SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended September 30, 1995 Commission File No. 0-25280
- --------------------------------------------------------------------------------
The Equitable Life Assurance Society of the United
States (Exact name of registrant as specified in
its charter)
New York 13-5570651
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
787 Seventh Avenue, New York, New York 10019
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 554-1234
- --------------------------------------------------------------------------------
None
- --------------------------------------------------------------------------------
(Former name, former address, and former fiscal year if changed
since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) been subject to such filing requirements
for the past 90 days.
Yes X No
---- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Shares Outstanding
Class at November 10, 1995
- --------------------------------------------------------------------------------
Common Stock, $1.25 par value 2,000,000
Page 1 of 35
<PAGE>
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1995
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION Page #
<S> <C> <C>
Item 1: Unaudited Consolidated Financial Statements
Consolidated Balance Sheets as of September 30, 1995 and December 31, 1994... 3
Consolidated Statements of Earnings for the Three Months and Nine Months
Ended September 30, 1995 and 1994........................................... 4
Consolidated Statements of Shareholder's Equity for the Nine Months Ended
September 30, 1995 and 1994................................................. 5
Consolidated Statements of Cash Flows for the Nine Months Ended September
30, 1995 and 1994............................................................ 6
Notes to Consolidated Financial Statements................................... 7
Item 2: Management's Discussion and Analysis of Financial Condition and Results of
Operations................................................................... 16
PART II OTHER INFORMATION
Item 1: Legal Proceedings............................................................ 34
Item 6: Exhibits and Reports on Form 8-K............................................. 34
SIGNATURES........................................................................... 35
</TABLE>
2
<PAGE>
PART I FINANCIAL INFORMATION
Item 1: Unaudited Consolidated Financial Statements.
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
September 30, December 31,
1995 1994
-------------- -------------
(In Millions)
<S> <C> <C>
ASSETS
Investments:
Fixed maturities:
Held to maturity, at amortized cost ........................ $ 4,752.6 $ 5,223.0
Available for sale, at estimated fair value ................ 9,955.7 7,586.0
Mortgage loans on real estate ................................ 3,604.2 4,018.0
Equity real estate ........................................... 4,251.0 4,446.4
Policy loans ................................................. 1,929.2 1,731.2
Investment in and loans to affiliates ........................ 593.4 678.5
Other equity investments ..................................... 647.0 560.2
Other invested assets ........................................ 573.8 489.3
----------- ----------
Total investments ........................................ 26,306.9 24,732.6
Cash and cash equivalents ...................................... 980.6 693.6
Deferred policy acquisition costs .............................. 3,092.0 3,221.1
Amounts due from discontinued GIC Segment ...................... 2,168.6 2,108.6
Other assets ................................................... 2,250.6 2,078.6
Closed Block assets ............................................ 8,394.1 8,105.5
Separate Accounts assets ....................................... 24,052.9 20,469.5
----------- -----------
Total Assets ................................................... $ 67,245.7 $ 61,409.5
=========== ===========
LIABILITIES
Policyholders' account balances ................................ $ 21,819.4 $ 21,238.0
Future policy benefits and other policyholders' liabilities .... 3,982.5 3,840.8
Short-term and long-term debt .................................. 1,617.5 1,337.4
Other liabilities .............................................. 2,804.2 2,300.1
Closed Block liabilities ....................................... 9,305.5 9,069.5
Separate Accounts liabilities .................................. 24,007.2 20,429.3
----------- -----------
Total liabilities ........................................ 63,536.3 58,215.1
----------- -----------
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 ................................. 2,913.6 2,913.6
Retained earnings .............................................. 728.5 484.0
Net unrealized investment gains (losses) ....................... 67.5 (203.0)
Minimum pension liability ...................................... (2.7) (2.7)
----------- -----------
Total shareholder's equity ............................... 3,709.4 3,194.4
----------- -----------
Total Liabilities and Shareholder's Equity ..................... $ 67,245.7 $ 61,409.5
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
3
<PAGE>
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- --------------------
1995 1994 1995 1994
--------- ---------- -------- ---------
(In Millions)
<S> <C> <C> <C> <C>
REVENUES
Universal life and investment-type
product policy fee income ................ $ 192.7 $ 186.2 $ 569.6 $ 540.2
Premiums ................................... 140.2 156.3 452.7 459.6
Net investment income ...................... 528.8 505.1 1,583.9 1,520.3
Investment gains, net ...................... 8.5 59.1 27.7 79.4
Commissions, fees and other income ......... 228.7 205.4 640.9 620.1
Contribution from the Closed Block ......... 28.2 41.7 85.4 116.6
--------- --------- --------- ---------
Total revenues ....................... 1,127.1 1,153.8 3,360.2 3,336.2
--------- --------- --------- ---------
BENEFITS AND OTHER DEDUCTIONS
Interest credited to policyholders'
account balances ......................... 313.5 301.0 918.2 901.8
Policyholders' benefits .................... 246.0 228.1 766.7 691.4
Other operating costs and expenses ......... 442.5 502.6 1,340.9 1,441.8
--------- --------- --------- --------
Total benefits and other deductions .. 1,002.0 1,031.7 3,025.8 3,035.0
--------- --------- --------- --------
Earnings before Federal income taxes and
cumulative effect of accounting change ... 125.1 122.1 334.4 301.2
Federal income taxes ....................... 33.9 33.0 89.9 79.7
--------- --------- -------- --------
Earnings before cumulative effect of
accounting change ........................ 91.2 89.1 244.5 221.5
Cumulative effect of accounting change,
net of Federal income taxes .............. -- -- -- (27.1)
--------- --------- --------- --------
Net Earnings ............................... $ 91.2 $ 89.1 $ 244.5 $ 194.4
========= ========= ========== ========
</TABLE>
See Notes to Consolidated Financial Statements.
4
<PAGE>
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
----------------------
1995 1994
---------- -----------
(In Millions)
<S> <C> <C>
Common stock, at par value, beginning of year and end of period ..... $ 2.5 $ 2.5
--------- ----------
Capital in excess of par value, beginning of year and end of period . 2,913.6 2,613.6
--------- ----------
Retained earnings, beginning of year ................................ 484.0 217.5
Net earnings ........................................................ 244.5 194.4
--------- ----------
Retained earnings, end of period .................................... 728.5 411.9
--------- ----------
Net unrealized investment (losses) gains, beginning of year ......... (203.0) 133.0
Change in net unrealized investment gains (losses) .................. 270.5 (268.8)
--------- ----------
Net unrealized investment gains (losses), end of period ............. 67.5 (135.8)
--------- ----------
Minimum pension liability, beginning of year ........................ (2.7) (15.0)
Change in minimum pension liability ................................. -- (.3)
--------- ----------
Minimum pension liability, end of period ............................ (2.7 (15.3)
--------- ---------
Total Shareholder's Equity, End of Period ........................... $3,709.4 $2,876.9
========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
5
<PAGE>
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
--------------------
1995 1994
-------- ----------
(In Millions)
<S> <C> <C>
Net earnings ............................................................ $ 244.5 $ 194.4
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Investment gains, net ............................................... (27.7) (79.6)
Change in amounts due from discontinued GIC Segment ................. -- 43.0
General Account policy charges ...................................... (570.0) (537.3)
Interest credited to policyholders' account balances ................ 918.2 901.8
Changes in Closed Block assets and liabilities, net ................. (52.6) (73.5)
Other, net .......................................................... 194.9 13.6
-------- ----------
Net cash provided by operating activities ............................... 707.3 462.4
-------- ----------
Cash flows from investing activities:
Maturities and repayments ............................................. 1,283.7 1,518.6
Sales ................................................................. 5,399.9 4,716.4
Return of capital from joint ventures and limited partnerships ........ 34.7 17.6
Purchases ............................................................. (7,100.5) (5,330.2)
Decrease (increase) in loans to discontinued GIC Segment .............. 1,155.4 (40.0)
Other, net ............................................................ (167.7) (561.2)
-------- ----------
Net cash provided by investing activities ............................... 605.5 321.2
-------- ----------
Cash flows from financing activities: Policyholders' account balances:
Deposits ............................................................ 2,024.7 1,540.2
Withdrawals ......................................................... (2,102.3) (2,206.9)
Net increase in short-term financings ................................. 272.5 (5.2)
Additions to long-term debt ........................................... -- 58.4
Repayments of long-term debt .......................................... (5.3) (162.4)
Proceeds from issuance of Alliance Units .............................. -- 100.0
Payment of obligation to fund accumulated deficit of discontinued
GIC Segment ......................................................... (1,215.4) --
-------- ----------
Net cash used by financing activities ................................... (1,025.8) (675.9)
-------- ----------
Change in cash and cash equivalents ..................................... 287.0 107.7
Cash and cash equivalents, beginning of year ............................ 693.6 593.4
-------- ----------
Cash and Cash Equivalents, End of Period ................................ $ 980.6 $ 701.1
======== ==========
Supplemental cash flow information
Interest Paid ......................................................... $ 61.2 $ 43.5
======== ==========
Income Taxes Paid ..................................................... $ 4.1 $ 138.9
======== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
6
<PAGE>
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1) BASIS OF PRESENTATION
The accompanying consolidated financial statements are prepared in
conformity with GAAP and reflect, in the opinion of the Company's
management, all adjustments (consisting of normal, recurring accruals)
necessary for a fair presentation of the financial position and results of
operations of the Company. Such statements should be read in conjunction
with the consolidated financial statements of the Company for the year
ended December 31, 1994. The results of operations for the nine months
ended September 30, 1995 are not necessarily indicative of the results to
be expected for the full year.
Certain reclassifications have been made in the amounts presented for
prior periods to conform those periods with the current presentation.
2) ACCOUNTING CHANGES AND PRONOUNCEMENTS
In the first quarter of 1995, the Company adopted SFAS No. 114,
"Accounting by Creditors for Impairment of a Loan". SFAS No. 114 applies
to all creditors and addresses the accounting for impairment of a loan by
specifying how allowances for credit losses should be determined. SFAS No.
114 also applies to all loans that are restructured in a troubled debt
restructuring involving a modification of terms. Impaired loans within the
scope of SFAS No. 114 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 allowances 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.
