THE EQUITABLE LIFE ASSURANCE SOCIETY
OF THE UNITED STATES
VARIABLE LIFE INSURANCE POLICIES
FUNDED THROUGH SEPARATE ACCOUNT I
THE CHAMPION
SP-1
BASIC POLICY
EXPANDED POLICY
PROSPECTUS SUPPLEMENT DATED MAY 1, 1997
This prospectus supplement updates certain information in the prospectus you
received for your Equitable variable life insurance policy.* We also mailed to
you other prospectus supplements dated May 1, 1996 and January 1, 1997.
Capitalized terms used in this supplement have the same meanings as in the
prospectus. You should keep this supplement with your prospectus and your May 1,
1996 and January 1, 1997 supplements. We will send you another copy of any
prospectus or supplement, without charge, upon written request.
EQUITABLE. The information under the heading "EQUITABLE" in your prospectus is
updated as follows:
EQUITABLE. Equitable, a New York stock life insurance company, has been in
business since 1859. We are a wholly owned subsidiary of The Equitable Companies
Incorporated (the Holding Company). The largest shareholder of the Holding
Company is AXA-UAP (AXA), a French insurance holding company. As of December 31,
1996, AXA beneficially owned 63.8% of the outstanding shares of common stock of
the Holding Company (assuming conversion of the convertible preferred stock held
by AXA). Under its investment arrangements with Equitable and the Holding
Company, AXA is able to exercise significant influence over the operations and
capital structure of the Holding Company and its subsidiaries, including
Equitable. AXA is the holding company for an international group of insurance
and related financial services companies. Equitable, the Holding Company and
their subsidiaries managed approximately $239.8 billion of assets as of December
31, 1996, including third party assets of approximately $184.8 billion.
Equitable's home office is 1290 Avenue of the Americas, New York, New York
10104. We are licensed to do business in all 50 states, Puerto Rico, the Virgin
Islands and the District of Columbia. We maintain local offices throughout the
United States. At December 31, 1996, we had approximately $114.6 billion face
amount of variable life insurance in force, as compared to $103.9 billion at
December 31, 1995. Prior to January 1, 1997, Separate Account I policies were
issued by Equitable's wholly owned subsidiary, Equitable Variable Life Insurance
Company (Equitable Variable). Equitable Variable was merged into Equitable as of
January 1, 1997.
INVESTMENT PORTFOLIOS. The names of The Hudson River Trust ("HRT") investment
portfolios have been modified as follows, to include "Alliance" in their names:
o Alliance Money Market o Alliance Common Stock
o Alliance Intermediate o Alliance Aggressive Stock
Government Securities
o Alliance Balanced
o Alliance High Yield
PERFORMANCE INFORMATION. The performance information for The Hudson River Trust
rates of return in the prospectus and any illustrations of policy values based
on such information are deleted.
- -----------------------
* This supplement updates certain information contained in The Champion
Prospectuses dated September 30, 1987 and December 18, 1986; the SP-1
Prospectuses dated September 30, 1987, April 30, 1986 and January 1, 1984; and
the Basic and Expanded Prospectuses dated April 30, 1986 and March 26, 1985.
EVM-117
1
<PAGE>
DEDUCTIONS AND CHARGES
FROM THE TRUST.
o The Separate Account Funds purchase Class IA shares of corresponding
portfolios of the HRT at net asset value. That price reflects investment
management fees, indirect expenses, such as brokerage commissions, and
certain other operating expenses.
The Hudson River Trust. Effective May 1, 1997, a new investment advisory
agreement relating to each of the HRT portfolios was entered into between HRT
and Alliance, HRT's Investment Adviser. The table below shows (i) the
investment management fees paid by the HRT in 1996 and (ii) other expenses
deducted from HRT assets in 1996, both restated to reflect the fees and other
expenses that would have been paid by the portfolios if the present
investment advisory agreement had been in effect as of January 1, 1996. These
restated fees and expenses are based on average net assets for 1996. For
actual investment management fees and other expenses paid by HRT in 1996, see
the HRT prospectus. Investment management fees may increase or decrease based
on the level of portfolio net assets. These fees are subject to maximum
rates, as described in the attached HRT prospectus. Other HRT expenses are
likely to fluctuate from year to year. Both investment management fees and
other expenses are expressed in the table on the next page as an annual
percentage of each portfolio's daily average net assets:
<TABLE>
<CAPTION>
1996 FEES AND EXPENSES RESTATED AS IF SUBJECT TO 1997 ADVISORY AGREEMENT
-------------------------------------------------------------------------
RESTATED 1996 RESTATED 1996 RESTATED 1996
HRT PORTFOLIO MANAGEMENT FEE OTHER EXPENSES TOTAL EXPENSES*
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Alliance Money Market 0.35% 0.04% 0.39%
Alliance Intermediate Govt.
Securities 0.50% 0.09% 0.59%
Alliance High Yield 0.60% 0.06% 0.66%
Alliance Common Stock 0.38% 0.03% 0.41%
Alliance Aggressive Stock 0.55% 0.03% 0.58%
Alliance Balanced 0.42% 0.05% 0.47%
</TABLE>
---------------------------------
*Equitable credits the Separate Account Funds daily to offset
investment management fees and other expenses of the HRT which
exceed a 0.25% effective annual rate.
INVESTMENT PERFORMANCE. Footnote 7 to the Separate Account I financial
statements included herein contains information about the net return for each
Fund. The attached prospectus for The Hudson River Trust contains rates of
return and other portfolio performance information of the HRT for various
periods ended December 31, 1996. Remember, the changes in the Account/Cash Value
of your policy depend not only on the performance of the portfolios, but also on
the deductions and charges under your policy. To obtain the current index values
of the Separate Account Funds for Champion policies, call (212) 314-3310.
The index values and the information contained in footnote 7 are computed using
gross rates of return for the corresponding portfolios of the HRT, reduced by a
daily asset charge for investment management services corresponding to an
effective annual rate of 0.25% and by the mortality and expense risk charge.
DISTRIBUTION. Certain of the information presented under the caption
"DISTRIBUTION" in your prospectus is revised as follows:
EQ Financial Consultants, Inc. (EQF) is the principal underwriter of the HRT and
also a distributor of our variable life insurance policies and variable annuity
contracts. EQF's principal business address is 1755 Broadway, New York, NY
10019. EQF is registered with the SEC as a broker-dealer under the Securities
Exchange Act of 1934 (1934 Act) and is a member of the National Association of
Securities Dealers, Inc. In 1995 and 1996, Equitable Variable paid EQF a fee of
$325,380 annually for its services as distributor of its policies.
ILLUSTRATIONS OF POLICY BENEFITS. The tables in your prospectus have not been
restated to reflect a new portfolio expense assumption. For a personalized
illustration reflecting the fees and expenses under your policy, contact your
Equitable agent.
MANAGEMENT. A list of our directors and, to the extent they are responsible for
variable life insurance operations, our principal officers and a brief statement
of their business experience for the past five years is contained in Appendix A
to this supplement.
LONG-TERM MARKET TRENDS. Appendix B to this supplement presents historical
return trends for various types of securities which may be useful for
understanding how different investment strategies may affect long-term results.
FINANCIAL STATEMENTS. The financial statements of Separate Account I and
Equitable included in this prospectus supplement have been audited for the years
ended December 31, 1996, 1995 and 1994 by the accounting firm of Price
Waterhouse LLP, independent accountants, as stated in their reports. The
financial statements of Separate Account I and Equitable for the years ended
December 31, 1996, 1995 and 1994 included in this prospectus supplement have
been so included in reliance on the reports of Price Waterhouse LLP, given on
the authority of such firm as experts in accounting and auditing.
The financial statements of Equitable contained in this prospectus supplement
should be considered only as bearing upon the ability of Equitable to meet its
obligations under the policies. They should not be considered as bearing upon
the investment experience of the funds in the Separate Account. The financial
statements of Separate Account I include periods prior to the merger when
Separate Account I was part of Equitable Variable Life Insurance Company
("Equitable Variable"). As mentioned in a previously distributed supplement,
Equitable Variable was merged with and into Equitable on January 1, 1997.
2
<PAGE>
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
SEPARATE ACCOUNT I+
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Accountants........................................................................................ FSA-2
Financial Statements:
Statements of Assets and Liabilities, December 31, 1996.......................................................... FSA-3
Statements of Operations for the Years Ended December 31, 1996, 1995 and 1994.................................... FSA-4
Statements of Changes in Net Assets for the Years Ended December 31, 1996, 1995 and 1994......................... FSA-7
Notes to Financial Statements.................................................................................... FSA-10
<FN>
+ Formerly known as Equitable Variable Life Insurance Company Separate Account I.
</FN>
</TABLE>
FSA-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
The Equitable Life Assurance Society of the United States
and Policyowners of Separate Account I
of The Equitable Life Assurance Society of the United States
In our opinion, the accompanying statements of assets and liabilities and the
related statements of operations and of changes in net assets present fairly, in
all material respects, the financial position of the Money Market Fund,
Intermediate Government Securities Fund, High Yield Fund, Balanced Fund, Common
Stock Fund and Aggressive Stock Fund, separate investment funds of The Equitable
Life Assurance Society of the United States ("Equitable Life") Separate Account
I (formerly Equitable Variable Life Insurance Company Separate Account I)at
December 31, 1996 and the results of each of their operations and changes in
each of their net assets for the years indicated, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of Equitable Life's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of shares in The Hudson River Trust at
December 31, 1996 with the transfer agent, provide a reasonable basis for the
opinion expressed above. The rates of return information presented in note 7 for
the year ended December 31, 1992, and for each of the periods indicated prior
thereto, were audited by other independent accountants whose report dated
February 16, 1993 expressed an unqualified opinion on the financial statements
containing such information.
PRICE WATERHOUSE LLP
New York, New York
February 10, 1997
FSA-2
<PAGE>
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
SEPARATE ACCOUNT I+
STATEMENTS OF ASSETS AND LIABILITIES
DECEMBER 31, 1996
<TABLE>
<CAPTION>
INTERMEDIATE
MONEY GOVERNMENT HIGH
MARKET SECURITIES YIELD
FUND FUND FUND
------------ ---------------- -----------
<S> <C> <C> <C>
ASSETS
Investments in shares of The Hudson River Trust -- at market value
(Notes 2 and 6)
Cost: $66,401,674..................................................... $67,476,741
2,455,042..................................................... $2,446,690
9,342,140..................................................... $10,464,112
34,079,909.....................................................
317,825,084.....................................................
20,811,659.....................................................
Receivable for The Hudson River Trust shares sold.......................... -- -- 4,677
Receivable for policy related transactions................................. -- -- --
----------- ---------- -----------
Total Assets............................................................... 67,476,741 2,446,690 10,468,789
----------- ---------- -----------
LIABILITIES
Payable for The Hudson River Trust shares purchased........................ 42,198 762 --
Payable for policy related transactions.................................... 707,060 76,199 218,114
Amount retained by Equitable Life in Separate Account I (Note 4)........... 517,456 83,576 584,042
----------- ---------- -----------
Total Liabilities.......................................................... 1,266,714 160,537 802,156
----------- ---------- -----------
NET ASSETS ATTRIBUTABLE TO POLICYOWNERS.................................... $66,210,027 $2,286,153 $ 9,666,633
=========== ========== ===========
</TABLE>
<TABLE>
<CAPTION>
COMMON AGGRESSIVE
BALANCED STOCK STOCK
FUND FUND FUND
------------ -------------- ------------
<S> <C> <C> <C>
ASSETS
Investments in shares of The Hudson River Trust -- at market value
(Notes 2 and 6)
Cost: $66,401,674.....................................................
2,455,042.....................................................
9,342,140.....................................................
34,079,909..................................................... $40,158,726
317,825,084..................................................... $543,778,508
20,811,659..................................................... $30,076,602
Receivable for The Hudson River Trust shares sold.......................... 10,307 73,012 28,965
Receivable for policy related transactions................................. -- -- --
---------- ------------ -----------
Total Assets............................................................... 40,169,033 543,851,520 30,105,567
---------- ------------ -----------
LIABILITIES
Payable for The Hudson River Trust shares purchased........................ -- -- --
Payable for policy related transactions.................................... 609,416 8,079,776 451,346
Amount retained by Equitable Life in Separate Account I (Note 4)........... 657,588 4,700,784 466,191
---------- ------------ -----------
Total Liabilities.......................................................... 1,267,004 12,780,560 917,537
---------- ------------ -----------
NET ASSETS ATTRIBUTABLE TO POLICYOWNERS.................................... $38,902,029 $531,070,960 $29,188,030
=========== ============ ===========
<FN>
See Notes to Financial Statements.
+ Formerly known as Equitable Variable Life Insurance Company Separate Account I.
</FN>
</TABLE>
FSA-3
<PAGE>
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
SEPARATE ACCOUNT I+
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
MONEY MARKET FUND
--------------------------------------
1996 1995 1994
------------ ----------- -----------
<S> <C> <C> <C>
INCOME AND EXPENSES:
Income (Note 2):
Dividends from The Hudson River Trust................................................ $3,440,074 $3,738,980 $2,684,291
Expenses (Note 3):
Mortality and expense risk charges................................................... 337,817 347,935 355,911
---------- ---------- ----------
NET INVESTMENT INCOME..................................................................... 3,102,257 3,391,045 2,328,380
---------- ---------- ----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS (Note 2):
Realized gain (loss) on investments.................................................... 82,253 31,732 52,117
Realized gain distribution from The Hudson River Trust................................. -- -- --
---------- ---------- ----------
NET REALIZED GAIN (LOSS).................................................................. 82,253 31,732 52,117
Unrealized appreciation / (depreciation) on investments:
Beginning of period.................................................................. 1,068,018 920,431 844,597
End of period........................................................................ 1,075,067 1,068,018 920,431
---------- ---------- ----------
Change in unrealized appreciation / (depreciation) during the period................... 7,049 147,587 75,834
---------- ---------- ----------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS.................................... 89,302 179,319 127,951
---------- ---------- ----------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS........................... $3,191,559 $3,570,364 $2,456,331
========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
INTERMEDIATE GOVERNMENT
SECURITIES FUND
----------------------------------
1996 1995 1994
---------- --------- -----------
<S> <C> <C> <C>
INCOME AND EXPENSES:
Income (Note 2):
Dividends from The Hudson River Trust................................................ $136,334 $145,274 $ 199,648
Expenses (Note 3):
Mortality and expense risk charges................................................... 10,873 11,943 11,365
-------- -------- ---------
NET INVESTMENT INCOME..................................................................... 125,461 133,331 188,283
-------- -------- ---------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS (Note 2):
Realized gain (loss) on investments.................................................... (46,354) (94,891) (303,584)
Realized gain distribution from The Hudson River Trust................................. -- -- 157,383
-------- -------- ---------
NET REALIZED GAIN (LOSS).................................................................. (46,354) (94,891) (146,201)
Unrealized appreciation / (depreciation) on investments:
Beginning of period.................................................................. (7,887) (267,346) (100,844)
End of period........................................................................ (8,352) (7,887) (267,346)
-------- -------- ---------
Change in unrealized appreciation / (depreciation) during the period................... (465) 259,459 (166,502)
-------- -------- ---------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS.................................... (46,819) 164,568 (312,703)
-------- -------- ---------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS........................... $ 78,642 $297,899 $(124,420)
======== ======== =========
<FN>
See Notes to Financial Statements.
+ Formerly known as Equitable Variable Life Insurance Company Separate Account I.
</FN>
</TABLE>
FSA-4
<PAGE>
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
SEPARATE ACCOUNT I+
STATEMENTS OF OPERATIONS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
HIGH YIELD FUND
--------------------------------------
1996 1995 1994
----------- ------------ -------------
<S> <C> <C> <C>
INCOME AND EXPENSES:
Income (Note 2):
Dividends from The Hudson River Trust.............................................. $ 952,760 $ 862,089 $ 806,574
Expenses (Note 3):
Mortality and expense risk charges................................................. 44,945 39,170 41,676
---------- ---------- -----------
NET INVESTMENT INCOME................................................................... 907,815 822,919 764,898
---------- ---------- -----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS (Note 2):
Realized gain (loss) on investments.................................................. 15,812 (10,426) (94,683)
Realized gain distribution from The Hudson River Trust............................... 661,606 -- --
---------- ---------- -----------
NET REALIZED GAIN (LOSS)................................................................ 677,418 (10,426) (94,683)
Unrealized appreciation / (depreciation) on investments:
Beginning of period................................................................ 767,393 98,061 1,064,280
End of period...................................................................... 1,121,972 767,393 98,061
---------- ---------- -----------
Change in unrealized appreciation / (depreciation) during the period................. 354,579 669,332 (966,219)
---------- ---------- -----------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS.................................. 1,031,997 658,906 (1,060,902)
---------- ---------- -----------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS......................... $1,939,812 $1,481,825 $ (296,004)
========== ========== ===========
</TABLE>
<TABLE>
<CAPTION>
BALANCED FUND
--------------------------------------
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
INCOME AND EXPENSES:
Income (Note 2):
Dividends from The Hudson River Trust.............................................. $1,225,630 $1,126,871 $ 1,006,200
Expenses (Note 3):
Mortality and expense risk charges................................................. 189,178 167,041 164,873
---------- ---------- ----------
NET INVESTMENT INCOME................................................................... 1,036,452 959,830 841,327
---------- ---------- ----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS (Note 2):
Realized gain (loss) on investments.................................................. (82,952) (113,948) (379,076)
Realized gain distribution from The Hudson River Trust............................... 3,222,070 1,008,186 --
---------- ---------- ----------
NET REALIZED GAIN (LOSS)................................................................ 3,139,118 894,238 (379,076)
Unrealized appreciation / (depreciation) on investments:
Beginning of period................................................................ 6,183,884 2,080,968 5,526,191
End of period...................................................................... 6,078,817 6,183,884 2,080,968
---------- ---------- ----------
Change in unrealized appreciation / (depreciation) during the period................. (105,067) 4,102,916 (3,445,223)
---------- ---------- ----------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS.................................. 3,034,051 4,997,154 (3,824,299)
---------- ---------- ----------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS......................... $4,070,503 $5,956,984 $(2,982,972)
========== ========== ===========
<FN>
See Notes to Financial Statements.
+ Formerly known as Equitable Variable Life Insurance Company Separate Account I.
</FN>
</TABLE>
FSA-5
<PAGE>
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
SEPARATE ACCOUNT I+
STATEMENTS OF OPERATIONS (CONCLUDED)
FOR THE YEARS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
COMMON STOCK FUND
-----------------------------------------------
1996 1995 1994
-------------- -------------- ---------------
<S> <C> <C> <C>
INCOME AND EXPENSES:
Income (Note 2):
Dividends from The Hudson River Trust..................................... $ 4,143,111 $ 5,978,397 $ 5,727,748
Expenses (Note 3):
Mortality and expense risk charges........................................ 2,447,308 2,095,213 1,942,844
------------ ------------ ------------
NET INVESTMENT INCOME.......................................................... 1,695,803 3,883,184 3,784,904
------------ ------------ ------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS (Note 2):
Realized gain (loss) on investments......................................... 1,202,024 1,269,512 (328,604)
Realized gain distribution from The Hudson River Trust...................... 54,893,874 25,928,481 20,219,440
------------ ------------ ------------
NET REALIZED GAIN (LOSS)....................................................... 56,095,898 27,197,993 19,890,836
Unrealized appreciation / (depreciation) on investments:
Beginning of period....................................................... 177,639,703 92,693,149 126,545,990
End of period............................................................. 225,953,424 177,639,703 92,693,149
------------ ------------ ------------
Change in unrealized appreciation / (depreciation) during the period........ 48,313,721 84,946,554 (33,852,841)
------------ ------------ ------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS......................... 104,409,619 112,144,547 (13,962,005)
------------ ------------ ------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS................ $106,105,422 $116,027,731 $(10,177,101)
============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
AGGRESSIVE STOCK FUND
---------------------------------------
1996 1995 1994
------------ ----------- ------------
<S> <C> <C> <C>
INCOME AND EXPENSES:
Income (Note 2):
Dividends from The Hudson River Trust..................................... $ 65,784 $ 57,627 $ 22,268
Expenses (Note 3):
Mortality and expense risk charges........................................ 135,068 102,259 89,577
---------- ----------- ----------
NET INVESTMENT INCOME.......................................................... (69,284) (44,632) (67,309)
---------- ----------- ----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS (Note 2):
Realized gain (loss) on investments......................................... (104,890) 42,192 (226,938)
Realized gain distribution from The Hudson River Trust...................... 5,275,685 2,691,238 --
---------- ---------- ----------
NET REALIZED GAIN (LOSS)....................................................... 5,170,795 2,733,430 (226,938)
Unrealized appreciation / (depreciation) on investments:
Beginning of period....................................................... 9,098,725 6,102,433 6,618,938
End of period............................................................. 9,264,943 9,098,725 6,102,433
---------- ---------- ----------
Change in unrealized appreciation / (depreciation) during the period......... 166,218 2,996,292 (516,505)
---------- ---------- ----------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS......................... 5,337,013 5,729,722 (743,443)
---------- ---------- ----------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS................ $5,267,729 $5,685,090 $ (810,752)
========== ========== ==========
<FN>
See Notes to Financial Statements.
+ Formerly known as Equitable Variable Life Insurance Company Separate Account I.
</FN>
</TABLE>
FSA-6
<PAGE>
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
SEPARATE ACCOUNT I+
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
MONEY MARKET FUND
-----------------------------------------
1996 1995 1994
------------ ------------- ------------
<S> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income............................................................. $ 3,102,257 $ 3,391,045 $ 2,328,380
Net realized gain (loss).......................................................... 82,253 31,732 52,117
Change in unrealized appreciation / (depreciation) on investments................. 7,049 147,587 75,834
----------- ----------- -----------
Net increase (decrease) in net assets from operations............................. 3,191,559 3,570,364 2,456,331
----------- ----------- -----------
FROM POLICY RELATED TRANSACTIONS:
Net premiums (Note 3)............................................................. 4,963,890 5,540,000 6,128,438
Benefits and other policy related transactions (Note 3)........................... (8,085,524) (8,585,006) (8,940,995)
Net transfers among funds......................................................... (2,603,630) (340,867) (1,904,223)
----------- ----------- -----------
Net increase (decrease) in net assets from policy related transactions............ (5,725,264) (3,385,873) (4,716,780)
----------- ----------- -----------
NET (INCREASE) DECREASE IN AMOUNT RETAINED BY EQUITABLE LIFE
IN SEPARATE ACCOUNT I (Note 4).................................................... (160,954) (33,731) (22,105)
----------- ----------- -----------
INCREASE (DECREASE) IN NET ASSETS ATTRIBUTABLE TO POLICYOWNERS....................... (2,694,659) 150,760 (2,282,554)
NET ASSETS ATTRIBUTABLE TO POLICYOWNERS, BEGINNING OF PERIOD......................... 68,904,686 68,753,926 71,036,480
----------- ----------- -----------
NET ASSETS ATTRIBUTABLE TO POLICYOWNERS, END OF PERIOD............................... $66,210,027 $68,904,686 $68,753,926
=========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
INTERMEDIATE GOVERNMENT
SECURITIES FUND
--------------------------------------
1996 1995 1994
----------- ----------- ------------
<S> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income............................................................. $ 125,461 $ 133,331 $ 188,283
Net realized gain (loss).......................................................... (46,354) (94,891) (146,201)
Change in unrealized appreciation / (depreciation) on investments................. (465) 259,459 (166,502)
---------- ---------- ----------
Net increase (decrease) in net assets from operations............................. 78,642 297,899 (124,420)
---------- ---------- ----------
FROM POLICY RELATED TRANSACTIONS:
Net premiums (Note 3)............................................................. 115,593 120,110 130,572
Benefits and other policy related transactions (Note 3)........................... (238,156) (292,199) (402,355)
Net transfers among funds......................................................... 177,990 (65,399) 606,857
---------- ---------- ----------
Net increase (decrease) in net assets from policy related transactions........... 55,427 (237,488) 335,074
---------- ---------- ----------
NET (INCREASE) DECREASE IN AMOUNT RETAINED BY EQUITABLE LIFE
IN SEPARATE ACCOUNT I (Note 4).................................................... (9,981) (12,591) 4,561
---------- ---------- ----------
INCREASE (DECREASE) IN NET ASSETS ATTRIBUTABLE TO POLICYOWNERS....................... 124,088 47,820 215,215
NET ASSETS ATTRIBUTABLE TO POLICYOWNERS, BEGINNING OF PERIOD......................... 2,162,065 2,114,245 1,899,030
---------- ---------- ----------
NET ASSETS ATTRIBUTABLE TO POLICYOWNERS, END OF PERIOD............................... $2,286,153 $2,162,065 $2,114,245
========== ========== ==========
<FN>
See Notes to Financial Statements.
