SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
==============
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 0-8590
Equitable of Iowa Companies
(Exact name of registrant as specified in its charter)
Iowa 42-1083593
(State or other jurisdiction of (IRS employer identification no.)
incorporation or organization)
604 Locust Street, Des Moines, Iowa 50306
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (515) 245-6911
___________________________________________________________________________
Former name, former address and formal fiscal year, if changed since last
report
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes /X/ No / /
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a
plan confirmed by a court. Yes / / No / /
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: 32,046,721 shares of
Common Stock as of May 6, 1997.
FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Person for whom the Financial Information is given: EQUITABLE OF IOWA
COMPANIES AND ITS
SUBSIDIARIES
Consolidated Statements of Income (Unaudited):
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
March 31, 1997 March 31, 1996
________________ ________________
(Current Year) (Preceding Year)
(Dollars in thousands)
<S> <C> <C>
REVENUES:
Annuity and interest sensitive life
product charges $25,283 $14,717
Traditional life insurance premiums 9,825 10,151
Net investment income 192,252 171,212
Realized gains on investments 4,506 5,150
Other income 10,804 4,346
________________ ________________
242,670 205,576
INSURANCE BENEFITS AND EXPENSES:
Annuity and interest sensitive life
benefits:
Interest credited to account balances 118,059 107,758
Benefit claims incurred in excess of
account balances 2,252 1,622
Traditional life insurance benefits 11,770 13,121
Increase (decrease) in future policy
benefits (2,041) (1,884)
Distributions to participating
policyholders 6,433 6,299
Underwriting, acquisition and insurance
expenses:
Commissions 35,746 32,679
General expenses 16,488 11,018
Insurance taxes 2,873 2,817
Policy acquisition costs deferred (41,226) (39,681)
Amortization:
Deferred policy acquisition costs 23,012 18,123
Present value of in force acquired 2,101 --
Goodwill 411 19
________________ ________________
175,878 151,891
Interest expense 3,889 3,326
Other expenses 9,163 3,571
________________ ________________
188,930 158,788
________________ ________________
53,740 46,788
</TABLE>
See accompanying notes.
Consolidated Statement of Income (Unaudited): (CONTINUATION)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
March 31, 1997 March 31, 1996
________________ ________________
(Current Year) (Preceding Year)
(Dollars in thousands,
except per share data)
<S> <C> <C>
Income taxes:
Current $14,305 $14,482
Deferred 3,692 1,986
________________ ________________
17,997 16,468
________________ ________________
35,743 30,320
Equity loss, net of related tax benefit
of $167 in 1997 and $62 in 1996 (310) (115)
________________ ________________
Net income before distributions on
company-obligated, mandatorily-redeemable
securities 35,433 30,205
Distributions on company-obligated,
mandatorily-redeemable securities, of
subsidiary trust (2,719) --
________________ ________________
NET INCOME $32,714 $30,205
================ ================
NET INCOME PER COMMON SHARE (average
shares used: 1997 - 32,016,871;
1996 - 31,816,700): $1.02 $0.95
================ ================
CASH DIVIDENDS PAID PER COMMON SHARE $0.150 $0.135
</TABLE>
See accompanying notes.
Consolidated Balance Sheets (Unaudited):
<TABLE>
<CAPTION>
March 31, 1997 December 31, 1996
________________ _________________
(Dollars in thousands,
except per share data)
<S> <C> <C>
ASSETS
Investments:
Fixed maturities, available for sale, at
fair value (cost: 1997 - $7,654,772;
1996 - $7,557,735) $7,634,977 $7,731,964
Equity securities, at fair value
(cost: 1997 - $48,896; 1996 - $48,857) 66,714 77,181
Mortgage loans on real estate 1,794,793 1,720,114
Real estate, less allowances for
depreciation of $4,698 in 1997
and $4,588 in 1996 8,559 8,613
Policy loans 194,652 190,487
Short-term investments 26,776 37,922
________________ _________________
TOTAL INVESTMENTS 9,726,471 9,766,281
Cash and cash equivalents 20,139 18,201
Securities and indebtedness of
related parties 7,713 8,305
Accrued investment income 137,190 135,291
Notes and other receivables 22,887 22,464
Deferred policy acquisition costs 812,986 733,158
Present value of in force acquired 81,431 83,051
Property and equipment, less
allowances for depreciation of
$14,711 in 1997 and $13,835 in 1996 10,934 10,465
Current income taxes recoverable -- 5,424
Intangible assets, less accumulated
amortization of $2,069 in 1997 and
$1,579 in 1996 46,237 46,726
Other assets 81,592 82,434
Separate account assets 1,793,298 1,657,879
________________ _________________
TOTAL ASSETS $12,740,878 $12,569,679
================ =================
</TABLE>
See accompanying notes.
Consolidated Balance Sheets (Unaudited): (CONTINUATION)
<TABLE>
<CAPTION>
March 31, 1997 December 31, 1996
________________ __________________
(Dollars in thousands,
except per share data)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Policy liabilities and accruals:
Future policy benefits:
Annuity and interest sensitive
life products $8,811,858 $8,675,175
Traditional life insurance products 710,114 712,296
Unearned revenue reserve 21,389 20,461
Other policy claims and benefits 7,757 7,481
________________ __________________
9,551,118 9,415,413
Other policyholders' funds:
Advance premiums and other deposits 602 597
Accrued dividends 12,784 12,807
________________ __________________
13,386 13,404
Income taxes:
Current 2,894 --
Deferred 7,792 45,681
Commercial paper notes 116,500 104,600
Long-term debt 100,000 100,000
Other liabilities 206,927 211,903
Separate account liabilities 1,793,298 1,657,879
________________ __________________
TOTAL LIABILITIES 11,791,915 11,548,880
Commitments and contingencies
Company-obligated, mandatorily-redeemable
securities, of subsidiary trust 125,000 125,000
Stockholders' equity:
Serial preferred stock, without par value,
authorized 2,500,000 shares -- --
Common stock, without par value (stated
value $1.00 per share), authorized 70,000,000
shares, issued and outstanding 32,043,526
shares in 1997 and 31,988,410 in 1996 32,044 31,988
Additional paid-in capital 86,811 85,140
Unrealized appreciation (depreciation) of
securities at fair value 3,869 104,711
Retained earnings 706,115 678,219
Unearned compensation (deduction) (4,876) (4,259)
________________ __________________
TOTAL STOCKHOLDERS' EQUITY 823,963 895,799
________________ __________________
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $12,740,878 $12,569,679
================ ==================
</TABLE>
See accompanying notes.
Consolidated Statements of Cash Flows (Unaudited):
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
March 31, 1997 March 31, 1996
________________ ________________
(Current Year) (Preceding Year)
(Dollars in thousands)
<S> <C> <C>
OPERATING ACTIVITIES
Net income $32,714 $30,205
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 117,183 107,758
Charges for mortality and
administration (17,822) (15,031)
Change in unearned revenues 749 (95)
Increase (decrease) in traditional life
policy liabilities and accruals (2,041) 6,746
Decrease in other policyholders' funds (18) (29)
Increase in accrued investment income (1,899) (800)
Policy acquisition costs deferred (41,226) (39,681)
Amortization of deferred policy
acquisition costs 23,012 18,123
Amortization of present value of in
force acquired 2,101 --
Change in other assets, other liabilities,
and accrued income taxes 3,787 41,618
Provision for depreciation and
amortization 1,977 (689)
Provision for deferred income taxes 3,705 1,998
Share of losses of related parties 478 177
Realized gains on investments (4,506) (5,150)
________________ ________________
NET CASH PROVIDED BY OPERATING
ACTIVITIES 118,194 145,150
INVESTING ACTIVITIES
Sale, maturity or repayment of investments:
Fixed maturities - available for sale 198,294 112,554
Equity securities 1,409 3,868
Mortgage loans on real estate 18,958 7,674
Real estate 60 --
Policy loans 7,612 8,083
Short-term investments - net 11,146 23,560
________________ ________________
237,479 155,739
Acquisition of investments:
Fixed maturities - available for sale (292,223) (344,752)
Equity securities (1,384) (11,106)
Mortgage loans on real estate (93,560) (182,968)
Real estate (57) (292)
Policy loans (11,777) (8,994)
________________ ________________
(399,001) (548,112)
</TABLE>
See accompanying notes.