In the fourth quarter of 1994 (effective as of January 1, 1994), the
Company adopted SFAS No. 112, "Employers' Accounting for Postemployment
Benefits," which requires employers to recognize the obligation for the
estimated cost of providing postemployment benefits. The Company's
consolidated financial statements for the nine months ended September 30,
1994 have been restated for the adoption of SFAS No. 112 to reflect a
charge of $27.1 million, net of Federal income tax benefit of $14.6
million, for the cumulative effect of initially applying the statement as
of January 1, 1994.
In January 1995, the FASB issued SFAS No. 120, "Accounting and Reporting
by Mutual Life Insurance Enterprises and by Insurance Enterprises for
Certain Long-Duration Participating Contracts," which permits stock life
insurance companies with participating life contracts to account for those
contracts in accordance with Statement of Position No. 95-1, "Accounting
for Certain Insurance Activities of Mutual Life Insurance Enterprises". In
March 1995, the FASB issued SFAS No. 121, "Accounting For the Impairment
of Long-Lived Assets and For Long-Lived Assets to be Disposed Of," which
requires that long-lived assets and certain identifiable intangibles being
held and used by an entity be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of such assets
may not be recoverable. In May 1995, the FASB issued SFAS No. 122,
"Accounting for Mortgage Servicing Rights," which requires a mortgage
banking enterprise recognize as separate assets rights to service mortgage
loans for others, however those servicing rights are acquired. It further
requires capitalized mortgage servicing rights be assessed for impairment
based on the fair value of those rights. In October 1995, the FASB issued
SFAS No. 123, "Accounting for Stock-Based Compensation". This statement
defines a fair value based method of accounting for stock-based employee
compensation plans while continuing to allow an entity to measure
compensation cost for such plans using the intrinsic value based method of
accounting. Management has not yet determined whether the Company will
adopt SFAS No. 120 nor the timing or effect of adopting SFAS Nos. 121, 122
and 123.
7
<PAGE>
3) FEDERAL INCOME TAXES
Federal income taxes for interim periods have been computed using an
estimated annual effective tax rate. This rate is revised, if necessary,
at the end of each successive interim period to reflect the current
estimate of the annual effective tax rate.
4) INVESTMENTS
Investment valuation allowances and changes thereto are shown below:
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
--------------------
1995 1994
--------- ---------
(In Millions)
<S> <C> <C>
Balances, beginning of year ........................ $ 284.9 $ 355.6
Additions charged to income ........................ 67.8 44.6
Deductions for writedowns and asset dispositions ... (49.7) (100.9)
-------- --------
Balances, End of Period ............................ $ 303.0 $ 299.3
======== ========
Balances, end of period:
Mortgage loans on real estate .................... $ 66.8 $ 78.2
Equity real estate ............................... 236.2 221.1
-------- --------
Total .............................................. $ 303.0 $ 299.3
======== ========
</TABLE>
For the three months and nine months ended September 30, 1995 and 1994,
investment income is shown net of investment expenses of $106.0 million,
$316.8 million, $106.9 million and $315.1 million, respectively.
As of September 30, 1995 and December 31, 1994, fixed maturities in the
held to maturity portfolio had estimated fair values of $4,979.1 million
and $5,016.9 million, fixed maturities classified as available for sale
had amortized costs of $9,819.2 million and $8,044.3 million,
respectively. Other equity investments included equity securities with
carrying values of $125.6 million and $134.1 million and costs of $111.4
million and $126.4 million as of September 30, 1995 and December 31, 1994,
respectively.
For the nine months ended September 30, 1995 and 1994, proceeds received
on sales of fixed maturities classified as available for sale amounted to
$5,038.5 million and $4,518.4 million, respectively. Gross gains of $134.3
million and $43.2 million and gross losses of $55.5 million and $39.8
million were realized on these sales for the nine months ended September
30, 1995 and 1994, respectively. The increase in unrealized investment
gains related to fixed maturities classified as available for sale for the
nine months ended September 30, 1995 amounted to $597.8 million.
During the nine months ended September 30, 1995, twelve securities
classified as held to maturity were transferred to the available for sale
portfolio. All actions were taken as a result of significant deterioration
in creditworthiness. The aggregate amortized cost of the securities
transferred was $116.0 million with gross unrealized investment losses of
$3.2 million transferred to equity.
8
<PAGE>
Impaired mortgage loans along with the related provision for losses were as
follows:
<TABLE>
<CAPTION>
September 30, 1995
------------------
(In Millions)
<S> <C>
Impaired mortgage loans with provision for losses ..... $ 336.9
Impaired mortgage loans with no provision for losses .. 119.5
--------
Recorded investment in impaired mortgage loans ........ 456.4
Provision for losses .................................. (62.8)
--------
Net Impaired Mortgage Loans ........................... $ 393.6
========
</TABLE>
Impaired mortgage loans with no provision for losses are loans where the
fair value of the collateral exceeds the recorded investment. Interest
income earned on loans where the collateral value is used to measure
impairment is recorded on a 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 the nine months ended September 30, 1995, the Company's average
recorded investment in impaired mortgage loans was $295.5 million.
Interest income recognized on these impaired mortgage loans totaled $20.3
million for the nine months ended September 30, 1995, including $10.8
million recognized on a cash basis.
5) SALES OF ALLIANCE CAPITAL MANAGEMENT LP UNITS
During the quarter ended September 30, 1994, Alliance sold 4.96 million of
newly issued units to third parties at prevailing market prices. The sales
decreased the Company's ownership of Alliance's publicly traded units from
63.2% to 59.2%. In addition, 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.
6) BUSINESS SEGMENT INFORMATION
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- --------------------
1995 1994 1995 1994
-------- --------- -------- ----------
(In Millions)
<S> <C> <C> <C> <C>
Revenues
Individual insurance and annuities .. $ 795.0 $ 782.5 $2,441.8 $ 2,330.2
Group pension ....................... 78.4 88.2 213.4 271.3
Attributed insurance capital ........ 17.0 20.1 45.6 57.4
-------- -------- -------- ----------
Insurance operations .............. 890.4 890.8 2,700.8 2,658.9
Investment services ................. 243.7 269.0 681.1 695.4
Consolidation/elimination ........... (7.0) (6.0) (21.7) (18.1)
-------- -------- -------- ----------
Total ............................... $1,127.1 $1,153.8 $3,360.2 $ 3,336.2
======== ======== ======== ==========
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- -------------------
1995 1994 1995 1994
-------- -------- -------- -------
(In Millions)
<S> <C> <C> <C> <C>
Earnings (Loss) Before Federal
Income Taxes and Cumulative
Effect of Accounting Change
Individual insurance and annuities .. $ 80.6 $ 60.1 $ 232.2 $ 190.8
Group pension ....................... (.9) 1.6 (12.7) 6.5
Attributed insurance capital ........ 9.9 17.9 22.5 53.3
-------- -------- -------- --------
Insurance operations .............. 89.6 79.6 242.0 250.6
Investment services ................. 42.5 71.1 112.0 136.1
-------- -------- -------- --------
Subtotal .......................... 132.1 150.7 354.0 386.7
Corporate interest expense .......... (7.0) (28.6) (19.6) (85.5)
-------- -------- -------- --------
Total ............................... $ 125.1 $ 122.1 $ 334.4 $ 301.2
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
September 30, December 31,
1995 1994
-------------- -------------
(In Millions)
<S> <C> <C>
Assets
Individual insurance and annuities ... $ 48,806.9 $ 44,063.4
Group pension ........................ 4,039.9 4,222.8
Attributed insurance capital ......... 1,806.8 2,609.8
----------- -----------
Insurance operations ............... 54,653.6 50,896.0
Investment services .................. 13,056.3 12,127.9
Consolidation/elimination ............ (464.2) (1,614.4)
----------- ----------
Total ................................ $ 67,245.7 $ 61,409.5
=========== ==========
</TABLE>
7) DISCONTINUED OPERATIONS
Summarized financial information of the discontinued GIC Segment is as
follows:
<TABLE>
<CAPTION>
September 30, December 31,
1995 1994
------------- ------------
(In Millions)
<S> <C> <C>
Assets
Mortgage loans on real estate .......... $ 1,539.1 $ 1,730.5
Equity real estate ..................... 1,133.9 1,194.8
Other invested assets .................. 719.5 978.8
Other assets ........................... 528.5 529.5
---------- ----------
Total Assets ........................... $ 3,921.0 $ 4,433.6
========== ==========
Liabilities
Policyholders' liabilities ............. $ 1,431.2 $ 1,924.0
Allowance for future losses ............ 125.5 185.6
Amounts due to continuing operations ... 2,168.6 2,108.6
Other liabilities ...................... 195.7 215.4
---------- ----------
Total Liabilities ...................... $ 3,921.0 $ 4,433.6
========== ==========
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- -------------------
1995 1994 1995 1994
-------- --------- --------- ---------
(In Millions)
<S> <C> <C> <C> <C>
Revenues
Investment income (net of investment
expenses of $38.4, $42.4, $110.7
and $124.7) ........................ $ 49.9 $ 89.0 $ 194.3 $ 283.4
Investment gains (losses), net ....... 6.6 15.4 (12.3) 10.0
Policy fees, premiums and other
income, net ........................ .1 .3 .6 .2
------- -------- -------- --------
Total revenues ....................... 56.6 104.7 182.6 293.6
Benefits and Other Deductions ........ 73.9 100.7 246.1 318.2
------- -------- -------- --------
Losses Charged to Allowance for
Future Losses ...................... $ (17.3) $ 4.0 $ (63.5) $ (24.6)
======= ======== ======== ========
</TABLE>
Amounts due to continuing operations at September 30, 1995 consisted of
$2,168.6 million the discontinued GIC Segment borrowed from continuing
operations. Amounts due to continuing operations at December 31, 1994
consisted of $3,324.0 million borrowed by the GIC Segment from continuing
operations, offset by $1,215.4 million representing an obligation of
continuing operations to provide assets to fund the accumulated deficit of
the GIC Segment. In January 1995, continuing operations transferred
$1,215.4 million in cash to the GIC Segment in settlement of its
obligation. 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.
