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 June 30, 1997 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.)
1290 Avenue of the Americas, New York, New York 10104
- --------------------------------------------------------------------------------
(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 August 11, 1997
- --------------------------------------------------------------------------------
Common Stock, $1.25 par value 2,000,000
Page 1 of 34
<PAGE>
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1997
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page #
------
<S> <C> <C>
PART I FINANCIAL INFORMATION
Item 1: Unaudited Consolidated Financial Statements
Consolidated Balance Sheets as of June 30, 1997 and December 31, 1996........... 3
Consolidated Statements of Earnings for the Three Months and Six
Months Ended June 30, 1997 and 1996.............................................. 4
Consolidated Statements of Shareholder's Equity for the Six Months
Ended June 30, 1997 and 1996..................................................... 5
Consolidated Statements of Cash Flows for the Six Months Ended
June 30, 1997 and 1996........................................................... 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.................................................................. 33
Item 6: Exhibits and Reports on Form 8-K................................................... 33
SIGNATURES......................................................................................... 34
</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>
June 30, December 31,
1997 1996
----------------- -----------------
(In Millions)
<S> <C> <C>
ASSETS
Investments:
Fixed maturities:
Available for sale, at estimated fair value............................. $ 18,888.2 $ 18,077.0
Mortgage loans on real estate............................................. 2,751.0 3,133.0
Equity real estate........................................................ 3,395.6 3,297.5
Policy loans.............................................................. 2,345.3 2,196.1
Investment in and loans to affiliates..................................... 689.4 685.0
Other equity investments.................................................. 890.8 870.1
Other invested assets..................................................... 138.0 15.9
----------------- -----------------
Total investments..................................................... 29,098.3 28,274.6
Cash and cash equivalents................................................... 757.5 538.8
Deferred policy acquisition costs........................................... 3,240.7 3,104.9
Amounts due from discontinued GIC Segment................................... 808.4 996.2
Other assets................................................................ 2,889.2 2,552.2
Closed Block assets......................................................... 8,504.3 8,495.0
Separate Accounts assets.................................................... 32,642.5 29,646.1
----------------- -----------------
Total Assets................................................................ $ 77,940.9 $ 73,607.8
================= =================
LIABILITIES
Policyholders' account balances............................................. $ 21,833.8 $ 21,865.6
Future policy benefits and other policyholders liabilities.................. 4,505.4 4,416.6
Short-term and long-term debt............................................... 1,940.1 1,766.9
Other liabilities........................................................... 3,610.2 2,785.1
Closed Block liabilities.................................................... 9,048.7 9,091.3
Separate Accounts liabilities............................................... 32,488.3 29,598.3
----------------- -----------------
Total liabilities..................................................... 73,426.5 69,523.8
----------------- -----------------
Commitments and contingencies (Note 10)
SHAREHOLDER'S EQUITY
Common stock, $1.25 par value; 2.0 million shares authorized
issued and outstanding.................................................... 2.5 2.5
Capital in excess of par value.............................................. 3,105.8 3,105.8
Retained earnings........................................................... 1,135.9 798.7
Net unrealized investment gains............................................. 283.1 189.9
Minimum pension liability................................................... (12.9) (12.9)
----------------- -----------------
Total shareholder's equity............................................ 4,514.4 4,084.0
----------------- -----------------
Total Liabilities and Shareholder's Equity.................................. $ 77,940.9 $ 73,607.8
================= =================
</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 Six Months Ended
June 30, June 30,
--------------------------------- ---------------------------------
1997 1996 1997 1996
--------------- --------------- --------------- ---------------
(In Millions)
<S> <C> <C> <C> <C>
REVENUES
Universal life and investment-type
product policy fee income........................ $ 236.1 $ 217.8 $ 466.6 $ 430.7
Premiums........................................... 141.0 152.4 292.8 293.4
Net investment income.............................. 588.8 545.5 1,125.5 1,092.9
Investment gains (losses), net..................... 261.0 (17.2) 280.9 (16.0)
Commissions, fees and other income................. 300.0 278.1 595.3 524.3
Contribution from the Closed Block................. 29.7 27.2 65.5 59.3
--------------- --------------- --------------- ---------------
Total revenues............................... 1,556.6 1,203.8 2,826.6 2,384.6
--------------- --------------- --------------- ---------------
BENEFITS AND OTHER DEDUCTIONS
Interest credited to policyholders' account
balances......................................... 331.5 312.6 644.2 633.0
Policyholders' benefits............................ 227.5 273.9 482.4 528.1
Other operating costs and expenses................. 676.6 484.0 1,190.5 940.4
--------------- --------------- --------------- ---------------
Total benefits and other deductions.......... 1,235.6 1,070.5 2,317.1 2,101.5
--------------- --------------- --------------- ---------------
Earnings from continuing operations before
Federal income taxes, minority interest
and cumulative effect of accounting change....... 321.0 133.3 509.5 283.1
Federal income taxes............................... 125.8 26.2 174.3 62.3
Minority interest in net (loss) income of
consolidated subsidiaries........................ (27.3) 20.0 (4.7) 38.9
--------------- --------------- --------------- ---------------
Earnings from continuing operations before
cumulative effect of accounting change........... 222.5 87.1 339.9 181.9
Discontinued operations, net of Federal income
taxes............................................ .6 - (2.7) -
Cumulative effect of accounting change,
net of Federal income taxes...................... - - - (23.1)
--------------- --------------- --------------- ---------------
Net Earnings....................................... $ 223.1 $ 87.1 $ 337.2 $ 158.8
=============== =============== =============== ===============
</TABLE>
See Notes to Consolidated Financial Statements.
4
<PAGE>
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1996
----------------- -----------------
(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 as previously reported.... 3,105.8 2,913.6
Cumulative effect on prior years of retroactive restatement for
accounting change......................................................... - 192.2
----------------- -----------------
Capital in excess of par value, beginning of year as restated and
end of period............................................................. 3,105.8 3,105.8
----------------- -----------------
Retained earnings, beginning of year as previously reported ................ 798.7 781.6
Cumulative effect on prior years of retroactive restatement for
accounting change......................................................... - 6.8
----------------- -----------------
Retained earnings, beginning of year as restated............................ 798.7 788.4
Net earnings................................................................ 337.2 158.8
----------------- -----------------
Retained earnings, end of period............................................ 1,135.9 947.2
----------------- -----------------
Net unrealized investment gains, beginning of year as previously reported... 189.9 338.2
Cumulative effect on prior years of retroactive restatement for
accounting change......................................................... - 58.3
----------------- -----------------
Net unrealized investment gains, beginning of year as restated.............. 189.9 396.5
Change in unrealized investment gains (losses).............................. 93.2 (384.5)
----------------- -----------------
Net unrealized investment gains, end of period.............................. 283.1 12.0
----------------- -----------------
Minimum pension liability, beginning of year and end of period.............. (12.9) (35.1)
----------------- -----------------
Total Shareholder's Equity, End of Period................................... $ 4,514.4 $ 4,032.4
================= =================
</TABLE>
See Notes to Consolidated Financial Statements.
5
<PAGE>
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1996
----------------- -----------------
(In Millions)
<S> <C> <C>
Net earnings................................................................ $ 337.2 $ 158.8
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Interest credited to policyholders' account balances.................... 644.2 633.0
Universal life and investment-type policy fee income.................... (466.6) (430.7)
Investment (gains) losses............................................... (280.9) 16.0
Change in Federal income taxes payable.................................. 158.7 (126.4)
Other, net.............................................................. 241.2 (172.2)
----------------- -----------------
Net cash provided by operating activities................................... 633.8 78.5
----------------- -----------------
Cash flows from investing activities:
Maturities and repayments................................................. 1,484.8 1,204.0
Sales.................................................................... 4,867.5 5,033.9
Return of capital from joint ventures and limited partnerships............ 30.4 48.5
Purchases................................................................. (6,700.6) (7,092.0)
Decrease in loans to discontinued GIC Segment............................. 185.2 492.5
Sale of subsidiaries...................................................... 261.0 -
Other, net................................................................ (454.8) 383.6
----------------- -----------------
Net cash (used) provided by investing activities............................ (326.5) 70.5
----------------- -----------------
Cash flows from financing activities: Policyholders' account balances:
Deposits................................................................ 858.6 913.9
Withdrawals............................................................. (1,063.6) (1,265.8)
Net change in short-term financings....................................... 169.4 174.1
Repayments of long-term debt.............................................. (5.8) (71.3)
Other, net................................................................ (47.2) (32.0)
----------------- -----------------
Net cash used by financing activities....................................... (88.6) (281.1)
----------------- -----------------
Change in cash and cash equivalents......................................... 218.7 (132.1)
Cash and cash equivalents, beginning of year................................ 538.8 774.7
----------------- -----------------
Cash and Cash Equivalents, End of Period.................................... $ 757.5 $ 642.6
================= =================
Supplemental cash flow information:
Interest Paid............................................................. $ 53.8 $ 49.7
================= =================
Income Taxes Paid......................................................... $ - $ 7.3
================= =================
</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 preparation of the accompanying consolidated financial statements in
conformity with GAAP requires management to make estimates and assumptions
(including normal, recurring accruals) that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. These statements should
be read in conjunction with the consolidated financial statements of the
Company for the year ended December 31, 1996. The results of operations
for the six months ended June 30, 1997 are not necessarily indicative of
the results to be expected for the full year.
The terms "second quarter 1997" and "second quarter 1996" refer to the
three months ended June 30, 1997 and 1996, respectively. The terms "first
half of 1997" and "first half of 1996" refer to the six months ended June
30, 1997 and 1996, respectively.
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 June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income". This statement establishes standards for reporting and displaying
comprehensive income and its components in a full set of general purpose
financial statements. This statement requires that an enterprise classify
items of other comprehensive income by their nature in a financial
statement and display the accumulated balance of other comprehensive
income separately from retained earnings and additional paid-in capital in
the equity section of a statement of financial position. This statement is
effective for fiscal years beginning after December 15, 1997.
