ___________
<S> <C> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Balance sheet financial liabilities:
Future policy benefits (net of related policy loans):
Universal life and
current interest
products $493,419 $309,620 $441,726 $309,142
Annuity products 8,021,601 6,726,423 6,846,030 5,905,241
Participating insurance
and non-participating
traditional life
insurance 688,758 515,706 745,339 558,445
____________ ____________ ___________ ___________
9,203,778 7,551,749 8,033,095 6,772,828
Long-term debt 100,000 108,870 100,000 115,080
Commercial paper notes 104,600 104,600 58,100 58,100
Separate account
liabilities 1,657,879 1,524,241 171,881 171,881
____________ ____________ ___________ ___________
11,066,257 9,289,460 8,363,076 7,117,889
Deferred income taxes on fair
value adjustments -- 325,962 -- 267,710
Non-financial liabilities 267,834 267,834 306,226 306,226
____________ ____________ ___________ ___________
Total liabilities 11,334,091 9,883,256 8,669,302 7,691,825
Company-obligated,
mandatorily-redeemable
preferred securities 125,000 127,500 -- --
Stockholders' equity 895,799 1,498,657 893,932 1,388,688
____________ ____________ ___________ ___________
Total liabilities and
stockholders' equity $12,354,890 $11,509,413 $9,563,234 $9,080,513
============ ============ =========== ===========
</TABLE>
Fixed maturities: Estimated fair values of publicly traded securities are as
reported by an independent pricing service. Estimated fair values of
conventional mortgage-backed securities not actively traded in a liquid market
are estimated using a third party pricing system. This pricing system uses a
matrix calculation assuming a spread over U.S. Treasury bonds based upon the
expected average lives of the securities. Fair 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
fair values of redeemable preferred stocks are as reported by the NAIC.
Equity securities: Estimated fair values are based upon the latest quoted
market prices, where available. For equity securities not actively traded,
estimated fair values are based upon values of issues of comparable yield and
quality or conversion value.
Mortgage loans on real estate: Fair values are estimated by discounting
expected cash flows, using interest rates currently being offered for similar
loans.
Short-term investments, cash and cash equivalents, notes and other
receivables, commercial paper notes: Carrying values reported in the
company's historical cost basis balance sheet approximate estimated fair
value for these instruments, due to their short-term nature.
Deferred policy acquisition costs, present value of in force acquired and
intangible assets: For historical cost purposes, the recovery of policy
acquisition costs and present value of in force acquired is based on the
realization, among other things, of future interest spreads and gross premiums
on in-force business. Because these cash flows are considered in the
computation of the future policy benefit cash flows, the balances of deferred
policy acquisition cost and present value of in force acquired do not appear
on the estimated fair value balance sheet. Intangible assets do not appear in
the estimated fair value balance sheet because there are no cash flows related
to these assets.
Prepaid pension and other postretirement benefits: Estimated fair value of
the prepaid pension costs asset and other postretirement benefits obligations
represents the fair value of plan assets less accumulated benefit obligations
(pension) and accumulated postretirement benefit obligations. Differences in
estimated fair value and carrying value are the result of deferral of
recognition of: prior service costs, unrecognized gains and losses and the
remaining balance of the unrecognized transition asset for pensions.
Derivative financial instruments: SFAS No. 119 requires disclosures about
derivative financial instruments such as futures, forward, swap or option
contracts, or other financial instruments with similar characteristics.
During 1996, with the implementation of the company's hedging program, the
company purchased interest rate caps and cash settled put swaptions. The
estimated fair values are the average of quotes obtained from related and
unrelated counterparties. The company was not a party to such instruments at
any time during 1995. Estimated fair values for these instruments reflect
changes in interest rates and market conditions since time of purchase.
Separate account assets: Separate account assets represents the estimated
fair values of the underlying securities in the company's historical cost and
estimated fair value basis balance sheets.
Future policy benefits: Estimated fair values of the company's liabilities
for future policy benefits for interest sensitive life products, annuity
products and participating insurance and non-participating traditional life
insurance products are based upon discounted cash flow calculations. Cash
flows of future policy benefits are discounted using the market yield rate of
the assets supporting these liabilities. Estimated fair values are presented
net of the estimated fair value of corresponding policy loans due to the
interdependent nature of the cash flows associated with these items.
Long-term debt: Estimated fair value of the company's publicly-traded debt
issue was based upon quoted market prices at December 31, 1996.
Separate account liabilities: Separate account liabilities are reported at
full account value in the company's historical cost balance sheet. Estimated
fair values of separate account liabilities are based upon assumptions using
an estimated long-term average market rate of return to discount future cash
flows. The reduction in fair values for separate account liabilities reflect
the present value of future revenue from product charges, distribution fees or
surrender charges.
Deferred income taxes on fair value adjustments: Deferred income taxes have
been reported at the statutory rate for the differences (except for those
attributed to permanent differences) between the carrying value and estimated
fair value of assets and liabilities set forth herein.
Non-financial assets and liabilities: Values are presented at historical
cost. Non-financial assets consist primarily of real estate, securities and
indebtedness of related parties, property and equipment, current income taxes
recoverable and guaranty fund premium tax offset. Non-financial liabilities
consist primarily of other policy claims and benefits, accrued dividends,
deferred income taxes payable, guaranty fund assessments payable, outstanding
checks, suspense accounts, draft accounts payable and mortgage escrow
accounts.
Company-obligated, mandatorily-redeemable preferred securities: Estimated
fair value of the publicly traded preferred securities of the company's
subsidiary trust was based upon quoted market prices at December 31, 1996.
SFAS No. 107 and SFAS No. 119 require disclosure of estimated fair value
information about financial instruments, whether or not recognized in the
consolidated balance sheets, for which it is practicable to estimate that
value. In cases where quoted market prices are not available, estimated fair
values are based on estimates using present value or other valuation
techniques. Those techniques are significantly affected by the assumptions
used, including the discount rate and estimates of future cash flows. In that
regard, the derived fair value estimates cannot be substantiated by comparison
to independent markets and, in many cases, could not be realized in immediate
settlement of the instrument. The above presentation should not be viewed as
an appraisal as there are several factors, such as the fair value associated
with customer and agent relationships and other intangible items, which have
not been considered. In addition, interest rates and other assumptions might
be modified if an actual appraisal were to be performed. Accordingly, the
aggregate estimated fair value amounts presented herein are limited by each of
these factors and do not purport to represent the underlying value of the
company.
6. CREDIT ARRANGEMENTS
__________________________________________________________________________
Company-Obligated, Mandatorily-Redeemable Preferred Securities of Subsidiary
Trust: On July 23, 1996, Equitable of Iowa Companies Capital Trust (the
"Trust"), a consolidated, wholly-owned subsidiary of Equitable of Iowa
Companies ("Equitable"), issued $125,000,000 of its 8.70% Trust Originated
Preferred Securities (the "Preferred Securities"). Concurrent with the
issuance of the Trust's Preferred Securities, Equitable issued to the Trust
$128,866,000 in principal amount, of its 8.70% Subordinated Deferrable
Interest Debentures (the "Debt Securities") due July 30, 2026. The sole
assets of the Trust are and will remain the Debt Securities and any accrued
interest thereon. The interest and other payment dates on the Debt Securities
correspond to the distribution and other payment dates on the Preferred
Securities. The Debt Securities mature on July 30, 2026, with an option to
extend the maturity an additional 19 years, and are redeemable by Equitable,
in whole or in part, beginning July 30, 2001. The Preferred Securities will
mature or be called simultaneously with the Debt Securities. The Preferred
Securities have a liquidation value of $25 per Preferred Security plus accrued
and unpaid distributions. As of December 31, 1996, 5,000,000 shares of
Preferred Securities were outstanding.
Equitable has obligations under the Debt Securities, the Preferred Securities
Guarantee Agreement, the Declaration of Trust, as amended, and the Indenture,
as amended by the First Supplemental Indenture. These obligations, when
considered together, constitute a full and unconditional guarantee by
Equitable of the Trust's obligations under the Preferred Securities.
Net proceeds of approximately $120,305,000 from the issuance of $125,000,000
of Preferred Securities, were used to fund, in part, the acquisition of BT
Variable Inc., which owned all the outstanding capital stock of Golden
American and Directed Services, Inc. Refer to Note 7 for further information
regarding the acquisition.
Long-term Debt: In February 1995, the company issued $100 million of 8.5%
notes, maturing on February 15, 2005, receiving net proceeds totaling
$98,812,000, after expenses. The company has contributed $50 million of the
proceeds to its insurance subsidiaries and has applied the remaining net
proceeds to the repayment of outstanding commercial paper notes.
Notes payable bearing interest at 9.3% totaling $49,996,000 at December 31,
1993 were repaid on June 1, 1994. Subordinated installment notes bearing
interest at 9% totaling $218,000 at December 31, 1993 were repaid on January
3, 1994.