Investment valuation allowances amounted to $57.1 million on mortgage
loans and $79.9 million on equity real estate for an aggregate of $137.0
million at September 30, 1995. At December 31, 1994, valuation allowances
amounted to $50.2 million on mortgage loans and $74.7 million on equity
real estate for an aggregate of $124.9 million.
The allowance for future losses is based upon management's best judgment
and there can be no assurance ultimate losses will not differ.
Investment income included $22.0 million and $66.1 million of interest on
amounts due from continuing operations for the three months and the nine
months ended September 30, 1994, respectively. Benefits and other
deductions includes $35.6 million, $107.0 million, $48.1 million and
$144.6 million of interest expense related to amounts borrowed from
continuing operations for the three months and the nine months ended
September 30, 1995 and 1994, respectively.
11
<PAGE>
8) CLOSED BLOCK
Summarized financial information of the Closed Block is as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1995 1994
------------- ------------
(In Millions)
<S> <C> <C>
Assets
Fixed maturities:
Held to maturity, at amortized cost (estimated fair value of
$1,831.0 and $1,785.0) ....................................... $ 1,785.6 $ 1,927.8
Available for sale, at estimated fair value (amortized cost of
$1,802.8 and $1,270.3) ....................................... 1,877.6 1,197.0
Mortgage loans on real estate .................................... 1,425.0 1,543.7
Policy loans ..................................................... 1,804.1 1,827.9
Cash and other invested assets ................................... 410.9 442.5
Deferred policy acquisition costs ................................ 839.0 878.1
Other assets ..................................................... 251.9 288.5
========== ==========
Total Assets ..................................................... $ 8,394.1 $ 8,105.5
========== ==========
Liabilities
Future policy benefits and other policyholders' account balances . $ 9,174.0 $ 8,965.3
Other liabilities ................................................ 131.5 104.2
========== ==========
Total Liabilities ................................................ $ 9,305.5 $ 9,069.5
========== ==========
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -------------------
1995 1994 1995 1994
-------- -------- -------- ---------
(In Millions)
<S> <C> <C> <C> <C>
Revenues
Premiums and other income ............. $ 178.8 $ 187.5 $ 561.3 $ 594.1
Investment income (net of investment
expenses of $6.6, $5.1, $20.3 and
$12.4) .............................. 133.3 132.1 400.7 392.4
Investment losses, net ................ (.6) (3.1) (7.5) (21.0)
-------- -------- -------- --------
Total revenues ........................ 311.5 316.5 954.5 965.5
-------- -------- -------- --------
Benefits and Other Deductions
Policyholders' benefits and dividends . 270.8 254.3 824.1 783.2
Other operating costs and expenses .... 12.5 20.5 45.0 65.7
-------- -------- -------- --------
Total benefits and other deductions ... 283.3 274.8 869.1 848.9
-------- -------- -------- --------
Contribution from the Closed Block .... $ 28.2 $ 41.7 $ 85.4 $ 116.6
======== ======== ======== ========
</TABLE>
Investment valuation allowances amounted to $41.7 million and $46.2
million on mortgage loans and $3.7 million and $2.6 million on equity real
estate for an aggregate of $45.4 million and $48.8 million at September
30, 1995 and December 31, 1994, respectively.
During the nine months ended September 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
were taken as a result of 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.
12
<PAGE>
9) RESTRUCTURE COSTS
At September 30, 1995, liabilities associated with the 1994 and 1995 cost
reduction programs totaled $11.2 million. During the nine months ended
September 30, 1995 and 1994, the Company restructured certain operations
in connection with cost reduction programs and incurred costs of $8.6
million and $15.6 million, respectively, primarily associated with
severance related benefits. Amounts paid during the nine months ended
September 30, 1995 and charged against the liabilities for the 1994 and
1995 cost reduction programs totaled $12.8 million.
10) COMMITMENTS AND CONTINGENT LIABILITIES
A number of lawsuits have 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 and its insurance subsidiaries, 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 Equitable Life. Among
litigations pending against Equitable Life and its insurance subsidiaries
of the type described in this paragraph are Golomb et al. v. The Equitable
Life Assurance Society of the United States and Sidney C. Cole v. The
Equitable Life Assurance Society of the United States et al.
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 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
insurance 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 has 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. Although the
outcome of any litigation cannot be predicted with certainty, particularly
in the early stages of an action, Equitable Life's management believes
that the ultimate resolution of this litigation should not have a material
adverse effect on the financial position of Equitable Life. Due to the
early stage of such litigation, Equitable Life's management cannot make an
estimate of loss, if any, or predict whether or not such litigation will
have a material adverse effect on Equitable Life's results of operations
in any particular period.
An action was instituted on April 6, 1995 against Equitable Life and its
wholly owned subsidiary, The Equitable of Colorado, Inc. ("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. Equitable Life and EOC intend to defend vigorously and
believe that they have meritorious defenses which, if successful, would
dispose of the action completely. Equitable Life and EOC further do not
believe that this case is an appropriate class action. Although the
outcome of any litigation cannot be predicted with certainty, particularly
in the early stages of an action, Equitable Life's management believes
that the ultimate resolution of this litigation should not have a material
13
<PAGE>
adverse effect on the financial position of Equitable Life. Due to the
early stage of such litigation, Equitable Life's management cannot make an
estimate of loss, if any, or predict whether or not such litigation will
have a material adverse effect on Equitable Life's results of operations
in any particular period.
Equitable Casualty Insurance Company ("Casualty"), a captive property and
casualty insurance company organized under the laws of Vermont, which is
an indirect wholly owned subsidiary of Equitable Life, is a party to an
arbitration proceeding that commenced in August 1995 with the selection of
three arbitrators. The arbitration will resolve a dispute among Casualty,
Houston General Insurance Company ("Houston General"), and GEICO General
Insurance Company ("GEICO General") regarding the interpretation of a
reinsurance agreement that was entered into as part of a 1980 transaction
whereby Equitable General Insurance Company ("Equitable General"),
formerly an indirect subsidiary of Equitable Life and the predecessor of
GEICO General, sold its commercial lines business along with the stock of
Houston General to subsidiaries of Tokio Marine & Fire Insurance Company,
Ltd. ("Tokio Marine"). Casualty and GEICO General maintain that, under the
reinsurance agreement, Houston General assumed liability for all losses
insured under commercial lines policies written by Equitable General and
its predecessors in order to effect the transfer of that business to Tokio
Marine's subsidiaries. Houston General contends that it did not assume
reinsurance liability for losses insured under certain of those commercial
lines policies. The arbitration panel determined to begin hearing evidence
in the arbitration in June 1996. The result of the arbitration is expected
to resolve two litigations that were commenced by Houston General and that
have been stayed by the presiding courts pending the completion of the
arbitration (in one case, Houston General named as a defendant only GEICO
General but Casualty intervened as a defendant with GEICO General, and in
the other case, Houston General named GEICO General and Equitable Life).
The arbitration is expected to be completed during the second half of
1996. While the ultimate outcome of the arbitration cannot be predicted
with certainty, Equitable Life's management believes that the arbitrators
will recognize that Houston General's position is without merit and
contrary to the way in which the reinsurance industry operates and
therefore the ultimate resolution of this matter should not have a
material effect on Equitable Life's financial position or results of
operations.
Due to the continuing uncertainty regarding Orange County
creditworthiness, on July 19, 1995, Alliance purchased approximately $21.3
million principal amount of Tax and Revenue Anticipation Notes Series A
issued by Orange County, California ("Orange County Obligations") from two
money market fund portfolios sponsored by Alliance. As a result, letters
of credit issued in favor of the portfolios, under which Alliance was
contingently liable, were terminated. On October 19, 1995, Alliance sold
$15.0 million of the $21.3 million principal amount of the Orange County
Obligations. The proceeds received approximated the carrying value of the
Orange County Obligations.
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, Alliance Capital Management
Corporation ("ACMC"), the general partner of Alliance, Alliance Fund
Distributors, Inc., a subsidiary of Alliance, The Equitable Companies
Incorporated, the parent of Alliance, certain officers and directors of
the Fund and certain officers and directors of ACMC 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 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. The Complaint 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 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.
Alliance believes that the allegations in this action are without merit
and intends to vigorously defend against these claims. While the ultimate
results of this action cannot be determined, management of Alliance does
not expect that this action will have a material adverse effect on
Alliance's business.
14
<PAGE>
11) SUBSEQUENT EVENTS
On October 30, 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. 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.
During the fourth quarter of 1995, Alliance announced an agreement in
principle to acquire Cursitor-Eaton Asset Management Company and Cursitor
Holdings Ltd. for approximately $141.5 million in cash and Alliance Units,
part of which will be payable over the next four years, and substantial
additional consideration to be determined at a later date. The acquisition
is subject to execution of a definitive agreement, board approvals,
certain consents and regulatory approvals and certain other conditions.
Upon completion of this transaction, the Company's ownership percentage of
Alliance will be reduced.
15
<PAGE>
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following analysis of the consolidated results of operations and financial
condition of the Company should be read in conjunction with the Consolidated
Financial Statements and the related Notes to Consolidated Financial Statements
included elsewhere herein, and with the Management's Discussion and Analysis
section included in Equitable Life's 1994 Report on Form 10-K.