Reclassification of financial statements for earlier periods provided for
comparative purposes is required.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information". This statement establishes
standards for the way public business enterprises report information about
operating segments in annual and interim financial statements issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. Generally,
financial information will be required to be reported on the basis used by
management for evaluating segment performance and deciding how to allocate
resources to segments. This statement is effective for fiscal years
beginning after December 15, 1997 and need not be applied to interim
reporting in the initial year of adoption. Restatement of comparative
information for earlier periods is required.
In 1996, the Company changed its method of accounting for long-duration
participating life insurance contracts, primarily within the Closed Block,
in accordance with the provisions prescribed by SFAS No. 120. The effect
of this change, including the impact on the Closed Block, was to increase
previously reported second quarter and first half of 1996 earnings from
continuing operations before cumulative effect of accounting change by
$3.9 million and $7.2 million, net of Federal income taxes of $2.0 million
and $3.8 million, respectively.
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.
7
<PAGE>
4) INVESTMENTS
Investment valuation allowances and changes thereto are shown below:
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-----------------------------------
1997 1996
--------------- ---------------
(In Millions)
<S> <C> <C>
Balances, beginning of year............................................... $ 137.1 $ 325.3
SFAS No. 121 release...................................................... - (152.4)
Additions charged to income............................................... 41.5 73.9
Deductions for writedowns and asset dispositions.......................... (46.5) (82.7)
--------------- ---------------
Balances, End of Period................................................... $ 132.1 $ 164.1
=============== ===============
Balances, end of period:
Mortgage loans on real estate........................................... $ 46.9 $ 102.1
Equity real estate...................................................... 85.2 62.0
--------------- ---------------
Total..................................................................... $ 132.1 $ 164.1
=============== ===============
</TABLE>
For the second quarter and first half of 1997 and of 1996, investment
income is shown net of investment expenses of $84.0 million, $162.8
million, $88.0 million and $182.2 million, respectively.
As of June 30, 1997 and December 31, 1996, respectively, fixed maturities
classified as available for sale had amortized costs of $18,510.4 million
and $17,719.2 million, respectively. Other equity investments included
equity securities with carrying values of $410.1 million and $403.0
million and costs of $385.4 million and $371.5 million.
For the first half of 1997 and 1996, proceeds received on sales of fixed
maturities classified as available for sale amounted to $4,711.4 million
and $4,936.3 million, respectively. Gross gains of $76.7 million and $68.5
million and gross losses of $78.2 million and $44.9 million were realized
on these sales for the first half of 1997 and 1996, respectively.
Unrealized investment gains related to fixed maturities classified as
available for sale by increased $20.0 million in the first half of 1997,
resulting in a balance of $377.8 million at June 30, 1997.
Impaired mortgage loans along with the related provision for losses were
as follows:
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
--------------- -----------------
(In Millions)
<S> <C> <C>
Impaired mortgage loans with provision for losses....................... $ 215.1 $ 340.0
Impaired mortgage loans without provision for losses.................... 4.0 122.3
--------------- -----------------
Recorded investment in impaired mortgage loans.......................... 219.1 462.3
Provision for losses.................................................... 43.2 46.4
--------------- -----------------
Net Impaired Mortgage Loans............................................. $ 175.9 $ 415.9
=============== =================
</TABLE>
During the first half of 1997 and of 1996, respectively, the Company's
average recorded investment in impaired mortgage loans was $341.1 million
and $541.2 million. Interest income recognized on these impaired mortgage
loans totaled $9.3 million and $20.8 million for the first half of 1997
and of 1996, respectively, including $1.0 million and $7.3 million
recognized on a cash basis.
8
<PAGE>
5) ALLIANCE - CURSITOR TRANSACTION
On February 29, 1996, Alliance acquired the business of Cursitor for
approximately $159.0 million. The purchase price consisted of 1.8 million
Alliance Units, $94.3 million in cash, $21.5 million in notes payable
ratably over four years and substantial additional consideration which
will be determined at a later date. The Company recognized an investment
gain of $20.6 million as a result of the issuance of Alliance Units in
this transaction.
On June 30, 1997, Alliance reduced the recorded value of goodwill and
contracts associated with Alliance's acquisition of Cursitor by $120.9
million. This charge reflected Alliance's view that Cursitor's continuing
decline in assets under management and its reduced profitability,
resulting from relative investment underperformance, no longer supported
the carrying value of its investment. As a result, the Company's earnings
from continuing operations before cumulative effect of accounting change
for the second quarter and first half of 1997 included a charge of $59.5
million, net of a Federal income tax benefit of $10.0 million and minority
interest of $51.4 million.
In addition to its 1% general partnership interest in Alliance, at June
30, 1997, the Company owned approximately 57.1% of Alliance Units.
6) BUSINESS SEGMENT INFORMATION
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------------- ---------------------------------
1997 1996 1997 1996
--------------- --------------- --------------- ---------------
(In Millions)
<S> <C> <C> <C> <C>
Revenues
Insurance Operations..................... $ 1,008.7 $ 928.8 $ 1,989.7 $ 1,845.6
Investment Services...................... 553.2 280.9 848.4 551.3
Consolidation/elimination................ (5.3) (5.9) (11.5) (12.3)
--------------- --------------- --------------- ---------------
Total.................................... $ 1,556.6 $ 1,203.8 $ 2,826.6 $ 2,384.6
=============== =============== =============== ===============
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------------- ---------------------------------
1997 1996 1997 1996
--------------- --------------- --------------- ---------------
(In Millions)
<S> <C> <C> <C> <C>
Earnings from Continuing Operations
before Federal Income Taxes,
Minority Interest and Cumulative
Effect of Accounting Change
Insurance Operations..................... $ 122.7 $ 73.4 $ 249.5 $ 158.0
Investment Services...................... 214.8 76.4 293.2 158.0
--------------- --------------- --------------- ---------------
Subtotal............................... 337.5 149.8 542.7 316.0
Corporate interest expense............... (16.5) (16.5) (33.2) (32.9)
--------------- --------------- --------------- ---------------
Total.................................... $ 321.0 $ 133.3 $ 509.5 $ 283.1
=============== =============== =============== ===============
</TABLE>
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
----------------- -----------------
(In Millions)
<S> <C> <C>
Assets
Insurance Operations................................................... $ 65,113.7 $ 60,464.9
Investment Services.................................................... 13,213.1 13,542.5
Consolidation/elimination.............................................. (385.9) (399.6)
----------------- -----------------
Total.................................................................. $ 77,940.9 $ 73,607.8
================= =================
</TABLE>
9
<PAGE>
7) CLOSED BLOCK
Summarized financial information of the Closed Block is as follows:
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
----------------- -----------------
(In Millions)
<S> <C> <C>
Assets
Fixed maturities:
Available for sale, at estimated fair value (amortized cost of
$3,907.8 and $3,820.7)............................................. $ 3,964.0 $ 3,889.5
Mortgage loans on real estate.......................................... 1,423.4 1,380.7
Policy loans........................................................... 1,733.1 1,765.9
Cash and other invested assets......................................... 287.0 336.1
Deferred policy acquisition costs...................................... 871.2 876.5
Other assets........................................................... 225.6 246.3
----------------- -----------------
Total Assets........................................................... $ 8,504.3 $ 8,495.0
================= =================
Liabilities
Future policy benefits and other policyholders' account balances....... $ 8,965.6 $ 8,999.7
Other liabilities...................................................... 83.1 91.6
----------------- -----------------
Total Liabilities...................................................... $ 9,048.7 $ 9,091.3
================= =================
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------------- ---------------------------------
1997 1996 1997 1996
--------------- --------------- --------------- ---------------
(In Millions)
<S> <C> <C> <C> <C>
Revenues
Premiums and other income................ $ 174.6 $ 182.9 $ 349.4 $ 367.8
Investment income (net of investment
expenses of $7.7, $7.2, $14.8 and
$14.1)................................. 139.5 131.4 278.3 268.2
Investment gains (losses), net........... 3.1 (4.4) 5.4 (8.6)
--------------- --------------- --------------- ---------------
Total revenues........................... 317.2 309.9 633.1 627.4
--------------- --------------- --------------- ---------------
Benefits and Other Deductions
Policyholders' benefits and dividends.... 265.8 276.1 536.8 554.1
Other operating costs and expenses....... 21.7 6.6 30.8 14.0
--------------- --------------- --------------- ---------------
Total benefits and other deductions...... 287.5 282.7 567.6 568.1
--------------- --------------- --------------- ---------------
Contribution from the Closed Block....... $ 29.7 $ 27.2 $ 65.5 $ 59.3
=============== =============== =============== ===============
</TABLE>
Investment valuation allowances amounted to $14.2 million and $13.8
million on mortgage loans and $2.8 million and $3.7 million on equity real
estate at June 30, 1997 and December 31, 1996, respectively. The adoption
of SFAS No. 121 at January 1, 1996 resulted in the recognition of
impairment losses of $5.6 million on real estate held and used.
10
<PAGE>
Impaired mortgage loans (as defined under SFAS No. 114) along with the
related provision for losses were as follows:
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
----------------- -----------------
(In Millions)
<S> <C> <C>
Impaired mortgage loans with provision for losses...................... $ 108.4 $ 128.1
Impaired mortgage loans without provision for losses................... .6 .6
----------------- -----------------
Recorded investment in impaired mortgages.............................. 109.0 128.7
Provision for losses................................................... 13.7 12.9
----------------- -----------------
Net Impaired Mortgage Loans............................................ $ 95.3 $ 115.8
================= =================
</TABLE>
During the first half of 1997 and of 1996, respectively, the Closed
Block's average recorded investment in impaired mortgage loans was $117.9
million and $143.5 million. Interest income recognized on these impaired
mortgage loans totaled $4.5 million and $5.4 million for the first half of
1997 and of 1996, respectively, including $1.8 million and $2.4 million
recognized on a cash basis.