Consolidated Statements of Cash Flows (Unaudited): (CONTINUATION)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
March 31, 1997 March 31, 1996
________________ ________________
(Current Year) (Preceding Year)
(Dollars in thousands)
<S> <C> <C>
INVESTING ACTIVITIES - continued
Disposal of investments accounted for
by the equity method $3,742 $6
Additions to investments accounted for
by the equity method (1,101) --
Purchases of property and equipment (1,646) (694)
________________ ________________
NET CASH USED IN INVESTING ACTIVITIES (160,527) (393,061)
FINANCING ACTIVITIES
Issuance of commercial paper - net 11,900 99,900
Receipts from annuity and interest sensitive
life policies credited to policyholder
account balances 340,207 380,152
Return of policyholder account balances
on annuity contracts and interest sensitive
life policies (302,885) (228,345)
Issuance of stock under stock plans (133) 381
Cash dividends paid (4,818) (4,315)
________________ ________________
NET CASH PROVIDED BY FINANCING
ACTIVITIES 44,271 247,773
________________ ________________
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 1,938 (138)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF YEAR 18,201 10,730
________________ ________________
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $20,139 $10,592
================ ================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest $6,448 $5,784
Income taxes 5,025 1,517
</TABLE>
See accompanying notes.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for annual
financial statements. In the opinion of management, all adjustments considered
necessary for a fair presentation have been included. All adjustments were of
a normal recurring nature, unless otherwise noted in Management's Discussion
and Analysis and the Notes to Financial Statements. Operating results for the
three months ended March 31, 1997 are not necessarily indicative of the results
that may be expected for the year ending December 31, 1997. For further
information, refer to the consolidated financial statements and footnotes
thereto included in the company's Annual Report on Form 10-K for the year ended
December 31, 1996.
On August 13, 1996, Equitable of Iowa Companies ("Equitable") acquired all of
the outstanding capital stock of BT Variable, Inc. ("BT Variable") from
Whitewood Properties Corp. ("Whitewood") pursuant to the terms of a Stock
Purchase Agreement dated as of May 3, 1996 between Equitable and Whitewood
(the "Purchase Agreement"). Refer to Note 4 for additional information.
NOTE 2 -- INVESTMENT OPERATIONS
FIXED MATURITIES: All of the company's fixed maturity securities are
designated as available for sale although the company is not precluded from
designating fixed maturity securities as held for investment or trading at
some future date. Investments classified as available for sale securities are
reported at 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. Securities 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 Statement of
Financial Accounting Standards (SFAS) No. 115. Securities 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 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 nonredeemable 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 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.
FIXED MATURITY AND EQUITY SECURITIES
At March 31, 1997 and December 31, 1996, amortized cost, gross unrealized
gains and losses and estimated fair values 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
March 31, 1997 Cost Gains Losses Value
______________________________________________________________________________
(Dollars in thousands)
<S> <C> <C> <C> <C>
U.S. government and
governmental agencies
and authorities:
Mortgage-backed securities $315,073 $6,632 ($4,214) $317,491
Other 63,703 1,304 (50) 64,957
States, municipalities and
political subdivisions 15,037 794 (19) 15,812
Foreign governments 12,633 2,099 -- 14,732
Public utilities 1,249,136 19,799 (37,058) 1,231,877
Investment grade corporate 2,894,469 101,982 (44,813) 2,951,638
Below investment grade
corporate 749,251 9,430 (19,851) 738,830
Mortgage-backed securities 2,354,854 18,920 (74,521) 2,299,253
Redeemable preferred stock 616 -- (229) 387
_______________________________________________
Total $7,654,772 $160,960 ($180,755) $7,634,977
===============================================
</TABLE>
<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 stock 616 -- (229) 387
_______________________________________________
Total $7,557,735 $270,742 ($96,513) $7,731,964
===============================================
</TABLE>
At March 31, 1997, net unrealized investment losses on fixed maturity
securities designated as available for sale totaled $19,795,000. This
depreciation caused a decrease in stockholders' equity of $7,712,000 at March
31, 1997 (net of deferred income taxes of $4,152,000, an adjustment of
$7,450,000 to deferred policy acquisition costs and present value of in force
acquired of $481,000). 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
$43,678,000 and an adjustment of $54,164,000 to deferred policy acquisition
costs). No fixed maturity securities were designated as held for investment
or trading at March 31, 1997 or December 31, 1996. 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 March 31, 1997, net unrealized appreciation of equity securities of
$17,818,000 was comprised of gross unrealized appreciation of $1,872,000 on
the company's investment in Equitable Life's registered separate account,
gross unrealized appreciation of $16,183,000 on an investment in a real estate
investment trust and gross unrealized depreciation of $237,000 on other equity
securities. The company's investment in the real estate investment trust had
an estimated fair value of $52,268,000 and a cost basis of $36,085,000 at
March 31, 1997. 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 March 31, 1997,
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
March 31, 1997 Cost Value
____________________________________________________________________________
(Dollars in thousands)
<S> <C> <C>
Due within one year $28,612 $28,805
Due after one year through five years 379,169 384,890
Due after five years through ten years 2,142,119 2,147,615
Due after ten years 2,434,945 2,456,923
_____________________________
4,984,845 5,018,233
Mortgage-backed securities 2,669,927 2,616,744
_____________________________
Total $7,654,772 $7,634,977
=============================
</TABLE>
An analysis of sales, maturities and principal repayments of the company's
fixed maturities portfolio, all of which were designated as available for
sale for the three months ended March 31, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
Gross Gross Proceeds
Amortized Realized Realized from
Three months ended March 31, 1997 Cost Gains Losses Sale
______________________________________________________________________________
(Dollars in thousands)
<S> <C> <C> <C> <C>
Scheduled principal repayments,
calls and tenders $79,943 $826 ($263) $80,506
Sales 116,497 4,575 (3,284) 117,788
_____________________________________________
Total $196,440 $5,401 ($3,547) $198,294
=============================================
</TABLE>
<TABLE>
<CAPTION>
Gross Gross Proceeds
Amortized Realized Realized from
Three months ended March 31, 1996 Cost Gains Losses Sale
______________________________________________________________________________
(Dollars in thousands)
<S> <C> <C> <C> <C>
Scheduled principal repayments,
calls and tenders $90,240 $4,340 ($226) $94,354
Sales 17,969 231 -- 18,200
_____________________________________________
Total $108,209 $4,571 ($226) $112,554
=============================================
</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 March 31, 1997, by type, are as follows:
<TABLE>
<CAPTION>
Estimated
Amortized Fair
Cost Value
_____________________________
(Dollars in thousands)
<S> <C> <C>
Mortgage-backed securities:
Government and agency guaranteed pools:
Very accurately defined maturities $17,394 $17,562
Planned amortization class 70,347 72,058
Targeted amortization class 29,348 28,081
Sequential pay 92,548 90,744
Pass through 105,436 109,046
Private Label CMOs and REMICs:
Very accurately defined maturities 30,685 30,696
Planned amortization class 25,604 26,817
Targeted amortization class 420,561 400,616
Sequential pay 1,816,270 1,779,808
Mezzanines 37,599 36,507
Private placements and subordinate issues 24,135 24,809
_____________________________
Total mortgage-backed securities $2,669,927 $2,616,744
=============================
</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 March 31,
1997, unamortized premiums on mortgage-backed securities totaled $4,390,000
and unaccrued discounts on mortgage-backed securities totaled $50,940,000.
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.
At March 31, 1997, the company had established a valuation allowance of
$245,000 on one of its mortgage loans to reduce the carrying value of this
investment to its estimated fair value less costs to sell. At March 31, 1997,
one mortgage loan with a carrying value of $33,000 was delinquent by 90 days
or more. At December 31, 1996, no investments were identified as having an
impairment other than temporary.
The carrying value of investments which have been non-income producing for
the quarter ended March 31, 1997 and the year ending December 31, 1996,
totaled $239,000 related to a real estate property.
INVESTMENT DIVERSIFICATIONS: The company's investment policies related to
its investment portfolio require diversification by asset type, company and
industry and sets limits on the amount which can be invested in an individual
issuer. Such policies are at least as restrictive as those set forth by
regulatory authorities. The percentages quoted in the following sentences
relate to the holdings at March 31, 1997 and December 31, 1996, respectively.
Fixed maturity investments included investments in various non-governmental
mortgage-backed securities (30% in 1997 and 1996), public utilities (17% in
1997 and 1996), basic industrials (24% in 1997, 23% in 1996) and consumer
products (12% in 1997 and 1996). 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 1997 and 1996. Mortgage loans on
real estate have also been analyzed by collateral type with significant
concentrations identified in retail facilities (28% in 1997 and 1996),
industrial buildings (29% in 1997 and 1996), multi-family residential
buildings (19% in 1997, 20% in 1996) and office buildings (22% in 1997 and
1996). Equity securities (which represent 0.7% of the company's investments)
consist primarily of investments in the company's registered separate accounts
and an investment of $52,268,000 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 March 31, 1997.
NOTE 3 -- 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 ("caps") and cash settled put swaptions ("swaptions"), 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 caps and swaptions,
all during the second quarter of 1996, with notional amounts totaling
approximately $600,000,000 and $1,300,000,000, respectively, all of which were
outstanding at March 31, 1997. The company paid approximately $21,100,000 in
premiums for these caps and swaptions. The cost of this program has been
incorporated into the company's product pricing. The caps and swaptions do
not require any additional payments by the company.
In January 1997, the company introduced an equity-indexed annuity product
which provides a guaranteed base rate of return with a higher potential return
linked to the performance of a broad based equity index. Concurrently, the
company implemented a hedging program to purchase Standard & Poor's ("S&P")
500 ([email protected].) Index Call Options ("call options", or collectively
with the interest rate caps and cash settled put swaptions, "instruments").