COMBINED RESULTS OF OPERATIONS
The contribution from the Closed Block is reported on one line in the
consolidated statements of earnings. The following table presents the results of
operations of the Closed Block for the three and nine months ended September 30,
1995 and 1994 combined with the results of operations outside of the Closed
Block. See Closed Block results as combined herein on page 18. Management's
discussion and analysis addresses the combined results of operations unless
noted otherwise.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- -------------------
1995 1994 1995 1994
-------- --------- --------- --------
(In Millions)
<S> <C> <C> <C> <C>
Combined Results of Operations
Policy fee income and premiums ........... $ 511.4 $ 529.6 $ 1,581.6 $ 1,592.8
Net investment income .................... 662.1 637.2 1,984.6 1,912.7
Investment gains, net .................... 8.2 56.0 20.2 58.4
Commissions, fees and other income ....... 228.7 205.8 642.9 621.2
-------- --------- --------- ---------
Total revenues ........................... 1,410.4 1,428.6 4,229.3 4,185.1
Total benefits and other deductions ...... 1,285.3 1,306.5 3,894.9 3,883.9
-------- --------- --------- ---------
Earnings before Federal income taxes and
cumulative effect of accounting change . 125.1 122.1 334.4 301.2
Federal income taxes ..................... 33.9 33.0 89.9 79.7
-------- --------- --------- ---------
Earnings before Cumulative Effect of
Accounting Change ...................... $ 91.2 $ 89.1 $ 244.5 $ 221.5
======== ========= ========= =========
</TABLE>
Continuing Operations
Compared to the comparable prior year period, the higher pre-tax results of
operations for the nine months ended September 30, 1995 reflected increased
earnings in the Individual Insurance and Annuities segment and lower Corporate
interest expense, partially offset by decreased earnings in the Investment
Services segment and losses as compared to earnings in the Group Pension
segment.
The $44.2 million increase in revenues for the nine months ended September 30,
1995 compared to the corresponding period in 1994 was attributed primarily to a
$33.7 million increase in investment results and a $21.7 million increase in
commissions, fees and other income, partly offset by the decline in policy fee
income and premiums.
16
<PAGE>
Net investment income increased $71.9 million for the nine months ended
September 30, 1995 with increases of $94.2 million and $3.8 million for the
Individual Insurance and Annuities and Investment Services segments, offset by
decreases of $14.3 million for the Group Pension segment and $10.1 million for
Attributed Insurance Capital. The Individual Insurance and Annuities increase
was due to higher overall yields on a larger investment asset base while the
Investment Services increase was attributed to higher business activity. The
decrease in investment income in Attributed Insurance Capital principally
resulted from a reduced investment asset base due to the $1.22 billion payment
of the obligation to fund the accumulated deficit of the discontinued GIC
Segment in January 1995, partially offset by income from the investment of
proceeds received on the Holding Company's issuance of $300.0 million Senior
Notes in December 1994.
Investment gains decreased by $38.2 million for the nine months ended September
30, 1995 from $58.4 million for the same period in 1994. Investment gains for
the nine months ended September 30, 1994 included the $43.9 million gain (net of
$8.5 million of related state income tax) recognized in the third quarter of
1994 on Alliance's sales of newly issued Units to third parties. Investment
gains on General Account Investment Assets were $13.6 million higher in 1995 due
to a $62.8 million increase in gains on fixed maturities and a $24.6 million
decrease in losses on mortgages, offset by a $56.2 million decrease in gains on
other equity investments and $15.0 million of losses on equity real estate as
compared to gains of $2.6 million in the 1994 period.
For the first nine months of 1995, total benefits and other deductions increased
by $11.0 million from the comparable period in 1994, primarily reflecting a
$104.7 million increase in policyholders' benefits and a $15.8 million increase
in interest credited to policyholders offset by decreases in other operating
costs and expenses of $109.5 million. The increase in policyholders' benefits
primarily resulted from higher mortality experience on the individual life term
business and the larger in force book of business for variable and
interest-sensitive life policies, offset by improved mortality experience on
policies within the Closed Block. Improved mortality experience and better
persistency resulted in an increase to the provision for policyholder dividends
on policies within the Closed Block. The $59.3 million increase in interest
credited to policyholders for the Individual Insurance and Annuities segment was
primarily due to higher crediting rates applied to a larger in force book of
business and was offset by the Group Pension segment's $43.5 million decrease in
interest credited to policyholders due to the impact of pass-throughs of
investment losses to participating pension contractholders and smaller
policyholders' account balances. The decrease in other operating costs and
expenses was attributable to lower Corporate interest expense and lower
operating costs in the Individual Insurance and Annuities segment. Corporate
interest expense declined primarily as a result of the previously described cash
settlement in January 1995 with the discontinued GIC Segment.
Discontinued GIC Segment
In the first nine months of 1995, $63.5 million of pre-tax losses were incurred
and charged to the GIC Segment's allowance for future losses as compared to
pre-tax losses of $24.6 million in the first nine months of 1994. Investment
results declined by $111.4 million in the first nine months of 1995 as compared
to the year-earlier period. Net investment income declined by $89.1 million,
principally due to the previously described January 1995 cash settlement with
continuing operations. Investment losses were $12.3 million in the first nine
months of 1995 compared to investment gains of $10.0 million in the comparable
period in 1994 primarily due to losses of $6.7 million on fixed maturities as
compared to gains of $3.2 million in 1994, $18.5 million lower gains on other
equity investments and $10.2 million higher losses on mortgage loans, offset by
$4.6 million of gains as compared to $11.9 million of losses in 1994 on equity
real estate. Benefits and other deductions declined by $72.1 million principally
due to the decrease in interest credited on a reduced GIC contract base and
lower interest expense as a result of the repayment of $1.16 billion of
borrowings from continuing operations, offset in part by a $5.0 million charge
resulting from an economically advantageous prepayment of a GIC contract during
the second quarter of 1995.
17
<PAGE>
COMBINED RESULTS OF CONTINUING OPERATIONS BY SEGMENT
Individual Insurance and Annuities
For discussion purposes, the Closed Block is considered part of the Individual
Insurance and Annuities segment. The following table combines the Closed Block
amounts with the reported results of operations outside of the Closed Block on a
line-by-line basis.
<TABLE>
<CAPTION>
Individual Insurance and Annuities
(In Millions)
Nine Months Ended September 30,
----------------------------------------
1995
-----------------------------
As Closed 1994
Reported Block Combined Combined
--------- -------- ---------- ----------
<S> <C> <C> <C> <C>
Policy fees, premiums and other income .... $ 1,031.3 $ 561.3 $ 1,592.6 $ 1,607.3
Net investment income ..................... 1,269.0 400.7 1,669.7 1,575.5
Investment gains (losses), net ............ 56.1 (7.5) 48.6 (3.7)
Contribution from the Closed Block ........ 85.4 (85.4) -- --
--------- -------- --------- ---------
Total revenues .......................... 2,441.8 869.1 3,310.9 3,179.1
Total benefits and other deductions ....... 2,209.6 869.1 3,078.7 2,988.3
--------- -------- --------- ---------
Earnings before Federal Income Taxes and
Cumulative Effect of Accounting Change .. $ 232.2 $ -- $ 232.2 $ 190.8
========= ======== ========= =========
</TABLE>
The earnings from operations in the Individual Insurance and Annuities segment
for the nine months ended September 30, 1995 reflected an increase of $41.4
million from the year-earlier period. Higher investment gains primarily on sales
of fixed maturities, lower operating costs and higher policy fees on variable
and interest-sensitive life and individual annuities contracts were offset by an
accrual for future dividend payments to the Closed Block policyholders, adverse
mortality experience on term life insurance and unfavorable morbidity results on
disability income policies. The effect of increased crediting rates on
interest-sensitive life and annuity contracts substantially offset the increase
in investment income.
Total revenues increased by $131.8 million primarily due to a $146.5 million
increase in investment results and a $28.5 million increase in policy fees,
offset by a $38.4 million decline in premiums. The decrease in premiums
principally was due to lower traditional life and individual health premiums.
Total benefits and other deductions for the nine months ended September 30, 1995
rose $90.4 million from the comparable 1994 period. The increase principally was
due to higher interest credited on policyholders' account balances, a $37.6
million accrual for future Closed Block policyholder dividends and the effects
of the mortality and morbidity experience noted above offset by a decrease in
other operating costs and expenses principally due to decreases in employee
related compensation and benefits. Interest credited on policyholders' account
balances in the segment increased by $59.3 million reflecting higher crediting
rates applied to a larger in force book of business.
Losses on the disability income business were $27.6 million for the nine months
ended September 30, 1995, a $5.0 million increase from the prior year's
comparable period. Incurred benefits (benefit payments plus additions to claims
reserves) for disability income products increased $16.2 million in the first
nine months of 1995 from the comparable 1994 levels reflecting a slowdown in
claim terminations.
18
<PAGE>
Premiums and Deposits - The following table reflects premiums and deposits,
including universal life and investment-type contract deposits, for the
segment's major product lines.
<TABLE>
<CAPTION>
Premiums and Deposits
(In Millions)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- ---------------------
1995 1994 1995 1994
-------- -------- --------- -----------
<S> <C> <C> <C> <C>
Product Line:
Traditional life
First year recurring ............... $ 5.7 $ 6.7 $ 17.8 $ 24.1
First year optional ................ 1.4 1.6 4.4 6.2
Renewal ............................ 202.7 208.4 634.6 654.6
-------- ------- --------- ---------
209.8 216.7 656.8 684.9
Variable and interest-sensitive life
First year recurring ............... 39.7 44.9 134.8 139.5
First year optional ................ 32.2 31.3 112.4 104.2
Renewal ............................ 246.2 216.3 781.8 703.5
-------- ------- --------- ---------
318.1 292.5 1,029.0 947.2
Individual annuities
First year ......................... 389.2 407.8 1,335.1 1,305.9
Renewal ............................ 248.0 234.7 828.1 806.4
-------- ------- -------- ---------
637.2 642.5 2,163.2 2,112.3
Other(1)
First year ......................... 15.5 3.7 64.3 11.3
Renewal ............................ 87.5 107.9 290.8 301.8
-------- ------- -------- ---------
103.0 111.6 355.1 313.1
Total First Year ..................... 483.7 496.0 1,668.8 1,591.2
Total Renewal ........................ 784.4 767.3 2,535.3 2,466.3
-------- -------- -------- ---------
Grand Total .......................... $1,268.1 $1,263.3 $4,204.1 $ 4,057.5
======== ======== ======== =========
<FN>
(1) Includes health insurance and reinsurance assumed.
</FN>
</TABLE>
First year premiums and deposits for the nine months ended September 30, 1995
increased from prior year levels by $77.6 million primarily due to higher sales
of individual annuities and reinsurance assumed on individual annuity contracts.