8) DISCONTINUED OPERATIONS
Summarized financial information for the GIC Segment is as follows:
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
----------------- -----------------
(In Millions)
<S> <C> <C>
Assets
Mortgage loans on real estate.......................................... $ 919.8 $ 1,111.1
Equity real estate..................................................... 888.0 925.6
Cash and other invested assets......................................... 297.5 474.0
Other assets........................................................... 203.8 226.1
----------------- -----------------
Total Assets........................................................... $ 2,309.1 $ 2,736.8
================= =================
Liabilities
Policyholders liabilities.............................................. $ 1,101.5 $ 1,335.9
Allowance for future losses............................................ 244.9 262.0
Amounts due to continuing operations................................... 808.4 996.2
Other liabilities...................................................... 154.3 142.7
----------------- -----------------
Total Liabilities...................................................... $ 2,309.1 $ 2,736.8
================= =================
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------------- ---------------------------------
1997 1996 1997 1996
--------------- --------------- --------------- ---------------
(In Millions)
<S> <C> <C> <C> <C>
Revenues
Investment income (net of investment
expenses of $24.1, $33.0, $49.6
and $64.3)............................. $ 43.5 $ 60.4 $ 78.4 $ 132.2
Investment gains (losses), net........... 1.0 (6.6) (4.1) (17.6)
Policy fees, premiums and other
income, net............................ - - .1 .1
--------------- --------------- --------------- ---------------
Total revenues........................... 44.5 53.8 74.4 114.7
Benefits and Other Deductions............ 43.4 68.0 90.6 139.3
Earnings credited (losses charged)
to allowance for future losses......... 1.1 (14.2) (16.2) (24.6)
--------------- --------------- --------------- ---------------
Pre-tax loss from operations............. - - - -
Pre-tax earnings from releasing (loss
from strengthening) the allowance
for future losses...................... 1.0 - (4.1) -
Federal income tax (expense) benefit..... (.4) - 1.4 -
--------------- --------------- --------------- ---------------
Earnings (Loss) from Discontinued
Operations............................. $ .6 $ - $ (2.7) $ -
=============== =============== =============== ===============
</TABLE>
The Company's quarterly process for evaluating the loss provisions applies
the current period's results of discontinued operations against the
allowance, re-estimates future losses, and adjusts the provisions, if
appropriate. The evaluation performed as of June 30, 1997 resulted in
management's decision to release $1.0 million of the loss provisions,
reducing the reserve strengthening for the six months ended June 30, 1997
to $4.1 million.
Management believes the loss provisions for Wind-Up Annuities and GIC
contracts at June 30, 1997 are adequate to provide for all future losses;
however, the determination of loss provisions continues to involve
numerous estimates and subjective judgments regarding the expected
performance of discontinued operations investment assets. There can be no
assurance the losses provided for will not differ from the losses
ultimately realized. To the extent actual results or future projections of
discontinued operations differ from management's current best estimates
and assumptions underlying the loss provisions, the difference would be
reflected as earnings (loss) from discontinued operations in the
consolidated statements of earnings. In particular, to the extent income,
sales proceeds and holding periods for equity real estate differ from
management's previous assumptions, periodic adjustments to the loss
provisions are likely to result.
Investment valuation allowances amounted to $7.8 million and $9.0 million
on mortgage loans and $13.3 million and $20.4 million on equity real
estate at June 30, 1997 and December 31, 1996, respectively. As of January
1, 1996, the adoption of SFAS No. 121 resulted in a release of existing
valuation allowances of $71.9 million on equity real estate and
recognition of impairment losses of $69.8 million on real estate held and
used.
12
<PAGE>
Impaired mortgage loans (as defined under SFAS No. 114) along with the
related provision for losses were as follows:
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
----------------- -----------------
(In Millions)
<S> <C> <C>
Impaired mortgage loans with provision for losses...................... $ 79.4 $ 83.5
Impaired mortgage loans without provision for losses................... 1.0 15.0
----------------- -----------------
Recorded investment in impaired mortgages.............................. 80.4 98.5
Provision for losses................................................... 7.8 8.8
----------------- -----------------
Net Impaired Mortgage Loans............................................ $ 72.6 $ 89.7
================= =================
</TABLE>
During the first half of 1997 and of 1996, the GIC Segment's average
recorded investment in impaired mortgage loans was $92.6 million and
$136.1 million, respectively. Interest income recognized on these impaired
mortgage loans totaled $3.1 million and $5.0 million for the first half of
1997 and of 1996, respectively, including $2.2 million and $3.8 million
recognized on a cash basis.
Benefits and other deductions included $14.9 million, $29.7 million, $33.9
million and $71.5 million of interest expense related to amounts borrowed
from continuing operations for the second quarter and first half of 1997
and of 1996, respectively.
9) RESTRUCTURING COSTS
During the first half of 1997 and of 1996, the Company recorded pre-tax
provisions of $42.4 million and $2.6 million, respectively, primarily for
employee termination and exit costs. The amounts paid during the first
half of 1997 totaled $12.0 million. At June 30, 1997, the liabilities
included costs related to employee termination and exit costs, the
termination of operating leases and the consolidation of insurance
operations' service centers and amounted to $72.7 million.
10) LITIGATION
There have been no new material legal proceedings and no material
developments in matters which were previously reported in the Company's
Notes to Consolidated Financial Statements for the year ended December 31,
1996, except as follows:
In Bowler, Equitable Life has filed its reply brief, urging summary
judgment on all claims but one. Issues of fact are raised by one
plaintiff's claim (that he was misled by the representation concerning
state approval), and accordingly this claim only could not be resolved on
summary judgment. The summary judgment motion is now under judicial
review.
In Bachman, plaintiff filed its response to the summary judgment motion
and Equitable Life asked permission to file a reply brief in support of
its motion for summary judgment and for oral argument.
In Cole, on April 29, 1997, at a pre-trial conference, the Court ordered
that all discovery be completed by October 8, 1997. The court further
ordered that a Note of Issue (placing the case on the trial calendar) be
filed on or before October 10, 1997, and that on October 14, 1997, the
Court would hold a conference to schedule a trial date. The parties have
agreed on a briefing schedule for plaintiffs' motion for class
certification. A hearing on plaintiffs' motion for class certification
will be scheduled, at the discretion of the court, on or after September
12, 1997. The plaintiffs filed their memorandum of law and affidavits in
support of their motion for class certification on June 30, 1997. That
memorandum indicates that plaintiffs seek to certify a class solely on
their breach of contract claim, not their negligent misrepresentation
claim. Discovery as to class certification and as to the merits continues.
13
<PAGE>
In Fletcher, on April 24, 1997, the magistrate granted plaintiffs' remand
motion, and Equitable Life has filed an application with the judge for
reconsideration. Equitable Life's time to answer the complaint has been
extended until 30 days after the court's final resolution of plaintiffs'
remand motion.
In Duncan, plaintiff moved to have the action certified as a nationwide
class action with two plaintiff subgroups: one comprising those alleging
misrepresentations concerning the extent to which their policies were
proper replacement policies, and the other comprising those alleging
misrepresentations concerning the number of years that the annual premium
would need to be paid. Equitable Life will oppose the motion.
Discovery as to class certification has begun.
In Bradley, on March 3, 1997, EVLICO served a notice of appeal of the
court's order denying EVLICO's motion to remove the Bradley action to New
York County and to consolidate or jointly try the Cole and Bradley
actions. The court has scheduled a hearing on plaintiff's motion for class
certification for November 21, 1997. Discovery as to class certification
continues.
In Dillon, on February 24, 1997, Equitable Life and EOC moved to dismiss
the complaint on several grounds. On May 12, 1997, plaintiffs served a
motion for class certification. Discovery as to class certification has
begun.
In Chaviano, plaintiff filed an amended complaint on April 14, 1997. On
July 14, 1997, Equitable Life served a motion to dismiss the amended
complaint or, in the alternative, for summary judgment.
In connection with the previously reported actions relating to Harrah's
Jazz Company and Harrah's Jazz Finance Corp., the parties to these actions
have agreed to a settlement, subject to the approval of the U.S. District
Court for the Eastern District of Louisiana which was granted on July 31,
1997. The settlement is also subject to the approval by the United States
Bankruptcy Court for the Eastern District of Louisiana of proposed
modifications to a confirmed plan of reorganization for Harrah's Jazz
Company and Harrah's Jazz Finance Corp., and the satisfaction or waiver of
all conditions to the effectiveness of the plan. There can be no assurance
of the Bankruptcy Court's approval of the modifications to the plan of
reorganization, or that the conditions to the effectiveness of the plan
will be satisfied or waived. In the opinion of DLJ's management, the
settlement, if approved, will not have a material adverse effect on DLJ's
results of operations or on its consolidated financial condition.
On May 2, 1997, DLJ was named as a defendant in the First Amended
Derivative Complaint in James G. Caven v. Charles R. Miller, et al., an
action in the United States District Court for the Southern District of
Texas. The action is a derivative action allegedly brought on behalf of
Paracelsus Healthcare Corporation ("Paracelsus"), and in turn on behalf of
Champion Healthcare Corporation ("Champion"), in connection with
Champion's merger with Paracelsus on or about August 16, 1996. Other
defendants named in the amended complaint are certain officers and
directors of Champion, Paracelsus, certain officers and directors of
Paracelsus, and Paracelsus' outside auditors. With respect to DLJ, the
amended complaint alleges that DLJ was engaged by Champion to act as its
investment advisor in identifying suitable merger and acquisition
prospects in the healthcare industry, and that DLJ was negligent in
recommending Paracelsus to Champion as a suitable merger partner and in
rendering an opinion to Champion's board of directors that the exchange
ratio of Paracelsus common stock for Champion common stock in the merger
was fair from a financial point of view to holders of Champion common
stock. The amended complaint seeks damages in an unspecified amount,
rescission of the merger, interest, attorney's fees and costs, and other
relief. Due to the early stage of such litigation, based on the
information currently available to it, DLJ's management cannot make an
estimate of loss, if any, or predict whether or not such litigation will
have a material adverse effect on DLJ's results of operations in any
particular period.