Call options are purchased to hedge potential increases in policyholder account
balances for equity-indexed annuity policies resulting from increases in the
index to which the product is linked. During the first quarter of 1997, the
company paid approximately $413,000 in premiums for call options which mature
in 2004. The cost of this program has been incorporated into the company's
pricing of its equity-indexed annuity product. The call options do not require
any additional payments by the company.
The agreements for the caps and swaptions 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. The agreements for the
call options entitle the company to receive payments from the counterparty if
the S&P 500 index exceeds the specified strike price on the maturity date. The
amount of such payments to be received by the company for the call options, if
any, will be calculated by taking the excess of the average closing price (as
defined in the contract) at maturity over the specified strike price, and
multiplying this excess by the number of S&P 500 units defined in the contract.
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
for the caps and swaptions at March 31, 1997:
<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 $1,232,000 in
the first quarter of 1997. Unrealized gains and losses on caps and swaptions
and related assets or liabilities will not be recorded in income until
realized. The call options are carried at amortized cost plus the intrinsic
value, if any, of the call option as of the valuation date. The future policy
benefit liability for the equity-indexed annuity product is established as the
full account value without regard to the performance of the equity index, plus
the intrinsic value, if any, as of the valuation date. 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 disclosure rules in January 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 caps and swaptions is off-balance sheet
and therefore, is not reflected in the financial statements. The effect of
changes in intrinsic value (which may vary from estimated market value) of
the call options and future policy benefits will be reflected in the financial
statements in the period of change. The following table summarizes the
amortized cost, gross unrealized gains and losses and estimated fair value on
these instruments as of March 31, 1997:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
March 31, 1997 Cost Gains Losses Value
_______________________________________________________________________________
(Dollars in thousands)
<S> <C> <C> <C> <C>
Interest rate caps $4,891 ($1,139) $3,752
Cash settled put swaptions 11,920 $419 (1,126) 11,213
S&P 500 call options 410 -- (58) 352
_________________________________________________
Total $17,221 $419 ($2,323) $15,317
=================================================
</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 non-performance by the counterparties of
these instruments. Losses recorded in the company's financial statements in
the event of non-performance will be limited to the unamortized premium
(remaining amortized cost) paid to purchase the instrument plus the recorded
intrinsic value, if any, for the call options because no additional payments
are required by the company on these instruments after the initial premium.
Counterparty non-performance would result in an economic loss if interest
rates exceeded the specified fixed rate or, for the S&P 500 index call options,
the average closing price at maturity exceeded the specified strike price.
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, if more than one quote is available, obtained from related and
unrelated counterparties. The company limits its exposure to such losses by:
diversifying 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 March 31, 1997, 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>
March 31, 1997 Net Replacement Value
_______________________________________________________________________________
Interest Cash Settled S&P 500
Rate Caps Put Swaptions Call Options Total
__________________________________________________
(Dollars in thousands)
<S> <C> <C> <C> <C>
Counterparties credit quality:
AAA $2,494 $5,769 $352 $8,615
AA- 1,258 3,066 -- 4,324
A+ -- 2,378 -- 2,378
__________________________________________________
Total $3,752 $11,213 $352 $15,317
==================================================
</TABLE>
NOTE 4 -- 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 Life Insurance Company ("Golden
American"), a Delaware stock life insurance company, and all of the
outstanding capital stock of Directed Services, Inc. ("DSI"), a New York
corporation and registered broker dealer and investment adviser. In exchange
for the outstanding capital stock of BT Variable, Equitable paid the sum of
$93,000,000 in cash to Whitewood in accordance with the terms of the Purchase
Agreement. Equitable also paid the sum of $51,000,000 in cash to Bankers Trust
to retire certain debt owed by BT Variable to Bankers Trust pursuant to a
revolving credit arrangement. The funds used in completing the acquisition
were obtained primarily through a July 1996 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 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 costs
and, as a result, goodwill may change. The total amount of goodwill and
other intangibles deferred relating to the acquisition is comprised of
$39,254,000 of estimated goodwill and approximately $4,695,000 of costs of
issuance of the preferred securities mentioned above. Goodwill and preferred
securities issuance costs will be amortized on a straight-line basis over 25
years and 35 years, respectively, and the carrying value will be reviewed
periodically for any indication of impairment in value.
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 quarter ended March 31, 1997 is as
follows:
<TABLE>
<CAPTION>
(Dollars in thousands)
<S> <C>
Beginning balance $83,051
Imputed interest 1,593
Amortization (3,694)
Adjustment for unrealized
losses on available for
sale securities 481
__________________
Ending balance $81,431
==================
</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 the asset is adjusted
for the change in 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 for the next five
years, relating to the balance of the PVIF as of March 31, 1997, is as follows:
<TABLE>
<CAPTION>
Year Amount
_________________________________________________________
(Dollars in thousands)
<S> <C>
Remainder of 1997 $8,000
1998 10,100
1999 9,200
2000 7,900
2001 6,800
2002 5,800
</TABLE>
Actual amortization may vary from the schedule above based upon changes in
assumptions and experience.
NOTE 5 -- COMMITMENTS AND CONTINGENCIES
REINSURANCE: In the normal course of business, the company seeks to limit
its exposure to loss on any single insured and to recover a portion of
benefits paid by ceding reinsurance to other insurance enterprises or
reinsurers. Reinsurance coverages for life insurance vary according to the
age and risk classification of the insured with retention limits ranging up
to $500,000 of coverage per individual life. The company does not use
financial or surplus relief reinsurance.
Reinsurance contracts do not relieve the company from its obligations to its
policyholders. To the extent that reinsuring companies are later unable to
meet obligations under reinsurance agreements, the company's life insurance
subsidiaries would be liable for these obligations, and payment of these
obligations could result in losses to the company. To limit the possibility
of such losses the company evaluates the financial condition of its
reinsurers, monitors concentrations of credit risk arising from factors such
as similar geographic regions, and limits its exposure to any one reinsurer.
At March 31, 1997, 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 $14,675,000 for reserve credits, reinsurance
claims and other receivables from these reinsurers. No allowance for
uncollectible amounts has been established since none of the receivables are
deemed to be uncollectible, and because such receivables, either individually
or in the aggregate, are not material to the company's operations. The
company's liability for future policy benefits and notes and other receivables
has been increased by $14,309,000 at March 31, 1997 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 $2,298,000 in the first
three months of 1997 compared to $1,917,000 in the first quarter of 1996.
Insurance benefits and expenses have been reduced by $1,205,000 in the first
three months of 1997 compared to $1,195,000 in the same periods of 1996. The
amount of reinsurance assumed is not significant.
INVESTMENT COMMITMENTS: At March 31, 1997, outstanding commitments to fund
mortgage loans on real estate and equity investments totaled $39,650,000 and
$9,814,000, respectively.
GUARANTY FUND ASSESSMENTS: Assessments are levied on the company's life
insurance subsidiaries by life and health guaranty associations in most states
in which these subsidiaries are licensed to cover losses of policyholders of
insolvent or rehabilitated insurers. In some states, these assessments can be
partially recovered through a reduction in future premium taxes. The company
cannot predict whether and to what extent legislative initiatives may affect
the right to offset. The 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. The
company has established a reserve to cover such assessments and regularly
reviews information regarding known failures and revises its estimates of
future guaranty fund assessments. During the first quarter of 1997, the
company accrued and charged to expense $76,000. At March 31, 1997, the
company has an undiscounted reserve of $44,242,000 to cover estimated future
assessments (net of related anticipated premium tax credits) and has
established an asset totaling $13,887,000 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.
COMPANY-OBLIGATED, MANDATORILY-REDEEMABLE SECURITIES OF SUBSIDIARY TRUST: 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 March 31, 1997, 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, which owned all the outstanding capital stock of Golden American
and DSI. Refer to Note 4 for further information regarding the acquisition.
EARNINGS PER SHARE: In February 1997, the Financial Accounting Standards
Board issued Statement No. 128, "Earnings per Share", which is required to be
adopted on December 31, 1997. At that time the company will be required to
disclose both primary earnings per share and fully diluted earnings per share
on the face of the income statement or in the notes to the financial
statements. The impact of the fully-diluted earnings per share would dilute
primary earnings per share by approximately $0.02 and $0.01 per share for the
first quarter of 1997 and 1996, respectively.
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.
In the ordinary course of business, the company and its subsidiaries are also
engaged in certain other litigation, none of which management believes is
material.
VULNERABILITY FROM CONCENTRATIONS: The company has various concentrations in
its investment portfolio (see Note 2 for further information). The company's
asset growth, net investment income and cash flow are primarily generated
from the sale of individual fixed annuity policies, 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 3) to
mitigate the financial statement impact of significant increases in interest
rates.
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The purpose of this section is to discuss and analyze the company's
consolidated results of operations, financial condition, and liquidity and
capital resources. This analysis should be read in conjunction with the
consolidated financial statements and related notes which appear elsewhere in
this report. The company reports financial results on a consolidated basis.