Renewal premiums and deposits increased by $69.0 million during the nine months
ended September 30, 1995 over the prior year period as increases in the growing
block of variable and interest-sensitive life and individual annuities policies
were offset by decreases in traditional life policies and other product lines.
Traditional life premiums and deposits for the first nine months of 1995
decreased from the prior year's comparable period by $28.1 million due to the
marketing focus on variable and interest-sensitive products and the decline in
the traditional life book of business. The 2.2% increase in first year
individual annuities premiums and deposits included a net increase of $147.7
million resulting from an exchange program that offers contractholders of
existing SPDA contracts with no remaining surrender charges an opportunity to
exchange their contract for a new flexible premium variable contract which
retains assets in Equitable and establishes new surrender charge scales.
Management believes total first year premiums and deposits continue to be
impacted by the transition to a new generation of variable life insurance
products, the assimilation of a new sales support system and the reduction of
agency district managers and new hires as a result of the implementation of new
performance standards beginning in 1994.
19
<PAGE>
Surrenders and Withdrawals - The following table summarizes surrenders and
withdrawals, including universal life and investment-type contract withdrawals,
for the segment's major product lines.
<TABLE>
<CAPTION>
Surrenders and Withdrawals
(In Millions)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- -----------------
1995 1994 1995 1994
------- ------ ------- --------
<S> <C> <C> <C> <C>
Product Line:
Traditional life ....................... $ 84.4 $ 87.8 $ 259.1 $ 267.0
Variable and interest-sensitive life ... 99.5 88.8 309.6 321.8
Individual annuities ................... 464.7 541.8 1,682.0 1,363.5
------- ------ -------- --------
Total .................................. $ 648.6 $718.4 $2,250.7 $1,952.3
======= ====== ======== ========
</TABLE>
Policy and contract surrenders and withdrawals increased $298.4 million during
the nine months ended September 30, 1995 compared to the same period in 1994 due
to the $318.5 million increase in individual annuities surrenders and
withdrawals. This increase occurred during in the first six months of 1995 and
primarily was due to increased surrenders of Equi-Vest contracts and increases
in the volume of SPDA surrenders due to the aging book of business, the effect
of the aforementioned exchange program which was designed to retain assets in
Equitable and the maintenance of crediting rates throughout 1994 despite an
increasing interest rate environment. Management expects the third quarter
moderation in SPDA exchange program volume to continue.
The 1994 nine months amount for variable and interest-sensitive life products
included a scheduled withdrawal of approximately $52.9 million of policy cash
value from a large corporate owned life insurance plan issued by EOC. Excluding
the effect of the 1994 scheduled withdrawal, surrenders and withdrawals of
variable and interest-sensitive life contracts for the nine months ended
September 30, 1995 increased by $40.7 million from the prior year's comparable
period due to the larger book of business.
Investment Services
The following table summarizes the results of operations for the Investment
Services segment.
<TABLE>
<CAPTION>
Investment Services
(In Millions)
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- ------------------
1995 1994 1995 1994
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Third party commissions and fees ............ $ 188.3 $ 169.1 $ 525.4 $ 507.2
Affiliate fees .............................. 34.6 35.7 102.1 102.5
Other income(1) ............................. 20.8 64.2 53.6 85.7
------- -------- -------- --------
Total revenues .............................. 243.7 269.0 681.1 695.4
Total costs and expenses .................... 201.1 197.9 569.0 559.3
------- -------- -------- --------
Earnings before Federal Income Taxes and
Cumulative Effect of Accounting Change .... $ 42.6 $ 71.1 $ 112.1 $ 136.1
======= ======== ======== ========
<FN>
(1) Includes equity in net earnings of DLJ and other items.
</FN>
</TABLE>
20
<PAGE>
For the nine months ended September 30, 1995, pre-tax earnings for the
Investment Services segment declined by $24.0 million from the year-earlier
period and total segment revenues were down $14.3 million as higher revenues at
Alliance and increased business activity at DLJ as reflected in Equitable Life's
share of DLJ's net earnings were more than offset by lower capital gains.
Revenues for the segment for the nine months ended September 30, 1994 included a
$43.9 million net gain on the issuance of Alliance Units.
Total costs and expenses increased by $9.7 million for the nine-month period of
1995 as compared to the comparable period in 1994 as increases related to
Alliance's minority interest and higher operating costs at Equitable Real Estate
were partially offset by lower operating costs at Alliance.
On October 24, 1995, Alliance announced an agreement in principal to acquire
Cursitor-Eaton Asset Management Company and Cursitor Holdings Ltd. (together,
"Cursitor") for approximately $141.5 million in cash and Alliance Units, part of
which will be payable over the next four years, and substantial additional
consideration to be determined at a later date. Cursitor, an international
investment management firm, currently manages approximately $10.0 billion in
assets for both U.S. and non-U.S. institutions, mainly pension plans. The
acquisition is subject to execution of a definitive agreement, board approvals,
certain consents and regulatory approvals and certain other conditions. Upon
completion of the acquisition, Equitable Life's ownership percentage of Alliance
will be reduced.
On October 27, 1995, Equitable Real Estate sold 30 securitized commercial
mortgage servicing contracts on assets under management of $7.5 billion to a
third party. The contracts, mostly RTC related, were managed by EQ Services,
Inc., Equitable Real Estate's mortgage servicing affiliate. Equitable Real
Estate will continue to manage and service the remaining $7.5 billion mortgage
portfolios of the General and Separate Accounts.
On October 30, 1995, DLJ completed an 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. The remaining 3.3 million common shares sold in the DLJ
IPO were shares newly issued by DLJ. Upon completion of the IPO, the Holding
Company's ownership percentage was reduced to 44.1%. Equitable Life continues to
own an additional 36.1% interest, reducing Equitable's total ownership interest
from 100% to 80.2%. In connection with the IPO, approximately 500 DLJ employees
acquired forfeitable restricted stock units and stock options covering common
stock of DLJ. Such restricted stock units and options will vest and become
exercisable over a four-year period beginning February 1997. Assuming full
vesting of the forfeitable restricted stock units and the exercise of the stock
options (but excluding any shares issued under employee stock options granted in
the future), these employees would own approximately 21% of the outstanding
common stock of DLJ and Equitable would own approximately 63% of such common
stock, approximately 35% held by the Holding Company and 28% by Equitable Life.
Concurrent with the IPO, DLJ completed the offering of $500.0 million aggregate
principal amount of 6.875% senior notes due November 1, 2005. DLJ's gross
proceeds from this senior debt offering totaled $493.5 million before deducting
certain expenses related to the transaction. DLJ intends to use the net proceeds
from the common stock and debt offerings to repay certain outstanding
indebtedness, which will have the effect of lengthening the average maturity of
DLJ's borrowings. DLJ did not receive any part of the proceeds from the sale of
shares by the Holding Company. Prior to these offerings, Equitable made a
capital contribution to DLJ of equity securities with a market value of $55.0
million, $33.8 million from the Holding Company and $21.2 million from Equitable
Life.
21
<PAGE>
The following table summarizes results of operations by business unit.
<TABLE>
<CAPTION>
Investment Services
Results of Operations by Business Unit
(In Millions)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- -----------------
1995 1994 1995 1994
-------- -------- ------- --------
<S> <C> <C> <C> <C>
Earnings before Federal income taxes and
cumulative effect of accounting change:
Alliance(1) ............................... $ 42.0 $ 34.8 $ 114.5 $ 99.3
Equitable Real Estate ..................... 11.2 6.8 28.1 27.7
Consolidation/elimination(2) .............. (10.6) 29.5 (30.5) 9.1
------- ------- -------- --------
Earnings before Federal Income Taxes and
Cumulative Effect of Accounting Change .... $ 42.6 $ 71.1 $ 112.1 $ 136.1
======= ======= ======= ========
<FN>
(1) Excludes $16.7 million, $13.4 million, $45.2 million and $36.5 million
related to minority interest in Alliance for the three months and the nine
months ended September 30, 1995 and 1994, respectively, which are included
in consolidation/elimination.
(2) Includes Equitable Life's share of DLJ's net earnings of $13.8 million, $7.5
million, $39.8 million and $26.0 million and interest expense of $4.4
million, $4.0 million, $14.1 million and $10.1 million related to
intercompany debt issued by intermediate holding companies payable to
Equitable Life for the three months and the nine months ended September 30,
1995 and 1994, respectively. Also includes the $43.9 million net gain
recognized in conjunction with the sales of newly issued Alliance Units to
third parties in the third quarter of 1994.
</FN>
</TABLE>
Alliance's earnings from operations for the nine months ended September 30, 1995
were $114.5 million, an increase of $15.2 million from the prior year's
comparable period. Revenues totaled $463.6 million for the first nine months of
1995, an increase of $14.2 million from the comparable period in 1994, due to
increased investment advisory fees, offset by lower distribution plan fees from
lower average load mutual fund assets. Alliance's costs and expenses decreased
$1.0 million to $349.1 million for the nine months ended September 30, 1995
primarily due to decreases in employee compensation and benefits, interest
expense and other promotional expenditures, offset by increases in rent and
related costs.
Equitable Real Estate's earnings from operations were $28.1 million for the
first nine months of 1995, up $0.4 million from the preceding year's comparable
period. The increase primarily was due to increased lease advisory and
disposition fees during the third quarter of 1995. The results for the nine
months ended September 30, 1994 included a $4.8 million disposition fee received
on a property sold in the first quarter of that year.
22
<PAGE>
Fees From Assets Under Management - Though now accounted for on an equity basis,
DLJ's fees and assets under management are included in their entirety in the
table and discussion that follows. Third party clients continued to represent an
important source of revenues and earnings.
<TABLE>
<CAPTION>
Fees and Assets Under Management
(In Millions)
At or For the
Three Months Ended Three Months Ended
September 30, September 30,
------------------- -------------------
1995 1994 1995 1994
-------- -------- -------- ---------
<S> <C> <C> <C> <C>
Fees:
Equitable Life and the Holding Company . $ 31.9 $ 32.5 $ 93.4 $ 93.9
Third Party ............................ 162.2 138.7 443.4 402.1
-------- -------- -------- --------
Total .................................... $ 194.1 $ 171.2 $ 536.8 $ 496.0
======== ======== ======== ========
Assets Under Management:
Equitable Life and the Holding Company . $ 48,569 $ 49,442
Third Party(1) ......................... 150,139 130,071
-------- --------
Total .................................... $198,708 $179,513
======== ========
<FN>
(1) Includes $1.8 billion and $2.4 billion of performing mortgages at September
30, 1995 and 1994, respectively, under a special stand-by services contract
with the RTC. Stand-by fees are received on the entire portfolio under the
contract; servicing fees are earned only on those mortgages that are
delinquent.