14
<PAGE>
On July 15, 1997, in the action relating to the Alliance North American
Government Income Trust, Inc., the court denied plaintiffs' motion for
leave to file an amended complaint and ordered that the case be dismissed.
Plaintiffs have until August 18, 1997 to file an appeal to the Second
Circuit Court of Appeals.
In addition to the matters previously reported and the matters described
above, the Holding Company and its subsidiaries are involved in various
legal actions and proceedings in connection with their businesses. Some of
the actions and proceedings have been brought on behalf of various alleged
classes of claimants and certain of these claimants seek damages of
unspecified amounts. While the ultimate outcome of such matters cannot be
predicted with certainty, in the opinion of management no such matter is
likely to have a material adverse effect on the Company's consolidated
financial position or results of operations.
11) SALE OF SUBSIDIARIES
On June 10, 1997, Equitable Life sold Equitable Real Estate ("EREIM")
(other than EQ Services, Inc. and its interest in Column Financial, Inc.)
to Lend Lease Corporation Limited ("Lend Lease"), a publicly traded,
international property and financial services company based in Sydney,
Australia. The total purchase price was $400.0 million and consisted of
$300.0 million in cash and a $100.0 million note maturing in eight years
and bearing interest at the rate of 7.4%, subject to certain adjustments.
Equitable Life recognized an investment gain of $162.4 million, net of
Federal income tax of $87.4 million as a result of this transaction.
Equitable Life entered into long-term advisory agreements pursuant to
which EREIM will continue to provide to Equitable Life's General Account
and Separate Accounts substantially the same services, for substantially
the same fees, as provided prior to the sale.
Through June 10, 1997 and the year ended December 31, 1996, respectively,
the businesses sold reported combined revenues of $91.6 million and $226.1
million and combined net earnings of $10.7 million and $30.7 million.
Total combined assets and liabilities as reported at December 31, 1996
were $171.8 million and $130.1 million, respectively.
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 the Company's 1996 Report on Form 10-K. The terms "second
quarter 1997" and "second quarter 1996" refer to the three months ended June 30,
1997 and 1996, respectively. The terms "first half of 1997" and "first half of
1996" refer to the six months ended June 30, 1997 and 1996, respectively.
Closed Block
The contribution from the Closed Block is reported on one line in the
consolidated statements of earnings. The Closed Block includes revenues, benefit
payments, dividends and premium taxes applicable to policies included in the
Closed Block but excludes many costs and expenses associated with operating the
Closed Block and administering the policies included therein. Since many
expenses related to the Closed Block were excluded from the calculation of the
Closed Block contribution, the contribution from the Closed Block does not
represent the actual profitability of the Closed Block.
CONSOLIDATED RESULTS OF OPERATIONS
The following table presents the consolidated results of operations for the
first half of 1997 and of 1996. In this presentation, the contribution of the
Closed Block is combined on a line-by-line basis with the results of operations
outside of the Closed Block. The Insurance Operations analysis, which begins on
page 18, also includes a table presenting the combination of Closed Block
amounts on a line-by-line basis. The Investment Services discussion begins on
page 21. Management's discussion and analysis addresses the combined results of
operations unless noted otherwise.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------------- ---------------------------------
1997 1996 1997 1996
--------------- ---------------- --------------- ---------------
(In Millions)
Consolidated Results of Operations(1)
<S> <C> <C> <C> <C>
Policy fee income and premiums................ $ 551.1 $ 552.8 $ 1,108.5 $ 1,091.4
Net investment income......................... 728.3 676.9 1,403.8 1,361.1
Investment gains (losses), net................ 264.1 (21.6) 286.3 (24.6)
Commissions, fees and other income............ 300.6 278.4 595.6 524.8
--------------- ---------------- --------------- ---------------
Total revenues.............................. 1,844.1 1,486.5 3,394.2 2,952.7
Total benefits and other deductions........... 1,523.1 1,353.2 2,884.7 2,669.6
--------------- ---------------- --------------- ---------------
Earnings from continuing operations
before Federal income taxes,
minority interest and cumulative
effect of accounting change................. 321.0 133.3 509.5 283.1
Federal income taxes.......................... 125.8 26.2 174.3 62.3
Minority interest in net (loss) income of
consolidated subsidiaries................... (27.3) 20.0 (4.7) 38.9
--------------- ---------------- --------------- ---------------
Earnings from Continuing Operations
before Cumulative Effect of
Accounting Change........................... $ 222.5 $ 87.1 $ 339.9 $ 181.9
=============== ================ =============== ===============
<FN>
(1) Includes the Closed Block on a line-by-line basis.
</FN>
</TABLE>
16
<PAGE>
Continuing Operations
Compared to the comparable 1996 period, the higher pre-tax results of continuing
operations for the first half of 1997 reflected increased earnings for
Investment Services and Insurance Operations. The increase in Federal income
taxes was attributed to higher pre-tax results of operations. Minority interest
in net income of consolidated subsidiaries was significantly lower principally
due to the effect of Alliance's write down of the carrying value of intangible
assets associated with the Cursitor acquisition. See "Combined Results of
Continuing Operations by Segment - Investment Services."
The $441.5 million increase in revenues for the first half of 1997 compared to
the corresponding period in 1996 was attributed primarily to a $353.6 million
increase in investment results which included a $252.1 million gross gain on the
sale of EREIM and to a $70.8 million increase in commissions, fees and other
income principally due to increased business activity within Investment
Services.
Net investment income increased $42.7 million for the first half of 1997
principally due to higher overall yields on a larger investment asset base for
Insurance Operations partially offset by lower interest income on lower amounts
due from discontinued operations.
There were investment gains of $286.3 million for the first half of 1997 as
compared to losses of $24.6 million for the same period in 1996. There was a
$252.1 million gross gain recognized on the sale of EREIM during second quarter
1997. Also in the first half of 1997, investment gains increased to $34.1
million on General Account Investment Assets as compared to losses of $45.2
million in the first half of 1996. In 1996, the gain of $20.6 million recognized
as a result of the issuance of Alliance Units to third parties upon completion
of the Cursitor acquisition was more than offset by investment losses of $45.2
million on General Account Investment Assets.
For the first half of 1997, total benefits and other deductions increased by
$215.1 million from the comparable period in 1996, reflecting increases in other
operating costs and expenses of $266.9 million and a $11.5 million increase in
interest credited to policyholders partially offset by a $63.3 million decrease
in policyholders' benefits. The increase in other operating costs and expenses
was attributable to increased operating costs of $161.9 million in Investment
Services associated with increased segment activities and a $103.9 million
increase in other operating costs and expenses in Insurance Operations primarily
due to increases in DAC amortization and in the provision for employee
termination and exit costs.
Discontinued GIC Segment
The Company's quarterly evaluation of the GIC Segment's loss provisions applies
the current period's results of the discontinued operations against the
allowance, re-estimates future losses and adjusts the provisions, if
appropriate. The evaluation performed at June 30, 1997 resulted in management's
decision to release $1.0 million of the loss provisions, reducing the reserve
strengthening for the six months ended June 30, 1997 to $4.1 million. The factor
contributing to the net strengthening in the first half of 1997 was higher than
anticipated investment losses, principally on other equity investments.
Excluding the effect of the aforementioned reserve strengthening, $16.2 million
of pre-tax losses were incurred and charged to the GIC Segment's allowance for
future losses in the first half of 1997 as compared to $24.6 million in the
first half of 1996. Investment results declined by $40.3 million in the first
half of 1997 as compared to the year earlier period. Net investment income
declined by $53.8 million, principally due to lower yield on a significantly
reduced GIC Segment Investment Asset base. The reduction in GIC Segment
investments was primarily due to the repayments of approximately $1.02 billion
of loans from continuing operations during 1996. Investment losses decreased
$13.5 million to $4.1 million in the first half of 1997. There were $1.2 million
of gains on mortgage loans as compared to $2.7 million in losses in the first
half of 1996 and $7.7 million and $2.7 million lower losses on equity real
estate and other equity investments, respectively. Benefits and other deductions
declined by $48.7 million principally due to the aforementioned repayments in
1996 resulting in the decrease in interest expense on lower borrowings from
continuing operations.
17
<PAGE>
COMBINED RESULTS OF CONTINUING OPERATIONS BY SEGMENT
Insurance Operations
The Closed Block is part of Insurance Operations. 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>
Insurance Operations
(In Millions)
Six Months Ended June 30,
------------------------------------------------------------------
1997
------------------------------------------------
As Closed 1996
Reported Block Combined Combined
------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
Policy fees, premiums and other income.......... $ 813.3 $ 349.4 $ 1,162.7 $ 1,141.2
Net investment income........................... 1,082.2 278.3 1,360.5 1,317.7
Investment gains (losses), net.................. 28.7 5.4 34.1 (45.2)
Contribution from the Closed Block.............. 65.5 (65.5) - -
------------- -------------- ------------- --------------
Total revenues................................ 1,989.7 567.6 2,557.3 2,413.7
Total benefits and other deductions............. 1,740.2 567.6 2,307.8 2,255.7
------------- -------------- ------------- --------------
Earnings from Continuing Operations
before Federal Income Taxes,
Minority Interest and Cumulative
Effect of Accounting Change................... $ 249.5 $ - $ 249.5 $ 158.0
============= ============== ============= ==============
</TABLE>
The earnings from continuing operations in Insurance Operations for the first
half of 1997 reflected an increase of $91.5 million from the year earlier
period. Investment gains in 1997 versus losses in 1996, higher net investment
income, higher policy fees on variable and interest-sensitive life and
individual annuities contracts, lower life insurance mortality and improved DI
and group pension results were offset by higher amortization of deferred
acquisition costs and the provision for employee termination and exit costs. The
improved DI and group pension results reflect the establishment of premium
deficiency reserves in fourth quarter 1996. To the extent periodic results from
these businesses differ from the assumptions used in establishing those
reserves, the resulting earnings (loss) will impact Insurance Operations'
results.