The consolidated financial statements include the accounts of the company and
its subsidiaries, all of which are wholly owned at March 31, 1997. 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 July 1996 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, first
quarter 1997 results of operations include the operations of BT Variable and
its subsidiaries, Golden American and DSI. Information provided for the first
quarter of 1996 does 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 the
first quarter of 1996, to assist the reader in assessing the operations and
prospects of the company as it is currently comprised. The following table
reflects actual results for the quarter ended March 31, 1997 and 1996.
PREMIUMS
<TABLE>
<CAPTION>
Percentage Dollar
Quarter ended March 31 1997 Change Change 1996
______________________________________________________________________________
(Dollars in thousands)
<S> <C> <C> <C> <C>
Fixed annuity premiums $241,486 (23.7)% ($74,810) $316,296
Variable annuity premiums:
Separate account 172,671 402.2 138,289 34,382
Fixed account 38,683 4,434.2 37,830 853
_____________________________________________
Total variable annuity
premiums 211,354 499.8 176,119 35,235
_____________________________________________
Total annuity premiums 452,840 28.8 101,309 351,531
Life insurance premiums:
First year and single
premiums 13,041 57.3 4,753 8,288
Renewal premiums 24,727 7.2 1,653 23,074
_____________________________________________
Total life insurance
premiums 37,768 20.4 6,406 31,362
_____________________________________________
Total premiums $490,608 28.1% $107,715 $382,893
=============================================
</TABLE>
Total annuity and life insurance premiums, increased 28.1%, to $490,608,000
in the first quarter of 1997. Fixed annuity premiums decreased 23.7%, to
$241,486,000 in the first quarter of 1997 due to continued contraction in the
fixed annuity market place. Variable annuity premiums continue to reflect
strong growth, with a 499.8% increase in the first quarter of 1997. This
increase is due, in part, to the August 13, 1996 acquisition of Golden
American, recent strong stock market returns and the company's marketing
efforts.
Golden American reported variable annuity premiums of $87,961,000, and
variable life premiums of $7,306,000, in the first quarter of 1997. 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 43.1% of total
premiums in the first quarter of 1997, compared to 9.2% for the first quarter
of 1996. During the same period, fixed annuity premiums represent 49.2% of
total premiums in the first quarter of 1997, compared to 82.6% in the first
quarter of 1996, while life insurance premiums represent approximately 7.7% of
total premiums.
The decrease in fixed annuity premiums during the first quarter of 1997
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 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 for the first quarter
of 1997. As a result, the premiums provide insight as to 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 the first quarter of 1997 and 1996.
PRO FORMA PREMIUMS
<TABLE>
<CAPTION>
Percentage Dollar
Quarter ended March 31 1997 Change Change 1996
______________________________________________________________________________
(Dollars in thousands)
<S> <C> <C> <C> <C>
Fixed annuity premiums $241,486 (23.7)% ($74,810) $316,296
Variable annuity premiums:
Separate account:
Equitable Life 121,745 254.1 87,363 34,382
Golden American 50,926 14.5 6,464 44,462
Fixed account:
Equitable Life 1,648 93.1 795 853
Golden American 37,035 (44.5) (29,702) 66,737
_____________________________________________
Total variable annuity premiums 211,354 44.3 64,920 146,434
_____________________________________________
Total annuity premiums 452,840 (2.1) (9,890) 462,730
Life insurance premiums:
Equitable Life & USG 30,462 (2.9) (900) 31,362
Golden American 7,306 78.5 3,213 4,093
_____________________________________________
Life insurance premiums 37,768 6.5 2,313 35,455
_____________________________________________
Total premiums $490,608 (1.5)% ($7,577) $498,185
=============================================
</TABLE>
On a pro forma combined basis, total annuity and life insurance premiums
decreased 1.5% to 490,608,000 in 1997. On a pro forma combined basis,
variable annuity separate account premiums increased 119.0% to $172,671,000.
The fixed account portion of Golden American's variable annuity premiums,
however, decreased 44.5% to $37,305,000 during the first quarter of 1997 on a
pro forma basis. This decrease in the fixed account portion as well as the
decline in fixed annuity premiums reflects the challenging sales environment
the industry continues to face for fixed product sales. 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. 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, of which sales are impacted by many of the same factors as
variable annuities, including a strong stock market, low interest rates, a
flat yield curve and increased competition. Premiums, net of reinsurance, for
variable annuity and variable life products from significant sellers for the
quarter ended March 31, 1997 are as follows: Paine Webber, $24,000,000 or
11%; Smith Barney, $41,000,000 or 19%; Locust Street Securities, Inc., an
affiliate, $36,000,000 or 17%; and Primerica Financial Services, $36,000,000
or 17%.
REVENUES
<TABLE>
<CAPTION>
Percentage Dollar
Quarter ended March 31 1997 Change Change 1996
______________________________________________________________________________
(Dollars in thousands)
<S> <C> <C> <C> <C>
Annuity and interest
sensitive life
product charges $25,283 71.8% $10,566 $14,717
Traditional life insurance
premiums 9,825 (3.2) (326) 10,151
Net investment income 192,252 12.3 21,040 171,212
Realized gains on
investments 4,506 (12.5) (644) 5,150
Other income 10,804 148.6 6,458 4,346
______________________________________________
$242,670 18.0% $37,094 $205,576
==============================================
</TABLE>
Total revenues increased 18.0% in the first quarter of 1997. Annuity and
interest sensitive life insurance product charges increased 71.8% in the
first quarter of 1997. Excluding Golden American, annuity and interest
sensitive life product charges increased 22.1% in the first quarter of 1997.
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 3.2% in the first quarter
of 1997, 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 12.3% in the first quarter of 1997 due to the
increase in invested assets. During the first quarter of 1997, the company
had realized gains on the sale of investments of $4,506,000 compared to gains
of $5,150,000 in the same periods of 1996.
Other income increased 148.6% in the first quarter of 1997 as a result of the
acquisition of DSI and an increase in commission income from an affiliated
broker/dealer. The increase in commission income from the broker/dealers is
substantially offset by an increase in other expense.
EXPENSES
Total insurance benefits and expenses increased $23,987,000, or 15.8%, to
$175,878,000 in the first quarter of 1997. Interest credited to annuity and
interest sensitive life account balances increased $10,301,000, or 9.6%, to
$118,059,000 in the first three months of 1997 as a result of higher account
balances associated with those products. The amortization of financial
instruments purchased for the company's hedging programs during 1996 and 1997
increased interest credited to account balances by $1,232,000 during the
first quarter of 1997. See further discussion of the hedging programs 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 following table summarizes the
effective annual yield on assets invested to support policy accounts for
interest-sensitive products, the average annual interest rate credited to
those products and the interest rate spread for the three months ended March
31, 1997 and 1996. Yield on assets and cost of funds are estimated by
calculating the weighted average of the three month end values for those
items. Golden American is included in the tables below for the first quarter
of 1997.
<TABLE>
<CAPTION>
Yield on Credited Interest
Three months ended March 31 Assets Rate Rate Spread
_______________________________________________________________________
<S> <C> <C> <C>
Average base rate (excluding
first year bonus):
1997 8.37% 5.55% 2.84%
1996 8.53 5.60 2.93
Average total (including
first year bonus):
1997 8.37 5.73 2.64
1996 8.53 5.90 2.63
</TABLE>
At March 31, 1997 and 1996, the effective annual yield on assets, credited
rate and interest rate spread were as follows:
<TABLE>
<CAPTION>
Yield on Credited Interest
March 31, Assets Rate Rate Spread
_______________________________________________________________________
<S> <C> <C> <C>
Base rate (excluding
first year bonus):
1997 8.36% 5.52% 2.84%
1996 8.49 5.58 2.91
Total (including
first year bonus):
1997 8.36 5.70 2.66
1996 8.49 5.87 2.62
</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 increased $190,000, or 2.2%, to $8,981,000 in the
first quarter of 1997. 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 1997 by approximately $278,000 in the
first three months of 1997 compared to first quarter of 1996.
Commissions increased $3,067,000, or 9.4%, to $35,746,000 in the first three
months of 1997. Excluding Golden American, commissions decreased 8.1% in the
first quarter of 1997. Insurance taxes increased $56,000, or 2.0%, to
$2,873,000 in the first quarter of 1997. Increases and decreases in
commissions and insurance taxes are generally related to changes in the level
of annuity sales. Commissions are also affected by the mix of annuity sales.
The shift in premium volume from annuity products with higher commissions to
products with lower commissions resulted in the decrease in commissions
(excluding Golden American) in the first quarter of 1997. Most costs incurred
as the result of new sales have been deferred, and thus have very little
impact on total insurance expenses.
General expenses increased $5,470,000, or 49.6%, to $16,488,000 in the first
three months of 1997. The increase in 1997 is primarily attributable to the
acquisition of Golden American. Excluding Golden American, general expenses
increased 10.7% in 1997. 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 continue 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 a couple of 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.
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 annualized annuity withdrawal rates and the
life insurance lapse ratios for the three months ended March 31, 1997 and
1996.