+ Formerly known as Equitable Variable Life Insurance Company Separate Account I.
</FN>
</TABLE>
FSA-7
<PAGE>
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
SEPARATE ACCOUNT I+
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31,
<TABLE>
<CAPTION>
HIGH YIELD FUND
------------------------------------
1996 1995 1994
----------- ----------- ------------
<S> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income............................................................. $ 907,815 $ 822,919 $ 764,898
Net realized gain (loss).......................................................... 677,418 (10,426) (94,683)
Change in unrealized appreciation / (depreciation) on investments................. 354,579 669,332 (966,219)
---------- ---------- ----------
Net increase (decrease) in net assets from operations............................. 1,939,812 1,481,825 (296,004)
---------- ---------- ----------
FROM POLICY RELATED TRANSACTIONS:
Net premiums (Note 3)............................................................. 846,420 821,557 852,874
Benefits and other policy related transactions (Note 3)........................... (1,604,859) (1,690,910) (1,525,854)
Net transfers among funds......................................................... 491,074 154,049 (38,627)
---------- ---------- ----------
Net increase (decrease) in net assets from policy related transactions............ (267,365) (715,304) (711,607)
---------- ---------- ----------
NET (INCREASE) DECREASE IN AMOUNT RETAINED BY EQUITABLE LIFE
IN SEPARATE ACCOUNT I (Note 4).................................................... (239,649) (96,346) 14,805
---------- ---------- ----------
INCREASE (DECREASE) IN NET ASSETS ATTRIBUTABLE TO POLICYOWNERS....................... 1,432,798 670,175 (992,806)
NET ASSETS ATTRIBUTABLE TO POLICYOWNERS, BEGINNING OF PERIOD......................... 8,233,835 7,563,660 8,556,466
---------- ---------- ----------
NET ASSETS ATTRIBUTABLE TO POLICYOWNERS, END OF PERIOD............................... $9,666,633 $8,233,835 $7,563,660
========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
BALANCED FUND
----------------------------------------
1996 1995 1994
------------- ------------ -------------
<S> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income............................................................. $ 1,036,452 $ 959,830 $ 841,327
Net realized gain (loss).......................................................... 3,139,118 894,238 (379,076)
Change in unrealized appreciation / (depreciation) on investments................. (105,067) 4,102,916 (3,445,223)
----------- ----------- -----------
Net increase (decrease) in net assets from operations............................. 4,070,503 5,956,984 (2,982,972)
----------- ----------- -----------
FROM POLICY RELATED TRANSACTIONS:
Net premiums (Note 3)............................................................. 3,152,716 3,295,027 3,487,888
Benefits and other policy related transactions (Note 3)........................... (3,355,785) (3,348,951) (3,823,829)
Net transfers among funds......................................................... (512,979) (376,087) (3,406)
----------- ----------- -----------
Net increase (decrease) in net assets from policy related transactions............ (716,048) (430,011) (339,347)
----------- ----------- -----------
NET (INCREASE) DECREASE IN AMOUNT RETAINED BY EQUITABLE LIFE
IN SEPARATE ACCOUNT I (Note 4).................................................... (294,944) (89,517) 42,214
----------- ----------- -----------
INCREASE (DECREASE) IN NET ASSETS ATTRIBUTABLE TO POLICYOWNERS....................... 3,059,511 5,437,456 (3,280,105)
NET ASSETS ATTRIBUTABLE TO POLICYOWNERS, BEGINNING OF PERIOD......................... 35,842,518 30,405,062 33,685,167
----------- ----------- -----------
NET ASSETS ATTRIBUTABLE TO POLICYOWNERS, END OF PERIOD............................... $38,902,029 $35,842,518 $30,405,062
=========== =========== ============
<FN>
See Notes to Financial Statements.
+ Formerly known as Equitable Variable Life Insurance Company Separate Account I.
</FN>
</TABLE>
FSA-8
<PAGE>
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
SEPARATE ACCOUNT I+
STATEMENTS OF CHANGES IN NET ASSETS (CONCLUDED)
FOR THE YEARS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
COMMON STOCK FUND
--------------------------------------------
1996 1995 1994
-------------- -------------- --------------
<S> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income........................................................ $ 1,695,803 $ 3,883,184 $ 3,784,904
Net realized gain (loss)..................................................... 56,095,898 27,197,993 19,890,836
Change in unrealized appreciation / (depreciation) on investments............ 48,313,721 84,946,554 (33,852,841)
------------ ------------ ------------
Net increase (decrease) in net assets from operations........................ 106,105,422 116,027,731 (10,177,101)
------------ ------------ ------------
FROM POLICY RELATED TRANSACTIONS:
Net premiums (Note 3)........................................................ 21,081,997 22,520,480 24,056,215
Benefits and other policy related transactions (Note 3)...................... (53,186,448) (43,155,008) (44,688,333)
Net transfers among funds.................................................... 201,379 (27,413) 459,966
------------ ------------ ------------
Net increase (decrease) in net assets from policy related transactions...... (31,903,072) (20,661,941) (20,172,152)
------------ ------------ ------------
NET (INCREASE) DECREASE IN AMOUNT RETAINED BY EQUITABLE LIFE
IN SEPARATE ACCOUNT I (Note 4)............................................... 775,149 (1,859,326) 149,257
------------ ------------ ------------
INCREASE (DECREASE) IN NET ASSETS ATTRIBUTABLE TO POLICYOWNERS.................. 74,977,499 93,506,464 (30,199,996)
NET ASSETS ATTRIBUTABLE TO POLICYOWNERS, BEGINNING OF PERIOD.................... 456,093,461 362,586,997 392,786,993
------------ ------------ ------------
NET ASSETS ATTRIBUTABLE TO POLICYOWNERS, END OF PERIOD.......................... $531,070,960 $456,093,461 $362,586,997
============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
AGGRESSIVE STOCK FUND
-----------------------------------------
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income........................................................ $ (69,284) $ (44,632) $ (67,309)
Net realized gain (loss)..................................................... 5,170,795 2,733,430 (226,938)
Change in unrealized appreciation / (depreciation) on investments............ 166,218 2,996,292 (516,505)
----------- ----------- -----------
Net increase (decrease) in net assets from operations........................ 5,267,729 5,685,090 (810,752)
----------- ----------- -----------
FROM POLICY RELATED TRANSACTIONS:
Net premiums (Note 3)........................................................ 1,523,680 1,509,349 1,480,535
Benefits and other policy related transactions (Note 3)...................... (2,984,701) (2,642,068) (1,982,576)
Net transfers among funds.................................................... 2,246,166 655,717 1,279,484
----------- ----------- -----------
Net increase (decrease) in net assets from policy related transactions...... 785,145 (477,002) 777,443
----------- ----------- -----------
NET (INCREASE) DECREASE IN AMOUNT RETAINED BY EQUITABLE LIFE
IN SEPARATE ACCOUNT I (Note 4)............................................... (83,646) (150,764) 20,425
----------- ----------- -----------
INCREASE (DECREASE) IN NET ASSETS ATTRIBUTABLE TO POLICYOWNERS.................. 5,969,228 5,057,324 (12,884)
NET ASSETS ATTRIBUTABLE TO POLICYOWNERS, BEGINNING OF PERIOD.................... 23,218,802 18,161,478 18,174,362
----------- ----------- -----------
NET ASSETS ATTRIBUTABLE TO POLICYOWNERS, END OF PERIOD.......................... $29,188,030 $23,218,802 $18,161,478
=========== =========== ===========
<FN>
See Notes to Financial Statements.
+ Formerly known as Equitable Variable Life Insurance Company Separate Account I.
</FN>
</TABLE>
FSA-9
<PAGE>
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
SEPARATE ACCOUNT I+
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
1. General
On September 19, 1996 the Board of Directors of The Equitable Life Assurance
Society of the United States ("Equitable Life") approved an Agreement and
Plan of Merger by and between Equitable Life and Equitable Variable Life
Insurance Company (the "Merger Agreement"). The merger was completed on
January 1, 1997. On that date, and in accordance with the provisions of the
Merger Agreement, the separate existence of Equitable Variable Life
Insurance Company ("Equitable Variable Life") ceased and Equitable Life
survived the merger. From January 1, 1997, Equitable Life is liable in place
of Equitable Variable Life for the liabilities and obligations of Equitable
Variable Life, including liabilities under policies and contracts issued by
Equitable Variable Life, and all of Equitable Variable Life's assets became
assets of Equitable Life.
Equitable Variable Life, a wholly-owned subsidiary of Equitable Life,
established Separate Account I (the Account) under New York insurance law to
support the operations of Equitable Variable Life's scheduled and single
premium variable life insurance policies (Policies). The Account is a unit
investment trust registered with the Securities and Exchange Commission
under the Investment Company Act of 1940. The Account consists of six
investment funds: the Money Market Fund, the Intermediate Government
Securities Fund, the High Yield Fund, the Balanced Fund, the Common Stock
Fund and the Aggressive Stock Fund. The assets in each Fund are invested in
Class IA shares of a designated portfolio (Portfolio) of a mutual fund, The
Hudson River Trust (the Trust). Each Portfolio has separate investment
objectives.
The assets of the Account are the property of Equitable Life. However, the
portion of the Account's assets equal to the reserves and other policy
liabilities with respect to the Account will not be chargeable with
liabilities arising out of any other business Equitable Life may conduct.
The net assets may not be less than the amount required under New York
insurance law to provide for death benefits (without regard to the minimum
death benefit guarantee) and other policy benefits. Additional assets are
held in Equitable Life's General Account to cover the contingency that the
guaranteed minimum death benefit might exceed the death benefit which would
have been payable in the absence of such guarantee.
2. Significant Accounting Policies
The accompanying financial statements are prepared in conformity with
generally accepted accounting principles (GAAP). The preparation of
financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Investments made in shares of the Trust are valued at the net asset value
per share of the respective Portfolios. The net asset value is determined by
the Trust using the market or fair value of the underlying assets of the
Portfolios.
Investment transactions are recorded on the trade date. Realized gains and
losses include gains and losses on redemptions of the Trust's shares
(determined on the identified cost basis) and Trust distributions
representing the net realized gains on Trust investment transactions.
Dividends are recorded as income at the end of each quarter on the
ex-dividend date. Capital gains are distributed by the Trust at the end of
each year.
The operations of the Account are included in the consolidated Federal
income tax return of Equitable Life. Under the provisions of the Policies,
Equitable Life has the right to charge the Account for Federal income tax
attributable to the Account. No charge is currently being made against the
Account for such tax since, under current tax law, Equitable Life pays no
tax on investment income and capital gains reflected in variable life
insurance policy reserves. However, Equitable Life retains the right to
charge for any Federal income tax incurred which is attributable to the
Account if the law is changed. Charges for state and local taxes, if any,
attributable to the Account may also be made.
3. Asset Charges
Under the policies, Equitable Life assumes mortality and expense risks and,
to cover these risks, deducts a charge from the assets of the Account at an
annual rate of 0.50% of net assets attributable to policyowners.
Equitable Life makes certain deductions from net premiums before amounts are
allocated to the Account. The deductions are for (1) premiums for optional
benefits, (2) additional premiums for extra mortality risks, (3)
administrative expenses, (4) state premium taxes, and (5) except as to
single premium policies, a risk charge for the guaranteed minimum death
benefit.
+ Formerly known as Equitable Variable Life Insurance Company Separate
Account I.
FSA-10
<PAGE>
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
SEPARATE ACCOUNT I+
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996
4. Amounts Retained by Equitable Life in Separate Account I
The amount retained by Equitable Life in the Account arises principally from
(1) mortality and other gains and losses resulting from the Account's
operations, (2) contributions from Equitable Life, and (3) that portion,
determined ratably, of the Account's investment results applicable to those
assets in the Account in excess of the net assets for the Policies. Amounts
retained by Equitable Life are not subject to charges for mortality and
expense risks.
Amounts retained by Equitable Life in the Account may be transferred at any
time by Equitable Life to its General Account.
The following table shows the surplus withdrawals by Equitable Life by
investment fund:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
INVESTMENT FUND 1996 1995 1994
--------------- ---- ---- ----
<S> <C> <C> <C>
Money Market...................................... $ 200,000 $ -- $ --
Intermediate Government Securities................ 35,000 -- --
High Yield........................................ 240,000 -- --
Balanced.......................................... 190,000 -- --
Common Stock...................................... 225,000 1,975,000 --
Aggressive Stock.................................. 150,000 100,000 --
Short-Term World Income........................... -- -- 119,356
----------- ----------- ---------
$ 1,040,000 $ 2,075,000 $ 119,356
=========== =========== =========
</TABLE>
Equitable Life credits the values of the Policies participating in the
Account to compensate policyowners for their share of the Trust expenses in
excess of (1) fees for advisory services at an annual rate equivalent to
0.25% of the average daily value of the aggregate net assets of the
Portfolios, and (2) the Trust income taxes, if any. For the Money Market
Fund and the Common Stock Fund, fees for advisory services in excess of an
annual rate equivalent to 0.25% of the average daily value of the aggregate
net assets of the related Trust Portfolios are refunded to the Funds. Excess
fees for advisory services for the Intermediate Government Securities Fund,
the High Yield Fund, the Balanced Fund and the Aggressive Stock Fund are
absorbed by Equitable Life's surplus account.
5. Distribution and Servicing Agreement
Equitable Life has entered into a Distribution and Servicing Agreement with
EQ Financial Consultants, Inc., whereby registered representatives of EQ
Financial Consultants, Inc., authorized as variable life insurance agents
under applicable state insurance laws, sell the Policies. The registered
representatives are compensated on a commission basis by Equitable Life.
6. Share Substitution
On February 22, 1994, Equitable Variable Life, the Account and the Trust
substituted shares of the Trust's Intermediate Government Securities
Portfolio for shares of the Trust's Short-Term World Income Portfolio. The
amount transferred to Intermediate Government Securities Portfolio was
$390,705. The statements of operations and statements of changes in net
assets for the Intermediate Government Securities Portfolio is combined with
the Short-Term World Income Portfolio for periods prior to the merger on
February 22, 1994. The Short-Term World Income Fund is not available for
future investment.
7. Investment Returns
The tables on the following page show the gross and net investment returns
with respect to the Funds for the periods shown. The net return for each
Fund is based upon net assets for a policy which commences with the
beginning date of such period and is not based on the average net assets in
the Fund during such period. Gross return is equal to the total return
earned by the underlying Trust investment.
+ Formerly known as Equitable Variable Life Insurance Company Separate
Account I.
FSA-11
<PAGE>
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
SEPARATE ACCOUNT I+
NOTES TO FINANCIAL STATEMENTS -- (CONCLUDED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
RATES OF RETURN:
YEARS ENDED DECEMBER 31,
MONEY MARKET ----------------------------------------------------------------------------------------------
FUND(C) 1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
- ------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Gross return.............. 5.33% 5.74% 4.02% 3.16% 3.75% 6.38% 8.44% 9.44% 7.56% 6.85%
Net return................ 4.99% 5.41% 3.68% 2.62% 3.23% 5.85% 7.90% 8.85% 7.02% 6.32%
<CAPTION>
APRIL 1(A) TO
INTERMEDIATE YEARS ENDED DECEMBER 31, DECEMBER 31,
GOVERNMENT -------------------------------------------------- ---------------
SECURITIES FUND 1996 1995 1994 1993 1992 1991
- --------------- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Gross return.............. 3.78% 13.33% (4.37)% 10.87% 5.88% 12.51%
Net return................ 3.57% 13.12% (4.54)% 10.29% 5.35% 12.09%
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------------------------------------------------------------------
HIGH YIELD FUND 1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
- --------------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Gross return.............. 22.89% 19.92% (2.79)% 23.60% 12.69% 24.91% (0.75)% 5.52% 10.55% 5.30%
Net return................ 22.68% 19.74% (2.94)% 22.99% 12.13% 24.29% (1.25)% 4.99% 9.73% 4.77%
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------------------------------------------------------------------
BALANCED FUND 1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
- ------------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Gross return.............. 11.68% 19.75% (8.02)% 12.44% (2.68)% 41.52% 0.43 % 26.08% 13.84% (0.65)%
Net return................ 11.29% 19.33% (8.35)% 11.91% (3.17)% 40.81% (0.07)% 25.45% 12.99% (1.15)%
<CAPTION>
YEARS ENDED DECEMBER 31,
COMMON STOCK ----------------------------------------------------------------------------------------------
FUND 1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
- ---------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Gross return.............. 24.28% 32.45% (2.14)% 24.99% 3.36% 38.10% (7.95)% 25.82% 22.69% 7.71%
Net return................ 23.81% 31.97% (2.50)% 24.36% 2.84% 37.41% (8.41)% 25.19% 22.08% 7.17%
<CAPTION>
YEARS ENDED DECEMBER 31,
AGGRESSIVE -------------------------------------------------------------------------------------------------------
STOCK FUND 1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
- ---------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Gross return.............. 22.20% 31.63% (3.81)% 17.05% (2.91)% 87.41% 8.49% 43.93% 1.78% 7.69%
Net return................ 21.87% 31.29% (4.07)% 16.45% (3.40)% 86.47% 7.95% 43.21% 1.02% 7.15%
</TABLE>
(a) Date as of which net premiums under the Policies were first allocated to the
Fund. The gross return and the net return for the periods indicated are not
annual rates of return.
+ Formerly known as Equitable Variable Life Insurance Company Separate
Account I.
FSA-12
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholder of
The Equitable Life Assurance Society of the United States
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of earnings, of shareholder's equity and of cash flows
present fairly, in all material respects, the financial position of The
Equitable Life Assurance Society of the United States and its subsidiaries
("Equitable Life") at December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of Equitable Life's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
As discussed in Note 2 to the consolidated financial statements, Equitable Life
changed its methods of accounting for long-duration participating life insurance
contracts and long-lived assets in 1996, for loan impairments in 1995 and for
postemployment benefits in 1994.
Price Waterhouse LLP
New York, New York
February 10, 1997
F-1
<PAGE>
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
----------------- -----------------
(IN MILLIONS)
<S> <C> <C>
ASSETS
Investments:
Fixed maturities:
Available for sale, at estimated fair value................. $ 18,077.0 $ 15,899.9
Mortgage loans on real estate................................. 3,133.0 3,638.3
Equity real estate............................................ 3,297.5 3,916.2
Policy loans.................................................. 2,196.1 1,976.4
Investment in and loans to affiliates......................... 685.0 636.6
Other equity investments...................................... 597.3 621.1
Other invested assets......................................... 288.7 706.1
----------------- -----------------
Total investments......................................... 28,274.6 27,394.6
Cash and cash equivalents....................................... 538.8 774.7
Deferred policy acquisition costs............................... 3,104.9 3,075.8
Amounts due from discontinued GIC Segment....................... 996.2 2,097.1
Other assets.................................................... 2,552.2 2,718.1
Closed Block assets............................................. 8,495.0 8,582.1
Separate Accounts assets........................................ 29,646.1 24,566.6
----------------- -----------------
TOTAL ASSETS.................................................... $ 73,607.8 $ 69,209.0
================= =================
LIABILITIES
Policyholders' account balances................................. $ 21,865.6 $ 21,911.2
Future policy benefits and other policyholders' liabilities..... 4,416.6 4,007.3
Short-term and long-term debt................................... 1,766.9 1,899.3
Other liabilities............................................... 2,785.1 3,380.7
Closed Block liabilities........................................ 9,091.3 9,221.4
Separate Accounts liabilities................................... 29,598.3 24,531.0
----------------- -----------------
Total liabilities......................................... 69,523.8 64,950.9
----------------- -----------------
Commitments and contingencies (Notes 10, 12, 13, 14 and 15)
SHAREHOLDER'S EQUITY
Common stock, $1.25 par value 2.0 million shares
authorized, issued and outstanding............................ 2.5 2.5
Capital in excess of par value.................................. 3,105.8 3,105.8
Retained earnings............................................... 798.7 788.4
Net unrealized investment gains................................. 189.9 396.5
Minimum pension liability....................................... (12.9) (35.1)
----------------- -----------------
Total shareholder's equity................................ 4,084.0 4,258.1
----------------- -----------------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY...................... $ 73,607.8 $ 69,209.0
================= =================
</TABLE>
See Notes to Consolidated Financial Statements.
F-2
<PAGE>
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
CONSOLIDATED STATEMENTS OF EARNINGS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
----------------- ----------------- -----------------
(IN MILLIONS)
<S> <C> <C> <C>
REVENUES
Universal life and investment-type product policy fee
income................................................ $ 874.0 $ 788.2 $ 715.0
Premiums................................................ 597.6 606.8 625.6
Net investment income................................... 2,175.9 2,088.2 1,998.6
Investment (losses) gains, net.......................... (9.8) 5.3 91.8
Commissions, fees and other income...................... 1,081.8 897.1 847.4
Contribution from the Closed Block...................... 125.0 143.2 137.0
----------------- ----------------- -----------------
Total revenues.................................... 4,844.5 4,528.8 4,415.4
----------------- ----------------- -----------------
BENEFITS AND OTHER DEDUCTIONS
Interest credited to policyholders' account balances.... 1,270.2 1,248.3 1,201.3
Policyholders' benefits................................. 1,317.7 1,008.6 914.9
Other operating costs and expenses...................... 2,048.0 1,775.8 1,857.7
----------------- ----------------- -----------------
Total benefits and other deductions............... 4,635.9 4,032.7 3,973.9
----------------- ----------------- -----------------
Earnings from continuing operations before Federal
income taxes, minority interest and cumulative
effect of accounting change........................... 208.6 496.1 441.5
Federal income taxes.................................... 9.7 120.5 100.2
Minority interest in net income of consolidated
subsidiaries.......................................... 81.7 62.8 50.4
----------------- ----------------- -----------------
Earnings from continuing operations before
cumulative effect of accounting change................ 117.2 312.8 290.9
Discontinued operations, net of Federal income taxes.... (83.8) - -
Cumulative effect of accounting change, net of Federal
income taxes.......................................... (23.1) - (27.1)
----------------- ----------------- -----------------
Net Earnings............................................ $ 10.3 $ 312.8 $ 263.8
================= ================= =================
</TABLE>
See Notes to Consolidated Financial Statements.