</FN>
</TABLE>
Fees from assets under management increased for the nine months ended September
30, 1995 from the prior year's comparable period principally as a result of
growth in assets under management for third parties. Alliance's third party
assets under management increased by $19.3 billion primarily due to market
appreciation. Third party assets at Equitable Real Estate decreased by $0.3
billion due to loan repayments, asset sales and the expiration of RTC contracts.
Group Pension
The following table summarizes the results of operations for the Group Pension
segment.
<TABLE>
<CAPTION>
Group Pension
(In Millions)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ------------------
1995 1994 1995 1994
------- ------- ------- --------
<S> <C> <C> <C> <C>
Policy fees, premiums and other income ...... $ 14.2 $ 13.1 $ 41.6 $ 42.7
Net investment income ....................... 64.0 71.4 203.8 218.1
Investment gains (losses), net .............. 0.2 3.7 (32.0) 10.5
------- ------- -------- --------
Total revenues .............................. 78.4 88.2 213.4 271.3
Total benefits and other deductions ......... 79.3 86.6 226.1 264.8
------- ------- -------- --------
(Loss) Earnings before Federal Income
Taxes and Cumulative Effect of
Accounting Change ......................... $ (0.9) $ 1.6 $ (12.7) $ 6.5
======== ======= ======== ========
</TABLE>
23
<PAGE>
The results for the Group Pension segment reflected a decline of $19.2 million
for the nine months ended September 30, 1995 compared to the same period a year
ago. This decrease was attributed to investment losses in 1995 as compared to
investment gains in 1994 offset by higher policy risk charges and market value
adjustments to participating policyholders' accounts that transferred to
Separate Account annuity contracts. The $42.5 million decrease from $10.5
million of investment gains in the first nine months of 1994 to $32.0 million of
losses in 1995 produced an earnings decline of approximately $28.0 million after
reflecting the effect of pass-throughs to participating pension contractholders.
The investment losses principally resulted from additions to asset valuation
allowances on mortgage loans and equity real estate. Investment income for the
nine months ended September 30, 1995 decreased from the comparable period of the
prior year due to a smaller asset base.
GENERAL ACCOUNT INVESTMENT PORTFOLIO
As of September 30, 1995, net unrealized investment gains increased
shareholders' equity by $67.5 million, net of related deferred policy
acquisition costs, deferred Federal income taxes and amounts attributable to
participating pension contractholders and Closed Block policyholders.
The following table reconciles the consolidated balance sheet asset amounts to
the amounts of General Account Investment Assets.
<TABLE>
<CAPTION>
General Account Investment Assets Carrying Values
September 30, 1995
(In Millions)
General
Balance Account
Sheet Closed Investment
Balance Sheet Captions: Total Block Other(1) Assets
- ----------------------- --------- ---------- --------- -----------
<S> <C> <C> <C> <C>
Fixed maturities:
Held to maturity ............. $ 4,752.6 $ 1,785.6 $ (191.1) $ 6,729.3
Available for sale ........... 9,955.7 1,877.6 (28.4) 11,861.7
Mortgage loans on real estate .. 3,604.2 1,425.0 -- 5,029.2
Equity real estate ............. 4,251.0 173.3 (21.5) 4,445.8
Policy loans ................... 1,929.2 1,804.1 -- 3,733.3
Other equity investments ....... 647.0 165.2 10.7 801.5
Other invested assets(2) ....... 1,167.2 82.3 1,006.8 242.7
--------- ---------- -------- -----------
Total investments ............ 26,306.9 7,313.1 776.5 32,843.5
Cash and cash equivalents ...... 980.6 (12.2) 198.2 770.2
--------- ----------- -------- -----------
Total .......................... $27,287.5 $ 7,300.9 $ 974.7 $ 33,613.7
========= ========== ======== ===========
<FN>
(1) Assets listed in the "Other" category consist principally of assets held in
portfolios other than the General Account (primarily the equity investment
in DLJ) which are not managed as part of General Account Investment Assets
and certain reclassifications and intercompany adjustments. The "Other"
category is deducted in arriving at the General Account Investment Assets.
(2) Includes amounts related to balance sheet captions "Investment in and loans
to affiliates" and "Other invested assets".
</FN>
</TABLE>
24
<PAGE>
The General Account Investment Asset presentation set forth in the following
pages includes the investments of the Closed Block on a line-by-line basis.
Management believes it is appropriate to discuss the information on a combined
basis in view of the similar asset quality characteristics of major asset
categories in the portfolios.
Writedowns on fixed maturities were $40.3 million and $38.1 million for the nine
months ended September 30, 1995 and 1994, respectively. The following table
shows asset valuation allowances and additions to and deductions from such
allowances for mortgages and equity real estate for the nine months ended
September 30, 1995 and 1994.
<TABLE>
<CAPTION>
General Account Investment Assets
Valuation Allowances
(In Millions)
quity Real
Mortgages Estate Total
---------- ---------- --------
<S> <C> <C> <C>
September 30, 1995
Assets Outside of the Closed Block:
Beginning balances ....................... $ 64.2 $ 220.7 $ 284.9
Additions ................................ 28.4 39.4 67.8
Deductions(1) ............................ (25.8) (23.9) (49.7)
-------- -------- --------
Ending Balances ............................ $ 66.8 $ 236.2 $ 303.0
======== ======== ========
Closed Block:
Beginning balances ......................... $ 46.2 $ 2.6 $ 48.8
Additions .................................. 4.9 1.9 6.8
Deductions(1) .............................. (9.4) (0.8) (10.2)
-------- -------- --------
Ending Balances ............................ $ 41.7 $ 3.7 $ 45.4
======== ======== ========
Total:
Beginning balances ......................... $ 110.4 $ 223.3 $ 333.7
Additions .................................. 33.3 41.3 74.6
Deductions(1) .............................. (35.2) (24.7) (59.9)
-------- -------- --------
Ending Balances ............................ $ 108.5 $ 239.9 $ 348.4
======== ======== ========
September 30, 1994 Total:
Beginning balances ......................... $ 216.6 $ 211.8 $ 428.4
Additions .................................. 43.2 19.2 62.4
Deductions(1) .............................. (135.5) (8.0) (143.5)
-------- -------- --------
Ending Balances ............................ $ 124.3 $ 223.0 $ 347.3
======== ======== ========
<FN>
(1) Primarily reflected releases of allowances due to asset dispositions and writedowns.
</FN>
</TABLE>
25
<PAGE>
General Account Investment Assets by Category
The following table shows the amortized cost, valuation allowances and carrying
value of the major categories of General Account Investment Assets at September
30, 1995 and carrying value at December 31, 1994.
<TABLE>
<CAPTION>
General Account Investment Assets
(Dollars In Millions)
September 30, December 31, 1994
---------------------------------------------- ----------------------
% of % of
Total Total
Amortized Valuation Carrying Carrying Carrying Carrying
Cost Allowances Value Value Value Value
---------- ----------- ----------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Fixed maturities(1) ...... $ 18,372.4 $ -- $18,591.0 55.3% $16,329.1 51.3%
Mortgages ................ 5,137.7 108.5 5,029.2 15.0 5,582.9 17.6
Equity real estate ....... 4,685.7 239.9 4,445.8 13.2 4,654.7 14.6
Other equity investments . 801.5 -- 801.5 2.4 846.1 2.7
Policy loans ............. 3,733.3 -- 3,733.3 11.1 3,559.1 11.2
Cash and short-term
investments(2) ......... 1,012.9 -- 1,012.9 3.0 824.2 2.6
----------- -------- ---------- ------ --------- ------
Total .................... $ 33,743.5 $ 348.4 $33,613.7 100.0% $31,796.1 100.0%
=========== ========= ========= ====== ========= ======
<FN>
(1) Carrying values reflected an unrealized gain of $218.6 million and an
unrealized loss of $542.5 million in fixed maturities classified as
available for sale at September 30, 1995 and December 31, 1994,
respectively.
(2) Comprised of "Cash and cash equivalents" and short-term investments included
within the "Other invested assets" caption on the consolidated balance
sheets.
</FN>
</TABLE>
Management has a policy of not investing substantial new funds in equity real
estate except to safeguard values in existing investments or to honor
outstanding commitments. It is management's continuing objective to reduce the
size of the equity real estate portfolio relative to total assets over the next
several years depending on real estate market conditions. Management anticipates
that reductions will depend on the level of mortgage foreclosures and
expenditures required to fund necessary or desired improvements to properties.