<TABLE>
<CAPTION>
Three Months Ended March 31 1997 1996
___________________________ ______ ______
<S> <C> <C>
Annuity withdrawals 8.8% 8.3%
Life insurance lapse ratio 7.4% 6.7%
</TABLE>
The withdrawal ratio for the company's annuity products is calculated by
dividing aggregate surrenders and withdrawals by beginning of period account
balances. The company's annualized lapse ratio for life insurance is measured
in terms of face amount and uses A.M. Best's formula.
The amortization of deferred policy acquisition costs ("DPAC") increased by
$4,889,000, or 27.0%, in the first quarter of 1997. Golden American had
amortization of deferred policy acquisition costs of $349,000 in the first
quarter. 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 declined as a result of
a decrease in realized and prepayment gains from assets backing fixed annuity
and interest sensitive life insurance liabilities.
A breakdown of the amortization of deferred policy acquisition costs for the
three months ended March 31, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
Percentage Dollar
Three Months Ended March 31 1997 Change Change 1996
_____________________________________________________________________________
(Dollars in thousands)
<S> <C> <C> <C> <C>
Amortization related to:
Operating income $22,334 36.8% $6,012 $16,322
Realized gains 678 (62.4) (1,123) 1,801
__________________________________________________
Total $23,012 27.0% $4,889 $18,123
==================================================
</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 $2,101,000 in the
first quarter of 1997. 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 $8,000,000 for the remainder of 1997, $10,100,000
in 1998, $9,200,000 in 1999, $7,900,000 in 2000, $6,800,000 in 2001 and
$5,800,000 in 2002. Actual amortization may vary based upon changes in
assumptions and experience.
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 first
quarter of 1997 totaled $392,000. Amortization of goodwill attributed to
licenses acquired in conjunction with the purchase of USG totaled $19,000 in
the first quarter of 1997 and 1996, respectively. Goodwill resulting from the
acquisition of Golden American is being amortized on a straight-line basis
over 25 years and is expected to total approximately $1,570,000 annually.
Other expenses increased $5,592,000, or 156.6% to $9,163,000 in the first
quarter of 1997. 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 $2,719,000 in the first quarter of
1997.
INCOME
Operating income (income excluding realized gains and losses, commercial
mortgage and mortgage-backed securities prepayment gains and related
amortization of deferred policy acquisition costs, increased $2,271,000, or
8.2%, in the first quarter of 1997. Net income increased $2,509,000, or
8.3%, in the first quarter of 1997. A breakdown of income is as follows:
<TABLE>
<CAPTION>
Three months ended March 31 1997 1996
______________________________________________________________________________
$ Per Share $ Per Share
___________________________________________________
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C>
Operating income $29,946 $0.94 $27,675 $0.87
Realized gains (net of
tax):
Gains realized on dis-
posal of investments 2,929 0.09 3,347 0.11
Commercial mortgage
and mortgage-backed
securities prepayment
gains 280 0.01 353 0.01
Realized gains related
amortization of
DPAC (441) (0.02) (1,170) (0.04)
___________________________________________________
2,768 0.08 2,530 0.08
___________________________________________________
Net income $32,714 $1.02 $30,205 $0.95
===================================================
</TABLE>
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.
During the first quarter of 1997, the acquisition diluted earnings by
approximately 3.5 cents per share. The acquisition is currently expected to
dilute year-end 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.
Average shares outstanding totaled 32,016,871 in the first three months of
1997 up from 31,816,700 in the same period of 1996.
FINANCIAL CONDITION
___________________
INVESTMENTS
The financial statement carrying value of the company's total investment
portfolio decreased 0.4% in the first three months of 1997. The amortized
cost basis of the company's total investment portfolio grew 1.7% during the
same period. 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. 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 March 31, 1997, the company's investment portfolio was
comprised of the following:
<TABLE>
<CAPTION>
Estimated Yield at
Amortized % of Fair % of Amortized
Cost Total Value Total Cost
_______________________________________________
<S> <C> <C> <C> <C> <C>
Investment cash and short-term
investments $27,848 0.3% $27,848 0.3% 4.7%
Governments and agency mortgage-
backed securities 406,446 4.2 412,992 4.3 8.1
Conventional mortgage-backed
securities 2,354,854 24.7 2,299,253 24.2 7.9
Investment grade corporate
securities 4,144,221 43.5 4,183,903 44.0 8.1
Below-investment grade corporate
securities 749,251 7.9 738,829 7.8 9.1
Mortgage loans 1,794,793 18.8 1,766,540 18.6 8.2
_______________________________________________
Total cash and fixed income
investments 9,477,413 99.4 9,429,365 99.2 8.1
Equity securities 48,896 0.5 66,714 0.7 9.9
Real estate 8,559 0.1 8,559 0.1 3.5
_______________________________________________
Total investments $9,534,868 100.0% $9,504,638 100.0% 8.1%
===============================================
</TABLE>
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 account, 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.
FIXED MATURITY SECURITIES: At March 31, 1997, 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 $2,669,166 34.8% $2,620,466 34.3%
AA+ to AA- 394,918 5.2 394,117 5.2
A+ to A- 2,193,599 28.6 2,225,962 29.2
BBB+ to BBB- 1,468,813 19.2 1,475,218 19.2
BB+ to BB- 639,364 8.4 634,321 8.3
B+ to B- 131,174 1.7 127,653 1.7
Issues not rated by S&P
(by NAIC rating):
Rated 1 (AAA to A-) 101,201 1.3 101,715 1.3
Rated 2 (BBB+ to BBB-) 19,736 0.3 20,016 0.3
Rated 3 (BB+ to BB-) 27,346 0.4 27,645 0.4
Rated 5 (CCC+ to C) 8,839 0.1 7,476 0.1
Redeemable preferred stock 616 0.0 388 0.0
____________________________________________
Total fixed maturities $7,654,772 100.0% $7,634,977 100.0%
============================================
</TABLE>
All of the company's fixed maturity securities are designated as available
for sale although the company is not precluded from designating fixed
maturity securities as held for investment or trading at some future date.
Investments classified as available for sale securities are reported at 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. Securities 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 Statement of Financial Accounting
Standards (SFAS) No. 115. Securities 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 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.
On March 31, 1997, fixed income securities with an amortized cost of
$7,654,772,000 and an estimated fair value of $7,634,977,000 were designated
as available for sale. Unrealized holding losses on these securities, net of
adjustments to deferred policy acquisition costs, present value of in force
acquired and deferred income taxes, decreased stockholders' equity by
$7,712,000, or $0.24 per share at March 31, 1997 compared to an increase of
$76,387,000, or $2.38 per share at December 31, 1996.
Net unrealized depreciation of fixed maturity investments of $19,795,000 was
comprised of gross appreciation of $160,960,000 and gross depreciation of
$180,755,000.
The percentage of the company's portfolio invested in below investment grade
securities increased slightly during the first three months of 1997. At
March 31, 1997 the amortized cost value of the company's total investment in
below investment grade securities consisted of investments in 93 issuers
totaling $749,251,000, or 7.9% of the company's investment portfolio compared
to 93 issuers totaling $733,182,000, or 7.8%, at December 31, 1996. The
company intends to purchase additional below investment grade securities but
it does not expect the percentage of its portfolio invested in below
investment grade securities to exceed 10% of the investment portfolio. At
March 31, 1997, 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 the fair value of its below
investment grade portfolio was $738,829,000, or 98.6% of amortized cost value,
at March 31, 1997.
Below investment grade securities have different characteristics than
investment grade corporate debt securities. Risk of loss upon default by the
borrower is significantly greater with respect to below investment grade
securities than with other corporate debt securities. Below investment grade
securities are generally unsecured and are often subordinated to other
creditors of the issuer. Also, issuers of below investment grade securities
usually have higher levels of debt and are more sensitive to adverse economic
conditions, such as recession or increasing interest rates, than are
investment grade issuers. The company attempts to reduce the overall risk in
its below investment grade portfolio, as in all of its investments, through
careful credit analysis, strict investment policy guidelines, and
diversification by company and by industry.
The company analyzes its investment portfolio, including below investment
grade securities, at least quarterly in order to determine if its ability to
realize its carrying value on any investment has been impaired. For debt and
equity securities, if impairment in value is determined to be other than
temporary (i.e. if it is probable that the company will be unable to collect
all amounts due according to the contractual terms of the security), the cost
basis of the impaired security is written down to fair value, which becomes
the security's new cost basis. The amount of the writedown is included in
earnings as a realized loss. Future events may occur, or additional or
updated information may be received, which may necessitate future write-downs
of securities in the company's portfolio. Significant write-downs in the
carrying value of investments could materially adversely affect the company's
net income in future periods.
During the first three months of 1997, fixed maturity securities designated
as available for sale with a combined amortized cost value of $79,943,000
were called or repaid by their issuers generating net realized gains totaling
$563,000. In total, net pre-tax gains from sales, calls, repayments, tenders
and writedowns of fixed maturity investments amounted to $1,854,000 in the
first three months of 1997.
The company's fixed maturity investment portfolio had a combined amortized
cost yield of 8.1% at March 31, 1997 and December 31, 1996.
At March 31, 1997, no fixed maturity securities were deemed to have
impairments in value that are other than temporary.