F-3
<PAGE>
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
----------------- ----------------- -----------------
(IN MILLIONS)
<S> <C> <C> <C>
Common stock, at par value, beginning and end of year......... $ 2.5 $ 2.5 $ 2.5
----------------- ----------------- -----------------
Capital in excess of par value, beginning of year as
previously reported......................................... 2,913.6 2,913.6 2,613.6
Cumulative effect on prior years of retroactive restatement
for accounting change....................................... 192.2 192.2 192.2
----------------- ----------------- -----------------
Capital in excess of par value, beginning of year as restated. 3,105.8 3,105.8 2,805.8
Additional capital in excess of par value..................... - - 300.0
----------------- ----------------- -----------------
Capital in excess of par value, end of year................... 3,105.8 3,105.8 3,105.8
----------------- ----------------- -----------------
Retained earnings, beginning of year as previously reported... 781.6 484.0 217.6
Cumulative effect on prior years of retroactive restatement
for accounting change....................................... 6.8 (8.4) (5.8)
----------------- ----------------- -----------------
Retained earnings, beginning of year as restated.............. 788.4 475.6 211.8
Net earnings.................................................. 10.3 312.8 263.8
----------------- ----------------- -----------------
Retained earnings, end of year................................ 798.7 788.4 475.6
----------------- ----------------- -----------------
Net unrealized investment gains (losses), beginning of year
as previously reported...................................... 338.2 (203.0) 131.9
Cumulative effect on prior years of retroactive restatement
for accounting change....................................... 58.3 (17.5) 12.7
----------------- ----------------- -----------------
Net unrealized investment gains (losses), beginning of
year as restated............................................ 396.5 (220.5) 144.6
Change in unrealized investment (losses) gains................ (206.6) 617.0 (365.1)
----------------- ----------------- -----------------
Net unrealized investment gains (losses), end of year......... 189.9 396.5 (220.5)
----------------- ----------------- -----------------
Minimum pension liability, beginning of year.................. (35.1) (2.7) (15.0)
Change in minimum pension liability........................... 22.2 (32.4) 12.3
----------------- ----------------- -----------------
Minimum pension liability, end of year........................ (12.9) (35.1) (2.7)
----------------- ----------------- -----------------
TOTAL SHAREHOLDER'S EQUITY, END OF YEAR....................... $ 4,084.0 $ 4,258.1 $ 3,360.7
================= ================= =================
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE>
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
----------------- ----------------- -----------------
(IN MILLIONS)
<S> <C> <C> <C>
Net earnings.................................................. $ 10.3 $ 312.8 $ 263.8
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Interest credited to policyholders' account balances........ 1,270.2 1,248.3 1,201.3
Universal life and investment-type policy fee income........ (874.0) (788.2) (715.0)
Investment losses (gains)................................... 9.8 (5.3) (91.8)
Change in Federal income taxes payable...................... (197.1) 221.6 38.3
Other, net.................................................. 364.4 127.3 (19.4)
----------------- ----------------- -----------------
Net cash provided by operating activities..................... 583.6 1,116.5 677.2
----------------- ----------------- -----------------
Cash flows from investing activities:
Maturities and repayments................................... 2,275.1 1,897.4 2,323.8
Sales....................................................... 8,964.3 8,867.1 5,816.6
Return of capital from joint ventures and limited
partnerships.............................................. 78.4 65.2 39.0
Purchases................................................... (12,559.6) (11,675.5) (7,564.7)
Decrease (increase) in loans to discontinued GIC Segment.... 1,017.0 1,226.9 (40.0)
Other, net.................................................. 56.7 (624.7) (478.1)
----------------- ----------------- -----------------
Net cash (used) provided by investing activities.............. (168.1) (243.6) 96.6
----------------- ----------------- -----------------
Cash flows from financing activities:
Policyholders' account balances:
Deposits.................................................. 1,925.4 2,586.5 2,082.5
Withdrawals............................................... (2,385.2) (2,657.1) (2,864.4)
Net decrease in short-term financings....................... (.3) (16.4) (173.0)
Additions to long-term debt................................. - 599.7 51.8
Repayments of long-term debt................................ (124.8) (40.7) (199.8)
Proceeds from issuance of Alliance units.................... - - 100.0
Payment of obligation to fund accumulated deficit of
discontinued GIC Segment.................................. - (1,215.4) -
Capital contribution from the Holding Company............... - - 300.0
Other, net.................................................. (66.5) (48.4) 26.5
----------------- ----------------- -----------------
Net cash (used) by financing activities....................... (651.4) (791.8) (676.4)
----------------- ----------------- -----------------
Change in cash and cash equivalents........................... (235.9) 81.1 97.4
Cash and cash equivalents, beginning of year.................. 774.7 693.6 596.2
----------------- ----------------- -----------------
Cash and Cash Equivalents, End of Year........................ $ 538.8 $ 774.7 $ 693.6
================= ================= =================
Supplemental cash flow information
Interest Paid............................................... $ 109.9 $ 89.6 $ 34.9
================= ================= =================
Income Taxes (Refunded) Paid................................ $ (10.0) $ (82.7) $ 49.2
================= ================= =================
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE>
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1) ORGANIZATION
The Equitable Life Assurance Society of the United States ("Equitable
Life") converted to a stock life insurance company on July 22, 1992 and
became a wholly owned subsidiary of The Equitable Companies Incorporated
(the "Holding Company"). Equitable Life's insurance business is
conducted principally by Equitable Life and its wholly owned life
insurance subsidiary, Equitable Variable Life Insurance Company
("EVLICO"). Effective January 1, 1997, EVLICO was merged into Equitable
Life, which will continue to conduct the Company's insurance business.
Equitable Life's investment management business, which comprises the
Investment Services segment, is conducted principally by Alliance
Capital Management L.P. ("Alliance"), Equitable Real Estate Investment
Management, Inc. ("EREIM") and Donaldson, Lufkin & Jenrette, Inc.
("DLJ"), an investment banking and brokerage affiliate. AXA-UAP ("AXA"),
a French holding company for an international group of insurance and
related financial services companies, is the Holding Company's largest
shareholder, owning approximately 60.8% at December 31, 1996 (63.6%
assuming conversion of Series E Convertible Preferred Stock held by AXA
and 54.4% if all securities convertible into, and options on, common
stock were to be converted or exercised).
2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Principles of Consolidation
-----------------------------------------------------
The accompanying consolidated financial statements are prepared in
conformity with generally accepted accounting principles ("GAAP").
The accompanying consolidated financial statements include the accounts
of Equitable Life and its wholly owned life insurance subsidiaries
(collectively, the "Insurance Group"); non-insurance subsidiaries,
principally Alliance, an investment advisory subsidiary, and EREIM, a
real estate investment management subsidiary; and those partnerships and
joint ventures in which Equitable Life or its subsidiaries has control
and a majority economic interest (collectively, including its
consolidated subsidiaries, the "Company"). The Company's investment in
DLJ is reported on the equity basis of accounting. Closed Block assets
and liabilities and results of operations are presented in the
consolidated financial statements as single line items (see Note 6).
Unless specifically stated, all disclosures contained herein supporting
the consolidated financial statements exclude the Closed Block related
amounts.
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
All significant intercompany transactions and balances have been
eliminated in consolidation other than intercompany transactions and
balances with the Closed Block and the discontinued Guaranteed Interest
Contract ("GIC") Segment (see Note 7).
The years "1996," "1995" and "1994" refer to the years ended December
31, 1996, 1995 and 1994, respectively.
Certain reclassifications have been made in the amounts presented for
prior periods to conform these periods with the 1996 presentation.
F-6
<PAGE>
Closed Block
------------
As of July 22, 1992, Equitable Life established the Closed Block for the
benefit of certain classes of individual participating policies for
which Equitable Life had a dividend scale payable in 1991 and which were
in force on that date. Assets were allocated to the Closed Block in an
amount which, together with anticipated revenues from policies included
in the Closed Block, was reasonably expected to be sufficient to support
such business, including provision for payment of claims, certain
expenses and taxes, and for continuation of dividend scales payable in
1991, assuming the experience underlying such scales continues.
Assets allocated to the Closed Block inure solely to the benefit of the
holders of policies included in the Closed Block and will not revert to
the benefit of the Holding Company. The plan of demutualization
prohibits the reallocation, transfer, borrowing or lending of assets
between the Closed Block and other portions of Equitable Life's General
Account, any of its Separate Accounts or to any affiliate of Equitable
Life without the approval of the New York Superintendent of Insurance
(the "Superintendent"). Closed Block assets and liabilities are carried
on the same basis as similar assets and liabilities held in the General
Account. The excess of Closed Block liabilities over Closed Block assets
represents the expected future post-tax contribution from the Closed
Block which would be recognized in income over the period the policies
and contracts in the Closed Block remain in force.
Discontinued Operations
-----------------------
In 1991, the Company's management adopted a plan to discontinue the
business operations of the GIC Segment, consisting of the Group
Non-Participating Wind-Up Annuities ("Wind-Up Annuities") and Guaranteed
Interest Contract ("GIC") lines of business. The Company established a
pre-tax provision for the estimated future losses of the GIC line of
business and a premium deficiency reserve for the Wind-Up Annuities.
Subsequent losses incurred have been charged to the two loss provisions.
Management reviews the adequacy of the allowance and reserve each
quarter. During the fourth quarter 1996 review, management determined it
was necessary to increase the allowance for expected future losses of
the GIC Segment. Management believes the loss provisions for GIC
contracts and Wind-Up Annuities at December 31, 1996 are adequate to
provide for all future losses; however, the determination of loss
provisions continues to involve numerous estimates and subjective
judgments regarding the expected performance of discontinued operations
investment assets. There can be no assurance the losses provided for
will not differ from the losses ultimately realized (See Note 7).
Accounting Changes
------------------
In 1996, the Company changed its method of accounting for long-duration
participating life insurance contracts, primarily within the Closed
Block, in accordance with the provisions prescribed by Statement of
Financial Accounting Standards ("SFAS") No. 120, "Accounting and
Reporting by Mutual Life Insurance Enterprises and by Insurance
Enterprises for Certain Long-Duration Participating Contracts". The
effect of this change, including the impact on the Closed Block, was to
increase earnings from continuing operations before cumulative effect of
accounting change by $19.2 million, net of Federal income taxes of $10.3
million for 1996. The financial statements for 1995 and 1994 have been
retroactively restated for the change which resulted in an increase
(decrease) in earnings before cumulative effect of accounting change of
$15.2 million, net of Federal income taxes of $8.2 million, and $(2.6)
million, net of Federal income tax benefit of $1.0 million,
respectively. Shareholder's equity increased $199.1 million as of
January 1, 1994 for the effect of retroactive application of the new
method. (See "Deferred Policy Acquisition Costs," "Policyholders'
Account Balances and Future Policy Benefits" and Note 6.)
The Company implemented SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of," as of
January 1, 1996. The statement requires long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever events or
changes in circumstances
F-7
<PAGE>
indicate the carrying value of such assets may not be recoverable.
Effective with SFAS No. 121's adoption, impaired real estate is written
down to fair value with the impairment loss being included in investment
gains (losses), net. Before implementing SFAS No. 121, valuation
allowances on real estate held for the production of income were
computed using the forecasted cash flows of the respective properties
discounted at a rate equal to the Company's cost of funds. The adoption
of the statement resulted in the release of valuation allowances of
$152.4 million and recognition of impairment losses of $144.0 million on
real estate held and used. Real estate which management has committed to
disposing of by sale or abandonment is classified as real estate to be
disposed of. Valuation allowances on real estate to be disposed of
continue to be computed using the lower of estimated fair value or
depreciated cost, net of disposition costs. Implementation of the SFAS
No. 121 impairment requirements relative to other assets to be disposed
of resulted in a charge for the cumulative effect of an accounting
change of $23.1 million, net of a Federal income tax benefit of $12.4
million, due to the writedown to fair value of building improvements
relating to facilities being vacated beginning in 1996.
In the first quarter of 1995, the Company adopted SFAS No. 114,
"Accounting by Creditors for Impairment of a Loan". This statement
applies to all loans, including loans restructured in a troubled debt
restructuring involving a modification of terms. This statement
addresses the accounting for impairment of a loan by specifying how
allowances for credit losses should be determined. Impaired loans within
the scope of this statement are measured based on the present value of
expected future cash flows discounted at the loan's effective interest
rate, at the loan's observable market price or the fair value of the
collateral if the loan is collateral dependent. The Company provides for
impairment of loans through an allowance for possible losses. The
adoption of this statement did not have a material effect on the level
of these allowances or on the Company's consolidated statements of
earnings and shareholder's equity.
Beginning coincident with issuance of SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities," implementation
guidance in November 1995, the Financial Accounting Standards Board
("FASB") permitted companies a one-time opportunity, through December
31, 1995, to reassess the appropriateness of the classification of all
securities held at that time. On December 1, 1995, the Company
transferred $4,794.9 million of securities classified as held to
maturity to the available for sale portfolio. As a result, consolidated
shareholder's equity increased by $149.4 million, net of deferred policy
acquisition costs ("DAC"), amounts attributable to participating group
annuity contracts and deferred Federal income taxes.
In the fourth quarter of 1994 (effective as of January 1, 1994), the
Company adopted SFAS No. 112, "Employers' Accounting for Postemployment
Benefits," which required employers to recognize the obligation to
provide postemployment benefits. Implementation of this statement
resulted in a charge for the cumulative effect of accounting change of
$27.1 million, net of a Federal income tax benefit of $14.6 million.
New Accounting Pronouncements
-----------------------------
The FASB issued SFAS No. 123, "Accounting for Stock-Based Compensation,"
which permits entities to recognize as expense over the vesting period
the fair value of all stock-based awards on the date of grant or,
alternatively, to continue to apply the provisions of Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations. Companies which elect to
continue to apply APB Opinion No. 25 must provide pro forma net income
disclosures for employee stock option grants made in 1995 and future
years as if the fair-value-based method defined in SFAS No. 123 had been
applied. The Company accounts for stock option plans sponsored by the
Holding Company, DLJ and Alliance in accordance with the provisions of
APB Opinion No. 25 (see Note 21).
F-8
<PAGE>
In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities".
SFAS No. 125 specifies the accounting and reporting requirements for
transfers of financial assets, the recognition and measurement of
servicing assets and liabilities and extinguishments of liabilities.
SFAS No. 125 is effective for transactions occurring after December 31,
1996 and is to be applied prospectively. In December 1996, the FASB
issued SFAS No. 127, "Deferral of the Effective Date of Certain
Provisions of FASB Statement No. 125," which defers for one year the
effective date of provisions relating to secured borrowings and
collateral and transfers of financial assets that are part of repurchase
agreements, dollar-roll, securities lending and similar transactions.
Management has not yet determined the effect of implementing SFAS No.
125.
Valuation of Investments
------------------------
Fixed maturities identified as available for sale are reported at
estimated fair value. The amortized cost of fixed maturities is adjusted
for impairments in value deemed to be other than temporary.
Mortgage loans on real estate are stated at unpaid principal balances,
net of unamortized discounts and valuation allowances. Effective with
the adoption of SFAS No. 114 on January 1, 1995, the valuation
allowances are based on the present value of expected future cash flows
discounted at the loan's original effective interest rate or the
collateral value if the loan is collateral dependent. However, if
foreclosure is or becomes probable, the measurement method used is
collateral value. Prior to the adoption of SFAS No. 114, the valuation
allowances were based on losses expected by management to be realized on
transfers of mortgage loans to real estate (upon foreclosure or
in-substance foreclosure), on the disposition or settlement of mortgage
loans and on mortgage loans management believed may not be collectible
in full. In establishing valuation allowances, management previously
considered, among other things the estimated fair value of the
underlying collateral.
Real estate, including real estate acquired in satisfaction of debt, is
stated at depreciated cost less valuation allowances. At the date of
foreclosure (including in-substance foreclosure), real estate acquired
in satisfaction of debt is valued at estimated fair value. Impaired real
estate is written down to fair value with the impairment loss being
included in investment gains (losses) net. Valuation allowances on real
estate available for sale are computed using the lower of current
estimated fair value or depreciated cost, net of disposition costs.
Prior to the adoption of SFAS No. 121, valuation allowances on real
estate held for the production of income were computed using the
forecasted cash flows of the respective properties discounted at a rate
equal to the Company's cost of funds.
Policy loans are stated at unpaid principal balances.
Partnerships and joint venture interests in which the Company does not
have control and a majority economic interest are reported on the equity
basis of accounting and are included either with equity real estate or
other equity investments, as appropriate.
Common stocks are carried at estimated fair value and are included in
other equity investments.
Short-term investments are stated at amortized cost which approximates
fair value and are included with other invested assets.
Cash and cash equivalents includes cash on hand, amounts due from banks
and highly liquid debt instruments purchased with an original maturity
of three months or less.
All securities are recorded in the consolidated financial statements on
a trade date basis.
Investment Results and Unrealized Investment Gains (Losses)
-----------------------------------------------------------
Net investment income and realized investment gains and losses
(collectively, "investment results") related to certain participating
group annuity contracts which are passed through to the contractholders
are reflected as interest credited to policyholders' account balances.
F-9
<PAGE>
Realized investment gains and losses are determined by specific
identification and are presented as a component of revenue. Valuation
allowances are netted against the asset categories to which they apply
and changes in the valuation allowances are included in investment gains
or losses.
Unrealized investment gains and losses on fixed maturities available for
sale and equity securities held by the Company are accounted for as a
separate component of shareholder's equity, net of related deferred
Federal income taxes, amounts attributable to the discontinued GIC
Segment, participating group annuity contracts, and DAC related to
universal life and investment-type products and participating
traditional life contracts.
Recognition of Insurance Income and Related Expenses
----------------------------------------------------
Premiums from universal life and investment-type contracts are reported
as deposits to policyholders' account balances. Revenues from these
contracts consist of amounts assessed during the period against
policyholders' account balances for mortality charges, policy
administration charges and surrender charges. Policy benefits and claims
that are charged to expense include benefit claims incurred in the
period in excess of related policyholders' account balances.
Premiums from participating and non-participating traditional life and
annuity policies with life contingencies generally are recognized as
income when due. Benefits and expenses are matched with such income so
as to result in the recognition of profits over the life of the
contracts. This match is accomplished by means of the provision for
liabilities for future policy benefits and the deferral and subsequent
amortization of policy acquisition costs.
For contracts with a single premium or a limited number of premium
payments due over a significantly shorter period than the total period
over which benefits are provided, premiums are recorded as income when
due with any excess profit deferred and recognized in income in a
constant relationship to insurance in force or, for annuities, the
amount of expected future benefit payments.
Premiums from individual health contracts are recognized as income over
the period to which the premiums relate in proportion to the amount of
insurance protection provided.
Deferred Policy Acquisition Costs
---------------------------------
The costs of acquiring new business, principally commissions,
underwriting, agency and policy issue expenses, all of which vary with
and are primarily related to the production of new business, are
deferred. DAC is subject to recoverability testing at the time of policy
issue and loss recognition testing at the end of each accounting period.
For universal life products and investment-type products, DAC is
amortized over the expected total life of the contract group (periods
ranging from 15 to 35 years and 5 to 17 years, respectively) as a
constant percentage of estimated gross profits arising principally from
investment results, mortality and expense margins and surrender charges
based on historical and anticipated future experience, updated at the
end of each accounting period. The effect on the amortization of DAC of
revisions to estimated gross profits is reflected in earnings in the
period such estimated gross profits are revised. The effect on the DAC
asset that would result from realization of unrealized gains (losses) is
recognized with an offset to unrealized gains (losses) in consolidated
shareholder's equity as of the balance sheet date.
For participating traditional life policies (substantially all of which
are in the Closed Block), DAC is amortized over the expected total life
of the contract group (40 years) as a constant percentage based on the
present value of the estimated gross margin amounts expected to be
realized over the life of the contracts using the expected investment
yield. At December 31, 1996, the expected investment yield ranged from
7.30% grading to 7.68% over 13 years. Estimated gross margin includes
anticipated premiums and investment results less claims and
administrative expenses, changes in the net level premium reserve and
expected annual policyholder dividends. Deviations of actual results
from estimated experience are reflected in earnings in the period such
deviations occur. The effect on the DAC asset that would result from
realization of unrealized gains (losses) is recognized with an offset to
unrealized gains (losses) in consolidated shareholder's equity as of the
balance sheet date.
F-10
<PAGE>
For non-participating traditional life and annuity policies with life
contingencies, DAC is amortized in proportion to anticipated premiums.
Assumptions as to anticipated premiums are estimated at the date of
policy issue and are consistently applied during the life of the
contracts. Deviations from estimated experience are reflected in
earnings in the period such deviations occur. For these contracts, the
amortization periods generally are for the total life of the policy.
For individual health benefit insurance, DAC is amortized over the
expected average life of the contracts (10 years for major medical
policies and 20 years for disability income ("DI") products) in
proportion to anticipated premium revenue at time of issue. In the
fourth quarter of 1996, the DAC related to DI contracts issued prior to
July 1993 was written off.
Policyholders' Account Balances and Future Policy Benefits
----------------------------------------------------------
Policyholders' account balances for universal life and investment-type
contracts are equal to the policy account values. The policy account
values represent an accumulation of gross premium payments plus credited
interest less expense and mortality charges and withdrawals.
For participating traditional life policies, future policy benefit
liabilities are calculated using a net level premium method on the basis
of actuarial assumptions equal to guaranteed mortality and dividend fund
interest rates. The liability for annual dividends represents the
accrual of annual dividends earned. Terminal dividends are accrued in
proportion to gross margins over the life of the contract.
For non-participating traditional life insurance policies, future policy
benefit liabilities are estimated using a net level premium method on
the basis of actuarial assumptions as to mortality, persistency and
interest established at policy issue. Assumptions established at policy
issue as to mortality and persistency are based on the Insurance Group's
experience which, together with interest and expense assumptions,
include a margin for adverse deviation. When the liabilities for future
policy benefits plus the present value of expected future gross premiums
for a product are insufficient to provide for expected future policy
benefits and expenses for that product, DAC is written off and
thereafter, if required, a premium deficiency reserve is established by
a charge to earnings. Benefit liabilities for traditional annuities
during the accumulation period are equal to accumulated contractholders'
fund balances and after annuitization are equal to the present value of
expected future payments. Interest rates used in establishing such
liabilities range from 2.25% to 11.5% for life insurance liabilities and
from 2.25% to 13.5% for annuity liabilities.
During the fourth quarter of 1996, a loss recognition study on
participating group annuity contracts and conversion annuities ("Pension
Par") was completed which included management's revised estimate of
assumptions, including expected mortality and future investment returns.
The study's results prompted management to establish a premium
deficiency reserve which decreased earnings from continuing operations
and net earnings by $47.5 million ($73.0 million pre-tax).
Individual health benefit liabilities for active lives are estimated
using the net level premium method, and assumptions as to future
morbidity, withdrawals and interest. Benefit liabilities for disabled
lives are estimated using the present value of benefits method and
experience assumptions as to claim terminations, expenses and interest.
During the fourth quarter of 1996, the Company completed a loss
recognition study of the DI business which incorporated management's
revised estimates of future experience with regard to morbidity,
investment returns, claims and administration expenses and other
factors. The study indicated DAC was not recoverable and the reserves
were not sufficient. Earnings from continuing operations and net
earnings decreased by $208.0 million ($320.0 million pre-tax) as a
result of strengthening DI reserves by $175.0 million and writing off
unamortized DAC of $145.0 million. The determination of DI reserves
requires making assumptions and estimates relating to a variety of
factors, including morbidity and interest rates, claims experience and
lapse
F-11
<PAGE>
rates based on then known facts and circumstances. Such factors as claim
incidence and termination rates can be affected by changes in the
economic, legal and regulatory environments and work ethic. While
management believes its DI reserves have been calculated on a reasonable
basis and are adequate, there can be no assurance reserves will be
sufficient to provide for future liabilities.