Commercial Paper Notes: The company issues commercial paper notes to provide
for working capital needs and to provide short term liquidity. This
commercial paper program is supported by the company's line of credit
discussed below. Commercial paper notes are issued for periods not exceeding
270 days. At December 31, 1996 and 1995, commercial paper notes of
$104,600,000 and $58,100,000, respectively, were outstanding under this
arrangement at a weighted average interest rate of 5.7% and 6.0%, respectively.
At December 31, 1996, the company's commercial paper was rated A-1 by Standard
and Poor's Corporation, D-1 by Duff & Phelps Credit Rating Company and P-2 by
Moody's Investors Service.
Line of Credit: The company maintains a line of credit arrangement with
several banks to support its commercial paper notes payable and to provide
short-term liquidity. The maximum borrowing allowed under this facility is
$300,000,000 (no amounts outstanding at December 31, 1996) expiring on May 10,
2001. The terms of the credit arrangement set limits on debt levels of the
company and its insurance subsidiaries, require maintenance of a minimum level
of consolidated tangible net worth and insurance subsidiary statutory capital
and surplus and risk-based capital, and restricts certain investments.
7. ACQUISITION
__________________________________________________________________________
Transaction: On August 13, 1996, Equitable acquired all of the outstanding
capital stock of BT Variable Inc., ("BT Variable"), a New York corporation,
from Whitewood Properties Corp. ("Whitewood"), a New York corporation and
wholly-owned subsidiary of Bankers Trust Company ("Bankers Trust"), pursuant
to the terms of a Purchase Agreement dated as of May 3, 1996 between Equitable
and Whitewood. BT Variable, a New York corporation, in turn, owns all the
outstanding capital stock of Golden American, a Delaware stock life insurance
company, and all of the outstanding capital stock of Directed Services, Inc.
("DSI"), a New York corporation and registered broker/dealer and investment
adviser. In exchange for the outstanding capital stock of BT Variable,
Equitable paid the sum of $93,000,000 in cash to Whitewood in accordance with
the terms of the Purchase Agreement. Equitable also paid the sum of
$51,000,000 in cash to Bankers Trust to retire certain debt owed by BT
Variable to Bankers Trust pursuant to a revolving credit arrangement. The
funds used in completing the acquisition were obtained primarily through a
recent offering of securities undertaken by the Trust, an affiliate of
Equitable, the proceeds of which were loaned to Equitable in exchange for
subordinated debentures issued by Equitable to the Trust. Additional funds
were provided by reducing short-term investments of Equitable and its
insurance subsidiaries. Funds provided by Equitable's insurance subsidiaries
were transferred to Equitable in the form of dividends paid. The acquisition
was accounted for using the purchase method, and the results of operations
of BT Variable are included in the consolidated statement of income from the
date of acquisition. Subsequent to the acquisition, the BT Variable, Inc.
name was changed to EIC Variable, Inc.
Accounting Treatment: The acquisition was accounted for as a purchase
resulting in a new basis of accounting, reflecting estimated fair values for
assets and liabilities at August 13, 1996. The purchase price was allocated
to the three companies purchased - BT Variable, DSI, and Golden American.
Goodwill relating to the acquisition was established for the excess of the
acquisition cost over the fair value of the net assets acquired and pushed
down to Golden American. The acquisition cost is preliminary with respect to
the final settlement of taxes with Bankers Trust and estimated expenses and,
as a result, goodwill may change. The total amount of goodwill and other
intangibles deferred relating to the acquisition is comprised of $39,254,000
of estimated goodwill and approximately $4,695,000 of costs of issuance
relating to the preferred securities mentioned above. Goodwill and preferred
securities issuance costs will be amortized on a straight-line basis over 25
years and 35 years, respectively, and the carrying value will be reviewed
periodically for any indication of impairment in value.
Pro Forma Information (Unaudited): The following pro forma information is
presented as if the acquisition had occurred on January 1, 1995. This
information is intended for informational purposes only and may not be
indicative of the company's future results of operations.
<TABLE>
<CAPTION>
Year ended December 31 1996 1995
____________________________________________________________________
(Dollars in thousands, except per share data) (Unaudited)
<S> <C> <C>
Revenues $893,168 $797,925
Net income 119,553 79,478
Net income per share 3.75 2.51
</TABLE>
Present Value of In Force Acquired: As part of the acquisition, a portion of
the cost was allocated to the right to receive future cash flows from the
insurance contracts existing with Golden American at the date of acquisition.
This allocated cost represents the present value of in force acquired ("PVIF")
which reflects the value of those purchased policies calculated by discounting
the actuarially determined expected future cash flows at the discount rate
determined by the company.
An analysis of the PVIF asset for the year ended December 31, 1996 is as
follows:
<TABLE>
<CAPTION>
(Dollars in thousands)
<S> <C>
Beginning balance --
Acquired $85,796
Imputed interest 2,465
Amortization (5,210)
__________________
Ending balance $83,051
==================
</TABLE>
Interest is imputed on the unamortized balance of PVIF at rates of 7.70% to
7.80%. Amortization of PVIF is charged to expense and adjusted for the
unrealized gains (losses) on available for sale securities. Based on current
conditions and assumptions as to future events on acquired policies in force,
the expected approximate net amortization relating to the beginning balance of
the PVIF is as follows:
<TABLE>
<CAPTION>
Year Amount
_________________________________________________
(Dollars in thousands)
<S> <C>
1997 $9,664
1998 10,109
1999 9,243
2000 7,919
2001 6,798
</TABLE>
8. INCOME TAXES
__________________________________________________________________________
The company and all of its subsidiaries except Golden American and its
wholly-owned subsidiary First Golden American Life Insurance Company of New
York ("First Golden") file a consolidated federal income tax return. The
parent company and its subsidiaries (except Golden American and First Golden)
each report current income tax expense as allocated under a consolidated tax
allocation agreement. Generally, this allocation results in profitable
companies recognizing a tax provision as if the individual company filed a
separate return and loss companies recognizing benefits to the extent their
losses contribute to reduce consolidated taxes. Deferred income taxes have
been established by each member of the consolidated group based upon the
temporary differences, the reversal of which will result in taxable or
deductible amounts in future years when the related asset or liability is
recovered or settled, within each entity. Golden American and First Golden
each file a separate federal income tax return. Deferred income taxes are
also established based upon the temporary differences. At December 31, 1996,
Golden American and the non-life companies had net operating loss ("NOL")
carryforwards for federal income tax purposes of approximately $4,725,000 and
$2,667,000, respectively. Approximately $2,549,000, $118,000, and $4,725,000
of these NOL's can be used to offset future taxable income of Golden American
and the company through the years 2008, 2010, and 2011, respectively.
Income Tax Expense
Income tax expenses (credits) are included in the consolidated financial
statements as follows:
<TABLE>
<CAPTION>
Year ended December 31 1996 1995 1994
______________________________________________________________________________
(Dollars in thousands)
<S> <C> <C> <C>
Taxes provided in consolidated statements
of income on:
Income before equity income (loss):
Current $66,375 $43,901 $39,762
Deferred 539 (268) 13,159
___________ ___________ ___________
66,914 43,633 52,921
Equity income (loss):
Current (98) (43) (65)
Deferred 52 52 52
___________ ___________ ___________
(46) 9 (13)
Taxes provided in consolidated statement
of changes in stockholders' equity:
Amounts attributable to stock
incentive plans - current (1,195) (4,177) (1,309)
Amounts attributable to unrealized
gains and losses, less valuation
allowance of $9,403 in 1994 -
deferred (69,825) 113,503 --
___________ ___________ ___________
($4,152) $152,968 $51,599
=========== =========== ===========
</TABLE>
Income tax expense (credits) attributed to realized gains and losses on
investments amounted to $5,689,000, $3,333,000 and $6,744,000 for the years
ended December 31, 1996, 1995 and 1994, respectively. The effective tax rate
on income before income taxes and equity income (loss) is different from the
prevailing federal income tax rate as follows:
<TABLE>
<CAPTION>
Year ended December 31 1996 1995 1994
______________________________________________________________________________
(Dollars in thousands)
<S> <C> <C> <C>
Income before income taxes, equity
income (loss) and distributions
on preferred securities $194,995 $128,506 $151,244
Distributions on preferred securities (4,833) -- --
___________ ___________ ___________
Income before income taxes and equity
income (loss) 190,162 128,506 151,244
Income tax at federal statutory rate 66,557 44,977 52,935
Tax effect (decrease) of:
State income taxes, net of federal
effect 160 82 79
Other items 197 (1,426) (93)
___________ ___________ ___________
Income tax expense $66,914 $43,633 $52,921
=========== =========== ===========
</TABLE>
The Internal Revenue Service ("IRS") is currently examining, or has examined,
the company's consolidated income tax returns through 1992. The 1993, 1994
and 1995 consolidated income tax returns remain open to examination.
Management believes amounts provided for income taxes are adequate to settle
any adjustments raised by the IRS.