Total revenues increased by $143.6 million primarily due to investment results
which increased by $122.1 million, a $35.9 million increase in policy fees and a
$4.4 million increase in commissions, fees and other income, offset by an $18.8
million decline in premiums. The decrease in premiums principally was due to
lower traditional life and individual health premiums. The increase in Insurance
Operations investment results primarily resulted from investment gains in 1997
as compared to losses in 1996. There were gains of $45.4 million on fixed
maturities, an increase of $10.3 million over the comparable 1996 period and
$6.4 million of gains on the General Account's other equity investments as
compared to $2.4 million during the first half of 1996. Losses on mortgage loans
decreased $48.3 million to $3.0 million, while losses on equity real estate
totaled $14.7 million, $16.7 million lower than in the first half of 1996.
Insurance Operations' $42.8 million increase in investment income principally
was due to $79.8 million higher overall yields on a larger General Account
Investment Asset base, offset by $41.8 million lower interest on lower amounts
due from discontinued operations. Policy fee income rose to $466.6 million due
to higher insurance and annuity account balances.
Total benefits and other deductions for the first half of 1997 rose $52.1
million from the comparable 1996 period as increases of $108.0 million in other
operating expenses and $47.0 million higher DAC amortization were offset by
$51.1 million higher DAC capitalization, the effects of the favorable mortality
experience on variable and interest-sensitive life policies and a decrease in
policy benefits. The increase in operating costs resulted from higher variable
expenses related to increased sales, higher restructuring costs of $39.1 million
and higher costs related to the annuity wholesaler distribution system
18
<PAGE>
implemented in the latter part of 1996. The decrease of $63.3 million in
policyholders' benefits primarily resulted from a lower increase in reserves on
DI business and improved mortality experience on the larger in force book of
business for variable and interest-sensitive life policies. This lower mortality
experience resulted in an increase in the amortization of DAC on variable and
interest-sensitive life policies. Interest credited on policyholders' account
balances in Insurance Operations increased by $11.5 million reflecting
moderately lower crediting rates applied to a larger in force book of business.
Premiums and Deposits - The following table lists premiums and deposits,
including universal life and investment-type contract deposits, for Insurance
Operations' major product lines.
<TABLE>
<CAPTION>
Premiums and Deposits
(In Millions)
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------------- ---------------------------------
1997 1996 1997 1996
--------------- ---------------- --------------- ---------------
<S> <C> <C> <C> <C>
Individual annuities
First year.................................. $ 746.5 $ 562.2 $ 1,393.8 $ 1,071.9
Renewal..................................... 344.3 331.7 684.6 661.8
--------------- ---------------- --------------- ---------------
1,090.8 893.9 2,078.4 1,733.7
Variable and interest-sensitive life
First year recurring........................ 45.1 45.2 97.7 90.1
First year optional......................... 57.1 44.3 116.9 84.5
Renewal..................................... 288.9 264.8 630.2 602.9
--------------- ---------------- --------------- ---------------
391.1 354.3 844.8 777.5
Traditional life
First year recurring........................ 3.3 4.8 7.3 9.7
First year optional......................... 0.8 1.2 1.9 2.5
Renewal..................................... 204.2 210.7 409.6 423.5
--------------- ---------------- --------------- ---------------
208.3 216.7 418.8 435.7
Other(1)
First year.................................. 4.3 11.0 8.3 18.1
Renewal..................................... 91.3 98.3 181.7 187.9
--------------- ---------------- --------------- ---------------
95.6 109.3 190.0 206.0
Total first year.............................. 857.1 668.7 1,625.9 1,276.8
Total renewal................................. 928.7 905.5 1,906.1 1,876.1
--------------- ---------------- --------------- ---------------
Total individual insurance and
annuity products............................ 1,785.8 1,574.2 3,532.0 3,152.9
Participating group annuities................. 47.6 57.5 94.9 118.4
Conversion annuities.......................... (0.6) 0.0 1.5 0.0
Association plans............................. 37.3 27.0 68.7 50.2
--------------- ---------------- --------------- ---------------
Total group pension products.................. 84.3 84.5 165.1 168.6
Total Premiums and Deposits................... $ 1,870.1 $ 1,658.7 $ 3,697.1 $ 3,321.5
=============== ================ =============== ===============
<FN>
(1) Includes health insurance and reinsurance assumed.
</FN>
</TABLE>
19
<PAGE>
First year premiums and deposits for individual insurance and annuity products
for the first half of 1997 increased from prior year's level by $349.1 million
primarily due to higher sales of individual annuities and variable and
interest-sensitive life products. Renewal premiums and deposits increased by
$30.0 million during the first half of 1997 over the prior year period as
increases in the larger block of variable and interest-sensitive life and
individual annuities policies were partially offset by decreases in traditional
life and other product lines. Traditional life premiums and deposits for the
first six months of 1997 decreased from the prior year's comparable period by
$16.9 million due to the marketing focus on variable and interest-sensitive
products and the decline in the traditional life book of business. The 30.0%
increase in first year individual annuities premiums and deposits in 1997 over
the prior year period included a $355.9 million increase in sales of a new line
of retirement annuity products sold through both the career agency force and
complementary distribution channels. First year variable and interest-sensitive
life premiums and deposits for the first half of 1997 included $39.8 million of
premiums and deposits from the sale of two large COLI cases. Management believes
the strategic positioning of the Company's insurance operations has begun to
have a positive effect on premium growth. Particular emphasis will continue to
be devoted to the support of the new needs based selling approach and the
establishment of consultative financial services as the cornerstone of the sales
process. Changes in agent recruitment and training practices have resulted in
retention and productivity improvements which, management believes, are
contributing to premium results.
Surrenders and Withdrawals - The following table summarizes Insurance
Operations' surrenders and withdrawals, including universal life and
investment-type contract withdrawals, for major individual insurance and
annuities' product lines.
<TABLE>
<CAPTION>
Surrenders and Withdrawals
(In Millions)
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------------- ---------------------------------
1997 1996 1997 1996
--------------- ---------------- --------------- ---------------
<S> <C> <C> <C> <C>
Individual Insurance and Annuities'
Product Lines:
Individual annuities.......................... $ 569.1 $ 588.2 $ 1,163.5 $ 1,198.7
Variable and interest-sensitive life.......... 123.3 116.7 246.5 229.0
Traditional life.............................. 91.8 92.9 197.4 186.5
--------------- ---------------- --------------- ---------------
Total......................................... $ 784.2 $ 797.8 $ 1,607.4 $ 1,614.2
=============== ================ =============== ===============
</TABLE>
Policy and contract surrenders and withdrawals decreased $6.8 million during the
first half of 1997 compared to the same period in 1996. Surrenders of variable
and interest-sensitive products increased by $17.5 million due to the increased
size of the book of business. The $35.2 million decrease in individual annuities
surrenders was principally due to decreased surrenders of Equi-Vest contracts.
Surrenders and withdrawals in 1996 included $88.0 million paid in January 1996
for two small pension clients who terminated their contracts.
20
<PAGE>
Investment Services
The following table summarizes the results of operations for Investment
Services.
<TABLE>
<CAPTION>
Investment Services
(In Millions)
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------------- ---------------------------------
1997 1996 1997 1996
--------------- ---------------- --------------- ---------------
<S> <C> <C> <C> <C>
Third party commissions and fees.............. $ 236.7 $ 215.2 $ 472.1 $ 412.1
Affiliate fees................................ 27.6 32.0 58.3 62.1
Other income(1)............................... 288.9 33.7 318.0 77.1
--------------- ---------------- --------------- ---------------
Total revenues................................ 553.2 280.9 848.4 551.3
Total costs and expenses...................... 338.4 204.5 555.2 393.3
--------------- ---------------- --------------- ---------------
Earnings from Continuing Operations
before Federal Income Taxes,
Minority Interest and Cumulative
Effect of Accounting Change................. $ 214.8 $ 76.4 $ 293.2 $ 158.0
=============== ================ =============== ===============
<FN>
(1) Includes investment results and other items.
</FN>
</TABLE>
On June 10, 1997, Equitable Life sold EREIM to Lend Lease for $300.0 million in
cash and a $100.0 million eight year note, subject to certain adjustments.
Equitable Life entered into long-term advisory agreements whereby the businesses
sold will continue to provide services to Equitable Life's General Account and
Separate Accounts. The Company recognized a gain on this sale of $249.8 million
(net of $2.3 million related state income tax). See Note 11 to Consolidated
Financial Statements for further information. EREIM's results from operations
continue to be included in Investment Services' results up to the date of sale.
Also during the second quarter 1997, Alliance wrote down the recorded value of
goodwill and contracts associated with its acquisition of Cursitor by $120.9
million. This charge reflected Alliance management's view that Cursitor's
continuing decline in assets under management and its reduced profitability,
resulting from relative investment underperformance, no longer supported
Cursitor's carrying value. Cursitor's assets under management declined from
approximately $10.0 billion at the date of acquisition to $5.1 billion at June
30, 1997. At June 30, 1997, the Company owned approximately 58% of Alliance. The
impact of Alliance's charge on the Company's net earnings was approximately
$59.5 million.
For the first half of 1997, pre-tax earnings for Investment Services increased
by $135.2 million from the year earlier period primarily due to the gain on sale
of EREIM and higher earnings for DLJ, partially offset by lower earnings for
Alliance reflecting the effect of the abovementioned writedown. DLJ's earnings
were higher in 1997 largely due to strong merger and acquisition activity,
private fund capital raising assignments, higher investment banking fees and the
growth in trading volume on most major exchanges. Total segment revenues were up
$297.1 million principally due to the gain on the sale of EREIM and higher
revenues at DLJ. Other income for the first half of 1997 included a pre-tax gain
of $252.1 million from the sale of EREIM. Other income for the first half of
1996 included a gross gain of $20.6 million on the issuance of Alliance Units
during the first quarter of that year in connection with the Cursitor
transaction.
Total costs and expenses increased by $161.9 million for the first half of 1997
as compared to the comparable period in 1996 primarily due to a $170.1 million
increase at Alliance reflecting the aforementioned writedown of intangible
assets at Alliance of $120.9 million and increases in compensation and other
promotional expenses due to increased activity.