Claim reserves and associated liabilities for individual disability
income and major medical policies were $711.8 million and $639.6 million
at December 31, 1996 and 1995, respectively (excluding $175.0 million of
reserve strengthening in 1996). Incurred benefits (benefits paid plus
changes in claim reserves) and benefits paid for individual DI and major
medical policies (excluding $175.0 million of reserve strengthening in
1996) are summarized as follows:
<TABLE>
<CAPTION>
1996 1995 1994
----------------- ---------------- -----------------
(IN MILLIONS)
<S> <C> <C> <C>
Incurred benefits related to current year.......... $ 189.0 $ 176.0 $ 188.6
Incurred benefits related to prior years........... 69.1 67.8 28.7
----------------- ---------------- -----------------
Total Incurred Benefits............................ $ 258.1 $ 243.8 $ 217.3
================= ================ =================
Benefits paid related to current year.............. $ 32.6 $ 37.0 $ 43.7
Benefits paid related to prior years............... 153.3 137.8 132.3
----------------- ---------------- -----------------
Total Benefits Paid................................ $ 185.9 $ 174.8 $ 176.0
================= ================ =================
</TABLE>
Policyholders' Dividends
------------------------
The amount of policyholders' dividends to be paid (including those on
policies included in the Closed Block) is determined annually by
Equitable Life's Board of Directors. The aggregate amount of
policyholders' dividends is related to actual interest, mortality,
morbidity and expense experience for the year and judgment as to the
appropriate level of statutory surplus to be retained by Equitable Life.
Equitable Life is subject to limitations on the amount of statutory
profits which can be retained with respect to certain classes of
individual participating policies that were in force on July 22, 1992
which are not included in the Closed Block and with respect to
participating policies issued subsequent to July 22, 1992. Excess
statutory profits, if any, will be distributed over time to such
policyholders and will not be available to Equitable Life's shareholder.
Earnings in excess of limitations, if any, would be accrued as
policyholders' dividends.
At December 31, 1996, participating policies, including those in the
Closed Block, represent approximately 24.2% ($52.3 billion) of directly
written life insurance in force, net of amounts ceded.
Federal Income Taxes
--------------------
The Company files a consolidated Federal income tax return with the
Holding Company and its non-life insurance subsidiaries. Current Federal
income taxes were charged or credited to operations based upon amounts
estimated to be payable or recoverable as a result of taxable operations
for the current year. Deferred income tax assets and liabilities were
recognized based on the difference between financial statement carrying
amounts and income tax bases of assets and liabilities using enacted
income tax rates and laws.
Separate Accounts
-----------------
Separate Accounts are established in conformity with the New York State
Insurance Law and generally are not chargeable with liabilities that
arise from any other business of the Insurance Group. Separate Accounts
assets are subject to General Account claims only to the extent the
value of such assets exceeds the Separate Accounts liabilities.
F-12
<PAGE>
Assets and liabilities of the Separate Accounts, representing net
deposits and accumulated net investment earnings less fees, held
primarily for the benefit of contractholders, and for which the
Insurance Group does not bear the investment risk, are shown as separate
captions in the consolidated balance sheets. The Insurance Group bears
the investment risk on assets held in one Separate Account, therefore,
such assets are carried on the same basis as similar assets held in the
General Account portfolio. Assets held in the other Separate Accounts
are carried at quoted market values or, where quoted values are not
available, at estimated fair values as determined by the Insurance
Group.
The investment results of Separate Accounts on which the Insurance Group
does not bear the investment risk are reflected directly in Separate
Accounts liabilities. For 1996, 1995 and 1994, investment results of
such Separate Accounts were $2,970.6 million, $1,963.2 million and
$665.2 million, respectively.
Deposits to Separate Accounts are reported as increases in Separate
Accounts liabilities and are not reported in revenues. Mortality, policy
administration and surrender charges on all Separate Accounts are
included in revenues.
F-13
<PAGE>
3) INVESTMENTS
The following tables provide additional information relating to fixed
maturities and equity securities:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
----------------- ----------------- ---------------- ---------------
(IN MILLIONS)
<S> <C> <C> <C> <C>
DECEMBER 31, 1996
-----------------
Fixed Maturities:
Available for Sale:
Corporate.......................... $ 13,645.2 $ 451.5 $ 121.0 $ 13,975.7
Mortgage-backed.................... 2,015.9 11.2 20.3 2,006.8
U.S. Treasury securities and
U.S. government and
agency securities................ 1,539.4 39.2 19.3 1,559.3
States and political subdivisions.. 77.0 4.5 - 81.5
Foreign governments................ 302.6 18.0 2.2 318.4
Redeemable preferred stock......... 139.1 3.3 7.1 135.3
----------------- ----------------- ---------------- ---------------
Total Available for Sale............... $ 17,719.2 $ 527.7 $ 169.9 $ 18,077.0
================= ================= ================ ===============
Equity Securities:
Common stock......................... $ 98.7 $ 49.3 $ 17.7 $ 130.3
================= ================= ================ ===============
December 31, 1995
-----------------
Fixed Maturities:
Available for Sale:
Corporate.......................... $ 10,910.7 $ 617.6 $ 118.1 $ 11,410.2
Mortgage-backed.................... 1,838.0 31.2 1.2 1,868.0
U.S. Treasury securities and
U.S. government and
agency securities................ 2,257.0 77.8 4.1 2,330.7
States and political subdivisions.. 45.7 5.2 - 50.9
Foreign governments................ 124.5 11.0 .2 135.3
Redeemable preferred stock......... 108.1 5.3 8.6 104.8
----------------- ----------------- ---------------- ---------------
Total Available for Sale............... $ 15,284.0 $ 748.1 $ 132.2 $ 15,899.9
================= ================= ================ ===============
Equity Securities:
Common stock......................... $ 97.3 $ 49.1 $ 18.0 $ 128.4
================= ================= ================ ===============
</TABLE>
For publicly traded fixed maturities and equity securities, estimated
fair value is determined using quoted market prices. For fixed
maturities without a readily ascertainable market value, the Company has
determined an estimated fair value using a discounted cash flow
approach, including provisions for credit risk, generally based upon the
assumption such securities will be held to maturity. Estimated fair
value for equity securities, substantially all of which do not have a
readily ascertainable market value, has been determined by the Company.
Such estimated fair values do not necessarily represent the values for
which these securities could have been sold at the dates of the
consolidated balance sheets. At December 31, 1996 and 1995, securities
without a readily ascertainable market value having an amortized cost of
$3,915.7 million and $3,748.9 million, respectively, had estimated fair
values of $4,024.6 million and $3,981.8 million, respectively.
F-14
<PAGE>
The contractual maturity of bonds at December 31, 1996 is shown below:
AVAILABLE FOR SALE
------------------------------------
AMORTIZED ESTIMATED
COST FAIR VALUE
---------------- -----------------
(IN MILLIONS)
Due in one year or less........... $ 539.6 $ 542.5
Due in years two through five..... 2,776.2 2,804.0
Due in years six through ten...... 6,044.7 6,158.1
Due after ten years............... 6,203.7 6,430.3
Mortgage-backed securities........ 2,015.9 2,006.8
---------------- -----------------
Total............................. $ 17,580.1 $ 17,941.7
================ =================
Bonds not due at a single maturity date have been included in the above
table in the year of final maturity. Actual maturities will differ from
contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
The Insurance Group's fixed maturity investment portfolio includes
corporate high yield securities consisting of public high yield bonds,
redeemable preferred stocks and directly negotiated debt in leveraged
buyout transactions. The Insurance Group seeks to minimize the higher
than normal credit risks associated with such securities by monitoring
the total investments in any single issuer or total investment in a
particular industry group. Certain of these corporate high yield
securities are classified as other than investment grade by the various
rating agencies, i.e., a rating below Baa or National Association of
Insurance Commissioners ("NAIC") designation of 3 (medium grade), 4 or 5
(below investment grade) or 6 (in or near default). At December 31,
1996, approximately 14.20% of the $17,563.7 million aggregate amortized
cost of bonds held by the Insurance Group were considered to be other
than investment grade.
In addition to its holdings of corporate high yield securities, the
Insurance Group is an equity investor in limited partnership interests
which primarily invest in securities considered to be other than
investment grade.
The Company has restructured or modified the terms of certain fixed
maturity investments. The fixed maturity portfolio includes amortized
costs of $5.5 million and $15.9 million at December 31, 1996 and 1995,
respectively, of such restructured securities. These amounts include
fixed maturities which are in default as to principal and/or interest
payments, are to be restructured pursuant to commenced negotiations or
where the borrowers went into bankruptcy subsequent to acquisition
(collectively, "problem fixed maturities") of $2.2 million and $1.6
million as of December 31, 1996 and 1995, respectively. Gross interest
income that would have been recorded in accordance with the original
terms of restructured fixed maturities amounted to $1.4 million, $3.0
million and $7.5 million in 1996, 1995 and 1994, respectively. Gross
interest income on these fixed maturities included in net investment
income aggregated $1.3 million, $2.9 million and $6.8 million in 1996,
1995 and 1994, respectively.
F-15
<PAGE>
Investment valuation allowances and changes thereto are shown below:
<TABLE>
<CAPTION>
1996 1995 1994
----------------- ---------------- -----------------
(IN MILLIONS)
<S> <C> <C> <C>
Balances, beginning of year........................ $ 325.3 $ 284.9 $ 355.6
SFAS No. 121 release............................... (152.4) - -
Additions charged to income........................ 125.0 136.0 51.0
Deductions for writedowns and
asset dispositions............................... (160.8) (95.6) (121.7)
----------------- ---------------- -----------------
Balances, End of Year.............................. $ 137.1 $ 325.3 $ 284.9
================= ================ =================
Balances, end of year comprise:
Mortgage loans on real estate.................... $ 50.4 $ 65.5 $ 64.2
Equity real estate............................... 86.7 259.8 220.7
----------------- ---------------- -----------------
Total.............................................. $ 137.1 $ 325.3 $ 284.9
================= ================ =================
</TABLE>
At December 31, 1996, the carrying values of investments held for the
production of income which were non-income producing for the twelve
months preceding the consolidated balance sheet date were $25.0 million
of fixed maturities and $2.6 million of mortgage loans on real estate.
At December 31, 1996 and 1995, mortgage loans on real estate with
scheduled payments 60 days (90 days for agricultural mortgages) or more
past due or in foreclosure (collectively, "problem mortgage loans on
real estate") had an amortized cost of $12.4 million (0.4% of total
mortgage loans on real estate) and $87.7 million (2.4% of total mortgage
loans on real estate), respectively.
The payment terms of mortgage loans on real estate may from time to time
be restructured or modified. The investment in restructured mortgage
loans on real estate, based on amortized cost, amounted to $388.3
million and $531.5 million at December 31, 1996 and 1995, respectively.
These amounts include $1.0 million and $3.8 million of problem mortgage
loans on real estate at December 31, 1996 and 1995, respectively. Gross
interest income on restructured mortgage loans on real estate that would
have been recorded in accordance with the original terms of such loans
amounted to $35.5 million, $52.1 million and $44.9 million in 1996, 1995
and 1994, respectively. Gross interest income on these loans included in
net investment income aggregated $28.2 million, $37.4 million and $32.8
million in 1996, 1995 and 1994, respectively.
Impaired mortgage loans (as defined under SFAS No. 114) along with the
related provision for losses were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------
1996 1995
------------------- -------------------
(IN MILLIONS)
<S> <C> <C>
Impaired mortgage loans with provision for losses.................. $ 340.0 $ 310.1
Impaired mortgage loans with no provision for losses............... 122.3 160.8
------------------- -------------------
Recorded investment in impaired mortgage loans..................... 462.3 470.9
Provision for losses............................................... 46.4 62.7
------------------- -------------------
Net Impaired Mortgage Loans........................................ $ 415.9 $ 408.2
=================== ===================
</TABLE>
Impaired mortgage loans with no provision for losses are loans where the
fair value of the collateral or the net present value of the expected
future cash flows related to the loan equals or exceeds the recorded
investment. Interest income earned on loans where the collateral value
is used to measure impairment is recorded on a
F-16
<PAGE>
cash basis. Interest income on loans where the present value method is
used to measure impairment is accrued on the net carrying value amount
of the loan at the interest rate used to discount the cash flows.
Changes in the present value attributable to changes in the amount or
timing of expected cash flows are reported as investment gains or
losses.
During 1996 and 1995, respectively, the Company's average recorded
investment in impaired mortgage loans was $552.1 million and $429.0
million. Interest income recognized on these impaired mortgage loans
totaled $38.8 million and $27.9 million for 1996 and 1995, respectively,
including $17.9 million and $13.4 million recognized on a cash basis.
The Insurance Group's investment in equity real estate is through direct
ownership and through investments in real estate joint ventures. At
December 31, 1996 and 1995, the carrying value of equity real estate
available for sale amounted to $345.6 million and $255.5 million,
respectively. For 1996, 1995 and 1994, respectively, real estate of
$58.7 million, $35.3 million and $189.8 million was acquired in
satisfaction of debt. At December 31, 1996 and 1995, the Company owned
$771.7 million and $862.7 million, respectively, of real estate acquired
in satisfaction of debt.
Depreciation of real estate is computed using the straight-line method
over the estimated useful lives of the properties, which generally range
from 40 to 50 years. Accumulated depreciation on real estate was $587.5
million and $662.4 million at December 31, 1996 and 1995, respectively.
Depreciation expense on real estate totaled $91.8 million, $121.7
million and $117.0 million for 1996, 1995 and 1994, respectively. As a
result of the implementation of SFAS No. 121, during 1996 no
depreciation expense has been recorded on real estate available for
sale.
F-17
<PAGE>
4) JOINT VENTURES AND PARTNERSHIPS
Summarized combined financial information of real estate joint ventures
(34 and 38 individual ventures as of December 31, 1996 and 1995,
respectively) and of limited partnership interests accounted for under
the equity method, in which the Company has an investment of $10.0
million or greater and an equity interest of 10% or greater is as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------
1996 1995
---------------- -----------------
(IN MILLIONS)
<S> <C> <C>
FINANCIAL POSITION
Investments in real estate, at depreciated cost........................ $ 1,883.7 $ 2,684.1
Investments in securities, generally at estimated fair value........... 2,430.6 2,459.8
Cash and cash equivalents.............................................. 98.0 489.1
Other assets........................................................... 427.0 270.8
---------------- -----------------
Total assets........................................................... 4,839.3 5,903.8
---------------- -----------------
Borrowed funds - third party........................................... 1,574.3 1,782.3
Borrowed funds - the Company........................................... 137.9 220.5
Other liabilities...................................................... 415.8 593.9
---------------- -----------------
Total liabilities...................................................... 2,128.0 2,596.7
---------------- -----------------
Partners' Capital...................................................... $ 2,711.3 $ 3,307.1
================ =================
Equity in partners' capital included above............................. $ 806.8 $ 902.2
Equity in limited partnership interests not included above............. 201.8 212.8
Other.................................................................. 9.8 8.9
---------------- -----------------
Carrying Value......................................................... $ 1,018.4 $ 1,123.9
================ =================
</TABLE>
<TABLE>
<CAPTION>
1996 1995 1994
----------------- ---------------- -----------------
(IN MILLIONS)
<S> <C> <C> <C>
STATEMENTS OF EARNINGS
Revenues of real estate joint ventures............. $ 348.9 $ 463.5 $ 537.7
Revenues of other limited partnership interests.... 386.1 242.3 103.4
Interest expense - third party..................... (111.0) (135.3) (114.9)
Interest expense - the Company..................... (30.0) (41.0) (36.9)
Other expenses..................................... (282.5) (397.7) (430.9)
----------------- ---------------- -----------------
Net Earnings....................................... $ 311.5 $ 131.8 $ 58.4
================= ================ =================
Equity in net earnings included above.............. $ 73.9 $ 49.1 $ 18.9
Equity in net earnings of limited partnerships
interests not included above..................... 35.8 44.8 25.3
Other.............................................. .9 1.0 1.8
----------------- ---------------- -----------------
Total Equity in Net Earnings....................... $ 110.6 $ 94.9 $ 46.0
================= ================ =================
</TABLE>
F-18
<PAGE>
5) NET INVESTMENT INCOME AND INVESTMENT GAINS (LOSSES)
The sources of net investment income are summarized as follows:
<TABLE>
<CAPTION>
1996 1995 1994
----------------- ---------------- -----------------
(IN MILLIONS)
<S> <C> <C> <C>
Fixed maturities.................... $ 1,307.4 $ 1,151.1 $ 1,036.5
Mortgage loans on real estate....... 303.0 329.0 385.7
Equity real estate.................. 442.4 560.4 561.8
Other equity investments............ 94.3 76.9 36.1
Policy loans........................ 160.3 144.4 122.7
Other investment income............. 217.4 273.0 322.4
----------------- ---------------- -----------------
Gross investment income........... 2,524.8 2,534.8 2,465.2
----------------- ---------------- -----------------
Investment expenses............... 348.9 446.6 466.6
----------------- ---------------- -----------------
Net Investment Income............... $ 2,175.9 $ 2,088.2 $ 1,998.6
================= ================ =================
Investment gains (losses), net, including changes in the valuation
allowances, are summarized as follows:
</TABLE>
<TABLE>
<CAPTION>
1996 1995 1994
----------------- ---------------- -----------------
(IN MILLIONS)
<S> <C> <C> <C>
Fixed maturities................................... $ 60.5 $ 119.9 $ (14.3)
Mortgage loans on real estate...................... (27.3) (40.2) (43.1)
Equity real estate................................. (79.7) (86.6) 20.6
Other equity investments........................... 18.9 12.8 75.9
Issuance and sales of Alliance Units............... 20.6 - 52.4
Other.............................................. (2.8) (.6) .3
----------------- ---------------- -----------------
Investment (Losses) Gains, Net..................... $ (9.8) $ 5.3 $ 91.8
================= ================ =================
</TABLE>
Writedowns of fixed maturities amounted to $29.9 million, $46.7 million
and $30.8 million for 1996, 1995 and 1994, respectively, and writedowns
of equity real estate subsequent to the adoption of SFAS No. 121
amounted to $23.7 million for the year ended December 31, 1996.
For 1996, 1995 and 1994, respectively, proceeds received on sales of
fixed maturities classified as available for sale amounted to $8,353.5
million, $8,206.0 million and $5,253.9 million. Gross gains of $154.2
million, $211.4 million and $65.2 million and gross losses of $92.7
million, $64.2 million and $50.8 million, respectively, were realized on
these sales. The change in unrealized investment (losses) gains related
to fixed maturities classified as available for sale for 1996, 1995 and
1994 amounted to $(258.0) million, $1,077.2 million and $(742.2)
million, respectively.
During each of 1995 and 1994, one security classified as held to
maturity was sold. During the eleven months ended November 30, 1995 and
the year ended December 31, 1994, respectively, twelve and six
securities so classified were transferred to the available for sale
portfolio. All actions were taken as a result of a significant
deterioration in creditworthiness. The aggregate amortized costs of the
securities sold were $1.0 million and $19.9 million with a related
investment gain of $-0- million and $.8 million recognized in 1995 and
1994, respectively; the aggregate amortized cost of the securities
transferred was $116.0 million and $42.8 million with gross unrealized
investment losses of $3.2 million and $3.1 million charged to
consolidated shareholder's equity for the eleven months ended November
30, 1995 and the year ended December 31,
F-19
<PAGE>
1994, respectively. On December 1, 1995, the Company transferred
$4,794.9 million of securities classified as held to maturity to the
available for sale portfolio. As a result, unrealized gains on fixed
maturities increased $395.6 million, offset by DAC of $126.5 million,
amounts attributable to participating group annuity contracts of $39.2
million and deferred Federal income taxes of $80.5 million.
For 1996, 1995 and 1994, investment results passed through to certain
participating group annuity contracts as interest credited to
policyholders' account balances amounted to $136.7 million, $131.2
million and $175.8 million, respectively.
In 1996, Alliance acquired the business of Cursitor-Eaton Asset
Management Company and Cursitor Holdings Limited (collectively,
"Cursitor") for approximately $159.0 million. The purchase price
consisted of $94.3 million in cash, 1.8 million of Alliance's publicly
traded units ("Alliance Units"), 6% notes aggregating $21.5 million
payable ratably over four years, and substantial additional
consideration which will be determined at a later date. The excess of
the purchase price, including acquisition costs and minority interest,
over the fair value of Cursitor's net assets acquired resulted in the
recognition of intangible assets consisting of costs assigned to
contracts acquired and goodwill of approximately $122.8 million and
$38.3 million, respectively, which are being amortized over the
estimated useful lives of 20 years. The Company recognized an investment
gain of $20.6 million as a result of the issuance of Alliance Units in
this transaction. At December 31, 1996, the Company's ownership of
Alliance Units was approximately 57.3%.
In 1994, Alliance sold 4.96 million newly issued Alliance Units to third
parties at prevailing market prices. The Company continues to hold its
1% general partnership interest in Alliance. The Company recognized an
investment gain of $52.4 million as a result of these transactions.
Net unrealized investment gains (losses), included in the consolidated
balance sheets as a component of equity and the changes for the
corresponding years, are summarized as follows:
<TABLE>
<CAPTION>
1996 1995 1994
----------------- ---------------- -----------------
(IN MILLIONS)
<S> <C> <C> <C>
Balance, beginning of year as restated............. $ 396.5 $ (220.5) $ 144.6
Changes in unrealized investment (losses) gains.... (297.6) 1,198.9 (856.7)
Changes in unrealized investment losses
(gains) attributable to:
Participating group annuity contracts.......... - (78.1) 40.8
DAC............................................ 42.3 (216.8) 273.6
Deferred Federal income taxes.................. 48.7 (287.0) 177.2
----------------- ---------------- -----------------
Balance, End of Year............................... $ 189.9 $ 396.5 $ (220.5)
================= ================ =================
Balance, end of year comprises:
Unrealized investment gains (losses) on:
Fixed maturities............................... $ 357.8 $ 615.9 $ (461.3)
Other equity investments....................... 31.6 31.1 7.7
Other, principally Closed Block................ 53.1 93.1 (5.1)
----------------- ---------------- -----------------
Total........................................ 442.5 740.1 (458.7)
Amounts of unrealized investment (gains)
losses attributable to:
Participating group annuity contracts........ (72.2) (72.2) 5.9
DAC.......................................... (52.0) (94.3) 122.4
Deferred Federal income taxes................ (128.4) (177.1) 109.9
----------------- ---------------- -----------------
Total.............................................. $ 189.9 $ 396.5 $ (220.5)
================= ================ =================
</TABLE>
F-20
<PAGE>
6) CLOSED BLOCK
Summarized financial information of the Closed Block follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------
1996 1995
----------------- -----------------
(IN MILLIONS)
<S> <C> <C>
Assets
Fixed Maturities:
Available for sale, at estimated fair value (amortized cost,
$3,820.7 and $3,662.8)...................................... $ 3,889.5 $ 3,896.2
Mortgage loans on real estate................................... 1,380.7 1,368.8
Policy loans.................................................... 1,765.9 1,797.2
Cash and other invested assets.................................. 336.1 440.9
DAC............................................................. 876.5 792.6
Other assets.................................................... 246.3 286.4
----------------- -----------------
Total Assets.................................................... $ 8,495.0 $ 8,582.1
================= =================
Liabilities
Future policy benefits and policyholders' account balances...... $ 8,999.7 $ 8,923.5
Other liabilities............................................... 91.6 297.9
----------------- -----------------
Total Liabilities............................................... $ 9,091.3 $ 9,221.4
================= =================
</TABLE>
<TABLE>
<CAPTION>
1996 1995 1994
----------------- ---------------- -----------------
(IN MILLIONS)
<S> <C> <C> <C>
Revenues
Premiums and other revenue......................... $ 724.8 $ 753.4 $ 798.1
Investment income (net of investment
expenses of $27.3, $26.7 and $19.0).............. 546.6 538.9 523.0
Investment losses, net............................. (5.5) (20.2) (24.0)
----------------- ---------------- -----------------
Total revenues............................... 1,265.9 1,272.1 1,297.1
----------------- ---------------- -----------------
Benefits and Other Deductions
Policyholders' benefits and dividends.............. 1,106.3 1,077.6 1,121.6
Other operating costs and expenses................. 34.6 51.3 38.5
----------------- ---------------- -----------------
Total benefits and other deductions.......... 1,140.9 1,128.9 1,160.1
----------------- ---------------- -----------------
Contribution from the Closed Block................. $ 125.0 $ 143.2 $ 137.0
================= ================ =================
</TABLE>
In the fourth quarter of 1996, the Company adopted SFAS No. 120, which
prescribes the accounting for individual participating life insurance
contracts, most of which are included in the Closed Block. The
implementation of SFAS No. 120 resulted in an increase (decrease) in the
contribution from the Closed Block of $27.5 million, $18.8 million and
$(14.0) million in 1996, 1995 and 1994, respectively.