Deferred Taxes
The tax effect of temporary differences giving rise to the company's deferred
income tax assets and liabilities at December 31, 1996 and 1995, is as
follows:
<TABLE>
<CAPTION>
December 31 1996 1995
____________________________________________________________________________
(Dollars in thousands)
<S> <C> <C>
Deferred tax assets:
Future policy benefits $250,567 $208,431
Accrued dividends 4,392 4,375
Guaranty fund assessment accruals 16,103 17,030
Goodwill 5,918 --
Other 13,601 10,689
___________ ___________
290,581 240,525
Deferred tax liabilities:
Net unrealized appreciation of securities at
fair value (61,189) (163,581)
Deferred policy acquisition costs (219,903) (168,753)
Prepaid pension costs (12,577) (11,653)
Present value of in force acquired (29,068) --
Other (13,525) (11,453)
___________ ___________
(336,262) (355,440)
___________ ___________
Deferred income tax liability ($45,681) ($114,915)
=========== ===========
</TABLE>
Prior to 1984, a portion of Equitable Life's current income was not subject
to current income taxation, but was accumulated, for tax purposes, in a
memorandum account designated as "policyholders' surplus account". The
aggregate accumulation in this account at December 31, 1996, was $14,388,000.
Should the policyholders' surplus account of Equitable Life exceed the
limitation prescribed by federal income tax law, or should distributions be
made by Equitable Life to the parent company in excess of $385,006,000, such
excess would be subject to federal income taxes at rates then effective.
Deferred income taxes of $5,036,000 have not been provided on amounts included
in this memorandum account since the company contemplates no action and can
foresee no events that would create such a tax.
Deferred income taxes (credits) were also reported on equity income during
these periods. These taxes arise from the recognition of income and losses
differently for purposes of filing federal income tax returns than for
financial reporting purposes.
9. EMPLOYEE STOCK AND INCENTIVE COMPENSATION PLANS
__________________________________________________________________________
The company's Restated and Amended 1992 Stock Incentive Plan is a successor
to the 1982 Stock Incentive Plan. These plans provide for the award of stock
options or shares of the company's common stock to key employees through
three means: qualified incentive stock options (as defined in the Internal
Revenue Code), non-qualified stock options and restricted shares. Shares of
common stock may be awarded under the 1982 plan for outstanding stock options
granted prior to adoption of the 1992 plan. Under the 1992 plan an initial
base of 2,240,000 shares of common stock may be awarded with automatic
increases of 7.5% for shares issued after April 30, 1992. At December 31,
1996, the company has reserved 2,564,314 shares (2,803,051 shares at December
31, 1995) of its common stock for future issuances under these plans.
The company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25) and related Interpretations
in accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under SFAS No. 123, "Accounting
for Stock-Based Compensation," requires use of option valuation models that
were not developed for use in valuing employee stock options. Under APB 25,
if the exercise price of the company's employee stock options equals the
market price of the underlying stock on the date of grant, no compensation
expense is recognized on grant date.
Pro forma information regarding net income and earnings per share is required
by SFAS 123, and has been determined as if the company had accounted for its
employee stock options granted subsequent to December 31, 1994 under the fair
value method of that Statement. The fair value for these options was
estimated at the date of grant using a Black-Scholes option pricing model with
the following weighted-average assumptions for 1996 and 1995, respectively:
risk-free interest rates of 6.06% and 5.34% and dividend yields of 1.5%;
volatility factors of the expected market price of the company's common stock
of .33 and .353; and a weighted-average expected life of the option of 5.35
years.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility
and risk free interest rates. Because the company's employee stock options
have characteristics significantly different from those of traded options,
and because changes in the subjective input assumptions can materially affect
the fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its
employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. Because
SFAS No. 123 prohibits retroactive application, pro forma information is not
indicative of future amounts. That is, the new rules are applied only to
stock options granted in 1995 and 1996 and do not reflect expense on nonvested
options granted prior to 1995. The company's pro forma information follows
(in thousands except for earnings per share information):
<TABLE>
<CAPTION>
1996 1995
________ ________
<S> <C> <C>
Pro forma net income $122,468 $84,551
Pro forma earnings per share 3.84 2.67
</TABLE>
A summary of the company's stock option activity, and related information for
the years ended December 31 is as follows:
<TABLE>
<CAPTION>
Option Price
______________________________________
Number Per Share
of Shares Minimum Average Maximum Total
_______________________________________________________________________________
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1994 1,089,900 $4.97 $11.41 $36.75 $12,432
Granted during 1994 202,500 32.50 32.53 34.50 6,588
Exercised during 1994 (154,705) 4.97 6.06 25.75 (938)
Terminated during 1994 (20,420) 4.97 18.07 32.50 (369)
__________________________________________________
Balance at December 31, 1994 1,117,275 4.97 15.84 36.75 17,713
Granted during 1995 285,750 27.75 31.16 37.63 8,905
Exercised during 1995 (215,600) 4.97 6.79 11.88 (1,464)
Terminated during 1995 (163,700) 4.97 21.15 36.75 (3,463)
__________________________________________________
Balance at December 31, 1995 1,023,725 4.97 21.19 37.63 21,691
Granted during 1996 329,000 35.00 35.72 45.50 11,751
Exercised during 1996 (133,000) 4.97 9.23 32.50 (1,227)
Terminated during 1996 (90,100) 4.97 29.05 36.75 (2,617)
__________________________________________________
Balance at December 31, 1996 1,129,625 $4.97 $26.20 $45.50 $29,598
==================================================
</TABLE>
Information with respect to the company's stock options outstanding at
December 31, 1996 is as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
_______________________________________________________________________________
Weighted-
Average Weighted- Weighted-
Range of Number Out- Remaining Average Number Average
Exercise standing at Contractual Exercise Exercisable at Exercise
Prices Dec. 31, 1996 Life (Years) Price Dec. 31, 1996 Price
_______________________________________________________________________________
<S> <C> <C> <C> <C> <C>
$4-$10 179,155 3.20 $5.98 179,155 $5.98
11-20 102,700 5.17 11.88 35,800 11.88
21-30 151,520 6.19 25.78 30,080 25.75
31-40 691,250 8.37 33.53 1,600 36.75
41-50 5,000 9.94 45.50 -- --
____________ _____________
$4-$50 1,129,625 246,635
============ =============
</TABLE>
Options are granted at fair value on the date of grant. Therefore, the
weighted average grant date fair value is equal to the weighted average option
price presented above. The company had exercisable options of 246,635,
210,135 and 252,515 at December 31, 1996, 1995 and 1994, respectively.
The non-qualified stock options are compensatory, and require the accrual of
compensation expense over the period of service from the date the options are
granted until they become fully exercisable if market values exceed the option
price on the measurement date. No expense was recognized during 1996. During
the years ended December 31, 1995 and 1994, compensation (income)/expense of
$(4,000) and $16,000, respectively, was recognized related to these options.
Shares of common stock issued under the company's stock incentive plans are
set forth in the following table:
<TABLE>
<CAPTION>
Year ended December 31 1996 1995 1994
_______________________________________________________________________
<S> <C> <C> <C>
Issued:
Exercise of stock options 133,000 215,600 154,705
Restricted stock grants 118,076 23,494 47,752
Discretionary stock awards 1,650 1,650 570
__________ __________ __________
252,726 240,744 203,027
Restricted shares forfeited (7,020) (7,981) (1,323)
Shares received as consideration (53,900) (168,632) (36,252)
__________ __________ __________
Net issuance of common stock 191,806 64,131 165,452
========== ========== ==========
</TABLE>
Shares of restricted common stock awarded (see table) to certain key
employees and directors are subject to forfeiture to the company should the
individuals terminate their relationship with the company for reasons other
than death, permanent disability or change in company control prior to full
vesting. Shares granted generally vest over three to five years from the date
of grant. The company amortizes as compensation expense the market value on
date of grant ($4,247,000 in 1996, $831,000 in 1995 and $1,661,000 in 1994) of
the restricted stock using the straight-line method over the vesting periods.
The weighted average grant date fair value was $35.97, $35.38 and $34.78 for
1996, 1995 and 1994, respectively. Compensation expense recognized during the
years ended December 31, 1996, 1995 and 1994 aggregated $1,224,000, $861,000
and $1,161,000, respectively.
The company has a discretionary stock award plan under which employees,
agents and other representatives of the company are awarded shares of stock
for superior performance. During the years ended December 31, 1996, 1995 and
1994, awards of shares of the company's common stock under this plan (see
table) resulted in charges to income of $59,000, $52,000 and $19,000,
respectively. The weighted average grant date fair value was $35.68, $31.24
and $33.25 for 1996, 1995 and 1994, respectively.
Equitable Life sponsors a long-term incentive compensation plan which allows
certain agents to earn units equal to shares of the company's common stock
based on personal production and the maintenance of specific levels of assets
under management. This program resulted in expense/(income) of $1,195,000,
$736,000 and $(129,000) in the years ended December 31, 1996, 1995 and 1994,
respectively.
10. RETIREMENT PLANS
__________________________________________________________________________
Defined Benefit Plans
Substantially all full-time employees of the company are covered by a
non-contributory self-insured defined benefit pension plan. The benefits are
based on years of service and the employee's compensation during the last five
years of employment. Further, the company sponsors a supplemental defined
benefit plan to provide benefits in excess of amounts allowed pursuant to
Internal Revenue Code Section 401(a) (17) and those allowed due to integration
rules. The company's funding policy with respect to these plans is consistent
with the funding requirements of federal law and regulations.