EQUITY SECURITIES: At March 31, 1997, the company owned equity securities
with a combined cost of $48,896,000 and an estimated fair value of
$66,714,000. Gross appreciation of equity securities totaled $18,055,000 and
gross depreciation totaled $237,000. 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 $52,268,000 and a cost basis of $36,085,000 at
March 31, 1997. 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 18.8% 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 $1,794,793,000 from
$1,720,114,000 at December 31, 1996. The company's mortgage loan portfolio,
excluding farm loans, includes 589 loans with an average size of $3,047,000,
and average seasoning of 3.6 years if weighted by the number of loans, and
1.8 years if weighted by mortgage loan carrying values. The company's mortgage
loans are typically secured by occupied buildings in major metropolitan
locations and not speculative developments, and are diversified by type of
property and geographic location. At March 31, 1997, the yield on the
company's mortgage loan portfolio was 8.2%.
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 $338,794 18.9%
Industrial 216 520,845 29.0
Office buildings 121 403,474 22.5
Retail 145 499,966 27.9
Farm 3 65 0.0
Other 9 31,649 1.7
_________________________________
Total 592 $1,794,793 100.0%
=================================
</TABLE>
Distribution of these loans by geographic location is as follows:
<TABLE>
<CAPTION>
% of
# of Carrying Mortgage
Loans Value Portfolio
_________________________________
(Dollars in thousands)
<S> <C> <C> <C>
Geographic Breakdown
______________________________
New England 6 $25,572 1.4%
Middle Atlantic 78 271,498 15.1
South Atlantic 93 314,208 17.5
East North Central 117 383,605 21.4
West North Central 75 230,786 12.9
East South Central 22 78,304 4.4
West South Central 34 92,403 5.1
Mountain 41 119,627 6.7
Pacific 126 278,790 15.5
_________________________________
Total 592 $1,794,793 100.0%
=================================
</TABLE>
At March 31, 1997, the company had established a valuation allowance of
$245,000 on one of its mortgage loans to reduce the carrying value of this
investment to its estimated fair value less costs to sell. At March 31, 1997,
one mortgage loan with a carrying value of $33,000 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 102.5% of the principal amount of problem mortgages resolved in the
last three years.
REAL ESTATE: At March 31, 1997, the company owned real estate totaling
$8,559,000, including properties acquired through foreclosure valued at
$5,282,000.
In total, the company has experienced a relatively small number of problems
with its total investment portfolio, with only 0.04% of the company's
investment in default at March 31, 1997. The company estimates its total
investment portfolio, excluding policy loans, had a fair value equal to 99.7%
of amortized cost value for accounting purposes at March 31, 1997.
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 ("caps") and cash settled put swaptions ("swaptions"),
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 caps
and swaptions, all during the second quarter, with notional amounts totaling
approximately $600,000,000 and $1,300,000,000, respectively, all of which
were outstanding at March 31, 1997. The company paid approximately
$21,100,000 in premiums for these caps and swaptions. The cost of this
program has been incorporated into the company's product pricing. The caps
and swaptions do not require any additional payments by the company.
In January 1997, the company introduced an equity-indexed annuity product
which provides a guaranteed base rate of return with a higher potential
return linked to the performance of a broad based equity index. At the same
time, the company implemented a hedging program to purchase Standard &
Poor's ("S&P") 500 ([email protected].) Index Call Options ("call options",
or collectively with the interest rate caps and cash settled put swaptions,
"instruments"). Call options are purchased to hedge potential increases in
policyholder account balances for equity-indexed annuity policies resulting
from increases in the index to which the product is linked. During the first
quarter of 1997, the company paid approximately $413,000 in premiums for call
options which mature in 2004. The cost of this program has been incorporated
into the company's pricing of its equity-indexed annuity product. The call
options do not require any additional payments by the company.
The agreements for the caps and swaptions 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. The
agreements for the call options entitle the company to receive payments from
the counterparty if the S&P 500 index exceeds the specified strike price on
the maturity date. The amount of such payments to be received by the company
for the call options, if any, will be calculated by taking the excess of the
average closing price (as defined in the contract) at maturity over the
specified strike price, and multiplying this excess by the number of S&P 500
units defined in the contract. 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
for the caps and swaptions at March 31, 1997:
<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 caps and swaptions is off-balance sheet
and therefore, is not reflected in the financial statements. The effect of
changes in intrinsic value (which may vary from estimated market value) of
the call options and future policy benefits will be reflected in the financial
statements in the period of change. The following table summarizes the
amortized cost, gross unrealized gains and losses and estimated fair value on
these instruments as of March 31, 1997:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
March 31, 1997 Cost Gains Losses Value
_______________________________________________________________________________
(Dollars in thousands)
<S> <C> <C> <C> <C>
Interest rate caps $4,891 ($1,139) $3,752
Cash settled put swaptions 11,920 $419 (1,126) 11,213
S&P 500 call options 410 -- (58) 352
_________________________________________________
Total $17,221 $419 ($2,323) $15,317
=================================================
</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 non-performance by the counterparties of
these instruments. Losses recorded in the company's financial statements in
the event of non-performance will be limited to the unamortized premium
(remaining amortized cost) paid to purchase the instrument plus the recorded
intrinsic value, if any, for the call options because no additional payments
are required by the company on these instruments after the initial premium.
Counterparty non-performance would result in an economic loss if interest
rates exceeded the specified fixed rate or, for the S&P 500 index call
options, the average closing price at maturity exceeded the specified strike
price. 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, if more than one quote is available, obtained from related
and unrelated counterparties. The company limits its exposure to such losses
by: diversifying 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 March 31, 1997, the ratings assigned
by Standard & Poor's Corporation by instrument with respect to the net
replacement value (market value) of the company's instruments was as follows:
<TABLE>
<CAPTION>
March 31, 1997 Net Replacement Value
_______________________________________________________________________________
Interest Cash Settled S&P 500
Rate Caps Put Swaptions Call Options Total
__________________________________________________
(Dollars in thousands)
<S> <C> <C> <C> <C>
Counterparties credit quality:
AAA $2,494 $5,769 $352 $8,615
AA- 1,258 3,066 -- 4,324
A+ -- 2,378 -- 2,378
__________________________________________________
Total $3,752 $11,213 $352 $15,317
==================================================
</TABLE>
OTHER ASSETS
Accrued investment income increased $1,899,000 primarily due to an increase
in the amortized cost of new fixed income investments and in the overall size
of the portfolio. Deferred policy acquisition costs increased $79,828,000
over year-end 1996 levels. Excluding the adjustment to reflect the impact of
SFAS No. 115, deferred policy acquisition costs increased $18,214,000 as the
deferral of current period costs, primarily commissions incurred to generate
insurance and annuity sales, totaled $41,226,000. Amortization of costs
deferred totaled $23,012,000.
Present value of in force acquired (PVIF) was established as a result of the
recent acquisition of variable annuity and life insurance business in force
on Golden American. At March 31, 1997, PVIF was $81,431,000 and amortization
(excluding the impact of SFAS No. 115) totaled $2,101,000 for the first
quarter of 1997.
At March 31, 1997, the company had $1,793,298,000 of separate account assets
compared to $1,657,879,000 at December 31, 1996. The increase in separate
account assets is due to the growth in the company's variable annuity
products. Golden American had separate account assets of $1,235,591,000 at
March 31, 1997. At March 31, 1997, the company had total assets of
$12,740,878,000, an increase of 1.4% over total assets at December 31, 1996.
LIABILITIES
In conjunction with the volume of annuity and insurance sales, and the
resulting increase in business in force, the company's liability for policy
liabilities and accruals increased $135,705,000, or 1.4%, during the first
three months of 1997.
Reserves for the company's annuity contracts, including separate account
reserves for variable contracts, increased $253,377,000, or 2.6%, to
$9,931,787,000 at March 31, 1997. Life insurance reserves, including
separate account reserves for variable life policies, increased $15,227,000,
or 1.2%, to $1,274,899,000 at March 31, 1997.
The company incorporates a number of features in its annuity products designed
to reduce early withdrawal or surrender of the policies and to partially
compensate the company for its costs if policies are withdrawn early.
Current surrender charge periods on fixed annuity policies typically range
from five years to the term of the policy. During the first quarter of 1997,
84% 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 for the three months ended March 31, 1997 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 $724,829 9.9%
1 to 4 percent 902,384 12.4
5 to 6 percent $27,132 13.6% 1,293,700 17.7
7 to 9 percent 145,572 73.1 3,086,644 42.3
10 percent and greater 26,368 13.3 1,290,382 17.7
_________________________________________
$199,072 100.0% $7,297,939 100.0%
=========================================
</TABLE>
Deferred income taxes decreased $37,889,000 to $7,792,000 at March 31, 1997,
from December 31, 1996 of which $47,830,000 of the decrease relates to the
change in unrealized appreciation of fixed maturity securities designated as
available for sale. Total consolidated debt increased $11,900,000 during the
first three months of 1997 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 $116,500,000 at March 31, 1997.