The fixed maturity portfolio, based on amortized cost, includes $.4
million and $4.3 million at December 31, 1996 and 1995, respectively, of
restructured securities which includes problem fixed maturities of $.3
million and $1.9 million, respectively.
F-21
<PAGE>
During the eleven months ended November 30, 1995, one security
classified as held to maturity was sold and ten securities classified as
held to maturity were transferred to the available for sale portfolio.
All actions resulted from significant deterioration in creditworthiness.
The amortized cost of the security sold was $4.2 million. The aggregate
amortized cost of the securities transferred was $81.3 million with
gross unrealized investment losses of $.1 million transferred to equity.
At December 1, 1995, $1,750.7 million of securities classified as held
to maturity were transferred to the available for sale portfolio. As a
result, unrealized gains of $88.5 million on fixed maturities were
recognized, offset by DAC amortization of $52.6 million.
At December 31, 1996 and 1995, problem mortgage loans on real estate had
an amortized cost of $4.3 million and $36.5 million, respectively, and
mortgage loans on real estate for which the payment terms have been
restructured had an amortized cost of $114.2 million and $137.7 million,
respectively. At December 31, 1996 and 1995, the restructured mortgage
loans on real estate amount included $.7 million and $8.8 million,
respectively, of problem mortgage loans on real estate.
Impaired mortgage loans (as defined under SFAS No. 114) along with the
related provision for losses were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------
1996 1995
---------------- -----------------
(IN MILLIONS)
<S> <C> <C>
Impaired mortgage loans with provision for losses......... $ 128.1 $ 106.8
Impaired mortgage loans with no provision for losses...... .6 10.1
---------------- -----------------
Recorded investment in impaired mortgages................. 128.7 116.9
Provision for losses...................................... 12.9 17.9
---------------- -----------------
Net Impaired Mortgage Loans............................... $ 115.8 $ 99.0
================ =================
</TABLE>
During 1996 and 1995, respectively, the Closed Block's average recorded
investment in impaired mortgage loans was $153.8 million and $146.9
million, respectively. Interest income recognized on these impaired
mortgage loans totaled $10.9 million and $5.9 million for 1996 and 1995,
respectively, including $4.7 million and $1.3 million recognized on a
cash basis.
Valuation allowances amounted to $13.8 million and $18.4 million on
mortgage loans on real estate and $3.7 million and $4.3 million on
equity real estate at December 31, 1996 and 1995, respectively.
Writedowns of fixed maturities amounted to $12.8 million, $16.8 million
and $15.9 million for 1996, 1995 and 1994, respectively. As of January
1, 1996, the adoption of SFAS No. 121 resulted in the recognition of
impairment losses of $5.6 million on real estate held and used.
Many expenses related to Closed Block operations are charged to
operations outside of the Closed Block; accordingly, the contribution
from the Closed Block does not represent the actual profitability of the
Closed Block operations. Operating costs and expenses outside of the
Closed Block are, therefore, disproportionate to the business outside of
the Closed Block.
F-22
<PAGE>
7) DISCONTINUED OPERATIONS
Summarized financial information of the GIC Segment follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------
1996 1995
----------------- -----------------
(IN MILLIONS)
<S> <C> <C>
Assets
Mortgage loans on real estate........... $ 1,111.1 $ 1,485.8
Equity real estate...................... 925.6 1,122.1
Other invested assets................... 474.0 665.2
Other assets............................ 226.1 579.3
----------------- -----------------
Total Assets............................ $ 2,736.8 $ 3,852.4
================= =================
Liabilities
Policyholders' liabilities.............. $ 1,335.9 $ 1,399.8
Allowance for future losses............. 262.0 164.2
Amounts due to continuing operations.... 996.2 2,097.1
Other liabilities....................... 142.7 191.3
----------------- -----------------
Total Liabilities....................... $ 2,736.8 $ 3,852.4
================= =================
</TABLE>
<TABLE>
<CAPTION>
1996 1995 1994
----------------- ---------------- -----------------
(IN MILLIONS)
<S> <C> <C> <C>
Revenues
Investment income (net of investment expenses
of $127.5, $153.1 and $183.3).................... $ 245.4 $ 323.6 $ 394.3
Investment (losses) gains, net..................... (18.9) (22.9) 26.8
Policy fees, premiums and other income............. .2 .7 .4
----------------- ---------------- -----------------
Total revenues..................................... 226.7 301.4 421.5
Benefits and other deductions...................... 250.4 326.5 443.2
Losses charged to allowance for future losses...... (23.7) (25.1) (21.7)
----------------- ---------------- -----------------
Pre-tax loss from operations....................... - - -
Pre-tax loss from strengthening of the
allowance for future losses...................... (129.0) - -
Federal income tax benefit......................... 45.2 - -
----------------- ---------------- -----------------
Loss from Discontinued Operations.................. $ (83.8) $ - $ -
================= ================ =================
</TABLE>
In 1991, management adopted a plan to discontinue the business
operations of the GIC Segment consisting of group non-participating
Wind-Up Annuities and the GIC lines of business. The loss allowance and
premium deficiency reserve of $569.6 million provided for in 1991 were
based on management's best judgment at that time.
The Company's quarterly process for evaluating the loss provisions
applies the current period's results of the discontinued operations
against the allowance, re-estimates future losses, and adjusts the
provisions, if appropriate. Additionally, as part of the Company's
annual planning process which takes place in the fourth quarter of each
year, investment and benefit cash flow projections are prepared. These
updated assumptions and estimates resulted in the need to strengthen the
loss provisions by $129.0 million, resulting in a post-tax charge of
$83.8 million to discontinued operations' results in the fourth quarter
of 1996.
F-23
<PAGE>
Management believes the loss provisions for Wind-Up Annuities and GIC
contracts at December 31, 1996 are adequate to provide for all future
losses; however, the determination of loss provisions continues to
involve numerous estimates and subjective judgments regarding the
expected performance of discontinued operations investment assets. There
can be no assurance the losses provided for will not differ from the
losses ultimately realized. To the extent actual results or future
projections of the discontinued operations differ from management's
current best estimates and assumptions underlying the loss provisions,
the difference would be reflected in the consolidated statements of
earnings in discontinued operations. In particular, to the extent
income, sales proceeds and holding periods for equity real estate differ
from management's previous assumptions, periodic adjustments to the loss
provisions are likely to result.
In January 1995, continuing operations transferred $1,215.4 million in
cash to the GIC Segment in settlement of its obligation to provide
assets to fund the accumulated deficit of the GIC Segment. Subsequently,
the GIC Segment remitted $1,155.4 million in cash to continuing
operations in partial repayment of borrowings by the GIC Segment. No
gains or losses were recognized on these transactions. Amounts due to
continuing operations at December 31, 1996, consisted of $1,080.0
million borrowed by the discontinued GIC Segment offset by $83.8 million
representing an obligation of continuing operations to provide assets to
fund the accumulated deficit of the GIC Segment.
Investment income included $88.2 million of interest income for 1994 on
amounts due from continuing operations. Benefits and other deductions
include $114.3 million, $154.6 million and $219.7 million of interest
expense related to amounts borrowed from continuing operations in 1996,
1995 and 1994, respectively.
Valuation allowances amounted to $9.0 million and $19.2 million on
mortgage loans on real estate and $20.4 million and $77.9 million on
equity real estate at December 31, 1996 and 1995, respectively. As of
January 1, 1996, the adoption of SFAS No. 121 resulted in a release of
existing valuation allowances of $71.9 million on equity real estate and
recognition of impairment losses of $69.8 million on real estate held
and used. Writedowns of fixed maturities amounted to $1.6 million, $8.1
million and $17.8 million for 1996, 1995 and 1994, respectively and
writedowns of equity real estate subsequent to the adoption of SFAS No.
121 amounted to $12.3 million for 1996.
The fixed maturity portfolio, based on amortized cost, includes $6.2
million and $15.1 million at December 31, 1996 and 1995, respectively,
of restructured securities. These amounts include problem fixed
maturities of $.5 million and $6.1 million at December 31, 1996 and
1995, respectively.
At December 31, 1996 and 1995, problem mortgage loans on real estate had
amortized costs of $7.9 million and $35.4 million, respectively, and
mortgage loans on real estate for which the payment terms have been
restructured had amortized costs of $208.1 million and $289.3 million,
respectively.
Impaired mortgage loans (as defined under SFAS No. 114) along with the
related provision for losses were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------
1996 1995
---------------- -----------------
(IN MILLIONS)
<S> <C> <C>
Impaired mortgage loans with provision for losses....... $ 83.5 $ 105.1
Impaired mortgage loans with no provision for losses.... 15.0 18.2
---------------- -----------------
Recorded investment in impaired mortgages............... 98.5 123.3
Provision for losses.................................... 8.8 17.7
---------------- -----------------
Net Impaired Mortgage Loans............................. $ 89.7 $ 105.6
================ =================
</TABLE>
F-24
<PAGE>
During 1996 and 1995, the GIC Segment's average recorded investment in
impaired mortgage loans was $134.8 million and $177.4 million,
respectively. Interest income recognized on these impaired mortgage
loans totaled $10.1 million and $4.5 million for 1996 and 1995,
respectively, including $7.5 million and $.4 million recognized on a
cash basis.
At December 31, 1996 and 1995, the GIC Segment had $263.0 million and
$310.9 million, respectively, of real estate acquired in satisfaction of
debt.
8) SHORT-TERM AND LONG-TERM DEBT
Short-term and long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------
1996 1995
----------------- -----------------
(IN MILLIONS)
<S> <C> <C>
Short-term debt.................................... $ 174.1 $ -
----------------- -----------------
Long-term debt:
Equitable Life:
6.95% surplus notes scheduled to mature 2005..... 399.4 399.3
7.70% surplus notes scheduled to mature 2015..... 199.6 199.6
Eurodollar notes, 10.5% due 1997................. - 76.2
Zero coupon note, 11.25% due 1997................ - 120.1
Other............................................ .5 16.3
----------------- -----------------
Total Equitable Life......................... 599.5 811.5
----------------- -----------------
Wholly Owned and Joint Venture Real Estate:
Mortgage notes, 4.92% - 12.50% due through 2006.. 968.6 1,084.4
----------------- -----------------
Alliance:
Other............................................ 24.7 3.4
----------------- -----------------
Total long-term debt............................... 1,592.8 1,899.3
----------------- -----------------
Total Short-term and Long-term Debt................ $ 1,766.9 $ 1,899.3
================= =================
</TABLE>
Short-term Debt
---------------
Equitable Life has a $350.0 million bank credit facility available to
fund short-term working capital needs and to facilitate the securities
settlement process. The credit facility consists of two types of
borrowing options with varying interest rates. The interest rates are
based on external indices dependent on the type of borrowing and at
December 31, 1996 range from 5.73% (the London Interbank Offering Rate
("LIBOR") plus 22.5 basis points) to 8.25% (the prime rate). There were
no borrowings outstanding under this bank credit facility at December
31, 1996.
F-25
<PAGE>
Equitable Life has a commercial paper program with an issue limit of
$500.0 million. This program is available for general corporate purposes
used to support Equitable Life's liquidity needs and is supported by
Equitable Life's existing $350.0 million five-year bank credit facility.
There were no borrowings outstanding under this program at December 31,
1996.
In February 1996, Alliance entered into a new $250.0 million five-year
revolving credit facility with a group of banks which replaced its
$100.0 million revolving credit facility and its $100.0 million
commercial paper back-up revolving credit facility. Under the new
revolving credit facility, the interest rate, at the option of Alliance,
is a floating rate generally based upon a defined prime rate, a rate
related to the LIBOR or the Federal Funds rate. A facility fee is
payable on the total facility. The revolving credit facility will be
used to provide back-up liquidity for commercial paper to be used under
Alliance's $100.0 million commercial paper program, to fund commission
payments to financial intermediaries for the sale of Class B and C
shares under Alliance's mutual fund distribution system, and for general
working capital purposes. As of December 31, 1996, Alliance had not
issued any commercial paper under its $100.0 million commercial paper
program and there were no borrowings outstanding under Alliance's
revolving credit facility.
At December 31, 1996, long-term debt expected to mature in 1997 totaling
$174.1 million was reclassified as short-term debt.
Long-term Debt
--------------
Several of the long-term debt agreements have restrictive covenants
related to the total amount of debt, net tangible assets and other
matters. The Company is in compliance with all debt covenants.
On December 18, 1995, Equitable Life issued, in accordance with Section
1307 of the New York Insurance Law, $400.0 million of surplus notes
having an interest rate of 6.95% scheduled to mature in 2005 and $200.0
million of surplus notes having an interest rate of 7.70% scheduled to
mature in 2015 (together, the "Surplus Notes"). Proceeds from the
issuance of the Surplus Notes were $596.6 million, net of related
issuance costs. The unamortized discount on the Surplus Notes was $1.0
million at December 31, 1996. Payments of interest on or principal of
the Surplus Notes are subject to prior approval by the Superintendent.
The Company has pledged real estate, mortgage loans, cash and securities
amounting to $1,406.4 million and $1,629.7 million at December 31, 1996
and 1995, respectively, as collateral for certain long-term debt.
At December 31, 1996, aggregate maturities of the long-term debt based
on required principal payments at maturity for 1997 and the succeeding
four years are $494.9 million, $316.7 million, $19.7 million, $5.4
million, $0 million, respectively, and $946.7 million thereafter.
9) FEDERAL INCOME TAXES
A summary of the Federal income tax expense (benefit) in the
consolidated statements of earnings is shown below:
<TABLE>
<CAPTION>
1996 1995 1994
----------------- ---------------- -----------------
(IN MILLIONS)
<S> <C> <C> <C>
Federal income tax expense (benefit):
Current............................... $ 97.9 $ (11.7) $ 4.0
Deferred.............................. (88.2) 132.2 96.2
----------------- ---------------- -----------------
Total................................... $ 9.7 $ 120.5 $ 100.2
================= ================ =================
</TABLE>
F-26
<PAGE>
The Federal income taxes attributable to consolidated operations are
different from the amounts determined by multiplying the earnings before
Federal income taxes and minority interest by the expected Federal
income tax rate of 35%. The sources of the difference and the tax
effects of each are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
----------------- ---------------- -----------------
(IN MILLIONS)
<S> <C> <C> <C>
Expected Federal income tax expense..... $ 73.0 $ 173.7 $ 154.5
Non-taxable minority interest........... (28.6) (22.0) (17.6)
Differential earnings amount............ - - (16.8)
Adjustment of tax audit reserves........ 6.9 4.1 (4.6)
Equity in unconsolidated subsidiaries... (32.3) (19.4) (12.5)
Other................................... (9.3) (15.9) (2.8)
----------------- ---------------- -----------------
Federal Income Tax Expense.............. $ 9.7 $ 120.5 $ 100.2
================= ================ =================
</TABLE>
Prior to the date of demutualization, Equitable Life reduced its
deduction for policyholder dividends by the differential earnings
amount. This amount was computed, for each tax year, by multiplying
Equitable Life's average equity base, as determined for tax purposes, by
an estimate of the excess of an imputed earnings rate for stock life
insurance companies over the average mutual life insurance companies'
earnings rate. The differential earnings amount for each tax year was
subsequently recomputed when actual earnings rates were published by the
Internal Revenue Service. As a stock life insurance company, Equitable
Life no longer is required to reduce its policyholder dividend deduction
by the differential earnings amount, but differential earnings amounts
for pre-demutualization years were still being recomputed in 1994.
The components of the net deferred Federal income tax account are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 December 31, 1995
--------------------------------- ---------------------------------
ASSETS LIABILITIES Assets Liabilities
--------------- ---------------- --------------- ---------------
(IN MILLIONS)
<S> <C> <C> <C> <C>
DAC, reserves and reinsurance.......... $ - $ 166.0 $ - $ 304.4
Investments............................ - 328.6 - 326.9
Compensation and related benefits...... 259.2 - 293.0 -
Other.................................. - 1.8 - 32.3
--------------- ---------------- --------------- ---------------
Total.................................. $ 259.2 $ 496.4 $ 293.0 $ 663.6
=============== ================ =============== ===============
</TABLE>
The deferred Federal income taxes impacting operations reflect the net
tax effects of temporary differences between the carrying amounts of
assets and liabilities for financial reporting purposes and the amounts
used for income tax purposes. The sources of these temporary differences
and the tax effects of each are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
----------------- ---------------- -----------------
(IN MILLIONS)
<S> <C> <C> <C>
DAC, reserves and reinsurance......... $ (156.2) $ 63.3 $ 12.0
Investments........................... 78.6 13.0 89.3
Compensation and related benefits..... 22.3 30.8 10.0
Other................................. (32.9) 25.1 (15.1)
----------------- ---------------- -----------------
Deferred Federal Income Tax
(Benefit) Expense................... $ (88.2) $ 132.2 $ 96.2
================= ================ =================
</TABLE>
F-27
<PAGE>
The Internal Revenue Service is in the process of examining the Holding
Company's consolidated Federal income tax returns for the years 1989
through 1991. Management believes these audits will have no material
adverse effect on the Company's results of operations.
10) REINSURANCE AGREEMENTS
The Insurance Group assumes and cedes reinsurance with other insurance
companies. The Insurance Group evaluates the financial condition of its
reinsurers to minimize its exposure to significant losses from reinsurer
insolvencies. The effect of reinsurance (excluding group life and
health) is summarized as follows:
<TABLE>
<CAPTION>
1996 1995 1994
----------------- ---------------- -----------------
(IN MILLIONS)
<S> <C> <C> <C>
Direct premiums.................................... $ 461.4 $ 474.2 $ 476.7
Reinsurance assumed................................ 177.5 171.3 180.5
Reinsurance ceded.................................. (41.3) (38.7) (31.6)
----------------- ---------------- -----------------
Premiums........................................... $ 597.6 $ 606.8 $ 625.6
================= ================ =================
Universal Life and Investment-type Product
Policy Fee Income Ceded.......................... $ 48.2 $ 44.0 $ 27.5
================= ================ =================
Policyholders' Benefits Ceded...................... $ 54.1 $ 48.9 $ 20.7
================= ================ =================
Interest Credited to Policyholders' Account
Balances Ceded................................... $ 32.3 $ 28.5 $ 25.4
================= ================ =================
</TABLE>
Effective January 1, 1994, all in force business above $5.0 million was
reinsured. During 1996, the Company's retention limit on joint
survivorship policies was increased to $15.0 million. The Insurance
Group also reinsures the entire risk on certain substandard underwriting
risks as well as in certain other cases.
The Insurance Group cedes 100% of its group life and health business to
a third party insurance company. Premiums ceded totaled $2.4 million,
$260.6 million and $241.0 million for 1996, 1995 and 1994, respectively.
Ceded death and disability benefits totaled $21.2 million, $188.1
million and $235.5 million for 1996, 1995 and 1994, respectively.
Insurance liabilities ceded totaled $652.4 million and $724.2 million at
December 31, 1996 and 1995, respectively.
11) EMPLOYEE BENEFIT PLANS
The Company sponsors qualified and non-qualified defined benefit plans
covering substantially all employees (including certain qualified
part-time employees), managers and certain agents. The pension plans are
non-contributory. Equitable Life's and EREIM's benefits are based on a
cash balance formula or years of service and final average earnings, if
greater, under certain grandfathering rules in the plans. Alliance's
benefits are based on years of credited service, average final base
salary and primary social security benefits. The Company's funding
policy is to make the minimum contribution required by the Employee
Retirement Income Security Act of 1974.
Components of net periodic pension cost (credit) for the qualified and
non-qualified plans are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
----------------- ---------------- -----------------
(IN MILLIONS)
<S> <C> <C> <C>
Service cost....................................... $ 33.8 $ 30.0 $ 30.3
Interest cost on projected benefit obligations..... 120.8 122.0 111.0
Actual return on assets............................ (181.4) (309.2) 24.4
Net amortization and deferrals..................... 43.4 155.6 (142.5)
----------------- ---------------- -----------------
Net Periodic Pension Cost (Credit)................. $ 16.6 $ (1.6) $ 23.2
================= ================ =================
</TABLE>
F-28
<PAGE>
The funded status of the qualified and non-qualified pension plans is as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------
1996 1995
---------------- -----------------
(IN MILLIONS)
<S> <C> <C>
Actuarial present value of obligations:
Vested.................................................. $ 1,672.2 $ 1,642.4
Non-vested.............................................. 10.1 10.9
---------------- -----------------
Accumulated Benefit Obligation............................ $ 1,682.3 $ 1,653.3
================ =================
Plan assets at fair value................................. $ 1,626.0 $ 1,503.8
Projected benefit obligation.............................. 1,765.5 1,743.0
---------------- -----------------
Projected benefit obligation in excess of plan assets..... (139.5) (239.2)
Unrecognized prior service cost........................... (17.9) (25.5)
Unrecognized net loss from past experience different
from that assumed....................................... 280.0 368.2
Unrecognized net asset at transition...................... 4.7 (7.3)
Additional minimum liability.............................. (19.3) (51.9)
---------------- -----------------
Prepaid Pension Cost...................................... $ 108.0 $ 44.3
================ =================
</TABLE>
The discount rate and rate of increase in future compensation levels
used in determining the actuarial present value of projected benefit
obligations were 7.5% and 4.25%, respectively, at December 31, 1996 and
7.25% and 4.50%, respectively, at December 31, 1995. As of January 1,
1996 and 1995, the expected long-term rate of return on assets for the
retirement plan was 10.25% and 11%, respectively.
The Company recorded, as a reduction of shareholder's equity, an
additional minimum pension liability of $12.9 million and $35.1 million,
net of Federal income taxes, at December 31, 1996 and 1995,
respectively, representing the excess of the accumulated benefit
obligation over the fair value of plan assets and accrued pension
liability.
The pension plan's assets include corporate and government debt
securities, equity securities, equity real estate and shares of Group
Trusts managed by Alliance.
Prior to 1987, the qualified plan funded participants' benefits through
the purchase of non-participating annuity contracts from Equitable Life.
Benefit payments under these contracts were approximately $34.7 million,
$36.4 million and $38.1 million for 1996, 1995 and 1994, respectively.
The Company provides certain medical and life insurance benefits
(collectively, "postretirement benefits") for qualifying employees,
managers and agents retiring from the Company on or after attaining age
55 who have at least 10 years of service. The life insurance benefits
are related to age and salary at retirement. The costs of postretirement
benefits are recognized in accordance with the provisions of SFAS No.
106. The Company continues to fund postretirement benefits costs on a
pay-as-you-go basis and, for 1996, 1995 and 1994, the Company made
estimated postretirement benefits payments of $18.9 million, $31.1
million and $29.8 million, respectively.
F-29
<PAGE>
The following table sets forth the postretirement benefits plan's
status, reconciled to amounts recognized in the Company's consolidated
financial statements:
<TABLE>
<CAPTION>
1996 1995 1994
----------------- ---------------- -----------------
(IN MILLIONS)
<S> <C> <C> <C>
Service cost....................................... $ 5.3 $ 4.0 $ 3.9
Interest cost on accumulated postretirement
benefits obligation.............................. 34.6 34.7 28.6
Net amortization and deferrals..................... 2.4 (2.3) (3.9)
----------------- ---------------- -----------------
Net Periodic Postretirement Benefits Costs......... $ 42.3 $ 36.4 $ 28.6
================= ================ =================
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------
1996 1995
---------------- -----------------
(IN MILLIONS)
<S> <C> <C>
Accumulated postretirement benefits obligation:
Retirees................................................ $ 381.8 $ 391.8
Fully eligible active plan participants................. 50.7 50.4
Other active plan participants.......................... 60.7 64.2
---------------- -----------------
493.2 506.4
Unrecognized prior service cost........................... 50.5 56.3
Unrecognized net loss from past experience different
from that assumed and from changes in assumptions....... (150.5) (181.3)
---------------- -----------------
Accrued Postretirement Benefits Cost...................... $ 393.2 $ 381.4
================ =================
</TABLE>
At January 1, 1994, medical benefits available to retirees under age 65
are the same as those offered to active employees and medical benefits
will be limited to 200% of 1993 costs for all participants.