21
<PAGE>
The following table summarizes results of operations by business unit.
<TABLE>
<CAPTION>
Investment Services
Pre-tax Results of Operations by Business Unit
(In Millions)
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------------- ---------------------------------
1997 1996 1997 1996
--------------- ---------------- --------------- ---------------
<S> <C> <C> <C> <C>
Business Unit:
DLJ(1)...................................... $ 152.0 $ 145.9 $ 283.0 $ 244.7
Alliance.................................... (62.8) 48.0 (8.7) 94.1
Equitable Real Estate(2).................... 8.3 9.0 14.8 16.5
Gain on sale of EREIM(3).................... 249.8 - 249.8 -
Consolidation/elimination(4)(5)(6).......... (132.5) (126.5) (245.7) (197.3)
--------------- ---------------- --------------- ---------------
Earnings from Continuing Operations
before Federal Income Taxes,
Minority Interest and Cumulative
Effect of Accounting Change(7).............. $ 214.8 $ 76.4 $ 293.2 $ 158.0
=============== ================ =============== ===============
<FN>
(1) Excludes amortization expense of $1.1 million, $1.0 million, $2.1 million
and $1.9 million for the second quarter and first half of 1997 and of 1996,
respectively, on goodwill and intangible assets related to Equitable Life's
acquisition of DLJ in 1985, which are included in consolidation/elimination.
(2) Includes results of operations through June 10, 1997, the sale date of EREIM
to Lend Lease.
(3) Gain on the sale of EREIM is net of $2.3 million related state income tax.
(4) Includes interest expense of $2.9 million, $2.9 million, $5.9 million and
$6.1 million related to intercompany debt issued by intermediate holding
companies payable to Equitable Life for the second quarter and first half of
1997 and of 1996, respectively.
(5) Includes the Holding Company and third party interests in DLJ's net
earnings, as well as taxes on the Company's equity interest in DLJ's pre-tax
earnings of $119.5 million, $115.9 million, $219.3 million and $195.3 million
for the second quarter and first half of 1997 and of 1996, respectively.
(6) Includes a gain of $16.9 million (net of $3.7 million related state income
tax) for the six months ended June 30, 1996 on issuance of Alliance Units to
third parties upon the completion of the Cursitor transaction during the first
quarter of 1996.
(7) Pre-tax minority interest in Alliance was $(26.7) million, $20.5 million,
$(3.8) million and $39.8 million for the second quarter and first half of 1997
and of 1996, respectively.
</FN>
</TABLE>
DLJ - DLJ's earnings from operations for the first half of 1997 were $283.0
million, up $38.3 million from the comparable prior year period. Revenues
increased $275.5 million to $2.04 billion primarily due to increased net
investment income of $209.0 million, higher fee income of $138.1 million, higher
commissions of $27.6 million partially offset by lower underwriting revenues of
$52.5 million and lower gains of $46.7 million on the corporate development
portfolio. DLJ's expenses were $1.76 billion for the first half of 1997, up
$237.2 million from the comparable prior year period primarily due to higher
interest expense of $112.7 million and a $56.8 million increase in compensation
and commissions and $12.1 million higher brokerage and exchange fees.
22
<PAGE>
Substantially all of DLJ's activities related to derivatives are, by their
nature, trading activities which are primarily for the purpose of customer
accommodation. DLJ enters into certain contractual agreements referred to as
derivatives or off-balance-sheet financial instruments involving futures,
forwards and options. DLJ's derivative activities are not as extensive as many
of its competitors. Instead, DLJ's derivative activities consist of writing OTC
options to accommodate its customers' needs, trading in forward contracts in
U.S. government and agency issued or guaranteed securities and engaging in
futures contracts on equity based indices, interest rate instruments and
currencies, and issuing structured notes. DLJ's involvement in swap contracts is
not significant. As a result, DLJ's involvement in derivatives products is
related primarily to revenue generation through the provision of products to its
clients as opposed to hedges against DLJ's own positions.
Options contracts are typically written for a duration of less than thirteen
months. Revenues from these activities (net of related interest expense) were
approximately $42.2 million and $31.9 million for the first half of 1997 and
1996, respectively. Option writing revenues are primarily from the amortization
of option premiums. The increase in revenues primarily resulted from higher
levels of activity, both in size and number of transactions, by DLJ's
institutional customers and favorable market conditions.
The notional value of written options contracts outstanding was approximately
$6.5 billion and $3.5 billion at June 30, 1997 and 1996, respectively. The
overall increase in the notional value of all options was primarily due to
increases in customer activity related to U.S. government obligations. Such
written options contracts are substantially covered by various financial
instruments that DLJ had purchased or sold as principal.
As part of DLJ's trading activities, including trading activities in the related
cash market instruments, DLJ enters into forward and futures contracts primarily
involving securities, foreign currencies, indices and forward rate agreements,
as well as options on futures contracts. Such forward and futures contracts are
entered into as part of DLJ's covering transactions and are generally not used
for speculative purposes.
Net trading losses on forward contracts were $(47.7) million and $(39.1) million
and net trading (losses) gains on futures contracts were $(25.7) million and
$8.5 million for the first six months of 1997 and 1996, respectively.
Treated as off-balance-sheet items, the notional contract and market values of
the forward and futures contracts at June 30, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
June 30, 1997 June 30, 1996
---------------------------------- -----------------------------------
Purchases Sales Purchases Sales
--------------- --------------- --------------- ---------------
(In Millions)
<S> <C> <C> <C> <C>
Forward Contracts
(Notional Contract Value).............. $ 15,622 $ 20,572 $ 17,102 $ 18,446
=============== =============== =============== ===============
Futures Contracts and Options on
Futures Contracts (Market Value)....... $ 2,669 $ 5,668 $ 803 $ 590
=============== =============== =============== ===============
</TABLE>
Structured notes are customized derivative instruments in which the amount of
interest or principal paid on a debt obligation is linked to the return on
specific cash market financial instruments. At June 30, 1997 and 1996, DLJ had
issued long-term structured notes totaling $188.1 million and $143.1 million
outstanding, respectively. DLJ covers its obligations on structured notes
primarily by purchasing and selling the securities to which the value of its
structured notes are linked.
23
<PAGE>
Alliance - Alliance's loss from operations for the first half of 1997 was $8.7
million, a decrease from the $94.1 million of earnings from the prior year's
comparable period. Revenues totaled $445.0 million for the first six months of
1997, an increase of $67.3 million from the comparable period in 1996, due to
increased investment advisory and service fees. Alliance's costs and expenses
increased $170.1 million for the first half of 1997 primarily due to the
abovementioned $120.9 million writedown of intangible assets and to increases of
$19.0 million in employee compensation and benefits.
Equitable Real Estate - This business' earnings from operations included the
results of EREIM through June 10, 1997, the date of sale. Equitable Real
Estate's earnings from operations were $14.8 million for the first six months of
1997, down $1.7 million from the preceding year's comparable period. Revenues
declined $10.4 million to $91.6 million for the first half of 1997 when compared
to the 1996 comparable period. Operating expenses similarly decreased by $8.7
million totaling $76.8 million for the first half of 1997.
Fees From Assets Under Management - As the following table illustrates, 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 Six Months Ended
June 30, June 30,
--------------------------------- ---------------------------------
1997 1996 1997 1996
--------------- ---------------- --------------- ---------------
<S> <C> <C> <C> <C>
Fees:
Third Party................................. $ 192.2 $ 184.9 $ 396.9 $ 351.4
The Holding Company and Equitable Life...... 33.4 28.9 61.1 56.1
--------------- ---------------- --------------- ---------------
Total......................................... $ 225.6 $ 213.8 $ 458.0 $ 407.5
=============== ================ =============== ===============
Assets Under Management:
Third Party(1).............................. $ 193,898 $ 167,580
The Holding Company and Equitable Life...... 57,528 50,058
--------------- ---------------
Total......................................... $ 251,426 $ 217,638
=============== ===============
<FN>
(1) Included Separate Account assets under management, as well as assets managed
on behalf of other AXA affiliates.
</FN>
</TABLE>
Fees from assets under management increased for the first half of 1997 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 $29.14 billion primarily due to the market appreciation and mutual
fund sales.
For the first half of 1997 and full year 1996, fees received for assets under
management by EREIM totaled $94.1 million and $229.9 million, respectively, of
which $63.7 million and $139.6 million, respectively, were received from third
parties.
24
<PAGE>
General Account Investment Portfolio
The following table reconciles the consolidated balance sheet asset amounts to
General Account Investment Asset amounts.
<TABLE>
<CAPTION>
General Account Investment Assets
Carrying Values at June 30, 1997
(In Millions)
General
Balance Account
Sheet Closed Investment
Balance Sheet Captions: Total Block Other(1) Assets
- ------------------------------------------------- --------------- ------------- --------------- --------------
<S> <C> <C> <C> <C>
Fixed maturities:
Available for sale............................ $ 18,888.2 $ 3,964.0 $ (131.6) $ 22,983.8
Mortgage loans on real estate................... 2,751.0 1,423.4 0.0 4,174.4
Equity real estate.............................. 3,395.6 195.0 (17.8) 3,608.4
Policy loans.................................... 2,345.3 1,733.1 0.0 4,078.4
Other equity investments........................ 890.8 107.4 0.7 997.5
Other invested assets........................... 827.4 87.2 908.8 5.8
--------------- ------------- --------------- --------------
Total investments............................. 29,098.3 7,510.1 760.1 35,848.3
Cash and cash equivalents....................... 757.5 (103.8) 130.5 523.2
--------------- ------------- --------------- --------------
Total........................................... $ 29,855.8 $ 7,406.3 $ 890.6 $ 36,371.5
=============== ============= =============== ==============
<FN>
(1) Assets listed in the "Other" category principally consist of assets held in
portfolios other than the General Account, certain reclassifications and
intercompany adjustments. The "Other" category is deducted in arriving at the
General Account Investment Assets.