At March 31, 1997, $7,884,000 of the commercial paper was issued for
investment smoothing purposes. Other liabilities decreased $4,976,000 from
year-end 1996 levels primarily due to a decrease in transfer and suspense
accounts, guaranty fund assessment reserve, outstanding checks, and other
payables, partially offset by increases in draft accounts payable and
securities payable.
Separate account liabilities increased $135,419,000 to $1,793,298,000 from
December 31, 1996 due to the growth in the company's variable annuity
products. At March 31, 1997, the company had total liabilities of
$11,791,915,000 compared to $11,548,880,000 at December 31, 1996, a 2.1%
increase.
PREFERRED SECURITIES
On July 23, 1996, Equitable of Iowa Companies Capital Trust, a consolidated,
wholly-owned subsidiary of the company, issued $125,000,000 of 8.70% Trust
Originated Preferred Securities (see Liquidity and Capital Resources section
below). The net proceeds of this offering were used to fund, in part, the
acquisition of BT Variable, Inc.
EQUITY
At March 31, 1997, stockholders' equity was $823,963,000, or $25.71 per share,
compared to 895,799,000 or $28.00 per common share at year end 1996.
Unrealized depreciation of available for sale fixed maturity securities
decreased stockholders' equity by $7,712,000, or $0.24 per share, after
adjustments to deferred acquisition costs and deferred income taxes, at March
31, 1997 compared to an increase of $76,387,000 or $2.38 per share at
December 31, 1996. The ratio of consolidated debt to total capital was 18.6%
(18.5% excluding SFAS No. 115) at March 31, 1997, compared to 16.7% (17.8%
excluding SFAS No. 115) at year-end 1996. The higher ratio is due to the
issuance of additional commercial paper during 1997. At March 31, 1997, there
were 32,043,526 common shares outstanding compared to 31,988,410 shares at
December 31, 1996.
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 all of 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 during
1997 for the new location. In addition, the company intends to increase its
commitment to improve product development, customer service and operating
efficiencies by spending approximately $8,000,000 to $11,000,000 over the
next three years on capital needs, primarily for information technology, as
compared to the approximately $5,400,000 spent in 1996. 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 March 31, 1997 the company had $116,500,000 in commercial
paper notes outstanding, an increase of $11,900,000 from December 31, 1996.
The company's commercial paper is rated A1 by Standard and Poor's, D1 by Duff
& Phelps Credit Rating Co., and P2 by Moody's.
To enhance short term liquidity and back up its outstanding commercial paper
notes, the company maintains a line of credit agreement with several banks.
On May 10, 1996, the company amended its agreement to increase the line of
credit to $300,000,000, and extend its term to May 10, 2001. The terms of
the agreement require the company to maintain certain adjusted consolidated
tangible net worth levels. "Adjusted consolidated tangible net worth" is
defined as consolidated stockholders' equity, adjusted to exclude the effects
of SFAS No. 115, less intangible assets. The most restrictive covenant
requires the company maintain adjusted consolidated tangible net worth equal
to or in excess of the sum of (1) $490,000,000, plus (2) 50% of consolidated
net income from January 1, 1995 to the end of the most recent quarter, plus
(3) net proceeds from the issuance of capital stock from January 1, 1995 to
the end of the most recent quarter. At March 31, 1997, $300,055,000 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 the
remainder of 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 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 of $98,812,000, after expenses. The company contributed
$50,000,000 of the proceeds to its insurance subsidiaries and applied the
remaining net proceeds to the repayment of outstanding commercial paper
notes.
In order to provide the flexibility to respond promptly to capital needs as
opportunities or needs arise, the company has available an effective universal
shelf registration on Form S-3 with the Securities and Exchange Commission
with respect to $300,000,000 of securities, including any combination of debt
securities, common stock and preferred stock, of which $175,000,000 remains to
be issued. Securities may be issued and sold upon such terms and conditions
and at such time or times as may be later determined. Any such offering will
be made only by means of a prospectus.
Pursuant to this shelf registration, on July 23, 1996, Equitable of Iowa
Companies Capital Trust (the "Trust"), a consolidated, wholly-owned
subsidiary of Equitable, issued $125,000,000 of its 8.70% Trust Originated
Preferred Securities (the "Preferred Securities"). Concurrent with the
issuance of the Trust's Preferred Securities, Equitable issued to the Trust
$128,866,000 in principal amount of its 8.70% Subordinated Deferrable
Interest Debentures (the "Debt Securities") due July 30, 2026. The sole
assets of the Trust are and will remain the Debt Securities and any accrued
interest thereon. The interest and other payment dates on the Debt
Securities correspond to the distribution and other payment dates on the
Preferred Securities. The Debt Securities mature on July 30, 2026, with an
option to extend the maturity an additional 19 years, and are redeemable by
Equitable, in whole or in part, beginning July 30, 2001. The Preferred
Securities will mature or be called simultaneously with the Debt Securities.
The Preferred Securities have a liquidation value of $25 per Preferred
Security plus accrued and unpaid distributions. As of March 31, 1997,
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 who owns all the outstanding capital stock
of Golden American Life Insurance Company and Directed Services, Inc.
As discussed above, on August 13, 1996, Equitable acquired all of the
outstanding capital stock of BT Variable from Whitewood, pursuant to the
terms of the Purchase Agreement dated as of May 3, 1996 between Equitable and
Whitewood. In exchange for the outstanding capital stock of BT Variable,
Equitable paid the sum of $93,000,000 in cash to Whitewood in accordance with
the terms of the Purchase Agreement. Equitable also paid the sum of
$51,000,000 in cash to Bankers Trust to retire certain debt owed by BT
Variable to Bankers Trust pursuant to a revolving credit arrangement. The
funds used in completing the acquisition were obtained primarily through the
July 1996 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").
On April 3, 1997, the company received net proceeds of approximately
$49,200,000 after estimated fees and expenses, from the issuance of
$50,000,000 of 8.424% Capital Securities by a subsidiary trust maturing in
2027. The proceeds from the sale of the securities will be utilized for
general corporate purposes.
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 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 statutory financial statements included an
increase in fixed annuity reserves of approximately $7,200,000 pursuant to
the requirements of the guideline. The quarterly statutory financial
statements include an increase in annuity reserves of approximately
$2,500,000 pursuant to the requirements of the guideline for the three months
ended March 31, 1997. 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
_________________________________
EARNINGS PER SHARE: In February 1997, the Financial Accounting Standards
Board issued Statement No. 128, "Earnings per Share", which is required to be
adopted on December 31, 1997. At that time the company will be required to
disclose both primary earnings per share and fully diluted earnings per share
on the face of the income statement or in the notes to the financial
statements. The impact of the fully-diluted earnings per share would dilute
primary earnings per share by approximately $0.02 and $0.01 per share for the
first quarter of 1997 and 1996, respectively.
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 March 31, 1997 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.
In the ordinary course of business, the company and its subsidiaries are also
engaged in certain other litigation, none of which management believes is
material.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
_________________________________________________________
Any forward-looking statement contained herein or in any other oral or
written statement by the company or any of its officers, directors or
employees is qualified by the fact that actual results of the company may
differ materially from such statement due to the following important factors,
among other risks and uncertainties inherent in the company's business:
1. Prevailing interest rate levels and stock market performance, which may
affect the ability of the company to sell its products, the market value
of the company's investments and the lapse rate of the company's
policies, notwithstanding product design features intended to enhance
persistency of the company's products.
2. Changes in the federal income tax laws and regulations which may affect
the relative tax advantages of 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. Increasing competition in the sale of the company's products.
5. 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, 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.
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
As previously reported, the company and certain of its subsidiaries
are defendants in class action lawsuits filed in the United States
District Court for the Middle District of Florida, Tampa Division, in
February, 1996 and in the Court of Common Pleas of Allegheny County,
Pennsylvania in June 1996. The suits claim unspecified damages as a
result of alleged improper life insurance sales practices. The company
believes the allegations are without merit. The suits are in the
discovery and procedural stages and have not yet been certified as
class actions. The company intends to defend the suits vigorously.
The amount of any liability which may arise as a result of these
suits, if any, cannot be reasonably estimated and no provision for
loss has been made in the company's financial statements.
In the ordinary course of business, the company and its subsidiaries
are also engaged in certain other litigation, none of which management
believes is material.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
A list of exhibits included as part of this report is set forth
in the Exhibit Index which immediately precedes such exhibits and
is hereby incorporated by reference herein.