The assumed health care cost trend rate used in measuring the
accumulated postretirement benefits obligation was 9.5% in 1996,
gradually declining to 3.5% in the year 2009 and in 1995 was 10%,
gradually declining to 3.5% in the year 2008. The discount rate used in
determining the accumulated postretirement benefits obligation was 7.50%
and 7.25% at December 31, 1996 and 1995, respectively.
If the health care cost trend rate assumptions were increased by 1%, the
accumulated postretirement benefits obligation as of December 31, 1996
would be increased 7%. The effect of this change on the sum of the
service cost and interest cost would be an increase of 8%.
12) DERIVATIVES AND FAIR VALUE OF FINANCIAL INSTRUMENTS
Derivatives
-----------
The Insurance Group primarily uses derivatives for asset/liability risk
management and for hedging individual securities. Derivatives mainly are
utilized to reduce the Insurance Group's exposure to interest rate
fluctuations. Accounting for interest rate swap transactions is on an
accrual basis. Gains and losses related to interest rate swap
transactions are amortized as yield adjustments over the remaining life
of the underlying hedged security. Income and expense resulting from
interest rate swap activities are reflected in net investment income.
The notional amount of matched interest rate swaps outstanding at
December 31, 1996 was $649.9 million. The average unexpired terms at
December 31, 1996 range from 2.2 to 2.7 years. At December 31, 1996, the
cost of terminating outstanding matched swaps in a loss position was
$8.3 million and the unrealized gain on outstanding matched swaps in a
gain position was $11.4 million. The Company has no intention of
terminating these contracts prior to maturity. During 1996, 1995 and
1994, net gains (losses) of $.2 million, $1.4 million and $(.2) million,
respectively, were recorded in connection with
F-30
<PAGE>
interest rate swap activity. Equitable Life has implemented an interest
rate cap program designed to hedge crediting rates on interest-sensitive
individual annuities contracts. The outstanding notional amounts at
December 31, 1996 of contracts purchased and sold were $5,050.0 million
and $500.0 million, respectively. The net premium paid by Equitable Life
on these contracts was $22.5 million and is being amortized ratably over
the contract periods ranging from 3 to 5 years. Income and expense
resulting from this program are reflected as an adjustment to interest
credited to policyholders' account balances.
Substantially all of DLJ's business related to derivatives is by its
nature trading activities which are primarily for the purpose of
customer accommodations. DLJ's derivative activities consist primarily
of option writing and trading in forward and futures contracts.
Derivative financial instruments have both on-and-off balance sheet
implications depending on the nature of the contracts. DLJ's involvement
in swap contracts is not significant.
Fair Value of Financial Instruments
-----------------------------------
The Company defines fair value as the quoted market prices for those
instruments that are actively traded in financial markets. In cases
where quoted market prices are not available, fair values are estimated
using present value or other valuation techniques. The fair value
estimates are made at a specific point in time, based on available
market information and judgments about the financial instrument,
including estimates of timing, amount of expected future cash flows and
the credit standing of counterparties. Such estimates do not reflect any
premium or discount that could result from offering for sale at one time
the Company's entire holdings of a particular financial instrument, nor
do they consider the tax impact of the realization of unrealized gains
or losses. In many cases, the fair value estimates cannot be
substantiated by comparison to independent markets, nor can the
disclosed value be realized in immediate settlement of the instrument.
Certain financial instruments are excluded, particularly insurance
liabilities other than financial guarantees and investment contracts.
Fair market value of off-balance-sheet financial instruments of the
Insurance Group was not material at December 31, 1996 and 1995.
Fair value for mortgage loans on real estate are estimated by
discounting future contractual cash flows using interest rates at which
loans with similar characteristics and credit quality would be made.
Fair values for foreclosed mortgage loans and problem mortgage loans are
limited to the estimated fair value of the underlying collateral if
lower.
The estimated fair values for the Company's liabilities under GIC and
association plan contracts are estimated using contractual cash flows
discounted based on the T. Rowe Price GIC Index Rate for the appropriate
duration. For durations in excess of the published index rate, the
appropriate Treasury rate is used plus a spread equal to the longest
duration GIC rate spread published.
The estimated fair values for those group annuity contracts which are
classified as universal life type contracts are measured at the
estimated fair value of the underlying assets. The estimated fair values
for single premium deferred annuities ("SPDA") are estimated using
projected cash flows discounted at current offering rates. The estimated
fair values for supplementary contracts not involving life contingencies
("SCNILC") and annuities certain are derived using discounted cash flows
based upon the estimated current offering rate.
Fair value for long-term debt is determined using published market
values, where available, or contractual cash flows discounted at market
interest rates. The estimated fair values for non-recourse mortgage debt
are determined by discounting contractual cash flows at a rate which
takes into account the level of current market interest rates and
collateral risk. The estimated fair values for recourse mortgage debt
are determined by discounting contractual cash flows at a rate based
upon current interest rates of other companies with credit ratings
similar to the Company. The Company's fair value of short-term
borrowings approximates their carrying value.
F-31
<PAGE>
The following table discloses carrying value and estimated fair value
for financial instruments not otherwise disclosed in Notes 3, 6 and 7:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------------------
1996 1995
--------------------------------- ---------------------------------
CARRYING ESTIMATED Carrying Estimated
VALUE FAIR VALUE Value Fair Value
--------------- ---------------- --------------- ---------------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Consolidated Financial Instruments:
-----------------------------------
Mortgage loans on real estate.......... $ 3,133.0 $ 3,394.6 $ 3,638.3 $ 3,973.6
Other joint ventures................... 467.0 467.0 492.7 492.7
Policy loans........................... 2,196.1 2,221.6 1,976.4 2,057.5
Policyholders' account balances:
Association plans.................... 78.1 77.3 101.0 100.0
Group annuity contracts.............. 2,141.0 1,954.0 2,335.0 2,395.0
SPDA................................. 1,062.7 1,065.7 1,265.8 1,272.0
Annuities certain and SCNILC......... 654.9 736.2 646.4 716.7
Long-term debt......................... 1,592.8 1,557.7 1,899.3 1,962.9
Closed Block Financial Instruments:
-----------------------------------
Mortgage loans on real estate.......... 1,380.7 1,425.6 1,368.8 1,461.4
Other equity investments............... 105.0 105.0 151.6 151.6
Policy loans........................... 1,765.9 1,798.0 1,797.2 1,891.4
SCNILC liability....................... 30.6 34.9 34.8 39.6
GIC Segment Financial Instruments:
----------------------------------
Mortgage loans on real estate.......... 1,111.1 1,220.3 1,485.8 1,666.1
Fixed maturities....................... 42.5 42.5 107.4 107.4
Other equity investments............... 300.5 300.5 455.9 455.9
Guaranteed interest contracts.......... 290.7 300.5 329.0 352.0
Long-term debt......................... 102.1 102.2 135.1 136.0
</TABLE>
13) COMMITMENTS AND CONTINGENT LIABILITIES
The Company has provided, from time to time, certain guarantees or
commitments to affiliates, investors and others. These arrangements
include commitments by the Company, under certain conditions: to make
capital contributions of up to $244.9 million to affiliated real estate
joint ventures; to provide equity financing to certain limited
partnerships of $205.8 million at December 31, 1996, under existing loan
or loan commitment agreements; and to provide short-term financing loans
which at December 31, 1996 totaled $14.6 million. Management believes
the Company will not incur any material losses as a result of these
commitments.
Equitable Life is the obligor under certain structured settlement
agreements which it had entered into with unaffiliated insurance
companies and beneficiaries. To satisfy its obligations under these
agreements, Equitable Life owns single premium annuities issued by
previously wholly owned life insurance subsidiaries. Equitable Life has
directed payment under these annuities to be made directly to the
beneficiaries under the structured settlement agreements. A contingent
liability exists with respect to these agreements should the previously
wholly owned subsidiaries be unable to meet their obligations.
Management believes the satisfaction of those obligations by Equitable
Life is remote.
At December 31, 1996, the Insurance Group had $51.6 million of letters
of credit outstanding.
F-32
<PAGE>
14) LITIGATION
A number of lawsuits has been filed against life and health insurers in
the jurisdictions in which Equitable Life and its subsidiaries do
business involving insurers' sales practices, alleged agent misconduct,
failure to properly supervise agents, and other matters. Some of the
lawsuits have resulted in the award of substantial judgments against
other insurers, including material amounts of punitive damages, or in
substantial settlements. In some states, juries have substantial
discretion in awarding punitive damages. Equitable Life, EVLICO and The
Equitable of Colorado, Inc. ("EOC"), like other life and health
insurers, from time to time are involved in such litigation. To date, no
such lawsuit has resulted in an award or settlement of any material
amount against the Company. Among litigations pending against Equitable
Life, EVLICO and EOC of the type referred to in this paragraph are the
litigations described in the following eight paragraphs.
An action entitled Golomb et al. v. The Equitable Life Assurance Society
of the United States was filed on January 20, 1995 in New York County
Supreme Court. The action purports to be brought on behalf of a class of
persons insured after 1983 under Lifetime Guaranteed Renewable Major
Medical Insurance Policies issued by Equitable Life (the "policies").
The complaint alleges that premium increases for these policies after
1983, all of which were filed with and approved by the New York State
Insurance Department and certain other state insurance departments,
breached the terms of the policies, and that statements in the policies
and elsewhere concerning premium increases constituted fraudulent
concealment, misrepresentations in violation of New York Insurance Law
Section 4226 and deceptive practices under New York General Business Law
Section 349. The complaint seeks a declaratory judgment, injunctive
relief restricting the methods by which Equitable Life increases
premiums on the policies in the future, a refund of premiums, and
punitive damages. Plaintiffs also have indicated that they will seek
damages in an unspecified amount. Equitable Life moved to dismiss the
complaint in its entirety on the grounds that it fails to state a claim
and that uncontroverted documentary evidence establishes a complete
defense to the claims. On May 29, 1996, the New York County Supreme
Court entered a judgment dismissing the complaint with prejudice.
Plaintiffs have filed a notice of appeal of that judgment.
In January 1996, separate actions were filed in Pennsylvania and Texas
state courts (entitled, respectively, Malvin et al. v. The Equitable
Life Assurance Society of the United States and Bowler et al. v. The
Equitable Life Assurance Society of the United States), making claims
similar to those in the New York action described above. The Texas
action also claims that Equitable Life misrepresented to Texas
policyholders that the Texas Insurance Department had approved Equitable
Life's rate increases. These actions are asserted on behalf of proposed
classes of Pennsylvania issued or renewed policyholders and Texas issued
or renewed policyholders, insured under the policies. The Pennsylvania
and Texas actions seek compensatory and punitive damages and injunctive
relief restricting the methods by which Equitable Life increases
premiums in the future based on the common law and statutes of those
states. On February 9, 1996, Equitable Life removed the Pennsylvania
action, Malvin, to the United States District Court for the Middle
District of Pennsylvania. Following the decision granting Equitable
Life's motion to dismiss the New York action (Golomb), on the consent of
the parties the District Court ordered an indefinite stay of all
proceedings in the Pennsylvania action, pending either party's right to
reinstate the proceeding, and ordered that for administrative purposes
the case be deemed administratively closed. On February 2, 1996,
Equitable Life removed the Texas action, Bowler, to the United States
District Court for the Northern District of Texas. On May 20, 1996, the
plaintiffs in Bowler amended their complaint by adding allegations of
misrepresentation regarding premium increases on other types of
guaranteed renewable major medical insurance policies issued by
Equitable Life up to and including 1983. On July 1, 1996, Equitable Life
filed a motion for summary judgment dismissing the first amended
complaint in its entirety. In August, 1996, the court granted plaintiffs
leave to file a supplemental complaint on behalf of a proposed class of
Texas policyholders claiming unfair discrimination, breach of contract
and other claims arising out of alleged differences between premiums
charged to Texas policyholders and premiums charged to similarly
situated policyholders in New York and certain other states. Plaintiffs
seek refunds of alleged overcharges, exemplary or additional damages
citing
F-33
<PAGE>
Texas statutory provisions which among other things, permit two times
the amount of actual damage plus additional penalties if the acts
complained of are found to be knowingly committed, and injunctive
relief. Equitable Life has also filed a motion for summary judgment
dismissing the supplemental complaint in its entirety. Plaintiffs also
obtained permission to add another plaintiff to the first amended and
supplemental complaints. Plaintiffs have opposed both motions for
summary judgment and requested that certain issues be found in their
favor. Equitable Life is in the process of replying.
On May 22, 1996, a separate action entitled Bachman v. The Equitable
Life Assurance Society of the United States, was filed in Florida state
court making claims similar to those in the previously reported Golomb
action. The Florida action is asserted on behalf of a proposed class of
Florida issued or renewed policyholders insured after 1983 under
Lifetime Guaranteed Renewable Major Medical Insurance Policies issued by
Equitable Life. The Florida action seeks compensatory and punitive
damages and injunctive relief restricting the methods by which Equitable
Life increases premiums in the future based on various common law
claims. On June 20, 1996, Equitable Life removed the Florida action to
Federal court. Equitable Life has answered the complaint, denying the
material allegations and asserting certain affirmative defenses. On
December 6, 1996, Equitable Life filed a motion for summary judgment and
plaintiff is expected to file its response to that motion shortly.
On November 6, 1996, a proposed class action entitled Fletcher, et al.
v. The Equitable Life Assurance Society of the United States, was filed
in California Superior Court for Fresno County, making substantially the
same allegations concerning premium rates and premium rate increases on
guaranteed renewable policies made in the Bowler action. The complaint
alleges, among other things, that differentials between rates charged
California policyholders and policyholders in New York and certain other
states, and the methods used by Equitable Life to calculate premium
increases, breached the terms of its policies, that Equitable Life
misrepresented and concealed the facts pertaining to such differentials
and methods in violation of California law, and that Equitable Life also
misrepresented that its rate increases were approved by the California
Insurance Department. Plaintiffs seek compensatory damages in an
unspecified amount, rescission, injunctive relief and attorneys' fees.
Equitable Life removed the action to Federal court; plaintiff has moved
to remand the case to state court. Although the outcome of any
litigation cannot be predicted with certainty, particularly in the early
stages of an action, the Company's management believes that the ultimate
resolution of the Golomb, Malvin, Bowler, Bachman and Fletcher
litigations should not have a material adverse effect on the financial
position of the Company. Due to the early stage of such litigations, the
Company's management cannot make an estimate of loss, if any, or predict
whether or not such litigations will have a material adverse effect on
the Company's results of operations in any particular period.
An action was instituted on April 6, 1995 against Equitable Life and its
wholly owned subsidiary, EOC, in New York state court, entitled Sidney
C. Cole et al. v. The Equitable Life Assurance Society of the United
States and The Equitable of Colorado, Inc., No. 95/108611 (N. Y.
County). The action is brought by the holders of a joint survivorship
whole life policy issued by EOC. The action purports to be on behalf of
a class consisting of all persons who from January 1, 1984 purchased
life insurance policies sold by Equitable Life and EOC based upon their
allegedly uniform sales presentations and policy illustrations. The
complaint puts in issue various alleged sales practices that plaintiffs
assert, among other things, misrepresented the stated number of years
that the annual premium would need to be paid. Plaintiffs seek damages
in an unspecified amount, imposition of a constructive trust, and seek
to enjoin Equitable Life and EOC from engaging in the challenged sales
practices. On June 28, 1996, the court issued a decision and order
dismissing with prejudice plaintiff's causes of action for fraud,
constructive fraud, breach of fiduciary duty, negligence, and unjust
enrichment, and dismissing without prejudice plaintiff's cause of action
under the New York State consumer protection statute. The only remaining
causes of action are for breach of contract and negligent
misrepresentation. Plaintiffs made a motion for reargument with respect
to this order, which was submitted to the court in October 1996. This
motion was denied by the court on December 16, 1996.
F-34
<PAGE>
On May 21, 1996, an action entitled Elton F. Duncan, III v. The
Equitable Life Assurance Society of the United States, was commenced
against Equitable Life in the Civil District Court for the Parish of
Orleans, State of Louisiana. The action is brought by an individual who
purchased a whole life policy. Plaintiff alleges misrepresentations
concerning the extent to which the policy was a proper replacement
policy and the number of years that the annual premium would need to be
paid. Plaintiff purports to represent a class consisting of all persons
who purchased whole life or universal life insurance policies from
Equitable Life from January 1, 1982 to the present. Plaintiff seeks
damages, including punitive damages, in an unspecified amount. On July
26, 1996, an action entitled Michael Bradley v. Equitable Variable Life
Insurance Company, was commenced in New York state court. The action is
brought by the holder of a variable life insurance policy issued by
EVLICO. The plaintiff purports to represent a class consisting of all
persons or entities who purchased one or more life insurance policies
issued by EVLICO from January 1, 1980. The complaint puts at issue
various alleged sales practices and alleges misrepresentations
concerning the extent to which the policy was a proper replacement
policy and the number of years that the annual premium would need to be
paid. Plaintiff seeks damages, including punitive damages, in an
unspecified amount and also seeks injunctive relief prohibiting EVLICO
from canceling policies for failure to make premium payments beyond the
alleged stated number of years that the annual premium would need to be
paid. On September 21, 1996 Equitable Life, EVLICO and EOC made a motion
to have this proceeding moved from Kings County Supreme Court to New
York County for joint trial or consolidation with the Cole action. The
motion was denied by the court on January 9, 1997. On January 10, 1997,
plaintiffs moved for certification of a nationwide class consisting of
all persons or entities who were sold one or more life insurance
products on a "vanishing premium" basis and/or were allegedly induced to
purchase additional policies from EVLICO, using the cash value
accumulated in existing policies, from January 1, 1980 through and
including December 31, 1996. Plaintiffs further moved to have Michael
Bradley designated as the class representative. Discovery regarding
class certification is underway.
On December 12, 1996, an action entitled Robert E. Dillon v. The
Equitable Life Assurance Society of the United States and The Equitable
of Colorado, was commenced in the United States District Court for the
Southern District of Florida. The action is brought by an individual who
purchased a joint whole life policy from EOC. The complaint puts at
issue various alleged sales practices and alleges misrepresentations
concerning the alleged impropriety of replacement policies issued by
Equitable Life and EOC and alleged misrepresentations regarding the
number of years premiums would have to be paid on the defendants'
policies. Plaintiff brings claims for breach of contract, fraud,
negligent misrepresentation, money had and received, unjust enrichment
and imposition of a constructive trust. Plaintiff purports to represent
two classes of persons. The first is a "contract class," consisting of
all persons who purchased whole or universal life insurance policies
from Equitable Life and EOC and from whom Equitable Life and EOC have
sought additional payments beyond the number of years allegedly promised
by Equitable Life and EOC. The second is a "fraud class," consisting of
all persons with an interest in policies issued by Equitable Life and
EOC at any time since October 1, 1986. Plaintiff seeks damages in an
unspecified amount, and also seeks injunctive relief attaching Equitable
Life's and EOC's profits from their alleged sales practices. Equitable
Life's and EOC's time to answer or move with respect to the complaint
has been extended until February 24, 1997. Although the outcome of
litigation cannot be predicted with certainty, particularly in the early
stages of an action, the Company's management believes that the ultimate
resolution of the Cole, Duncan, Bradley and Dillon litigations should
not have a material adverse effect on the financial position of the
Company. Due to the early stages of such litigations, the Company's
management cannot make an estimate of loss, if any, or predict whether
or not any such litigation will have a material adverse effect on the
Company's results of operations in any particular period.
On January 3, 1996, an amended complaint was filed in an action entitled
Frank Franze Jr. and George Busher, individually and on behalf of all
others similarly situated v. The Equitable Life Assurance Society of the
United States, and Equitable Variable Life Insurance Company, No.
94-2036 in the United States District Court for the Southern District of
Florida. The action was brought by two individuals who purchased
variable life insurance policies. The plaintiffs purport to represent a
nationwide class consisting of all persons who purchased variable life
insurance policies from Equitable Life and EVLICO since September 30,
1991. The basic allegation of the amended complaint is that Equitable
Life's and EVLICO's agents were trained not to
F-35
<PAGE>
disclose fully that the product being sold was life insurance.
Plaintiffs allege violations of the Federal securities laws and seek
rescission of the contracts or compensatory damages and attorneys' fees
and expenses. The court denied Equitable Life and EVLICO's motion to
dismiss the amended complaint on September 24, 1996. Equitable Life and
EVLICO have answered the amended complaint, denying the material
allegations and asserting certain affirmative defenses. Currently, the
parties are conducting discovery in connection with plaintiffs' attempt
to certify a class. On January 9, 1997, an action entitled Rosemarie
Chaviano, individually and on behalf of all others similarly situated v.
The Equitable Life Assurance Society of the United States, and Equitable
Variable Life Insurance Company, was filed in Massachusetts state court
making claims similar to those in the Franze action and alleging
violations of the Massachusetts securities laws. The plaintiff purports
to represent all persons in Massachusetts who purchased variable life
insurance contracts from Equitable Life and EVLICO from January 9, 1993
to the present. The Massachusetts action seeks rescission of the
contracts or compensatory damages, attorneys' fees, expenses and
injunctive relief. Although the outcome of any litigation cannot be
predicted with certainty, particularly in the early stages of an action,
the Company's management believes that the ultimate resolution of the
litigations discussed in this paragraph should not have a material
adverse effect on the financial position of the Company. Due to the
early stages of such litigation, the Company's management cannot make an
estimate of loss, if any, or predict whether or not any such litigation
will have a material adverse effect on the Company's results of
operations in any particular period.
Equitable Life recently responded to a subpoena from the U.S. Department
of Labor ("DOL") requesting copies of any third-party appraisals in
Equitable Life's possession relating to the ten largest properties (by
value) in the Prime Property Fund ("PPF"). PPF is an open-end,
commingled real estate separate account of Equitable Life for pension
clients. Equitable Life serves as investment manager in PPF and has
retained EREIM as advisor. In early 1995, the DOL commenced a national
investigation of commingled real estate funds with pension investors,
including PPF. The investigation now appears to be focused principally
on appraisal and valuation procedures in respect of fund properties. The
most recent request from the DOL seems to reflect, at least in part, an
interest in the relationship between the valuations for those properties
reflected in appraisals prepared for local property tax proceedings and
the valuations used by PPF for other purposes. At no time has the DOL
made any specific allegation that Equitable Life or EREIM has acted
improperly and Equitable Life and EREIM believe that any such allegation
would be without foundation. While the outcome of this investigation
cannot be predicted with certainty, in the opinion of management, the
ultimate resolution of this matter should not have a material adverse
effect on the Company's consolidated financial position or results of
operations in any particular period.
Equitable Casualty Insurance Company ("Casualty"), an indirect wholly
owned subsidiary of Equitable Life, is party to an arbitration
proceeding that commenced in August 1995. The proceeding relates to a
dispute among Casualty, Houston General Insurance Company ("Houston
General") and GEICO General Insurance Company ("GEICO General")
regarding the interpretation of a reinsurance agreement. The arbitration
panel issued a final award in favor of Casualty and GEICO General on
June 17, 1996. Casualty and GEICO General moved in the pending Texas
state court action, with Houston General's consent, for an order
confirming the arbitration award and entering judgment dismissing the
action. The motion was granted on January 29, 1997. The parties have
also stipulated to the dismissal without prejudice of a related Texas
Federal court action brought by Houston General against GEICO General
and Equitable Life. In connection with confirmation of the arbitration
award, Houston General paid to Casualty approximately $839,600 in
settlement of certain reimbursement claims by Casualty against Houston
General.