</FN>
</TABLE>
The General Account Investment Assets presentation set forth in the following
pages includes the Closed Block's investments 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 $9.0 million and $22.5 million for the first
six months of 1997 and of 1996, respectively; writedowns on equity real estate
during the first half of 1997 were $0.2 million. The following table shows asset
valuation allowances and additions to and deductions from such allowances for
mortgages and equity real estate for the first six months of 1997 and of 1996.
25
<PAGE>
<TABLE>
<CAPTION>
General Account Investment Assets
Valuation Allowances
(In Millions)
Equity Real
Mortgages Estate Total
--------------- --------------- --------------
<S> <C> <C> <C>
June 30, 1997
Assets Outside of the Closed Block:
Beginning balances............................................ $ 50.4 $ 86.7 $ 137.1
Additions..................................................... 20.6 20.9 41.5
Deductions(2)................................................. (24.1) (22.4) (46.5)
--------------- --------------- --------------
Ending Balances............................................... $ 46.9 $ 85.2 $ 132.1
=============== =============== ==============
Closed Block:
Beginning balances............................................ $ 13.8 $ 3.7 $ 17.5
Additions..................................................... 6.4 0.5 6.9
Deductions(2)................................................. (6.0) (1.4) (7.4)
--------------- --------------- --------------
Ending Balances............................................... $ 14.2 $ 2.8 $ 17.0
=============== =============== ==============
Total:
Beginning balances............................................ $ 64.2 $ 90.4 $ 154.6
Additions..................................................... 27.0 21.4 48.4
Deductions(2)................................................. (30.1) (23.8) (53.9)
--------------- --------------- --------------
Ending Balances............................................... $ 61.1 $ 88.0 $ 149.1
=============== =============== ==============
June 30, 1996
Total:
Beginning balances............................................ $ 83.9 $ 264.1 $ 348.0
SFAS No. 121 release(1)....................................... - (152.4) (152.4)
Additions..................................................... 50.1 37.8 87.9
Deductions(2)................................................. (0.5) (84.8) (85.3)
--------------- --------------- --------------
Ending Balances............................................... $ 133.5 $ 64.7 $ 198.2
=============== =============== ==============
<FN>
(1) As a result of the adoption of SFAS No. 121 at January 1, 1996, $152.4
million of allowances on assets held for investment were released and impairment
losses of $149.6 million were recognized on real estate held and used.
(2) Primarily reflected releases of allowances due to asset dispositions and
writedowns.
</FN>
</TABLE>
26
<PAGE>
General Account Investment Assets by Category
The following table shows the amortized cost, valuation allowances and the net
amortized cost of the major categories of General Account Investment Assets at
June 30, 1997 and the net amortized cost at December 31, 1996.
<TABLE>
<CAPTION>
General Account Investment Assets
(Dollars In Millions)
June 30, 1997 December 31, 1996
----------------------------------------------------------- -----------------------------
% of % of
Net Total Net Net Total Net
Amortized Valuation Amortized Amortized Amortized Amortized
Cost Allowances Cost Cost Cost Cost
--------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Fixed maturities(1).......... $ 22,541.3 $ - $ 22,541.3 62.7% $ 21,711.6 62.1%
Mortgages.................... 4,235.5 61.1 4,174.4 11.6 4,513.7 12.9
Equity real estate........... 3,696.4 88.0 3,608.4 10.0 3,518.6 10.1
Other equity investments..... 997.5 - 997.5 2.8 965.1 2.8
Policy loans................. 4,078.4 - 4,078.4 11.4 3,962.0 11.3
Cash and short-term
investments(2)............. 529.0 - 529.0 1.5 277.7 0.8
--------------- ------------- ------------- ------------- ------------- -------------
Total........................ $ 36,078.1 $ 149.1 $ 35,929.0 100.0% $ 34,948.7 100.0%
=============== ============= ============= ============= ============= =============
<FN>
(1) Excludes unrealized gains of $442.5 million and $432.9 million in fixed
maturities classified as available for sale at June 30, 1997 and December 31,
1996, respectively.
(2) Comprised of "Cash and cash equivalents" and short-term investments included
within the "Other invested assets" caption on the consolidated balance sheet.
</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 on an opportunistic basis. Management anticipates that reductions
will depend on real estate market conditions, the level of mortgage foreclosures
and the level of expenditures required to fund necessary or desired improvements
to properties.
27
<PAGE>
Investment Results of General Account Investment Assets
<TABLE>
<CAPTION>
Investment Results by Asset Category
(Dollars In Millions)
Three Months Ended June 30, Six Months Ended June 30,
-------------------------------------------------- --------------------------------------------------
1997 1996 1997 1996
------------------------ ------------------------ ------------------------ ------------------------
(1) (1) (1) (1)
Yield Amount Yield Amount Yield Amount Yield Amount
---------- ------------- ---------- ------------- ------------------------ ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed Maturities:
Income.............. 8.04% $ 446.5 7.92% $ 394.8 8.00% $ 882.4 7.91% $ 778.2
Investment
Gains/(Losses).... 0.25% 14.1 0.19% 9.6 0.42% 45.4 0.36% 35.1
---------- ------------- ---------- ------------- ------------------------ ---------- -------------
Total............... 8.29% $ 460.6 8.11% $ 404.4 8.42% $ 927.8 8.27% $ 813.3
Ending Assets....... $ 22,541.3 $ 20,304.9 $ 22,541.3 $ 20,304.9
Mortgages:
Income.............. 9.76% $ 103.8 8.99% $ 109.7 9.61% $ 208.5 8.87% $ 218.3
Investment
Gains/(Losses).... (0.43)% (4.6) (2.02)% (24.6) (0.14)% (3.0) (2.09)% (51.3)
---------- ------------- ---------- ------------- ------------------------------------ -------------
Total............... 9.33% $ 99.2 6.97% $ 85.1 9.47% $ 205.5 6.78% $ 167.0
Ending Assets....... $ 4,174.4 $ 4,828.1 $ 4,174.4 $ 4,828.1
Equity Real
Estate (2):
Income.............. 2.83% $ 19.4 2.46% $ 19.1 2.46% $ 33.6 2.87% $ 45.0
Investment
Gains/(Losses).... (0.61)% (4.2) (1.63)% (12.7) (1.08)% (14.7) (2.00)% (31.4)
---------- ------------- ----------- ------------- ------------------------------------ -------------
Total............... 2.22% $ 15.2 0.83% $ 6.4 1.38% $ 18.9 0.87% $ 13.6
Ending Assets....... $ 2,771.5 $ 3,100.1 $ 2,771.5 $ 3,100.1
Other Equity
Investments:
Income.............. 18.92% $ 46.1 16.03% $ 38.3 13.61% $ 66.1 15.79% $ 70.4
Investment
Gains/(Losses).... 2.71% 6.6 2.68% 6.4 1.32% 6.4 0.53% 2.4
---------- ------------- ----------- ------------- ------------------------------------ -------------
Total............... 21.63% $ 52.7 18.71% $ 44.7 14.93% $ 72.5 16.32% $ 72.8
Ending Assets....... $ 997.5 $ 961.6 $ 997.5 $ 961.6
Policy Loans:
Income.............. 7.00% $ 71.1 6.95% $ 67.3 6.96% $ 140.1 6.90% $ 132.4
Ending Assets....... $ 4,078.4 $ 3,891.1 $ 4,078.4 $ 3,891.1
Cash and Short-term
Investments:
Income.............. 7.78% $ 11.7 5.00% $ 8.3 9.85% $ 24.3 8.13% $ 30.9
Ending Assets....... $ 529.0 $ 529.0 $ 529.0 $ 529.0
Total:
Income.............. 8.02% $ 698.6 7.63% $ 637.5 7.83% $ 1,355.0 7.68% $ 1,275.2
Investment
Gains/(Losses).... 0.14% 11.9 (0.25)% (21.3) 0.20% 34.1 (0.28)% (45.2)
---------- ------------- ----------- ------------- ------------------------------------ -------------
Total(3)............ 8.16% $ 710.5 7.38% $ 616.2 8.03% $ 1,389.1 7.40% $ 1,230.0
Ending Assets....... $ 35,092.1 $ 33,614.8 $ 35,092.1 $ 33,614.8
<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.
28
<PAGE>
(2) Equity real estate carrying values are shown net of third party debt and
minority interest in real estate of $836.9 million and $840.6 million as of June
30, 1997 and 1996, 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 $12.5
million, $14.0 million, $25.8 million and $28.3 million for the three months and
the six months ended June 30, 1997 and 1996, respectively.
(3) Total yields are shown before deducting investment fees paid to investment
managers (which include asset management, acquisition, disposition, accounting
and legal fees). If such fees had been deducted, total yields would have been
7.86%, 7.11%, 7.74% and 7.13% for the three months and the six months ended June
30, 1997 and 1996, respectively.
</FN>
</TABLE>
For the first half of 1997, General Account investment results were up $159.1
million from the year earlier period reflecting higher income on a higher asset
base and investment gains as compared to losses in the prior period. On an
annualized basis, total investment yield increased to 8.03% from 7.40%.
Investment income increased by $79.8 million or 6.3%, resulting in an increase
in the annualized income yield to 7.83% from 7.68%. Excluding SFAS No. 121
related permanent impairment writedowns of $149.6 million and releases of
valuation allowances totaling $152.4 million relating to equity real estate in
1996, additions to asset valuation allowances and writedowns of fixed maturities
and equity real estate were $57.6 million in the first six months of 1997
compared to $110.4 million in the first half of 1996.
Total investment results for fixed maturities increased $114.5 million or 14.1%
for the first half of 1997 compared to the year earlier period. Investment
income increased by $104.2 million reflecting a higher asset base, primarily
from reinvesting nearly all available funds into fixed maturities. Investment
gains were $45.4 million for the first half of 1997 compared to $35.1 million in
1996. Writedowns on fixed maturities were $9.0 million in the first half of 1997
as compared to $22.5 million in the comparable period of 1996. Total investment
results on mortgages increased by $38.5 million or 23.1% in the first half of
1997 compared to the same period a year ago largely due to fewer additions to
asset valuation allowances. Equity real estate investment results were $5.3
million higher during the first six months of 1997 than the year earlier period
reflecting fewer additions to asset valuation allowances.