(b) The following reports on Form 8-K were filed during the quarter
ended March 31, 1997:
(i) None
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
DATE: May 9, 1997 EQUITABLE OF IOWA COMPANIES
By /s/ Paul E. Larson
________________________________
Executive Vice President and CFO
(Principal Financial Officer)
By /s/ David A. Terwilliger
________________________________
Vice President and Controller
(Principal Accounting Officer)
INDEX
Exhibits to Form 10-Q
Three Months ended March 31, 1997
EQUITABLE OF IOWA COMPANIES
2 Plan of Acquisition
(a) Stock Purchase Agreement dated as of May 3, 1996, between
Equitable and Whitewood Properties Corp. (incorporated by
reference from Exhibit 2 in Form 8-K filed August 28, 1996)
3 Articles of Incorporation and By-Laws
(a) Restated Articles of Incorporation as amended through
April 29, 1993, filed as Exhibit 3(a) to Form 10-Q for
the period ended June 30, 1993, is incorporated by
reference
(b) Amended and restated By-Laws filed as Exhibit 2 to
Form 8-K dated November 11, 1991, is incorporated by
reference
4 Instruments Defining the Rights of Security Holders, Including Indentures
(a) Letter Agreement to furnish Commission upon request copies
of other long-term debt instruments
(b)(i) Rights Agreement filed as Exhibit 1 to Form 8-K dated
April 30, 1992, is incorporated by reference
(ii) First amendment to Rights Agreement changing Rights Agent
filed as Exhibit 4(b)(ii) to Form 10-Q for the period
ended September 30, 1992, is incorporated by reference
(iii) Second amendment to Rights Agreement dated April 29, 1993,
adjusting Purchase Price filed as Exhibit 2.2 to Form
8-A/A dated May 13, 1993, is incorporated by reference
(c)(i) Indenture dated as of January 17, 1995 by and between Equitable
of Iowa Companies and The First National Bank of Chicago, as
Trustee, relating to the company's $100,000,000 of 8.5% Notes
due 2005 (incorporated by reference from Exhibit 4.1 to the
company's Registration Statement on Form S-3 Registration No.
33-57343 filed January 18, 1995)
(ii) Form of Global 8.5% Note dated February 22, 1995 due February
15, 2005 in the principal amount of $100,000,000 (incorporated
by reference from Exhibit 4.3 to the company's Report on Form
8-K filed February 15, 1995)
(iii) Form of First Supplemental Indenture dated July 18, 1996,
including therein the Form of Subordinated Deferrable Interest
Debenture, relating to the company's $128,866,000 of 8.70%
Subordinated Deferrable Interest Debentures (incorporated by
reference from Exhibit 4.7.1 to the company's Report on Form
8-K filed July 3, 1996)
INDEX
Exhibits to Form 10-Q
Three Months ended March 31, 1997
EQUITABLE OF IOWA COMPANIES
(iv) Form of Indenture dated March 31, 1997, including therein the
Form of Subordinated Deferrable Interest Debenture, relating to
the company's $51,550,000 of 8.424% Subordinated Deferrable
Interest Debentures (incorporated by reference from Exhibit 4.1
to the company's Report on Form 8-K filed April 4, 1997)
(d)(i) 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)
(ii) Certificate of Trust of Equitable of Iowa Companies Capital
Trust II (incorporated by reference from Exhibit 4.2 to the
company's Report on Form 8-K filed April 4, 1997)
(e)(i) Declaration of Trust of Equitable of Iowa Companies Capital
Trust (incorporated by reference from Exhibit 4.9 to the
company's Registration Statement on Form S-3 Registration No.
333-1909 filed March 22, 1996)
(ii) Form of First Amendment to Declaration of Trust of Equitable
of Iowa Companies Capital Trust dated July 18, 1996, including
therein the form of Preferred Securities, relating to
$125,000,000 of Trust Originated Preferred Securities issued
by Equitable of Iowa Companies Capital Trust (incorporated by
reference from Exhibit 4.9.1 to the company's Report on Form
8-K filed July 3, 1996)
(iii) Amended and Restated Declaration of Trust of Equitable of Iowa
Companies Capital Trust II dated March 31, 1997, including therein
the form of Capital Securities, relating to $50,000,000 of Trust
Originated Capital Capital Securities issued by Equitable of Iowa
Companies Capital Trust II (incorporated by reference from Exhibit
4.3 to the company's Report on Form 8-K filed April 4, 1997)
(f)(i) 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)
(ii) Series A Capital Securities Guarantee Agreement dated April 3,
1997 relating to $50,000,000 of Trust Originated Capital
Securities issued by Equitable of Iowa Companies Capital Trust II
(incorporated by reference from Exhibit 4.5 to the company's
Report on Form 8-K filed April 4, 1997)
INDEX
Exhibits to Form 10-Q
Three Months ended March 31, 1997
EQUITABLE OF IOWA COMPANIES
10 Material Contracts
(a) Executive compensation plans and arrangements *
(i) Restated Executive Severance Pay Plan filed as Exhibit
10(a)(i) to Form 10-K for the year ended December 31, 1996,
is incorporated by reference
(ii) Directors' Deferred Compensation Plan filed as Exhibit
10(b) to Form 10-K for the year ended December 31, 1989,
is incorporated by reference
(iii) 1982 Stock Incentive Plan filed as Exhibit 10(c) to Form
10-K for the year ended December 31, 1989, is incorporated
by reference
(iv) Excess Benefit Plan filed as Exhibit 10(d) to Form 10-K
for the year ended December 31, 1989, is incorporated by
reference
(v) Supplemental Employee Retirement Plan filed as Exhibit
10(e) to Form 10-K for the year ended December 31, 1989,
is incorporated by reference
(vi) Executive Flexible Perquisite Program filed as Exhibit
10(f) to Form 10-K for the year ended December 31, 1992,
is incorporated by reference
(vii) Restated and Amended Key Employee Incentive Plan 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
(ix) 1996 Non-Employee Directors' Stock Option Plan filed as Exhibit
A of Registrant's Proxy Statement dated April 25, 1996, is
incorporated by reference
* Management contracts or compensation plans required to
be filed as an Exhibit pursuant to Item 14(c) of Form
10(K).
11 Statement re: Computation of Per Share Earnings
21 Subsidiaries List
23 Consent of Experts and Counsel
(a) Consent of independent auditors (not required)
(b) Consent of counsel (not required)
27 Financial Data Schedule (electronic filing only)
INDEX
Exhibits to Form 10-Q
Three Months ended March 31, 1997
EQUITABLE OF IOWA COMPANIES
99 Additional Exhibits
Independence Policy filed as an Exhibit to Form 8-K dated November
11, 1991, is incorporated by reference
Exhibit 4(a)
May 9, 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 11
EQUITABLE OF IOWA COMPANIES
Consolidated Net Income Per Share Computation
<TABLE>
<CAPTION>
Three Months Ended
March 31
_____________________________
1997 1996
___________ ___________
(Dollars in thousands,
except per share data)
<S> <C> <C>
Primary:
Net income $32,714 $30,205
=========== ===========
Average shares outstanding 32,016,871 31,816,700
=========== ===========
Net income per share $1.02 $0.95
=========== ===========
Fully diluted:
Net income $32,714 $30,205
=========== ===========
Average shares outstanding 32,016,871 31,816,700
Add: Net effect of dilutive stock
options - based on the
treasury stock method
using period-end market
price, if higher than average
market price 537,776 415,913
___________ ___________
Total 32,554,647 32,232,613
=========== ===========
Net income per share $1.00 $0.94
=========== ===========
<FN>
NOTE: This computation is required by Regulation S-K Item 601 and is filed
as an Exhibit under Item 6(a) of Form 10-Q. Fully diluted earnings
per share calculated above has not been presented on the face of the
company's Consolidated Statements of Income because dilution is less
than three percent and, therefore, presentation is not required by
Accounting Principles Board Opinion No. 15.
</TABLE>
Exhibit 21
The company's subsidiaries are:
Name State of Organization
_____________________________________________ _____________________
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
Equitable of Iowa Companies Capital Trust II 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. First Golden American Life Insurance Company of New York, a New York
corporation, is a wholly-owned subsidiary of Golden American Life Insurance
Company. In addition, these entities own other subsidiaries which are not
considered in the aggregate to be a significant subsidiary as defined in
Securities and Exchange Commission rules.
All subsidiaries do business only under their corporate names.
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE CONSOLIDATED
STATEMENTS OF INCOME AND CONSOLIDATED BALANCE SHEETS (UNAUDITED) AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<EXCHANGE-RATE> 1
<DEBT-HELD-FOR-SALE> 7,634,977
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 66,714
<MORTGAGE> 1,794,793
<REAL-ESTATE> 8,559
<TOTAL-INVEST> 9,726,471
<CASH> 20,139
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 812,986
<TOTAL-ASSETS> 12,740,878
<POLICY-LOSSES> 9,521,972
<UNEARNED-PREMIUMS> 21,389
<POLICY-OTHER> 7,757
<POLICY-HOLDER-FUNDS> 13,386
<NOTES-PAYABLE> 216,500
125,000
0
<COMMON> 32,044
<OTHER-SE> 791,919
<TOTAL-LIABILITY-AND-EQUITY> 12,740,878
9,825
<INVESTMENT-INCOME> 192,252
<INVESTMENT-GAINS> 4,506
<OTHER-INCOME> 36,087
<BENEFITS> 136,473
<UNDERWRITING-AMORTIZATION> 23,012
<UNDERWRITING-OTHER> 16,393
<INCOME-PRETAX> 53,740
<INCOME-TAX> 35,743
<INCOME-CONTINUING> 32,714
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 32,714
<EPS-PRIMARY> 1.02
<EPS-DILUTED> 1.00
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
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</TABLE>