On July 25, 1995, a Consolidated and Supplemental Class Action Complaint
("Complaint") was filed against the Alliance North American Government
Income Trust, Inc. (the "Fund"), Alliance and certain other defendants
affiliated with Alliance, including the Holding Company, alleging
violations of Federal securities laws, fraud and breach of fiduciary
duty in connection with the Fund's investments in Mexican and Argentine
securities. The Complaint, which seeks certification of a plaintiff
class of persons who purchased or owned Class A, B or C shares of the
Fund from March 27, 1992 through December 23, 1994, seeks an unspecified
amount of damages, costs, attorneys' fees and punitive damages. The
principal allegations of the Complaint are that the Fund purchased debt
securities issued by the Mexican and Argentine governments in amounts
that
F-36
<PAGE>
were not permitted by the Fund's investment objective, and that there
was no shareholder vote to change the investment objective to permit
purchases in such amounts. The Complaint further alleges that the
decline in the value of the Mexican and Argentine securities held by the
Fund caused the Fund's net asset value to decline to the detriment of
the Fund's shareholders. On September 26, 1996, the United States
District Court for the Southern District of New York granted the
defendants' motion to dismiss all counts of the complaint. On October
11, 1996, plaintiffs filed a motion for reconsideration of the court's
decision granting defendants' motion to dismiss the Complaint. On
November 25, 1996, the court denied plaintiffs' motion for
reconsideration. On October 29, 1996, plaintiffs filed a motion for
leave to file an amended complaint. The principal allegations of the
proposed amended complaint are that the Fund did not properly disclose
that it planned to invest in mortgage-backed derivative securities and
that two advertisements used by the Fund misrepresented the risks of
investing in the Fund. Plaintiffs also reiterated allegations in the
Complaint that the Fund failed to hedge against the risks of investing
in foreign securities despite representations that it would do so.
Alliance believes that the allegations in the Complaint are without
merit and intends to vigorously defend against these claims. While the
ultimate outcome of this matter cannot be determined at this time,
management of Alliance does not expect that it will have a material
adverse effect on Alliance's results of operations or financial
condition.
On January 26, 1996, a purported purchaser of certain notes and warrants
to purchase shares of common stock of Rickel Home Centers, Inc.
("Rickel") filed a class action complaint against Donaldson, Lufkin &
Jenrette Securities Corporation ("DLJSC") and certain other defendants
for unspecified compensatory and punitive damages in the United States
District Court for the Southern District of New York. The suit was
brought on behalf of the purchasers of 126,457 units consisting of
$126,457,000 aggregate principal amount of 13 1/2% senior notes due 2001
and 126,457 warrants to purchase shares of common stock of Rickel issued
by Rickel in October 1994. The complaint alleges violations of Federal
securities laws and common law fraud against DLJSC, as the underwriter
of the units and as an owner of 7.3% of the common stock of Rickel, Eos
Partners, L.P., and General Electric Capital Corporation, each as owners
of 44.2% of the common stock of Rickel, and members of the Board of
Directors of Rickel, including a DLJSC Managing Director. The complaint
seeks to hold DLJSC liable for alleged misstatements and omissions
contained in the prospectus and registration statement filed in
connection with the offering of the units, alleging that the defendants
knew of financial losses and a decline in value of Rickel in the months
prior to the offering and did not disclose such information. The
complaint also alleges that Rickel failed to pay its semi-annual
interest payment due on the units on December 15, 1995 and that Rickel
filed a voluntary petition for reorganization pursuant to Chapter 11 of
the United States Bankruptcy Code on January 10, 1996. DLJSC intends to
defend itself vigorously against all of the allegations contained in the
complaint. Although there can be no assurance, DLJ does not believe the
outcome of this litigation will have a material adverse effect on its
financial condition. Due to the early stage of this litigation, based on
the information currently available to it, DLJ's management cannot make
an estimate of loss, if any, or predict whether or not such litigation
will have a material adverse effect on DLJ's results of operations in
any particular period.
In October 1995, DLJSC was named as a defendant in a purported class
action filed in a Texas State Court on behalf of the holders of $550.0
million principal amount of subordinated redeemable discount debentures
of National Gypsum Corporation ("NGC") canceled in connection with a
Chapter 11 plan of reorganization for NGC consummated in July 1993. The
named plaintiff in the State Court action also filed an adversary
proceeding in the Bankruptcy Court for the Northern District of Texas
seeking a declaratory judgment that the confirmed NGC plan of
reorganization does not bar the class action claims. Subsequent to the
consummation of NGC's plan of reorganization, NGC's shares traded for
values substantially in excess of, and in 1995 NGC was acquired for a
value substantially in excess of, the values upon which NGC's plan of
reorganization was based. The two actions arise out of DLJSC's
activities as financial advisor to NGC in the course of NGC's Chapter 11
reorganization proceedings. The class action complaint alleges that the
plan of reorganization submitted by NGC was based upon projections by
NGC and DLJSC which intentionally understated forecasts, and provided
misleading and incorrect information in order to hide NGC's true value
and that defendants breached their fiduciary duties by, among other
things, providing false, misleading or incomplete information to
deliberately understate the value of NGC. The class action complaint
seeks compensatory and punitive damages purportedly sustained by the
class. The Texas State Court action, which
F-37
<PAGE>
had been removed to the Bankruptcy Court, has been remanded back to the
state court, which remand is being opposed by DLJSC. DLJSC intends to
defend itself vigorously against all of the allegations contained in the
complaint. Although there can be no assurance, DLJ does not believe that
the ultimate outcome of this litigation will have a material adverse
effect on its financial condition. Due to the early stage of such
litigation, based upon the information currently available to it, DLJ's
management cannot make an estimate of loss, if any, or predict whether
or not such litigation will have a material adverse effect on DLJ's
results of operations in any particular period.
In November and December 1995, DLJSC, along with various other parties,
was named as a defendant in a number of purported class actions filed in
the U.S. District Court for the Eastern District of Louisiana. The
complaints allege violations of the Federal securities laws arising out
of a public offering in 1994 of $435.0 million of first mortgage notes
of Harrah's Jazz Company and Harrah's Jazz Finance Corp. The complaints
seek to hold DLJSC liable for various alleged misstatements and
omissions contained in the prospectus dated November 9, 1994. DLJSC
intends to defend itself vigorously against all of the allegations
contained in the complaints. Although there can be no assurance, DLJ
does not believe that the ultimate outcome of this litigation will have
a material adverse effect on its financial condition. Due to the early
stage of this litigation, based upon the information currently available
to it, DLJ's management cannot make an estimate of loss, if any, or
predict whether or not such litigation will have a material adverse
effect on DLJ's results of operations in any particular period.
In addition to the matters described above, Equitable Life and its
subsidiaries and DLJ and its subsidiaries are involved in various legal
actions and proceedings in connection with their businesses. Some of the
actions and proceedings have been brought on behalf of various alleged
classes of claimants and certain of these claimants seek damages of
unspecified amounts. While the ultimate outcome of such matters cannot
be predicted with certainty, in the opinion of management no such matter
is likely to have a material adverse effect on the Company's
consolidated financial position or results of operations.
15) LEASES
The Company has entered into operating leases for office space and
certain other assets, principally data processing equipment and office
furniture and equipment. Future minimum payments under noncancelable
leases for 1997 and the succeeding four years are $113.7 million, $110.6
million, $100.3 million, $72.3 million, $59.3 million and $427.3 million
thereafter. Minimum future sublease rental income on these noncancelable
leases for 1997 and the succeeding four years are $9.8 million, $6.0
million, $4.5 million, $2.4 million, $.8 million and $.1 million
thereafter.
At December 31, 1996, the minimum future rental income on noncancelable
operating leases for wholly owned investments in real estate for 1997
and the succeeding four years are $263.0 million, $242.1 million, $219.8
million, $194.3 million, $174.6 million and $847.1 million thereafter.
F-38
<PAGE>
16) OTHER OPERATING COSTS AND EXPENSES
Other operating costs and expenses consisted of the following:
<TABLE>
<CAPTION>
1996 1995 1994
----------------- ---------------- -----------------
(IN MILLIONS)
<S> <C> <C> <C>
Compensation costs................................. $ 647.3 $ 595.9 $ 687.5
Commissions........................................ 329.5 314.3 313.0
Short-term debt interest expense................... 8.0 11.4 19.0
Long-term debt interest expense.................... 137.3 108.1 98.3
Amortization of policy acquisition costs........... 405.2 317.8 313.4
Capitalization of policy acquisition costs......... (391.9) (391.0) (410.9)
Rent expense, net of sub-lease income.............. 113.7 109.3 116.0
Other.............................................. 798.9 710.0 721.4
----------------- ---------------- -----------------
Total.............................................. $ 2,048.0 $ 1,775.8 $ 1,857.7
================= ================ =================
</TABLE>
During 1996, 1995 and 1994, the Company restructured certain operations
in connection with cost reduction programs and recorded pre-tax
provisions of $24.4 million, $32.0 million and $20.4 million,
respectively. The amounts paid during 1996, associated with cost
reduction programs, totaled $17.7 million. At December 31, 1996, the
liabilities associated with cost reduction programs amounted to $44.5
million. The 1996 cost reduction program included restructuring costs
related to the consolidation of insurance operations' service centers.
The 1995 cost reduction program included relocation expenses, including
the accelerated amortization of building improvements associated with
the relocation of the home office. The 1994 cost reduction program
included costs associated with the termination of operating leases and
employee severance benefits in connection with the consolidation of 16
insurance agencies. Amortization of DAC included $145.0 million writeoff
of DAC related to DI contracts in the fourth quarter of 1996.
17) INSURANCE GROUP STATUTORY FINANCIAL INFORMATION
Equitable Life is restricted as to the amounts it may pay as dividends
to the Holding Company. Under the New York Insurance Law, the
Superintendent has broad discretion to determine whether the financia1
condition of a stock life insurance company would support the payment of
dividends to its shareholders. For 1996, 1995 and 1994, statutory net
(loss) earnings totaled $(351.1) million, $(352.4) million and $67.5
million, respectively. No amounts are expected to be available for
dividends from Equitable Life to the Holding Company in 1997.
At December 31, 1996, the Insurance Group, in accordance with various
government and state regulations, had $21.9 million of securities
deposited with such government or state agencies.
F-39
<PAGE>
Accounting practices used to prepare statutory financial statements for
regulatory filings of stock life insurance companies differ in certain
instances from GAAP. The New York Insurance Department (the
"Department") recognizes only statutory accounting practices for
determining and reporting the financial condition and results of
operations of an insurance company, for determining its solvency under
the New York Insurance Law, and for determining whether its financial
condition warrants the payment of a dividend to its stockholders. No
consideration is given by the Department to financial statements
prepared in accordance with GAAP in making such determinations. The
following reconciles the Company's statutory change in surplus and
capital stock and statutory surplus and capital stock determined in
accordance with accounting practices prescribed by the Department with
net earnings and equity on a GAAP basis.
<TABLE>
<CAPTION>
1996 1995 1994
----------------- ---------------- -----------------
(IN MILLIONS)
<S> <C> <C> <C>
Net change in statutory surplus and capital stock.. $ 56.0 $ 78.1 $ 292.4
Change in asset valuation reserves................. (48.4) 365.7 (285.2)
----------------- ---------------- -----------------
Net change in statutory surplus, capital stock
and asset valuation reserves..................... 7.6 443.8 7.2
Adjustments:
Future policy benefits and policyholders'
account balances............................... (298.5) (66.0) (5.3)
DAC.............................................. (13.3) 73.2 97.5
Deferred Federal income taxes.................... 108.0 (158.1) (58.7)
Valuation of investments......................... 289.8 189.1 45.2
Valuation of investment subsidiary............... (117.7) (188.6) 396.6
Limited risk reinsurance......................... 92.5 416.9 74.9
Contribution from the Holding Company............ - - (300.0)
Issuance of surplus notes........................ - (538.9) -
Postretirement benefits.......................... 28.9 (26.7) 17.1
Other, net....................................... 12.4 115.1 (44.0)
GAAP adjustments of Closed Block................. (9.8) 15.7 (9.5)
GAAP adjustments of discontinued GIC
Segment........................................ (89.6) 37.3 42.8
----------------- ---------------- -----------------
Net Earnings of the Insurance Group................ $ 10.3 $ 312.8 $ 263.8
================= ================ =================
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------
1996 1995 1994
----------------- ---------------- -----------------
(IN MILLIONS)
<S> <C> <C> <C>
Statutory surplus and capital stock................ $ 2,258.9 $ 2,202.9 $ 2,124.8
Asset valuation reserves........................... 1,297.5 1,345.9 980.2
----------------- ---------------- -----------------
Statutory surplus, capital stock and asset
valuation reserves............................... 3,556.4 3,548.8 3,105.0
Adjustments:
Future policy benefits and policyholders'
account balances............................... (1,305.0) (1,006.5) (940.5)
DAC.............................................. 3,104.9 3,075.8 3,219.4
Deferred Federal income taxes.................... (306.1) (452.0) (29.4)
Valuation of investments......................... 286.8 417.7 (794.1)
Valuation of investment subsidiary............... (782.8) (665.1) (476.5)
Limited risk reinsurance......................... (336.5) (429.0) (845.9)
Issuance of surplus notes........................ (539.0) (538.9) -
Postretirement benefits.......................... (314.4) (343.3) (316.6)
Other, net....................................... 126.3 4.4 (79.2)
GAAP adjustments of Closed Block................. 783.7 830.8 740.4
GAAP adjustments of discontinued GIC
Segment........................................ (190.3) (184.6) (221.9)
----------------- ---------------- -----------------
Equity of the Insurance Group...................... $ 4,084.0 $ 4,258.1 $ 3,360.7
================= ================ =================
</TABLE>
F-40
<PAGE>
18) BUSINESS SEGMENT INFORMATION
The Company has two major business segments: Insurance Operations and
Investment Services. Interest expense related to debt not specific to
either business segment is presented as Corporate interest expense.
Information for all periods is presented on a comparable basis.
The Insurance Operations segment offers a variety of traditional,
variable and interest-sensitive life insurance products, disability
income, annuity products, mutual fund and other investment products to
individuals and small groups and administers traditional participating
group annuity contracts with conversion features, generally for
corporate qualified pension plans, and association plans which provide
full service retirement programs for individuals affiliated with
professional and trade associations. This segment includes Separate
Accounts for individual insurance and annuity products.
The Investment Services segment provides investment fund management,
primarily to institutional clients. This segment includes the Company's
equity interest in DLJ and Separate Accounts which provide various
investment options for group clients through pooled or single group
accounts.
Intersegment investment advisory and other fees of approximately $127.5
million, $124.1 million and $135.3 million for 1996, 1995 and 1994,
respectively, are included in total revenues of the Investment Services
segment. These fees, excluding amounts related to the discontinued GIC
Segment of $15.7 million, $14.7 million and $27.4 million for 1996, 1995
and 1994, respectively, are eliminated in consolidation.
<TABLE>
<CAPTION>
1996 1995 1994
----------------- ---------------- -----------------
(IN MILLIONS)
<S> <C> <C> <C>
Revenues
Insurance operations............................... $ 3,742.9 $ 3,614.6 $ 3,507.4
Investment services................................ 1,126.1 949.1 935.2
Consolidation/elimination.......................... (24.5) (34.9) (27.2)
----------------- ---------------- -----------------
Total.............................................. $ 4,844.5 $ 4,528.8 $ 4,415.4
================= ================ =================
Earnings (loss) from continuing operations
before Federal income taxes, minority interest
and cumulative effect of accounting change
Insurance operations............................... $ (36.6) $ 303.1 $ 327.5
Investment services................................ 311.9 224.0 227.9
Consolidation/elimination.......................... .2 (3.1) .3
----------------- ---------------- -----------------
Subtotal..................................... 275.5 524.0 555.7
Corporate interest expense......................... (66.9) (27.9) (114.2)
----------------- ---------------- -----------------
Total.............................................. $ 208.6 $ 496.1 $ 441.5
================= ================ =================
</TABLE>
DECEMBER 31,
------------------------------------
1996 1995
---------------- -----------------
(IN MILLIONS)
Assets
Insurance operations........... $ 60,464.9 $ 56,720.5
Investment services............ 13,542.5 12,842.9
Consolidation/elimination...... (399.6) (354.4)
---------------- -----------------
Total.......................... $ 73,607.8 $ 69,209.0
================ =================
F-41
<PAGE>
19) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The quarterly results of operations for 1996 and 1995, are summarized
below:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
----------------- ----------------- ------------------ ------------------
(IN MILLIONS)
<S> <C> <C> <C> <C>
1996
----
Total Revenues................ $ 1,169.7 $ 1,193.6 $ 1,193.6 $ 1,287.6
================= ================= ================== ==================
Earnings (Loss) from
Continuing Operations
before Cumulative Effect
of Accounting Change........ $ 94.8 $ 87.1 $ 93.2 $ (157.9)
================= ================= ================== ==================
Net Earnings (Loss)........... $ 71.7 $ 87.1 $ 93.2 $ (241.7)
================= ================= ================== ==================
1995
----
Total Revenues................ $ 1,079.1 $ 1,164.0 $ 1,138.8 $ 1,146.9
================= ================= ================== ==================
Net Earnings.................. $ 66.3 $ 101.7 $ 100.2 $ 44.6
================= ================= ================== ==================
</TABLE>
The quarterly results of operations for 1996 and 1995 have been restated
to reflect the Company's accounting change adopted in the fourth quarter
of 1996 for long-duration participating life contracts in accordance
with the provisions prescribed by SFAS No. 120. Net earnings for the
three months ended December 31, 1996 includes a charge of $339.3 million
related to writeoffs of DAC on DI contracts of $94.3 million, reserve
strengthening on DI business of $113.7 million, pension par of $47.5
million and the discontinued GIC Segment of $83.8 million.
20) INVESTMENT IN DLJ
On December 15, 1993, the Company sold a 61% interest in DLJ to the
Holding Company for $800.0 million in cash and securities. The excess of
the proceeds over the book value in DLJ at the date of sale of $340.2
million has been reflected as a capital contribution. In 1995, DLJ
completed the initial public offering ("IPO") of 10.58 million shares of
its common stock, which included 7.28 million of the Holding Company's
shares in DLJ, priced at $27 per share. Concurrent with the IPO, the
Company contributed equity securities to DLJ having a market value of
$21.2 million. Upon completion of the IPO, the Company's ownership
percentage was reduced to 36.1%. The Company's ownership interest will
be further reduced upon the issuance of common stock after the vesting
of forfeitable restricted stock units acquired by and/or the exercise of
options granted to certain DLJ employees. DLJ restricted stock units
represents forfeitable rights to receive approximately 5.2 million
shares of DLJ common stock through February 2000.
The results of operations of DLJ are accounted for on the equity basis
and are included in commissions, fees and other income in the
consolidated statements of earnings. The Company's carrying value of DLJ
is included in investment in and loans to affiliates in the consolidated
balance sheets.
F-42
<PAGE>
Summarized balance sheets information for DLJ, reconciled to the
Company's carrying value of DLJ, are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------
1996 1995
---------------- -----------------
(IN MILLIONS)
<S> <C> <C>
Assets:
Trading account securities, at market value............................ $ 15,728.1 $ 10,821.3
Securities purchased under resale agreements........................... 20,598.7 18,748.2
Broker-dealer related receivables...................................... 16,525.9 13,023.7
Other assets........................................................... 2,651.0 1,983.3
---------------- -----------------
Total Assets........................................................... $ 55,503.7 $ 44,576.5
================ =================
Liabilities:
Securities sold under repurchase agreements............................ $ 29,378.3 $ 26,744.8
Broker-dealer related payables......................................... 19,409.7 12,915.5
Short-term and long-term debt.......................................... 2,704.5 1,742.0
Other liabilities...................................................... 2,164.0 1,750.5
---------------- -----------------
Total liabilities...................................................... 53,656.5 43,152.8
Cumulative exchangeable preferred stock................................ - 225.0
DLJ's company-obligated mandatorily redeemed preferred
securities of subsidiary trust holding solely debentures of DLJ...... 200.0 -
Total shareholders' equity............................................. 1,647.2 1,198.7
---------------- -----------------
Total Liabilities, Cumulative Exchangeable Preferred Stock and
Shareholders' Equity................................................. $ 55,503.7 $ 44,576.5
================ =================
DLJ's equity as reported............................................... $ 1,647.2 $ 1,198.7
Unamortized cost in excess of net assets acquired in 1985
and other adjustments................................................ 23.9 40.5
The Holding Company's equity ownership in DLJ.......................... (590.2) (499.0)
Minority interest in DLJ............................................... (588.6) (324.3)
---------------- -----------------
The Company's Carrying Value of DLJ.................................... $ 492.3 $ 415.9
================ =================
</TABLE>
Summarized statements of earnings information for DLJ reconciled to the
Company's equity in earnings of DLJ is as follows:
<TABLE>
<CAPTION>
1996 1995
---------------- -----------------
(IN MILLIONS)
<S> <C> <C>
Commission, fees and other income...................................... $ 1,818.2 $ 1,325.9
Net investment income.................................................. 1,074.2 904.1
Dealer, trading and investment gains, net.............................. 598.4 528.6
---------------- -----------------
Total revenues......................................................... 3,490.8 2,758.6
Total expenses including income taxes.................................. 3,199.5 2,579.5
---------------- -----------------
Net earnings........................................................... 291.3 179.1
Dividends on preferred stock........................................... 18.7 19.9
---------------- -----------------
Earnings Applicable to Common Shares................................... $ 272.6 $ 159.2
================ =================
DLJ's earnings applicable to common shares as reported................. $ 272.6 $ 159.2
Amortization of cost in excess of net assets acquired in 1985.......... (3.1) (3.9)
The Holding Company's equity in DLJ's earnings......................... (107.8) (90.4)
Minority interest in DLJ............................................... (73.4) (6.5)
---------------- -----------------
The Company's Equity in DLJ's Earnings................................. $ 88.3 $ 58.4
================ =================
</TABLE>
F-43
<PAGE>
21) ACCOUNTING FOR STOCK-BASED COMPENSATION
The Holding Company sponsors a stock option plan for employees of
Equitable Life. DLJ and Alliance each sponsor their own stock option
plans for certain employees. The Company elected to continue to account
for stock-based compensation using the intrinsic value method prescribed
in APB Opinion No. 25. Had compensation expense of the Company's stock
option incentive plans for options granted after December 31, 1994 been
determined based on the estimated fair value at the grant dates for
awards under those plans, the Company's pro forma net earnings for 1996
and 1995 would have been as follows:
1996 1995
--------------- ---------------
(IN MILLIONS)
Net Earnings
As Reported......... $ 10.3 $ 312.8
Pro Forma........... $ 3.2 $ 311.3
The fair value of options and units granted after December 31, 1994,
used as a basis for the above pro forma disclosures, was estimated as of
the date of grants using Black-Scholes option pricing models. The option
and unit pricing assumptions for 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
HOLDING COMPANY DLJ ALLIANCE
------------------------- -------------------------- -----------------------------
1996 1995 1996 1995 1996 1995
----------- ----------- ----------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Dividend yield........... 0.80% 0.96% 1.54% 1.85% 8.0% 8.0%
Expected volatility...... 20.00% 20.00% 25.00% 25.00% 23.00% 23.00%
Risk-free interest rate.. 5.92% 6.83% 6.07% 5.86% 5.80% 6.00%
Expected Life............ 5 YEARS 5 years 5 YEARS 5 years 7.43 YEARS 7.43 years
Weighted fair value
per option granted..... $6.94 $5.90 $9.35 - $2.69 $2.24
</TABLE>
F-44
<PAGE>
A summary of the Holding Company and DLJ stock option plans and
Alliance's Unit option plans are as follows:
<TABLE>
<CAPTION>
HOLDING COMPANY DLJ ALLIANCE
----------------------------- ----------------------------- -----------------------------
Options Options Options
Outstanding Outstanding Outstanding
Weighted Weighted Weighted
Average Average Average
Shares Exercise Shares Exercise Units Exercise
(In Millions) Price (In Millions) Price (In Millions) Price
------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance as of
January 1, 1994........ 6.1 - 3.2
Granted................ .7 - 1.2
Exercised.............. - - (.5)
Forfeited.............. - - (.1)
------------- ------------- -------------
Balance as of
December 31, 1994...... 6.8 - 3.8
Granted................ .4 9.2 1.8
Exercised.............. (.1) - (.5)
Expired................ (.1) - -
Forfeited.............. (.3) - (.3)
------------- ------------- -------------
Balance as of
December 31, 1995...... 6.7 $20.27 9.2 $27.00 4.8 $17.72
Granted................ .7 $24.94 2.1 $32.54 .7 $25.12
Exercised.............. (.1) $19.91 - - (.4) $13.64
Expired................ (.6) $20.21 - - - -
Forfeited.............. - - (.2) $27.00 (.1) $19.32
------------- ------------- -------------
Balance as of
December 31, 1996...... 6.7 $20.79 11.1 $28.06 5.0 $19.07
============= ============= ============= ============= ============= =============
</TABLE>
F-45
<PAGE>
Information with respect to stock and unit options outstanding and
exercisable at December 31, 1996 is as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------------------------------------- --------------------------------------
Weighted
Average Weighted Weighted
Range of Number Remaining Average Number Average
Exercise Outstanding Contractual Exercise Exercisable Exercise
Prices (In Millions) Life (Years) Price (In Millions) Price
--------------------- ----------------- --------------- ----------------- ------------------- ----------------
<S> <C> <C> <C> <C> <C>
Holding
Company
---------------------
$18.125-$27.75 6.7 7.00 $20.79 3.4 $20.18
================= =============== ================= =================== ================
DLJ
---------------------
$27.00-$33.50 11.1 9.00 $28.06 - -
================= =============== ================= =================== ================
Alliance
---------------------
$ 6.0625-$15.9375 1.3 4.76 $12.97 1.2 $12.58
$16.3125-$19.75 1.1 8.19 $19.13 .2 $18.69
$19.875 -$19.875 1.0 7.36 $19.88 .4 $19.88
$20.75 -$24.375 .9 8.46 $22.05 .3 $21.84
$24.375 -$25.125 .7 9.96 $25.13 - -
----------------- -------------------
$ 6.0625-$25.125 5.0 7.43 $19.07 2.1 $15.84
================= =============== ================= =================== ================
</TABLE>
F-46
<PAGE>
APPENDIX A
MANAGEMENT
Here is a list of our directors and, to the extent they are responsible for
variable life insurance operations, our principal officers and a brief statement
of their business experience for the past five years. Unless otherwise noted,
their address is 1290 Avenue of the Americas, New York, New York 10104.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
NAME AND PRINCIPAL BUSINESS EXPERIENCE
BUSINESS ADDRESS WITHIN PAST FIVE YEARS
- ------------------------------------------------------------------------------------------------------------------------------------
DIRECTORS
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Claude Bebear Director of Equitable since July 1991. Chairman of the Board of the Holding Company
AXA-UAP (February 1996 - present) and a Director of other affiliates of Equitable. Chairman of the
23, Avenue Matignon Executive Board of AXA-UAP ("AXA-UAP") since January 1997. Prior thereto, he was Chairman
75008 Paris, France and Chief Executive Officer of AXA S.A. Chief Executive Officer of the AXA-UAP Group
(formerly known as the AXA Group) since 1974 and Chairman or Director of numerous
subsidiaries and affiliated companies of the AXA-UAP Group.