The following table sets forth the plans' funded status and amounts
recognized in the company's consolidated balance sheet:
<TABLE>
<CAPTION>
December 31 1996 1995
______________________________________________________________________________
(Dollars in thousands)
<S> <C> <C>
Accumulated benefit obligation, including vested
benefits of $59,807 in 1996 and $56,617 in 1995 $60,862 $57,604
=========== ===========
Plan assets at fair value, primarily bonds, common
stocks (including 600,000 shares in 1996 and 1995
of the company's common stock), mortgage loans
and short-term investments $106,789 $98,018
Projected benefit obligation for service rendered
to date 68,988 65,432
___________ ___________
Plan assets in excess of projected benefit obligation 37,801 32,586
Unrecognized net (gain) loss from past experience
different from that assumed and effects of
changes in assumptions (2,468) 1,530
Prior service cost not yet recognized 507 652
Unrecognized net liability (asset) at the transition date,
net of amortization 108 (1,100)
___________ ___________
Prepaid pension cost $35,948 $33,668
=========== ===========
</TABLE>
Net periodic pension benefit included the following components:
<TABLE>
<CAPTION>
Year ended December 31 1996 1995 1994
_______________________________________________________________________________
(Dollars in thousands)
<S> <C> <C> <C>
Actual return on plan assets $12,515 $19,487 ($8,581)
Service cost-benefits earned during
the period (1,856) (1,238) (1,411)
Interest cost on projected benefit
obligation (4,517) (4,347) (4,097)
Net amortization and deferral (3,940) (10,928) 18,068
___________ ___________ ___________
Net periodic pension benefit $2,202 $2,974 $3,979
=========== =========== ===========
</TABLE>
The discount rate and rate of increase in future compensation levels used in
determining the actuarial present value of the projected benefit obligation
were 7.0% and 5.0%, respectively, at December 31, 1996 and 1995. The average
expected long term rate of return on plan assets was 8.0% in 1996, 1995 and
1994.
Postretirement Benefit Plans
The company sponsors plans that provide postretirement medical and group term
life insurance benefits to full-time employees and agents who have worked for
the company for five years or had been hired, had attained age 50 and had a
combined age and years of service of 60 or more before January 1, 1992. The
medical plans are contributory, with retiree contributions adjusted annually,
and contain other cost-sharing features such as deductibles and coinsurance.
The accounting for these plans anticipates that the company's contributions
will increase annually by the lesser of the health care inflation rate or 3%,
with increases in excess of these amounts borne by the employee or agent. All
payments of the liability for group-term life insurance are funded by the
company on a pay-as-you-go (cash) basis.
The company has chosen not to fund any amounts in excess of current benefits.
The following table sets forth the amounts recognized in the company's
consolidated balance sheet:
<TABLE>
<CAPTION>
Year ended December 31, 1996
_____________________________________________________________________________
(Dollars in thousands)
Life
Medical Insurance
Plans Plans Total
_____________________________
<S> <C> <C> <C>
Accumulated postretirement benefit obligation:
Retirees $4,036 $2,355 $6,391
Fully eligible active plan participants 1,056 159 1,215
Other active plan participants 1,669 54 1,723
_________ _________ _________
Accumulated postretirement benefit obligation
in excess of plan assets 6,761 2,568 9,329
Prior service cost not yet recognized in net
post-retirement benefit cost 347 93 440
Unrecognized net loss (236) (351) (587)
_________ _________ _________
Accrued postretirement benefit cost $6,872 $2,310 $9,182
========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
Year ended December 31, 1995
_____________________________________________________________________________
(Dollars in thousands)
Life
Medical Insurance
Plans Plans Total
_____________________________
<S> <C> <C> <C>
Accumulated postretirement benefit obligation:
Retirees $4,090 $2,094 $6,184
Fully eligible active plan participants 969 140 1,109
Other active plan participants 1,256 77 1,333
_________ _________ _________
Accumulated postretirement benefit obligation
in excess of plan assets 6,315 2,311 8,626
Prior service cost not yet recognized in net
post-retirement benefit cost 382 103 485
Unrecognized net loss (373) (129) (502)
_________ _________ _________
Accrued postretirement benefit cost $6,324 $2,285 $8,609
========= ========= =========
</TABLE>
Net periodic postretirement benefit costs include the following
components:
<TABLE>
<CAPTION>
Life
Medical Insurance
Year ended December 31, 1996 Plans Plans Total
_____________________________________________________________________________
(Dollars in thousands)
<S> <C> <C> <C>
Service cost $511 $12 $523
Interest cost 420 172 592
Net amortization of prior service cost (35) (10) (45)
_________ _________ _________
Net periodic postretirement benefit cost $896 $174 $1,070
========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
Life
Medical Insurance
Year ended December 31, 1995 Plans Plans Total
_____________________________________________________________________________
(Dollars in thousands)
<S> <C> <C> <C>
Service cost $251 $10 $261
Interest cost 414 163 577
Net amortization of prior service cost (35) (10) (45)
_________ _________ _________
Net periodic postretirement benefit cost $630 $163 $793
========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
Life
Medical Insurance
Year ended December 31, 1994 Plans Plans Total
_____________________________________________________________________________
(Dollars in thousands)
<S> <C> <C> <C>
Service cost $280 $12 $292
Interest cost 410 167 577
Net amortization of prior service cost and
amortization of unrecognized loss (28) (8) (36)
_________ _________ _________
Net periodic postretirement benefit cost $662 $171 $833
========= ========= =========
</TABLE>
The weighted-average annual assumed rate of increase in the per capita cost
of health care benefits (i.e. health care cost trend rate) used in determining
the actuarial present value of the accumulated postretirement benefit
obligation was 11.5% at December 31, 1996 and 12.5% at December 31, 1995 for
employees under 65 and 8.0% at December 31, 1996 and 8.5% at December 31, 1995
for employees over 65, with the rates for both groups to be graded down to
5.5% for 2005 and thereafter. The health care cost trend rate assumption has a
significant effect on the amounts reported. For example, increasing the
assumed health care trend rates by one percent would increase the accumulated
postretirement benefit obligation as of December 31, 1996 by $861,149 and net
periodic postretirement benefit costs for the year ended December 31, 1996 by
$165,730. The discount rate used in determining the accumulated
postretirement benefit obligation was 7.0% at December 31, 1996 and 1995.
Other Benefit Plans
The company also sponsors an unfunded deferred compensation plan providing
benefits to certain former employees. The company did not recognize any
benefits during 1996. During the years ended December 31, 1995 and 1994, the
company recognized benefits of $20,000 and $38,000, respectively, in
connection with this plan.
The company sponsors pension plans for its employees which are qualified
under Internal Revenue Code Section 401(k). Employees may contribute a portion
of their annual salary, subject to limitation, to the plans. The company
contributes an additional amount, subject to limitation, based on the
voluntary contribution of the employee. Company contributions charged to
expense with respect to these plans during the years ended December 31, 1996,
1995 and 1994 were $427,000, $328,000 and $333,000, respectively.
Equitable Life has non-contributory defined contribution pension plans, tax
qualified and non-qualified, for its agents. Combined contributions charged to
expense under the career, general and corporate agent pension plans during the
years ended December 31, 1996, 1995 and 1994 amounted to $710,000, $729,000
and $507,000, respectively.
Certain assets related to the plans discussed above are on deposit with
Equitable Life and amounts relating to these plans are included in these
consolidated financial statements.
11. COMMITMENTS AND CONTINGENCIES
__________________________________________________________________________
Reinsurance: In the normal course of business, the company seeks to limit
its exposure to loss on any single insured and to recover a portion of
benefits paid by ceding reinsurance to other insurance enterprises or
reinsurers. Reinsurance coverages for life insurance vary according to the
age and risk classification of the insured with retention limits ranging up
to $500,000 of coverage per individual life. The company does not use
financial or surplus relief reinsurance. At December 31, 1996, life insurance
in force ceded on a consolidated basis amounted to $1,541,268,000, or
approximately 13.3% of total life insurance in force.
Reinsurance contracts do not relieve the company of its obligations to its
policyholders. To the extent that reinsuring companies are later unable to
meet obligations under reinsurance agreements, the company's life insurance
subsidiaries would be liable for these obligations, and payment of these
obligations could result in losses to the company. To limit the possibility
of such losses the company evaluates the financial condition of its reinsurers,
monitors concentrations of credit risk arising from factors such as similar
geographic regions and limits its exposure to any one reinsurer. At December
31, 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 $14,764,000 for reserve credits ($19,298,000
in 1995), reinsurance claims and other receivables from these reinsurers. No
allowance for uncollectible amounts has been established since none of the
receivables are deemed to be uncollectible, and because such receivables,
either individually or in the aggregate, are not material to the company's
operations. The company's liability for future policy benefits and notes and
other receivables have been increased by $14,636,000 at December 31, 1996
($18,103,000 in 1995) 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 $7,725,000, $6,271,000 and $5,916,000 and insurance
benefits have been reduced by $6,571,000, $8,281,000 and $5,310,000 in 1996,
1995 and 1994, respectively, as a result of the cession agreements. The
amount of reinsurance assumed is not significant.