26
<PAGE>
Investment Results of General Account Investment Assets
<TABLE>
<CAPTION>
Investment Results by Asset Category(1)
(Dollars In Millions)
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------------- ------------------------------------------
1995 1994 1995 1994
------------------ ------------------ -------------------- -------------------
(1) (1) (1) (1)
Yield Amount Yield Amount Yield Amount Yield Amount
------- ---------- ------- ---------- -------- ---------- ------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed Maturities:
Income.............. 8.09% $ 369.5 8.21% $ 331.5 8.12% $ 1,076.9 8.06% $ 983.7
Investment
Gains/(Losses).... 0.46% 20.6 (0.30)% (12.1) 0.40% 53.6 (0.07)% (9.2)
------- --------- ------- ---------- -------- --------- ------- ---------
Total............... 8.55% $ 390.1 7.91% $ 319.4 8.52% $ 1,130.5 7.99% $ 974.5
Ending Assets....... $18,372.4 $16,008.9 $18,372.4 $16,008.9
Mortgages:
Income.............. 9.13% 116.3 8.66% $ 128.0 8.77% $ 346.6 8.76% $ 398.4
Investment
Gains/(Losses).... (1.28)% (16.2) (1.01)% (14.9) (0.60)% (23.7) (1.07)% (48.3)
------- ---------- ------- ---------- --------- ---------- ------- ---------
Total............... 7.85% $ 100.1 7.65% $ 113.1 8.17% $ 322.9 7.69% $ 350.1
Ending Assets....... $ 5,029.2 $ 5,752.3 $ 5,029.2 $ 5,752.3
Equity Real
Estate (2):
Income.............. 2.01% $ 18.1 2.97% $ 27.3 2.60% $ 71.4 2.82% $ 76.7
Investment
Gains/(Losses).... 0.46% 4.2 0.08% 0.8 (0.55)% (15.0) 0.10% 2.6
------ --------- ------- ---------- --------- ---------- ------ ---------
Total............... 2.47% $ 22.3 3.05% $ 28.1 2.05% $ 56.4 2.92% $ 79.3
Ending Assets....... $ 3,526.3 $ 3,790.9 $ 3,526.3 $ 3,790.9
Other Equity
Investments:
Income.............. 7.82% $ 15.6 4.46% $ 11.1 10.23% $ 62.4 6.83% $ 52.5
Investment
Gains/(Losses).... (0.30)% (0.6) 12.22 30.4 0.82% 5.0 7.97% 61.2
------- ---------- ------- ---------- -------- ---------- ------ ---------
Total............... 7.52% $ 15.0 16.68% $ 41.5 11.05% $ 67.4 14.80% $ 113.7
Ending Assets....... $ 801.5 $ 975.6 $ 801.5 $ 975.6
Policy Loans:
Income.............. 7.00% $ 65.0 6.51% $ 56.9 6.92% $ 190.4 6.61% $ 171.8
Ending Assets....... $ 3,733.3 $ 3,537.0 $ 3,733.3 $ 3,537.0
Cash and Short-term
Investments:
Income.............. 7.07% $ 16.4 6.19% $ 10.6 7.79% $ 50.9 6.62% $ 29.7
Ending Assets....... $ 1,012.9 $ 736.0 $ 1,012.9 $ 736.0
Total:
Income.............. 7.42% $ 600.9 7.31% $ 565.4 7.51% $ 1,798.6 7.37% $ 1,712.8
Investment
Gains/(Losses).... 0.10% 8.0 0.06% 4.2 0.08% 19.9 0.02% 6.3
------- --------- ------- ---------- ------- ---------- ------ ---------
Total(3)............ 7.52% $ 608.9 7.37% $ 569.6 7.59% $ 1,818.5 7.39% $ 1,719.1
Ending Assets....... $32,475.6 $ 30,800.7 $ 32,475.6 $30,800.7
<FN>
(1) Yields have been annualized and calculated based on the quarterly average
asset carrying values excluding unrealized gains (losses) in fixed
maturities. Annualized yields are not necessarily indicative of a full
year's results.
27
<PAGE>
(2) Equity real estate carrying values are shown net of third party debt and
minority interest in real estate of $919.5 million and $933.3 million as of
September 30, 1995 and 1994, respectively. Equity real estate income is
shown net of operating expenses, depreciation, third party interest expense
and minority interest. Third party interest expense and minority interest
totaled $14.6 million, $12.5 million, $44.0 million and $33.4 million for
the three months and the nine months ended September 30, 1995 and 1994,
respectively.
(3) Total yields are shown before deducting investment fees paid to the
Investment Subsidiaries (which include asset management, acquisition,
disposition, accounting and legal fees). If such fees had been deducted,
total yields would have been 7.21%, 7.05%, 7.29% and 7.09% for the three
months and the nine months ended September 30, 1995 and 1994, respectively.
</FN>
</TABLE>
For the nine months ended September 30, 1995, General Account investment results
were up $99.4 million or 5.8% from the year-earlier period reflecting higher
income and gains on fixed maturities. On an annualized basis, total investment
yield increased to 7.59% from 7.39%. Investment income increased by $85.8
million or 5.0%, resulting in an increase in the annualized income yield to
7.51% from 7.37%. Additions to asset valuation allowances and writedowns of
fixed maturities were $114.9 million in the nine months ended September 30, 1995
compared to $100.5 million in the nine months ended September 30, 1994.
Total investment results for fixed maturities increased $156.0 million or 16.0%
for the nine months ended September 30, 1995 compared to the year-earlier
period. Investment income increased by $93.2 million reflecting a higher asset
base, primarily from the reinvestment of nearly all available funds into fixed
maturities. Investment gains were $53.6 million for the nine months ended
September 30, 1995 compared to the year-earlier losses of $9.2 million.
Writedowns on fixed maturities were $40.3 million in the first nine months of
1995 as compared to $38.1 million in the comparable period of 1994. Total
investment results on mortgages declined by $27.2 million or 7.8% in the nine
months ended September 30, 1995 compared to the same period a year ago largely
due to lower investment income attributable to a lower asset base which more
than offset lower additions to asset valuation allowances. Equity real estate
investment results were $22.9 million lower during the nine months ended
September 30, 1995 than the year-earlier period reflecting higher additions to
asset valuations. During the first nine months of 1995, equity real estate with
amortized cost of $283.3 million was sold with realized gains of $20.8 million.
The lower results for other equity investments reflect the reduced level of
capital gains on disposition of common stocks.
Fixed Maturities. Fixed maturities consist of publicly traded debt securities,
privately placed debt securities and small amounts of redeemable preferred
stock, which represented 68.7%, 30.6% and 0.7%, respectively, of the amortized
cost of this asset category at September 30, 1995.
<TABLE>
<CAPTION>
Fixed Maturities By Credit Quality
(Dollars In Millions)
Rating Agency September 30, 1995 December 31, 1994
------------------------------------ --------------------------------------
NAIC Equivalent Amortized % of Estimated Amortized % of Estimated
Rating Designation Cost Total Fair Value Cost Total Fair Value
- ------- --------------------- --------------- -------- ------------ ---------------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
1-2 Aaa/Aa/A and Baa.... $ 15,872.1 (1) 86.4% $ 16,382.7 $ 14,835.9 (1) 87.9% $ 14,129.1
3-6 Ba and lower........ 2,368.4 (2) 12.9 2,345.8 1,898.8 (2) 11.3 1,742.3
------------ ------ ---------- ------------ ------ ----------
Subtotal.................... 18,240.5 99.3 18,728.5 16,734.7 99.2 15,871.4
Redeemable preferred stock
and other................. 131.9 0.7 128.0 136.9 0.8 120.2
------------ ------ ---------- ----------- ------ ----------
Total....................... $ 18,372.4 100.0% $ 18,856.5 $ 16,871.6 100.0% $ 15,991.6
============ ====== ========== =========== ====== ==========
<FN>
(1) Includes Class B Notes with an amortized cost of $100.0 million, eliminated in consolidation.
(2) Includes Class B Notes with an amortized cost of $100.0 million, eliminated in consolidation.
</FN>
</TABLE>
28
<PAGE>
At September 30, 1995, the Company held collateralized mortgage obligations
("CMOs") with an amortized cost of $2.41 billion, including $2.05 billion in
publicly traded CMOs. About 82% of the public CMO holdings were collateralized
by GNMA, FNMA and FHLMC securities. Approximately 55.1% of the public CMO
holdings were in planned amortization class ("PAC") bonds. At September 30,
1995, interest only ("IO") strips amounted to $17.3 million at amortized cost.
There were no holdings of principal only ("PO") strips at that date. In
addition, at September 30, 1995, the Company held $1.51 billion of mortgage
pass-through securities (GNMA, FNMA or FHLMC securities) and also held $691.8
million of Aa or higher rated public asset backed securities, primarily backed
by home equity or credit card receivables. IOs and mortgage pass-through
securities are classified as available for sale and are carried at estimated
fair value.
The amount of problem and restructured fixed maturities decreased from December
31, 1994 to September 30, 1995 largely due to asset sales and writedowns.
<TABLE>
<CAPTION>
Fixed Maturities
Problems, Potential Problems and Restructureds
Amortized Cost
(In Millions)
September 30, December 31,
1995 1994
-------------- ------------
<S> <C> <C>
FIXED MATURITIES ............................... $ 18,372.4 $ 16,871.6
Problem fixed maturities ....................... 67.2 94.9
Potential problem fixed maturities ............. 97.9 96.2
Restructured fixed maturities(1) ............... 5.9 38.2
<FN>
(1) Excludes restructured fixed maturities of $11.7 million and $24.0 million
that are shown as problems at September 30, 1995 and December 31, 1994,
respectively, and excludes $0.0 million and $4.8 million of restructured
fixed maturities that are shown as potential problems at September 30, 1995
and December 31, 1994, respectively.
</FN>
</TABLE>
Mortgages. Mortgages consist of commercial, agricultural and residential loans.
At September 30, 1995, commercial mortgages totaled $3.50 billion (68.1% of the
amortized cost of the category), agricultural loans were $1.58 billion (30.8%)
and residential loans were $57.1 million (1.1%).
29
<PAGE>
<TABLE>
<CAPTION>
Mortgages
Problems, Potential Problems and Restructureds
Amortized Cost
(Dollars In Millions)
September 30, December 31,
1995 1994
------------- --------------
<S> <C> <C>
COMMERCIAL MORTGAGES .......................................... $ 3,498.9 $ 4,007.4
Problem commercial mortgages .................................. 216.0 107.0
Potential problem commercial mortgages ........................ 225.4 349.4
Restructured commercial mortgages(1) .......................... 396.0 459.4
VALUATION ALLOWANCES .......................................... $ 104.6 $ 106.4
As a percent of Commercial Mortgages ........................ 3.0% 2.7%
As a percent of Problem Commercial Mortgages ................ 48.4% 99.4%
As a percent of Problem and Potential Problem Commercial
Mortgages ................................................. 23.7% 23.3%
As a percent of Problem, Potential Problem and Restructured
Commercial Mortgages ...................................... 12.5% 11.6%
AGRICULTURAL MORTGAGES ........................................ $ 1,581.7 $ 1,618.5
Problem agricultural mortgages ................................ 79.9 17.5
Potential problem agricultural mortgages ...................... -- 68.2
Restructured agricultural mortgages ........................... 2.0 1.4
VALUATION ALLOWANCES .......................................... $ 3.9 $ 4.0
<FN>
(1) Excludes restructured commercial mortgages of $177.6 million and $1.7
million that are shown as problems at September 30, 1995 and December 31,
1994, respectively, and excludes $130.5 million and $180.9 million of
restructured commercial mortgages that are shown as potential problems at
September 30, 1995 and December 31, 1994, respectively.