- ------------------------------------------------------------------------------------------------------------------------------------
Christopher J. Brocksom Director of Equitable since July 1992. Chief Executive Officer, AXA Equity & Law Life
AXA Equity & Law Assurance Society PLC ("AXA Equity & Law") and various directorships and officerships with
Elbury 9 AXA Equity & Law affiliated companies.
Weedon Lane
Buckinghamshire HP 6505
England
- ------------------------------------------------------------------------------------------------------------------------------------
Francoise Colloc'h Director of Equitable since July 1992. Senior Executive Vice President Human Resources and
AXA-UAP Communications of AXA-UAP, and various positions with AXA-UAP affiliated companies. Director
23, Avenue Matignon of the Holding Company.
75008 Paris, France
- ------------------------------------------------------------------------------------------------------------------------------------
Henri de Castries Director of Equitable since September 1993. Vice Chairman of the Board of the Holding
AXA-UAP Company since February 1996. Senior Executive Vice President Financial Services and Life
23, Avenue Matignon Insurance Activities of AXA-UAP since 1996. Also Director or Officer of various subsidiaries
75008 Paris, France and affiliates of the AXA-UAP Group. Director of the Holding Company and of other Equitable
affiliates. Previously held other officerships with the AXA Group.
- ------------------------------------------------------------------------------------------------------------------------------------
Joseph L. Dionne Director of Equitable since May 1982. Chairman (since April 1988) and Chief Executive
The McGraw-Hill Companies Officer (since April 1983) of The McGraw-Hill Companies. Director of the Holding Company.
1221 Avenue of the Americas
New York, NY 10020
- ------------------------------------------------------------------------------------------------------------------------------------
William T. Esrey Director of Equitable since July 1986. Chairman (since April 1990) and Chief Executive
Sprint Corporation Officer (since 1985) of Sprint Corporation. Director of the Holding Company.
P.O. Box 11315
Kansas City, MO 64112
- ------------------------------------------------------------------------------------------------------------------------------------
Jean-Rene Fourtou Director of Equitable since July 1992. Chairman and Chief Executive Officer, Rhone-Poulenc
Rhone-Poulenc S.A. S.A. since 1986. Member of the Supervisory Board of AXA-UAP. Director of the Holding
25, Quai Paul Doumer Company.
92408 Courbevoie Cedex
France
- -----------------------------------------------------------------------------------------------------------------------------------
Norman C. Francis Director of Equitable since March 1989. President, Xavier University of Louisiana.
Xavier University of Louisiana
7325 Palmetto Street
New Orleans, LA 70125
- ------------------------------------------------------------------------------------------------------------------------------------
Donald J. Greene Director of Equitable since July 1991. Partner, LeBoeuf, Lamb, Greene & MacRae since 1965.
LeBouef, Lamb, Greene & MacRae Director of the Holding Company.
125 West 55th Street
New York, NY 10019-4513
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
A-1
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
NAME AND PRINCIPAL BUSINESS EXPERIENCE
BUSINESS ADDRESS WITHIN PAST FIVE YEARS
- ------------------------------------------------------------------------------------------------------------------------------------
DIRECTORS (continued)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
John T.Hartley Director of Equitable since August 1987. Retired Chairman and Chief Executive Officer of
Harris Corporation Harris Corporation (retired since July 1995); previously held other officerships with Harris
1025 NASA Boulevard Corporation. Director of the Holding Company.
Melbourne, FL 32919
- ------------------------------------------------------------------------------------------------------------------------------------
John H.F. Haskell, Jr. Director of Equitable since July 1992. Managing Director of Dillon, Read & Co., Inc. since
Dillon, Read & Co., Inc. 1975 and member of its Board of Directors. Director of the Holding Company.
535 Madison Avenue
New York, NY 10022
- ------------------------------------------------------------------------------------------------------------------------------------
Mary R. (Nina) Henderson Director of Equitable since December 1996. President of CPC Specialty Markets Group of CPC
CPC Specialty Markets Group International, Inc. since 1993. Prior thereto, President of CPC Specialty Products and Best
700 Sylvan Avenue Foods Exports. Director of the Holding Company.
Englewood Cliffs, NJ 07632
- ------------------------------------------------------------------------------------------------------------------------------------
W. Edwin Jarmain Director of Equitable since July 1992. President of Jarmain Group Inc. since 1979; also an
Jarmain Group Inc. Officer or Director of several affiliated companies. Chairman and Director of FCA
121 King Street West International Ltd. Director of various AXA affiliated companies. Previously held other
Suite 2525, Box 36 officerships with FCA International. Director of the Holding Company.
Toronto, Ontario M5H 3T9,
Canada
- ------------------------------------------------------------------------------------------------------------------------------------
G. Donald Johnston, Jr. Director of Equitable since January 1986. Retired Chairman and Chief Executive Officer, JWT
184-400 Ocean Road Group, Inc. and J. Walter Thompson Company.
John's Island
Vero Beach, FL 32963
- ------------------------------------------------------------------------------------------------------------------------------------
Winthrop Knowlton Director of Equitable since October 1973. Chairman of the Board of Knowlton Brothers, Inc.
Knowlton Brothers, Inc. since May 1989; also President of Knowlton Associates, Inc. since September 1987; Director
530 Fifth Avenue of the Holding Company.
New York, NY 10036
- ------------------------------------------------------------------------------------------------------------------------------------
Arthur L. Liman Director of Equitable since March 1984. Partner, Paul, Weiss, Rifkind, Wharton & Garrison
Paul, Weiss, Rifkind, since 1966. Director of the Holding Company.
Wharton and Garrison
1285 Avenue of the Americas
New York, NY 10019
- ------------------------------------------------------------------------------------------------------------------------------------
George T. Lowy Director of Equitable since July 1992. Partner, Cravath, Swaine & Moore since 1965.
Cravath, Swaine & Moore
825 Eighth Avenue
New York, NY 10019
- ------------------------------------------------------------------------------------------------------------------------------------
Didier Pineau-Valencienne Director of Equitable since February 1996. Chairman and Chief Executive Officer of
Schneider S.A. Schneider S.A. since 1981 and Chairman or Director of numerous subsidiaries and affiliated
64-70, Avenue Jean-Baptiste Clement companies of Schneider. Director of AXA-UAP and the Holding Company.
92646 Boulogne-Billancourt Cedex
France
- ------------------------------------------------------------------------------------------------------------------------------------
George J. Sella, Jr. Director of Equitable since May 1987. Retired Chairman and Chief Executive Officer of
P.O. Box 397 American Cyanamid Company (until April 1993); previously held other officerships with
Newton, NJ 07860 American Cyanamid. Director of the Holding Company.
- ------------------------------------------------------------------------------------------------------------------------------------
Dave H. Williams Director of Equitable since March 1991. Chairman and Chief Executive Officer of Alliance
Alliance Capital Management since 1977 and Chairman or Director of numerous subsidiaries and affiliated companies of
Corporation Alliance. Director of the Holding Company.
1345 Avenue of the Americas
New York, NY 10105
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
A-2
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
NAME AND PRINCIPAL BUSINESS EXPERIENCE
BUSINESS ADDRESS WITHIN PAST FIVE YEARS
- ------------------------------------------------------------------------------------------------------------------------------------
OFFICERS and DIRECTORS
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
William T. McCaffrey Director, Senior Executive Vice President and Chief Operating Officer of Equitable (all
since February 1996). Executive Vice President and Chief Administrative Officer (since
February 1994) of the Holding Company. Director of various Equitable affiliated companies.
Previously held other officerships with Equitable and its affiliates.
- ------------------------------------------------------------------------------------------------------------------------------------
Joseph J. Melone Chairman, Chief Executive Officer and President of Equitable. Chief Executive Officer of the
Holding Company since February 1996 and Director and President of the Holding Company since
May 1992. Director of various Equitable and AXA-UAP affiliated companies.
- ------------------------------------------------------------------------------------------------------------------------------------
OTHER OFFICERS
- ------------------------------------------------------------------------------------------------------------------------------------
A. Frank Beaz Senior Vice President, Equitable. Executive Vice President, EQ Financial Consultants, Inc.
("EQF") (since May 1995). Director, Equitable Realty Assets Corporation since December 1996.
Previously held other officerships with Equitable.
- ------------------------------------------------------------------------------------------------------------------------------------
Leon B. Billis Senior Vice President, Equitable. Previously held other officerships with Equitable.
- ------------------------------------------------------------------------------------------------------------------------------------
Harvey Blitz Senior Vice President and Deputy Chief Financial Officer, Equitable. Senior Vice President,
the Holding Company; Vice President and Director, EQ Advisors Trust (EQAT); Chairman of
Frontier Trust Company and Director of various Equitable affiliated companies. Previously
held other officerships with Equitable and its affiliates.
- ------------------------------------------------------------------------------------------------------------------------------------
Kevin R. Byrne Vice President and Treasurer, Equitable and the Holding Company; Treasurer, EquiSource and
Frontier Trust Company. Vice President and Treasurer, Equitable Casualty Insurance Company
and EQAT. Previously held other officerships with Equitable and its affiliates.
- ------------------------------------------------------------------------------------------------------------------------------------
Jerry M. de St. Paer Executive Vice President, Equitable. Senior Executive Vice President (since May 1996) and
Chief Financial Officer (since May 1992) of the Holding Company. Executive Vice President
and Chief Operating Officer (since September 1994) of Equitable Investment Corporation.
Director of various Equitable affiliated companies. Previously held various officerships
with Equitable and its affiliates.
- ------------------------------------------------------------------------------------------------------------------------------------
Gordon G. Dinsmore Senior Vice President, Equitable. Executive Vice President, EQF. Vice President, EQAT.
Director of other Equitable affiliated companies. Previously held other officerships with
Equitable and its affiliates.
- ------------------------------------------------------------------------------------------------------------------------------------
Alvin H. Fenichel Senior Vice President and Controller, Equitable and the Holding Company. Previously held
other officerships with Equitable and its affiliates.
- ------------------------------------------------------------------------------------------------------------------------------------
Paul J. Flora Senior Vice President and Auditor, Equitable. Vice President and Auditor, Holding Company
(since September 1994). Vice President/Auditor, National Westminster Bank (November 1984 to
June 1993).
- ------------------------------------------------------------------------------------------------------------------------------------
Robert E. Garber Executive Vice President and General Counsel, Equitable and the Holding Company. Previously
held other officerships with Equitable and its affiliates.
- ------------------------------------------------------------------------------------------------------------------------------------
Donald R. Kaplan Vice President and Chief Compliance Officer, Equitable. Previously held other officerships
with Equitable.
- ------------------------------------------------------------------------------------------------------------------------------------
Michael S. Martin Senior Vice President, Equitable. Chairman and Chief Executive Officer, EQF. Vice President,
EQAT and HRT. Director, Equitable Underwriting and Sales Agency (Bahamas), Ltd. (since May
1996) and Colorado (since January 1995). Previously held other officerships with Equitable
and its affiliates.
- ------------------------------------------------------------------------------------------------------------------------------------
Peter D. Noris Executive Vice President and Chief Investment Officer, Equitable. Executive Vice President
(since May 1995) and Chief Investment Officer (since July 1995), Holding Company. Trustee,
HRT and President and Trustee, EQAT. Director of Alliance and Equitable Real Estate.
Executive Vice President EQF. Prior to May 1995, Vice President/Manager, Insurance Companies
Investment Strategies Group, Salomon Brothers, Inc. Prior to November 1992, with Morgan
Stanley & Co., Inc., as Principal, Fixed Income Insurance Group.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
A-3
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
NAME AND PRINCIPAL BUSINESS EXPERIENCE
BUSINESS ADDRESS WITHIN PAST FIVE YEARS
- ------------------------------------------------------------------------------------------------------------------------------------
OTHER OFFICERS (continued)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Anthony C. Pasquale Senior Vice President, Equitable. Director of Equitable Agri-Business, Inc. Previously held
other officerships with Equitable and its affiliates.
- ------------------------------------------------------------------------------------------------------------------------------------
Michael J. Rich Senior Vice President, Equitable. Prior to October 1994, Vice President of Underwriting,
John Hancock Mutual Life Insurance Co.
- ------------------------------------------------------------------------------------------------------------------------------------
Pauline Sherman Vice President, Secretary and Associate General Counsel, Equitable and the Holding Company,
both since September 1995. Previously held other officerships with Equitable.
- ------------------------------------------------------------------------------------------------------------------------------------
Samuel B. Shlesinger Senior Vice President and Actuary, Equitable. Director, Chairman and Chief Executive
Officer, The Equitable of Colorado, Inc. since 1985. Vice President, HRT and EQAT.
Previously held other officerships with Equitable and its affiliates.
- ------------------------------------------------------------------------------------------------------------------------------------
Jose S. Suquet Executive Vice President and Chief Agency Officer, Equitable, since August 1994. Prior
thereto, with Equitable as Sales/Agency Manager.
- ------------------------------------------------------------------------------------------------------------------------------------
Stanley B. Tulin Senior Executive Vice President and Chief Financial Officer, Equitable since April 1996.
Executive Vice President, Holding Company. Vice President, EQAT. Prior thereto, Chairman,
Insurance Consulting and Actuarial Practice, Coopers & Lybrand.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
A-4
<PAGE>
APPENDIX B
COMMUNICATING PERFORMANCE DATA
In reports or other communications to policyowners or in advertising material,
we may describe general economic and market conditions affecting the Separate
Account and the Trust and may compare the performance or ranking of the Separate
Account Funds and the Trust's portfolios with (1) that of other insurance
company separate accounts or mutual funds included in the rankings prepared by
Lipper Analytical Services, Inc., Morningstar, Inc. or similar investment
services that monitor the performance of insurance company separate accounts or
mutual funds, (2) other appropriate indices of investment securities and
averages for peer universes of funds, or (3) data developed by us derived from
such indices or averages. Advertisements or other communications furnished to
present or prospective policyowners may also include evaluations of a Separate
Account Fund or Trust portfolio by financial publications that are nationally
recognized such as Barron's, Morningstar's Variable Annuities / Life, Business
Week, Forbes, Fortune, Institutional Investor, Money, Kiplinger's Personal
Finance, Financial Planning, Investment Adviser, Investment Management Weekly,
Money Management Letter, Investment Dealers Digest, National Underwriter,
Pension & Investments, USA Today, Investor's Daily, The New York Times, The Wall
Street Journal, the Los Angeles Times and the Chicago Tribune.
Performance data for peer universes of funds with similar investment objectives
are compiled by Lipper Analytical Services, Inc. (Lipper) in its Lipper Variable
Insurance Products Performance Analysis Service (Lipper Survey) and Morningstar,
Inc. in the Morningstar Variable Annuity / Life Report (Morningstar Report).
The Lipper Survey records performance data as reported to it by over 800 funds
underlying variable annuity and life insurance products. The Lipper Survey
divides these actively managed funds into 25 categories by portfolio objectives.
The Lipper Survey contains two different universes, which differ in terms of the
types of fees reflected in performance data. The "Separate Account" universe
reports performance data net of investment management fees, direct operating
expenses and asset-based charges applicable under variable insurance and annuity
contracts. The "Mutual Fund" universe reports performance net only of investment
management fees and direct operating expenses, and therefore reflects
asset-based charges that relate only to the underlying mutual fund.
The Morningstar Report consists of over 700 variable life and annuity funds, all
of which report their data net of investment management fees, direct operating
expenses and separate account level charges.
LONG-TERM MARKET TRENDS
As a tool for understanding how different investment strategies may affect
long-term results, it may be useful to consider the historical returns on
different types of assets. The following chart presents historical return trends
for various types of securities. The information presented, while not directly
related to the performance of the Funds of the Separate Account or the Trust's
portfolios, may help to provide a perspective on the potential returns of
different asset classes over different periods of time. By combining this
information with your knowledge of your own financial needs, you may be able to
better determine how you wish to allocate your premiums.
Historically, the investment performance of common stocks over the long term has
generally been superior to that of long or short-term debt securities, although
common stocks have been subject to more dramatic changes in value over short
periods of time. The Alliance Common Stock Fund of the Separate Account may,
therefore, be a desirable selection for policyowners who are willing to accept
such risks. Policyowners who have a need to limit short-term risk, may find it
preferable to allocate a smaller percentage of their net premiums to those funds
that invest primarily in common stock. Any investment in securities, whether
equity or debt, involves varying degrees of potential risk, in addition to
offering varying degrees of potential reward.
The chart on page B-2 illustrates the average annual compound rates of return
over selected time periods between December 31, 1926 and December 31, 1996 for
common stocks, long-term government bonds, long-term corporate bonds,
intermediate-term government bonds and Treasury Bills. The Consumer Price Index
is shown as a measure of inflation for comparison purposes. The average annual
returns assume the reinvestment of dividends, capital gains and interest.
The information presented is an historical record of unmanaged groups of
securities and is neither an estimate nor a guarantee of future results. In
addition, investment management fees and expenses and charges associated with a
variable life insurance policy, are not reflected.
The rates of return illustrated do not represent returns of the Separate Account
or the Trust and do not constitute a representation that the performance of the
Separate Account Funds or the Trust's portfolios will correspond to rates of
return such as those illustrated in the chart. For a comparative illustration of
performance results of the portfolios of The Hudson River Trust, see page B-1 of
the HRT prospectus.
B-1
<PAGE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL RATES OF RETURN
FOR THE
FOLLOWING LONG-TERM LONG-TERM INTERMEDIATE- U.S. CONSUMER
PERIODS ENDING COMMON GOVERNMENT CORPORATE TERM GOV'T TREASURY PRICE
12/31/96: STOCKS BONDS BONDS BONDS BILLS INDEX
- -------- ------ ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
1 year.................. 23.07% -0.93% 1.40% 2.10% 5.21% 3.58%
3 years................. 19.66 6.36 6.72 4.19 4.90 2.93
5 years................. 15.20 8.98 8.52 6.17 4.22 2.89
10 years................. 15.28 9.39 9.48 7.77 5.46 3.70
20 years................. 14.55 9.54 9.71 9.14 7.28 5.15
30 years................. 11.85 7.75 8.24 8.27 6.73 5.39
40 years................. 11.18 6.51 6.99 7.08 5.80 4.47
50 years................. 12.59 5.33 5.76 5.89 4.89 4.08
60 years................. 11.19 5.06 5.38 5.32 4.10 4.13
Since 1926............... 10.71 5.08 5.64 5.21 3.74 3.12
Inflation Adjusted
Since 1926............... 7.36 1.90 2.44 2.02 0.60
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*Source: Ibbotson, Roger G. and Rex A. Sinquefield, STOCKS, BONDS, BILLS, AND
INFLATION (SBBI), 1982, updated in STOCKS, BONDS, BILLS, AND INFLATION 1997
YEARBOOK,(TM) Ibbotson Associates, Inc., Chicago. All rights reserved.
Common Stocks (S&P 500) -- Standard and Poor's Composite Index, an unmanaged
weighted index of the stock performance of 500 industrial, transportation,
utility and financial companies.
Long-term Government Bonds -- Measured using a one-bond portfolio constructed
each year containing a bond with approximately a twenty-year maturity and a
reasonably current coupon.
Long-term Corporate Bonds -- For the period 1969 - 1996, represented by the
Salomon Brothers Long-Term, High-Grade Corporate Bond Index; for the period
1946 - 1968, the Salomon Brothers' Index was backdated using Salomon Brothers'
monthly yield data and a methodology similar to that used by Salomon for 1969 -
1996; for the period 1926 - 1945, the Standard and Poor's monthly High-Grade
Corporate Composite yield data were used, assuming a 4 percent coupon and a
twenty-year maturity.
Intermediate-term Government Bonds -- Measured by a one-bond portfolio
constructed each year containing a bond with approximately a five-year
maturity.
U.S. Treasury Bills -- Measured by rolling over each month a one-bill portfolio
containing, at the beginning of each month, the bill having the shortest
maturity not less than one month.
Inflation -- Measured by the Consumer Price Index for all Urban Consumers
(CPI-U), not seasonally adjusted.
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