Guaranty Fund Assessments: Assessments are levied on the company's life
insurance subsidiaries by life and health guaranty associations in most states
in which these subsidiaries are licensed to cover losses of policyholders of
insolvent or rehabilitated insurers. In some states, these assessments can be
partially recovered through a reduction in future premium taxes. The company
cannot predict whether and to what extent legislative initiatives may affect
the right to offset. Based upon information currently available from the
National Organization of Life and Health Insurance Guaranty Associations
(NOLHGA), the company believes that it is probable these insolvencies will
result in future assessments which could be material to the company's
financial statements if the company's reserve is not sufficient. The company
regularly reviews its reserve for these insolvencies and updates its reserve
based upon the company's interpretation of the NOLHGA annual report recently
received. The associated cost for a particular insurance company can vary
significantly based upon its premium volume by line of business and state
premiums levels as well as its potential for premium tax offset. Accordingly,
the company accrued and charged to expense an additional $316,000, $36,492,000
and $1,763,000 during 1996, 1995 and 1994, respectively. At December 31, 1996,
the company has an undiscounted reserve of $46,718,000 to cover estimated
future assessments (net of related anticipated premium tax credits) and has
established an asset totaling $16,812,000 for assessments paid which may be
recoverable through future premium tax offsets. The company believes this
reserve is sufficient to cover expected future insurance guaranty fund
assessments, based upon previous premium levels, and known insolvencies at
this time.
Litigation: As previously reported, the company and certain of its
subsidiaries are defendants in class action lawsuits filed in the United
States District Court for the Middle District of Florida, Tampa Division, in
February, 1996 and in the Court of Common Pleas of Allegheny County,
Pennsylvania in June 1996. The suits claim unspecified damages as a result of
alleged improper life insurance sales practices. The company believes the
allegations are without merit. The suits are in the discovery and procedural
stages and have not yet been certified as class actions. The company intends
to defend the suits vigorously. The amount of any liability which may arise
as a result of these suits, if any, cannot be reasonably estimated and no
provision for loss has been made in the company's financial statements. The
company had also been a party to a similar previously reported class action
lawsuit filed in Iowa which has now been dismissed.
As previously reported, on December 15, 1995, USG received a Notice of
Intention to Arbitrate a dispute with one of its insurance brokerage agencies
before the American Arbitration Association regarding the payment of certain
commissions. The matter was submitted to arbitration and the determination of
the arbitration panel was that the company must pay, over time, commissions in
amounts that are not material.
In the ordinary course of business, the company and its subsidiaries are also
engaged in certain other litigation, none of which management believes is
material.
Vulnerability from Concentrations: The company has various concentrations
in its investment portfolio (see Note 3 for further information). The
company's asset growth, net investment income and cash flow are primarily
generated from the sale of individual fixed annuity policies, variable
products and associated future policy benefits and separate account
liabilities. Substantial changes in tax laws that would make these products
less attractive to consumers, extreme fluctuations in interest rates or stock
market returns which may result in higher lapse experience than assumed, could
cause a severe impact to the company's financial condition. The company has
purchased interest rate caps and swaptions for its hedging program (see Note
4) to mitigate the financial statement impact of significant increases in
interest rates.
Leases and Other Commitments: The company leases its home office space and
certain other equipment under operating leases which expire through 2017.
During the years ended December 31, 1996, 1995 and 1994, rent expense totaled
$2,953,000, $2,240,000 and $1,998,000, respectively. At December 31, 1996,
minimum rental payments due under all non-cancelable operating leases with
initial terms of one year or more are: 1997 - $3,734,000; 1998 - $4,285,000;
1999 - $2,908,000; 2000 - $2,638,000 and 2001 - $2,638,000.
At December 31, 1996, outstanding commitments to fund mortgage loans on real
estate and equity investments totaled $63,300,000 and $10,915,000,
respectively.
12. SUMMARY OF QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) AND DIVIDENDS PAID
______________________________________________________________________________
<TABLE>
<CAPTION>
Quarter ended March 31 June 30 September 30 December 31
______________________________________________________________________________
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C>
1996:
Premiums and other revenue $34,364 $36,508 $40,377 $41,847
Investment income - net 171,212 177,054 180,346 186,967
Net income 30,205 31,772 31,695 29,489
Net income per share 0.95 1.00 0.99 0.92
Dividends per common share 0.135 0.15 0.15 0.15
1995:
Premiums and other revenue $30,452 $28,871 $29,174 $35,271
Investment income - net 148,246 158,520 162,867 171,461
Net income 23,794 26,620 26,840 7,636
Net income per share 0.75 0.84 0.85 0.24
Dividends per common share 0.120 0.135 0.135 0.135
</TABLE>
Insurance revenues and profitability are typically not seasonal in nature.
However, the recognition of realized gains and losses on investments may vary
from quarter to quarter. During 1996, the company recognized pre-tax realized
gains of: first quarter - $5,150,000; second quarter - $6,168,000; third
quarter - $4,510,000 and fourth quarter - $427,000. During 1995, the company
recognized pre-tax realized gains of: first quarter - $113,000; second
quarter - $1,790,000; third quarter - $1,114,000 and fourth quarter -
$6,507,000.
In the fourth quarter of 1995, the company established an additional accrual
for guaranty funds assessments of $23,400,000, net of tax. This reduced net
income per share by $0.74. See Note 11 for further discussion.
REPORT OF INDEPENDENT AUDITORS
__________________________________________________________________________
The Board of Directors and Stockholders
Equitable of Iowa Companies
We have audited the accompanying consolidated balance sheets of Equitable of
Iowa Companies and subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of income, changes in stockholders' equity,
and cash flows for each of the three years in the period ended December 31,
1996. Our audits also included the financial statement schedules listed in
the Index at Item 14(a). These financial statements and schedules are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Equitable of Iowa Companies and subsidiaries at December 31, 1996 and 1995,
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended December 31, 1996, in conformity with
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedules, when considered in relation to the basic
financial statements taken as a whole, present fairly in all material respects
the information set forth therein.
As discussed in Note 3 to the consolidated financial statements, in 1994 the
company changed its method of accounting for certain investments in debt
securities.
s/Ernst & Young LLP
Des Moines, Iowa
February 11, 1997
MANAGEMENT REPORT ON RESPONSIBILITY FOR FINANCIAL REPORTING
__________________________________________________________________________
The accompanying financial statements of Equitable of Iowa Companies have
been prepared by management, which is responsible for their integrity and
objectivity. The statements have been prepared in conformity with generally
accepted accounting principles appropriate in the circumstances and are not
misstated due to material error or fraud. These statements include some
amounts that are based upon management's best estimates and judgments.
Financial information contained elsewhere in this annual report is consistent
with that contained in the financial statements.
In meeting its responsibility for the integrity of the financial statements,
management relies on the company's system of internal control. This system is
designed to provide reasonable assurance that assets are safeguarded and that
transactions are properly recorded and executed in accordance with management's
authorization. The company maintains a strong internal auditing program that
independently assesses the effectiveness of the internal controls and
recommends possible improvements thereto.
The company's financial statements have been audited by Ernst & Young LLP,
independent auditors. In connection with this audit, Ernst & Young LLP
performed examinations in accordance with generally accepted auditing
standards, which include a review of the system of internal control and
assurance that the financial statements are fairly presented. Management has
made pertinent records available to Ernst & Young LLP and, furthermore,
believes that all representations made to Ernst & Young LLP during its audit
were valid and appropriate.
s/Fred S. Hubbell
FRED S. HUBBELL
Chief Executive Officer
s/Paul E. Larson
PAUL E. LARSON
Chief Financial Officer
s/David A. Terwilliger
DAVID A. TERWILLIGER
Chief Accounting Officer
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None
PART III
ITEM 10. Directors and Executive Officers of the Registrant
Information regarding directors and executive officers on pages 4
through 7 of the Proxy Statement for the annual meeting of
shareholders to be held April 24, 1997 ("Proxy Statement") is
incorporated herein by reference.
ITEM 11. Executive Compensation
Executive compensation information on pages 9 through 19 of the Proxy
Statement is incorporated herein by reference.
ITEM 12. Security Ownership of Certain Beneficial Owners and
Management
Security ownership information on pages 2, 3 and 8 of the Proxy
Statement is incorporated herein by reference.
ITEM 13. Certain Relationships and Related Transactions
None.