</FN>
</TABLE>
Problem commercial mortgages increased from December 31, 1994 to September 30,
1995, primarily due to a mortgage loan package previously classified in the
potential problem mortgage category which became delinquent. During the nine
months ended September 30, 1995, the amortized cost of foreclosed commercial
mortgages totaled $22.3 million. At the time of foreclosure, reductions in
amortized cost for these mortgages reflecting the writedown of these properties
to estimated fair value totaled $11.0 million.
The original weighted average coupon rate on the $396.0 million of restructured
mortgages was 10.0%. As a result of these restructurings, the restructured
weighted average coupon rate was 9.0% and the restructured weighted average cash
payment rate was 6.7%. The foregone interest on restructured commercial
mortgages (including restructured commercial mortgages presented as problem or
potential problem commercial mortgages) for the nine months ended September 30,
1995 was $3.7 million.
30
<PAGE>
The following table shows the distribution of problem and potential problem
commercial mortgages by property type and by state.
<TABLE>
<CAPTION>
September 30, 1995
----------------------
(Dollars In Millions)
Amortized % of
Cost Total
----------- ------
<S> <C> <C>
Problem Commercial Mortgages
Property Type:
Industrial ......................................... $ 180.7 83.7%
Office ............................................. 10.1 4.7
Hotel .............................................. 9.5 4.4
Land ............................................... 7.6 3.5
Retail ............................................. 5.6 2.6
Apartment .......................................... 2.5 1.1
-------- ------
Total .............................................. $ 216.0 100.0%
======== ======
State:
Texas .............................................. $ 158.8 73.5%
California ......................................... 17.4 8.1
Other (no state larger than 5.0%) .................. 39.8 18.4
-------- -----
Total .............................................. $ 216.0 100.0%
======== ======
Potential Problem Commercial Mortgages
Property Type:
Office ............................................. $ 155.7 69.1%
Retail ............................................. 44.5 19.7
Hotel .............................................. 24.3 10.8
Apartment .......................................... 0.9 0.4
-------- -----
Total .............................................. $ 225.4 100.0%
======== ======
State:
California ......................................... $ 113.5 50.4%
Virginia ........................................... 38.8 17.2
South Carolina ..................................... 31.4 13.9
Texas .............................................. 22.9 10.2
Pennsylvania ....................................... 13.1 5.8
Other (no state larger than 5.0%) .................. 5.7 2.5
-------- -----
Total .............................................. $ 225.4 100.0%
======== ======
</TABLE>
Equitable Life adopted SFAS No. 114 effective January 1, 1995. At September 30,
1995, management identified impaired loans with a carrying value of $491.5
million. The provision for losses for these impaired mortgage loans was $102.7
million at September 30, 1995. Income accrued on these loans in the first nine
months of 1995 was $25.3 million, including cash received of $22.8 million.
31
<PAGE>
For the nine months ended September 30, 1995, scheduled principal amortization
payments and prepayments on commercial mortgage loans received aggregated $320.7
million. In addition, for the nine months ended September 30, 1995, $442.9
million of commercial mortgage loan maturity payments were scheduled, of which
$216.9 million were paid as due. Of the amount not paid, $107.9 million were
granted short term extensions of up to three months, $101.6 million were
extended for a weighted average of 5.3 years at a weighted average interest rate
of 9.2% and $16.5 million were delinquent or in default for non-payment of
principal. There were no foreclosures of maturing loans.
Equity Real Estate. As of September 30, 1995, on the basis of amortized cost,
the equity real estate category included $3.41 billion (or 72.7%) acquired as
investment real estate and $1.28 billion (or 27.3%) acquired through or in lieu
of foreclosure (including in-substance foreclosures).
At September 30, 1995, the vacancy rate for the Company's office properties was
15.0% in total, with a vacancy rate of 11.7% for properties acquired as
investment real estate and 23.3% for properties acquired through foreclosure.
The national commercial office vacancy rate was 14.7% (as of June 30, 1995) as
measured by CB Commercial.
LIQUIDITY AND CAPITAL RESOURCES
The Insurance Group's principal cash flow sources are premiums, deposits and
charges on policies and contracts, investment income, repayments of principal
and proceeds from maturities and sales of General Account Investment Assets and
dividends and distributions from subsidiaries.
At September 30, 1995, the Insurance Group's short-term liquidity is supported
by a pool of highly liquid, high quality, short-term instruments totaling
approximately $1.00 billion. This pool is structured to provide liquidity in
excess of the Insurance Group's expected cash requirements. In connection with
its October 1995 IPO, DLJ stated an intention to pay a quarterly dividend of
$0.125 per share on its common stock, beginning in the first quarter of 1996,
subject to declaration from time to time by the DLJ board of directors taking
into account such factors as it deems relevant. Based on that stated dividend
rate and the approximately 19.2 million DLJ common shares it still holds, the
Company expects to receive total dividends of $9.6 million during 1996, compared
to $12.5 million received in 1994 and $6.3 million in the first nine months of
1995.
In connection with the DLJ IPO, the Holding Company and Equitable Life
contributed to DLJ certain unregistered equity securities having carrying values
of $33.8 million and $21.2 million, respectively, for a total capital
contribution of $55.0 million.
Management believes it has sufficient liquidity in its short-term asset pool,
together with its cash flow from operations and from scheduled maturities of
fixed maturities, to satisfy its short-term liquidity needs. Equitable Life has
a commercial paper program with an issue limit of up to $500.0 million. This
program is available for general corporate purposes and is supported by
Equitable Life's existing $350.0 million bank credit facility, which expires in
July 1997. Equitable Life uses this program from time to time in its liquidity
management. At September 30, 1995, the commercial paper program had $49.7
million outstanding and no amounts were outstanding under the revolving credit
facility.
Consolidated Cash Flows
The net cash provided by operating activities was $707.3 million for the nine
months ended September 30, 1995 compared to $462.4 million for the nine months
ended September 30, 1994.
Net cash provided by investing activities was $605.5 million for the nine months
ended September 30, 1995 as compared to $321.2 million for the same period in
1994. Cash provided by investing activities during the first nine months of 1995
was primarily attributed to the $1.16 billion decrease in loans to the GIC
Segment. In January 1995, the GIC Segment partially repaid borrowings from
continuing operations. Investment purchases exceeded sales, maturities and
repayments by approximately $382.2 million, partially offsetting the effect of
the GIC repayment. In the comparable period of 1994, net cash provided by
investing activities was principally attributable to sales, maturities and
repayments of investments totaling $6.25 billion offset by purchases of $5.33
billion and by the net change in receivables/payables related to outstanding
security settlements, included in "Other, net".
32
<PAGE>
Net cash used by financing activities was $1.03 billion for the nine months
ended September 30, 1995. Net cash used by financing activities during the first
nine months of 1995 resulted primarily from the $1.22 billion decrease in the
amount due to the discontinued GIC Segment as a result of continuing operations'
$1.22 billion cash settlement at the beginning of the year of its obligation to
fund the GIC Segment's accumulated deficit. This decrease was partially offset
by a net increase in short-term financings of $272.5 million in 1995 principally
at Equitable Life. Net cash used by financing activities was $675.9 million for
the first nine months of 1994 principally due to withdrawals from policyholders'
account balances exceeding deposits by $666.7 million.
The operating, investing and financing activities described above resulted in an
increase in cash and cash equivalents during the first nine months of 1995 of
$287.0 million to $980.6 million.
33
<PAGE>
PART II OTHER INFORMATION
Item 1. Legal Proceedings.
None, except (i) as previously reported in the Registrant's Form 10-K for the
year ended December 31, 1994 and the Registrant's Form 10-Q for the quarter
ended June 30, 1995, and (ii) as set forth in Note 10 to the Registrant's
Unaudited Consolidated Financial Statements in Part I of this Form 10-Q for the
quarter ended September 30, 1995.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit 27
(b) Reports on Form 8-K
None
34
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
The Equitable Life Assurance Society of the
United States
----------------------------------------------------
(Registrant)
Date: November 10, 1995 /s/ Jerry M. de St. Paer
------------------- ----------------------------------------------------
Executive Vice President and
Chief Financial Officer
Date: November 10, 1995 /s/ Alvin H. Fenichel
------------------- ----------------------------------------------------
Senior Vice President and Controller
35
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 7
<S> <C>
<MULTIPLIER> 1,000
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> SEP-30-1995
<PERIOD-TYPE> 9-MOS
<DEBT-HELD-FOR-SALE> 9,955,700
<DEBT-CARRYING-VALUE> 4,752,600
<DEBT-MARKET-VALUE> 4,979,100
<EQUITIES> 647,000
<MORTGAGE> 3,604,200
<REAL-ESTATE> 4,251,000
<TOTAL-INVEST> 26,306,900
<CASH> 980,600
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 3,092,000
<TOTAL-ASSETS> 67,245,700
<POLICY-LOSSES> 0
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 3,982,500
<POLICY-HOLDER-FUNDS> 21,819,400
<NOTES-PAYABLE> 1,617,500
<COMMON> 2,500
0
0
<OTHER-SE> 3,706,900
<TOTAL-LIABILITY-AND-EQUITY> 67,245,700
1,022,300
<INVESTMENT-INCOME> 1,583,900
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<OTHER-INCOME> 726,300
<BENEFITS> 766,700
<UNDERWRITING-AMORTIZATION> 244,000
<UNDERWRITING-OTHER> 1,096,900
<INCOME-PRETAX> 334,400
<INCOME-TAX> 89,900
<INCOME-CONTINUING> 244,500
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 244,500
<EPS-PRIMARY> 0
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<PROVISION-CURRENT> 0
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