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a)(1) and (a)(2) Financial statements and schedules
The following consolidated financial statements of Equitable of Iowa
Companies and subsidiaries are included in Item 8:
Consolidated balance sheets - December 31, 1996 and 1995
Consolidated statements of income - Years ended December 31, 1996, 1995 and
1994
Consolidated statements of changes in stockholders' equity -
Years ended December 31, 1996, 1995 and 1994
Consolidated statements of cash flows - Years ended December 31, 1996, 1995
and 1994
Notes to consolidated financial statements
The following consolidated financial statement schedules of Equitable
of Iowa Companies and Subsidiaries are included in Item 14 (d):
Schedule I - Summary of investments - other than investments in related
parties
Schedule II - Condensed financial information of registrant
Schedule III - Supplementary insurance information
Schedule IV - Reinsurance
All other schedules to the consolidated financial statements pursuant
to Article 7 of Regulation S-X are not required under the related
instructions or are inapplicable and therefore have been omitted.
Financial statements and summarized financial information of
unconsolidated subsidiaries or 50% or less owned persons accounted for
by the equity method have been omitted because they do not, considered
individually or in the aggregate, constitute a significant subsidiary.
(a)(3), and (c) Exhibits
Exhibits filed are listed in the attached exhibit index.
(b) No reports on Form 8-K were filed for the quarter ended December 31, 1996.
ITEM 14(d). Schedules
SCHEDULE I
SUMMARY OF INVESTMENTS
OTHER THAN INVESTMENTS IN RELATED PARTIES
(Dollars in thousands)
<TABLE>
<CAPTION>
Balance
Sheet
December 31, 1996 Cost 1 Value Amount
_______________________________________________________________________________
<S> <C> <C> <C>
TYPE OF INVESTMENT
Fixed maturities, available for sale:
Bonds:
United States Government and govern-
mental agencies and authorities $412,700 $422,197 $422,197
States, municipalities and
political subdivisions 15,131 16,265 16,265
Foreign governments 10,572 13,278 13,278
Public utilities 1,241,270 1,266,744 1,266,744
Investment grade corporate 2,789,228 2,930,027 2,930,027
Below investment grade corporate 733,182 731,363 731,363
Mortgage-backed securities 2,355,036 2,351,703 2,351,703
Redeemable preferred stocks 616 387 387
___________ ___________ ___________
Total fixed maturities, available
for sale 7,557,735 7,731,964 7,731,964
Equity securities:
Common stocks: industrial, miscel-
laneous and all other 48,857 77,181 77,181
Mortgage loans on real estate 1,720,114 1,720,114
Real estate:
Investment properties 3,291 3,291
Acquired in satisfaction of debt 5,322 5,322
___________ ___________
Total real estate 8,613 8,613
Policy loans 190,487 190,487
Short-term investments 37,922 37,922
___________ ___________
Total investments $9,563,728 $9,766,281
=========== ===========
<FN>
Note 1: Cost is defined as original cost for stocks and other invested assets,
amortized cost for bonds and unpaid principal for policy loans and
mortgage loans on real estate, adjusted for amortization of premiums,
accrual of discounts and cost less allowances for depreciation for
real estate.
Note 2: Original cost and amortized cost of investments have been adjusted to
reflect other than temporary declines in value by charges to income
on real estate of $392,000.
</TABLE>
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
EQUITABLE OF IOWA COMPANIES (PARENT COMPANY)
(Dollars in thousands, except per share data)
NOTES TO CONDENSED FINANCIAL STATEMENTS
The accompanying condensed financial statements should be read in conjunction
with the consolidated financial statements and notes thereto of Equitable of
Iowa Companies and subsidiaries.
The company has guaranteed certain indebtedness of subsidiaries. Additionally,
the company has issued commercial paper and also maintains lines of credit
with various banks. See Note 6 to notes to consolidated financial statements.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31 1996 1995
_______________________________________________________________________________
<S> <C> <C>
ASSETS
Cash and cash equivalents $67 $111
Investments, principally short-term investments 1,152 284
Due from subsidiaries* 7,562 4,875
Current income taxes recoverable 4,750 6,968
Other assets 6,108 1,362
___________ ___________
19,639 13,600
Investments in subsidiaries* 1,219,798 1,045,633
___________ ___________
Total assets $1,239,437 $1,059,233
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deferred income taxes $2,578 $2,100
Long-term debt 100,000 100,000
Subordinated debentures 128,866 --
Commercial paper notes 104,600 58,100
Other liabilities 7,507 5,014
Due to subsidiaries* 87 87
___________ ___________
Total liabilities 343,638 165,301
Commitments and contingencies
</TABLE>
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT - CONTINUED
EQUITABLE OF IOWA COMPANIES (PARENT COMPANY)
(Dollars in thousands, except per share data)
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31 1996 1995
_______________________________________________________________________________
<S> <C> <C>
Stockholders' equity:
Serial preferred stock, without par value -
authorized 2,500,000 shares -- --
Common stock, without par value (stated
value $1.00 per share) - authorized
70,000,000 shares in 1996 and 1995,
issued and outstanding 31,988,410
shares in 1996 and 31,769,490 shares
in 1995 31,988 31,769
Additional paid-in capital 85,140 80,100
Unrealized appreciation (depreciation) of
securities at fair value 104,711 209,738
Retained earnings 678,219 573,799
Unearned compensation (deduction) (4,259) (1,474)
___________ ___________
Total stockholders' equity 895,799 893,932
___________ ___________
Total liabilities and stockholders' equity $1,239,437 $1,059,233
=========== ===========
<FN>
*Eliminated in consolidation.
</TABLE>
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT - CONTINUED
EQUITABLE OF IOWA COMPANIES (PARENT COMPANY)
(Dollars in thousands)
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year ended December 31 1996 1995 1994
_______________________________________________________________________________
<S> <C> <C> <C>
Revenues:
Investment income (including interest
and fees received from subsidiaries*
of $1,965 in 1996, $2,527 in 1995 and
$2,068 in 1994) $2,562 $3,171 $2,788
Expenses:
Interest 19,113 13,739 7,880
General and administrative 741 734 1,039
___________ ___________ ___________
19,854 14,473 8,919
Loss before intercompany tax
benefit and equity in income
of subsidiaries (17,292) (11,302) (6,131)
Intercompany income tax benefit (5,643) (5,389) (1,819)
___________ ___________ ___________
(11,649) (5,913) (4,312)
Equity in income of subsidiaries* 134,810 90,803 102,596
___________ ___________ ___________
Net income $123,161 $84,890 $98,284
=========== =========== ===========
<FN>
*Eliminated in consolidation.
</TABLE>
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT - CONTINUED
EQUITABLE OF IOWA COMPANIES (PARENT COMPANY)
(Dollars in thousands)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended December 31 1996 1995 1994
_______________________________________________________________________________
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $123,161 $84,890 $98,284
Adjustments to reconcile net income to
net cash provided by (used in)
operating activities:
Changes in other assets, other lia-
bilities and accrued income taxes (852) 78 1,223
Provision for depreciation and
amortization 287 327 1,111
Provision for deferred income taxes 478 (1,427) 3,345
Equity in earnings of subsidiaries (134,810) (90,803) (102,596)
___________ ___________ ___________
Net cash provided by (used in)
operating activities (11,736) (6,935) 1,367
INVESTING ACTIVITIES
Sales (purchases) of short-term
investments - net (868) 1,802 5,059
Capital contribution to subsidiary (3,866) (50,000) (25)
Cash dividends received from sub-
sidiaries 28,483 7,470 1,940
Proceeds from issuance of subordinated
debentures to affiliated subsidiary
trust 128,866 -- --
Issuance of surplus notes to insurance
subsidiary (25,000) -- --
Repayments of notes receivable 592,289 754,104 1,053,747
Issuance of notes receivable (592,289) (754,104) (1,053,746)
Purchase of subsidiary (144,000) -- --
Sales of property and equipment -- -- 1
___________ ___________ ___________
Net cash provided by (used in)
investing activities (16,385) (40,728) 6,976
</TABLE>
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT - CONTINUED
EQUITABLE OF IOWA COMPANIES (PARENT COMPANY)
(Dollars in thousands)
<TABLE>
<CAPTION>
Year ended December 31 1996 1995 1994
_______________________________________________________________________________
<S> <C> <C> <C>
FINANCING ACTIVITIES
Proceeds from long-term debt -- $100,000 --
Repayments of long-term debt -- -- ($50,214)
Issuance (repayment) of commercial
paper - net $46,500 (32,350) 56,450
Issuance of common stock under stock
plans and upon debt conversion 318 (3,216) 67
Cash dividends paid (18,741) (16,713) (14,755)
___________ ___________ ___________
Net cash provided by (used in)
financing activities 28,077 47,721 (8,452)
___________ ___________ ___________
Increase (decrease) in cash and cash
equivalents (44) 58 (109)
Cash and cash equivalents at beginning
of year 111 53 162
___________ ___________ ___________
Cash and cash equivalents at end of year $67 $111 $53
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest $19,056 $10,152 $7,649
Income taxes, net of amounts received
from subsidiaries (7,642) (2,985) (6,662)
</TABLE>
SCHEDULE III
SUPPLEMENTARY INSURANCE INFORMATION
(Dollars in thousands)
<TABLE>
<CAPTION>
Column Column Column Column Column Column
A B C D E F
________________________________________________________________________________
Future
Policy Other
De- Benefits, Policy
ferred Losses, Claims Insur-
Policy Claims Un- and ance
Acqui- and earned Bene- Premiums
sition Loss Revenue fits and
Segment Costs Expenses Reserve Payable Charges
________________________________________________________________________________
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1996:
Life insurance $733,158 $9,387,471 $20,461 $7,481 $110,972
Year ended December 31, 1995:
Life insurance 554,179 8,218,604 14,326 8,980 94,891
Year ended December 31, 1994:
Life insurance 607,626 7,026,431 14,317 7,785 90,032
</TABLE>
<TABLE>
<CAPTION>
Column Column Column Column Column Column
A G H I J K
________________________________________________________________________________
Amorti-
Benefits zation
Claims, of
Losses Deferred
Net and Policy Other
Invest- Settle- Acqui- Opera-
ment ment sitions ting Premiums
Segment Income Expenses Costs Expenses Written
________________________________________________________________________________
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1996:
Life insurance $715,579 $520,879 $79,550 $37,781 --
Year ended December 31, 1995:
Life insurance 641,094 487,031 72,537 54,337 --
Year ended December 31, 1994:
Life insurance 524,411 414,450 50,921 17,128 --
</TABLE>
SCHEDULE IV
REINSURANCE
EQUITABLE OF IOWA COMPANIES AND SUBSIDIARIES
(Dollars in thousands)
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E Column F
________________________________________________________________________________
Assumed Percentage
Ceded to from of Amount
Gross Other Other Net Assumed
Amount Companies Companies Amount to Net
________________________________________________________________________________
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1996:
Life insurance in
force $11,563,357 $1,541,268 $ -- $10,022,089 --
============ ============ ======== ============ ==========
Insurance premiums
and charges $118,658 $7,725 $39 $110,972 --
============ ============ ======== ============ ==========
Year ended December 31, 1995:
Life insurance in
force $10,927,445 $1,459,523 $ -- $9,467,922 --
============ ============ ======== ============ ==========
Insurance premiums
and charges $101,095 $6,271 $67 $94,891 --
============ ============ ======== ============ ==========
Year ended December 31, 1994:
Life insurance in
force $10,146,940 $1,421,608 $ -- $8,725,332 --
============ ============ ======== ============ ==========
Insurance premiums
and charges $95,821 $5,916 $127 $90,032 --
============ ============ ======== ============ ==========
</TABLE>
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned thereunto duly authorized.
EQUITABLE OF IOWA COMPANIES
(Registrant)
Dated March 7, 1997 By s/Frederick S. Hubbell
________________________________
Frederick S. Hubbell
President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signatures Title
______________ _________
s/Frederick S. Hubbell Chairman of the Board,
_______________________________ President, Chief
Frederick S. Hubbell Executive Officer
(principal executive officer) and Director
s/Paul E. Larson Executive Vice President
_______________________________ and Chief Financial
Paul E. Larson Officer
(principal financial officer)
March 7, 1997
s/David A. Terwilliger Vice President and
_______________________________ Controller
David A. Terwilliger
(principal accounting officer)
s/Richard B. Covey Director
_______________________________
Richard B. Covey
s/Doris M. Drury Director
_______________________________
Doris M. Drury
s/Gayle L. Greer Director
_______________________________
Gayle L. Greer
Signatures Title
______________ _________
_______________________________ Director
James L. Heskett
s/Richard S. Ingham, Jr. Director
_______________________________
Richard S. Ingham, Jr.
s/Robert E. Lee Director
_______________________________
Robert E. Lee
March 7, 1997
s/Jack D. Rehm Director
_______________________________
Jack D. Rehm
_______________________________ Director
Thomas N. Urban
s/Hans F. E. Wachtmeister Director
_______________________________
Hans F. E. Wachtmeister
s/Richard S. White Director
_______________________________
Richard S. White
INDEX
Exhibits to Annual Report Form 10-K
Year ended December 31, 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 Annual Report Form 10-K
Year ended December 31, 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
(ii) Directors' Deferred Compensation Plan filed as Exhibit
10(b) to Form 10-K for the year ended December 31, 1989,
is incorporated by reference
(iii) 1982 Stock Incentive Plan filed as Exhibit 10(c) to Form
10-K for the year ended December 31, 1989, is incorporated
by reference
(iv) Excess Benefit Plan filed as Exhibit 10(d) to Form 10-K
for the year ended December 31, 1989, is incorporated by
reference
(v) Supplemental Employee Retirement Plan filed as Exhibit
10(e) to Form 10-K for the year ended December 31, 1989,
is incorporated by reference
(vi) Executive Flexible Perquisite Program filed as Exhibit
10(f) to Form 10-K for the year ended December 31, 1992,
is incorporated by reference
(vii) Restated and Amended Key Employee Incentive Plan filed as
Exhibit A of Registrant's Proxy Statement dated
March 14, 1995, is incorporated by reference
(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 Annual Report Form 10-K
Year ended December 31, 1996
EQUITABLE OF IOWA COMPANIES
(ix) 1996 Non-Employee Directors' Stock Option Plan filed as Exhibit
A of Registrant's Proxy Statement dated March 12, 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
27 FINANCIAL DATA SCHEDULE (ELECTRONIC FILING ONLY)
99 ADDITIONAL EXHIBITS
Independence Policy filed as an Exhibit to Form 8-K dated November
11, 1991, is incorporated by reference
Exhibit 4
AGREEMENT TO FURNISH
DEBT INSTRUMENTS
March 7, 1997
Securities and Exchange Commission
450 5th Street NW
Washington, DC 20549
Ladies/Gentlemen:
The company agrees to furnish the Commission upon request copies of
the following long-term debt instruments:
1. Credit Agreement between Equitable of Iowa Companies and Morgan
Guaranty Trust Company of New York, as Agent, and the Bank of New York,
as Administrative Agent, and participating banks, dated May 10, 1996,
re: line of credit in amount of $300,000,000.
Very truly yours,
s/ John A. Merriman
John A. Merriman
General Counsel/Secretary
Equitable of Iowa Companies
Exhibit 10(a)(i)
RESTATED
EQUITABLE OF IOWA COMPANIES
KEY EMPLOYEE SEVERANCE PAY PLAN
1. The Chief Executive Officer of Equitable of Iowa Companies (the
"Company") shall be an eligible employee. In addition, such officers of the
Company or any subsidiary of the Company as designated by the Chief Executive
Officer and approved by the Equitable of Iowa Companies Board of Directors
Compensation Committee shall also be eligible employees. (These officers and
the Chief Executive Officer shall be referred to as "Group 1".) With respect
to severance benefits in the event of a "change of control" under paragraph 5
below, eligible employees shall also include such other key employees as
designated by the Chief Executive Officer and approved by the Compensation
Committee each year. (These key employees shall be referred to as "Group 2".)
The Company and its subsidiaries are collectively referred to herein as the
"Companies".
2. Each eligible employee whose employment is terminated shall be paid
severance pay in the total amount of one year's base annual salary at the
level in effect on the date of termination of employment, plus the average of
the bonuses earned by the eligible employee for the most recent two full plan
years under the Company's Key Employee Incentive Plan. If the eligible
employee has not been a participant in the Key Employee Incentive Plan for a
full two years, then the amount added to the base annual salary with respect
to the Key Employee Incentive Plan shall be the percentage of base annual
salary at the "target level" under each performance goal established under
the Key Employee Incentive Plan for the year in which termination occurs.
3. Severance pay benefits will be paid to eligible employees whose employment
is terminated by one of the Companies and will be paid in twenty-four semi-
monthly installments, with each payment equal to one-twenty-fourth of the
amount determined under paragraph 2 above. The first payment shall be made on
the first payroll date of Equitable Life Insurance Company of Iowa following
termination of employment that covers the first payroll period during which
the eligible employee was not, at any time, an employee. Each of the
remaining twenty-three payments shall be made on each subsequent payroll date
thereafter. Employee health insurance and group life insurance benefit plans
will be continued during such payment period. Except as provided in paragraph
5 below, amounts received from other employment during this benefit period
will be deducted from and reduce the severance pay benefits otherwise payable
hereunder; provided, however, that if the amount the employee would have
received under the regular severance pay plan for employees would have
provided a higher amount of benefits than under this plan because of no
requirement to offset other compensation in the regular employee severance
plan, the participant under this plan shall receive the higher amount that
would have been paid under the regular employee severance plan.
4. Except in the case of termination in the event of "change of control" as
provided in paragraph 5 below, no severance payments will be due employees
(i) terminated after age 65, (ii) terminated for Just Cause as defined below,
(iii) receiving similar benefit under written employment contracts with any of
the Companies, (iv) receiving disability or retirement benefits from Equitable
of Iowa Companies or a subsidiary, or (v) who voluntarily resign.
5. Notwithstanding any other provisions, each eligible employee will be
entitled to receive the benefit as provided herein below (without reduction
for compensation from other employment) upon termination of employment for
any reason (except voluntary termination) within one year following a "change
of control" of the Company. Voluntary termination in the event of a "change
of control" shall not include circumstances where the Employee voluntarily
terminates employment with Good Reason as defined below.
For purposes of this paragraph 5, Group 2 employees shall receive the
benefits provided in paragraphs 2 and 3 above. For purposes of this paragraph
5, Group 1 employees shall receive the benefits provided in paragraphs 2 and 3
above, as modified in the remainder of this paragraph. With respect to Group
1 employees, the amount of severance benefits provided under paragraph 2 above
shall be equal to twice the amount otherwise determined under paragraph 2
above, but in no event shall be less than twice the amount determined under
paragraph 2 above as if the date of termination of employment had been the
date the "change of control" is deemed to have occurred. The payment period
during which payments are to be made and the period for which health and life
insurance benefits are to be continued under paragraph 3 above shall be
twenty-four months instead of twelve months and the number of payments to be
made shall be forty-eight instead of twenty-four.
6. A "change of control" of the Company shall be deemed to have occurred if:
(i) any change of control occurs of a nature that would be required to be
disclosed in response to Item 6(e) of Regulation 14A of the Securities
Exchange Act of 1934; (ii) any person or entity owns 25% or more of the
combined voting power of the Company's then outstanding securities; (iii)
any person or entity acquires 50% or more of the combined voting power of the
Company's then outstanding securities; or (iv) there shall have been a change
in the composition of the Board of Directors of the Company such that any time
a majority of the Board of Directors of the Company shall have been members of
the Board of Directors for less than 24 months, unless the election of each
new director who was not a director at the beginning of the period was
approved or recommended by at least two-thirds of the directors then still in
office who were directors at the beginning of such period. The Board of
Directors of the Company as constituted prior to the "change of control" may,
prior to the effective date of the "change of control" declare this paragraph
inoperable as if a "change of control" had not occurred.
7. "Just Cause" shall mean (i) employee's conviction of any criminal
violation involving dishonesty, fraud, or breach of trust; (ii) employee's
willful engagement in any misconduct in the performance of his or her duty
that materially injures Company; (iii) employee's performance of any act
which, if known to the customers, policyholders, annuitants, insurance agents,
clients or stockholders of Company would materially and adversely impact on
the business of Company; or (iv) employee's willful and substantial
nonperformance of assigned duties; provided that such nonperformance has
continued more than ten days after Company has given written notice of such
nonperformance and of its intention to terminate employee's employment because
of such nonperformance.
8. "Good Reason" shall exist if, without employee's express written consent
(i) Company shall assign to employee duties of a substantially nonexecutive or
nonmanagerial nature; (ii) Company shall reduce the salary of employee, or
materially reduce the amount of paid vacations to which he or she is entitled,
or materially reduce his or her fringe benefits and perquisites; (iii)
Company shall require employee to relocate his or her principal business
office or his or her principal place of residence outside the metropolitan
area in which he or she currently has his or her principal business office or
his or her principal place of residence, or assigns to employee duties that
would reasonably require such relocation; (iv) Company shall require employee
or assign duties to employee which would reasonably require him or her to
spend more than 30 normal working days away from the metropolitan area
described above during any consecutive 12 month period where his or her duties
prior to the "change of control" did not require such absence; (v) Company
shall fail to provide office facilities, secretarial services, and other
administrative services to employee which are substantially equivalent to the
facilities and services provided to employee prior to the "change of control";
or (v) Company shall terminate incentive and benefit plans or arrangements,
or reduce or limit employee's participation therein relative to the level of
participation of other employees of similar rank, to such an extent as to
materially reduce the aggregate value of employee's incentive compensation and
benefits below their aggregate value in place prior to the "change of control".
9. In the event of the death of the eligible employee during the period he
or she is receiving payments pursuant to paragraph 3 above, the eligible
employee's designated beneficiary shall be entitled to receive the balance of
the payments; or in the event of no designated beneficiary, the remaining
payments shall be made to the eligible employee's estate.
10. All compensation payable to an employee shall be charged to the company
employing the eligible employee on the date of termination.
11. Participants may elect to reduce benefits otherwise payable in the event
total benefits payable would result in additional taxes to the Companies, or
any one of them, or an eligible employee under Internal Revenue Code of 1986
Section 280G.
As amended through February 12, 1997.
Exhibit 11
EQUITABLE OF IOWA COMPANIES
Consolidated Net Income Per Share Computation
<TABLE>
<CAPTION>
Year ended December 31 1996 1995 1994
_______________________________________________________________________________
(Dollars in thousands, except per share data)
<S> <C> <C> <C>
PRIMARY:
Net income $123,161 $84,890 $98,284
==============================================
Average shares outstanding 31,904,734 31,709,032 31,612,675
==============================================
Net income per share $3.86 $2.68 $3.11
==============================================
FULLY DILUTED:
Net income $123,161 $84,890 $98,284
==============================================
Average shares outstanding 31,904,734 31,709,032 31,612,675
Add: Net effect of dilutive
stock options - based on
the treasury stock method
using year-end market price,
if higher than average
market price 539,325 381,726 591,980
______________________________________________
Total 32,444,059 32,090,758 32,204,655
==============================================
Net income per share $3.80 $2.65 $3.05
==============================================
<FN>
Note: This computation is required by Regulation S-K Item 601 and is filed as
an exhibit under Item 14a(3) of Form 10-K. Fully diluted earnings per
share calculated above has not been presented on the face of the
company's Consolidated Statements of Income because dilution is less
than three percent and, therefore, presentation is not required by
Accounting Principles Board Opinion No. 15.
</TABLE>
Exhibit 21
The company's subsidiaries are:
Name State of Organization
------------------------------------------ ---------------------
EIC Variable, Inc. New York
Equitable Investment Services, Inc. Iowa
Equitable Life Insurance Company of Iowa Iowa
Equitable of Iowa Securities Network, Inc. Iowa
Locust Street Securities, Inc. Iowa
Equitable of Iowa Companies Capital Trust Delaware
All are wholly-owned.
USG Annuity & Life Company, an Oklahoma corporation, and Equitable
American Insurance Company, an Iowa corporation, are wholly-owned
subsidiaries of Equitable Life Insurance Company of Iowa. Golden
American Life Insurance Company, a Delaware stock life insurance
company, and Directed Services, Inc., a New York corporation, are
wholly-owned subsidiaries of EIC Variable, Inc. In addition, these
entities own other subsidiaries which are not considered in the
aggregate to be a significant subsidiary as defined in Securities and
Exchange Commission rules.
All subsidiaries do business only under their corporate names.
Exhibit 23(a) Consent of Independent Auditors
We consent to the incorporation by reference in the Registration
Statement (Form S-8 No. 33-27838) pertaining to the Equitable of Iowa
Companies (1982) Stock Incentive Plan, in the Registration Statement
(Form S-8 No. 33-57492), pertaining to the Equitable of Iowa Companies
Restated and Amended 1992 Stock Incentive Plan, in the Registration
Statement (Form S-8 No. 33-57484), pertaining to the Equitable of Iowa
Companies Deferred Profit Sharing and Retirement Savings Plan and
Trust, in the Registration Statement (Form S-8 No. 33-51091)
pertaining to the Equitable of Iowa Companies Employee Stock Purchase
Plan, in the Registration Statement (Form S-3 No. 33-55045) pertaining
to the Equitable of Iowa Companies Dividend Reinvestment and Stock
Purchase Plan, in the Registration Statement (Form S-3 No. 33-57343)
pertaining to the registration of debt securities, and in the
Registration Statement (Form S-3 No. 333-1909) pertaining to the
universal shelf registration of Equitable of Iowa Companies and
Equitable of Iowa Companies Capital Trust, and the respective related
Prospectuses, of our report dated February 11, 1997, with respect to
the consolidated financial statements and schedules of Equitable of
Iowa Companies and subsidiaries included in the Annual Report (Form 10-
K) for the year ended December 31, 1996.
s/ Ernst & Young LLP
Des Moines, Iowa
March 6, 1997
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE CONSOLIDATED
BALANCE SHEETS AND STATEMENTS ON INCOME AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<DEBT-HELD-FOR-SALE> 7,731,964
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 77,181
<MORTGAGE> 1,720,114
<REAL-ESTATE> 8,613
<TOTAL-INVEST> 9,766,281
<CASH> 18,201
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 733,158
<TOTAL-ASSETS> 12,569,679
<POLICY-LOSSES> 9,387,471
<UNEARNED-PREMIUMS> 20,461
<POLICY-OTHER> 7,481
<POLICY-HOLDER-FUNDS> 13,404
<NOTES-PAYABLE> 100,000
125,000
0
<COMMON> 31,988
<OTHER-SE> 863,811
<TOTAL-LIABILITY-AND-EQUITY> 12,569,679
39,566
<INVESTMENT-INCOME> 715,579
<INVESTMENT-GAINS> 16,255
<OTHER-INCOME> 97,275
<BENEFITS> 520,879
<UNDERWRITING-AMORTIZATION> 79,550
<UNDERWRITING-OTHER> 37,781
<INCOME-PRETAX> 190,162
<INCOME-TAX> 66,914
<INCOME-CONTINUING> 123,161
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 123,161
<EPS-PRIMARY> 3.86
<EPS-DILUTED> 3.80
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