Fixed Maturities. Fixed maturities consist of publicly traded debt securities,
privately placed debt securities and small amounts of redeemable preferred
stock, which represented 73.6%, 25.8% and 0.6%, respectively, of the amortized
cost of this asset category at June 30, 1997.
<TABLE>
<CAPTION>
Fixed Maturities By Credit Quality
(Dollars In Millions)
June 30, 1997 December 31, 1996
Rating Agency --------------------------------------- ---------------------------------------
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> <C>
1-2 Aaa/Aa/A and Baa...... $ 19,700.2(1) 87.4% $ 20,015.1 $ 18,994.8(1) 87.5% $ 19,334.0
3-6 Ba and lower.......... 2,697.8(2) 12.0 2,822.3 2,575.2(2) 11.9 2,665.7
------------ ----------- -------------- ------------ ---------- -------------
Subtotal........................ 22,398.0 99.4 22,837.4 21,570.0 99.4 21,999.7
Redeemable preferred stock
and other..................... 143.3 .6 146.4 141.6 .6 144.8
------------ ----------- -------------- ------------ ----------- -------------
Total........................... $ 22,541.3 100.0% $ 22,983.8 $ 21,711.6 100.0% $ 22,144.5
============ =========== ============== ============ =========== =============
<FN>
(1) Includes Class B Notes with an amortized cost of $20.8 million and $67.0
million at June 30, 1997 and December 31, 1996, respectively, eliminated in
consolidation.
(2) Includes Class B Notes with an amortized cost of $100.0 million, eliminated
in consolidation.
</FN>
</TABLE>
29
<PAGE>
At June 30, 1997, the Company held CMOs with an amortized cost of $2.39 billion,
including $2.28 billion in publicly traded CMOs. About 62.0% of the public CMO
holdings were collateralized by GNMA, FNMA and FHLMC securities. Approximately
38.5% of the public CMO holdings were in PAC bonds. At June 30, 1997, IO strips
amounted to $8.7 million at amortized cost. There were no holdings of PO strips
at that date. In addition, at June 30, 1997, the Company held $2.36 billion of
mortgage pass-through securities (GNMA, FNMA or FHLMC securities) and also held
$492.7 million of Aa or higher rated public asset backed securities, primarily
backed by home equity mortgages, airline and other equipment, and credit card
receivables.
<TABLE>
<CAPTION>
Fixed Maturities
Problems, Potential Problems and Restructureds
Amortized Cost
(In Millions)
June 30, December 31,
1997 1996
--------------- -----------------
<S> <C> <C>
FIXED MATURITIES.............................................................. $ 22,541.3 $ 21,711.6
Problem fixed maturities...................................................... 22.9 50.6
Potential problem fixed maturities............................................ .5 .5
Restructured fixed maturities(1).............................................. 2.9 3.4
<FN>
(1) Excludes restructured fixed maturities of $2.5 million that are shown as
problems at both June 30, 1997 and December 31, 1996; there were no restructured
fixed maturities that are shown as potential problems at June 30, 1997 nor at
December 31, 1996.
</FN>
</TABLE>
Mortgages. Mortgages consist of commercial, agricultural and residential loans.
At June 30, 1997, commercial mortgages totaled $2.52 billion (59.4% of the
amortized cost of the category), agricultural loans were $1.71 billion (40.5%)
and residential loans were $3.1 million (.1%).
<TABLE>
<CAPTION>
Mortgages
Problems, Potential Problems and Restructureds
Amortized Cost
(In Millions)
June 30, December 31,
1997 1996
--------------- -----------------
<S> <C> <C>
COMMERCIAL MORTGAGES.......................................................... $ 2,518.9 $ 2,901.2
Problem commercial mortgages.................................................. 70.8 11.3
Potential problem commercial mortgages........................................ 141.0 425.7
Restructured commercial mortgages(1).......................................... 233.0 269.3
VALUATION ALLOWANCES.......................................................... 61.1 64.2
AGRICULTURAL MORTGAGES........................................................ $ 1,713.5 $ 1,672.7
Problem agricultural mortgages................................................ 14.7 5.4
Potential problem agricultural mortgages...................................... - -
Restructured agricultural mortgages........................................... 1.2 2.0
VALUATION ALLOWANCES.......................................................... - -
<FN>
(1) Excludes restructured commercial mortgages of $40.0 million and $1.7 million
that are shown as problems at June 30, 1997 and December 31, 1996, respectively,
and excludes $38.3 million and $229.5 million of restructured commercial
mortgages that are shown as potential problems at June 30, 1997 and December 31,
1996, respectively.
</FN>
</TABLE>
30
<PAGE>
Problem commercial mortgages increased by $59.5 million from December 31, 1996
to June 30, 1997 as previously identified potential problems became delinquent.
Potential problem loans declined as mortgages were reclassified to performing
status and problem. During the first six months of 1997, the amortized cost of
foreclosed commercial mortgages totaled $153.5 million with a $1.5 million
reduction in amortized cost required at the time of foreclosure.
The original weighted average coupon rate on the $233.0 million of restructured
mortgages was 9.7%. As a result of these restructurings, the restructured
weighted average coupon rate was 8.6% and the restructured weighted average cash
payment rate was 8.2%. The foregone interest on restructured commercial
mortgages (including restructured commercial mortgages presented as problem or
potential problem commercial mortgages) for the first six months of 1997 was
$1.6 million.
At June 30, 1997, problem commercial mortgages were classified into the
following property types: retail ($69.1 million or 97.6%) and apartment ($1.7
million or 2.4%). Their distribution by state was: New York ($38.3 million or
54.1%), Massachusetts ($26.8 million or 37.9%) and Mississippi ($4.0 million or
5.6%). Potential problem commercial mortgages were classified by property type
as: retail ($86.4 million or 61.3%), industrial ($27.3 million or 19.4%), office
($21.0 million or 14.9%) and hotel ($5.4 million or 3.8%). By state, their
distribution was: New York ($63.9 million or 45.3%), Pennsylvania ($22.7 million
or 16.1%), Puerto Rico ($18.7 million or 13.3%) and Virginia ($16.4 million or
11.6%). No other state had 5.0% or more of the total.
At June 30, 1997 and 1996, management identified impaired commercial loans as
defined under SFAS No. 114 with a carrying value of $269.7 million and $595.8
million, respectively. The provision for losses for these impaired mortgage
loans was $56.9 million and $122.1 million at June 30, 1997 and 1996,
respectively. Income earned on these loans in the first six months of 1997 and
1996 was $13.7 million and $26.1 million, respectively, including cash received
of $12.8 million and $20.9 million, respectively.
For the first six months of 1997, scheduled principal amortization payments and
prepayments on commercial mortgage loans received aggregated $278.4 million. In
addition, during the first six months of 1997, $299.6 million of commercial
mortgage loan maturity payments were scheduled, of which $51.9 million were paid
as due. Of the amount not paid, $125.3 million were foreclosed, $117.8 million
were granted short term extensions of up to six months, $4.6 million were
extended for a weighted average of 3.0 years at a weighted average interest rate
of 9.65% and none were delinquent or in default for non-payment of principal.
Equity Real Estate. As of June 30, 1997, on the basis of amortized cost, the
equity real estate category included $2.62 billion (or 70.8%) acquired as
investment real estate and $1.08 billion (or 29.2%) acquired through or in lieu
of foreclosure (including in-substance foreclosures).
Real estate properties with amortized costs of $130.1 million and $247.0 million
were sold during the first six months of 1997 and 1996, respectively. In the
first half of 1997 and 1996, respectively, gains of $4.4 million and $2.5
million were recognized on equity real estate which was sold.
At June 30, 1997 and 1996, respectively, allowances totaling $88.0 million and
$64.7 million were held on properties identified as available for sale with
amortized costs of $429.1 million and $375.4 million.
At June 30, 1997, the vacancy rate for the Company's office properties was 13.1%
in total, with a vacancy rate of 9.9% for properties acquired as investment real
estate and 23.1% for properties acquired through foreclosure. The national
commercial office vacancy rate was 11.6% (as of March 31, 1997) as measured by
CB Commercial.
LIQUIDITY AND CAPITAL RESOURCES
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 June 2000. Equitable Life uses this program from time to time
in its liquidity management. At June 30, 1997, there were no amounts outstanding
under the commercial paper program or the revolving credit facility.
31
<PAGE>
DLJ continues to be active in raising additional capital. In April 1997, DLJ
commenced a program for the offering of up to $300.0 million of medium-term
notes under a shelf registration statement. On April 15, 1997, $10.0 million
aggregate principal amount of variable rate medium-term notes due 2000 were
issued. The interest rate is LIBOR plus 10 basis points with a rate at June 30,
1997 of 5.88125%. On June 18, 1997, DLJ issued an additional $10.0 million
aggregate principal amount of 6.85% medium-term notes due 2002, followed by the
June 30, 1997 issuance of $70.0 million aggregate principal amount of 6.70%
medium-term notes due in 2000. The proceeds of approximately $89.8 million were
used for general corporate purposes. In June 1997, DLJ filed a shelf
registration statement which enables DLJ to issue from time to time up to $1.00
billion in aggregate principal amount of senior or subordinated debt securities.
There were no securities outstanding under this shelf registration statement at
June 30, 1997. On August 8, 1997, DLJ converted its $28.8 million aggregate
principal amount of 5% junior subordinated convertible debentures into 685,204
shares of DLJ common stock.
To address a possible year end change in its tax status, on June 24, 1997,
Alliance announced plans for a change to a public corporate ownership structure
to become effective in December 1997. On August 5, 1997, The Taxpayer Relief Act
of 1997 was signed into law. It included the option for certain publicly traded
partnerships to maintain partnership tax status and pay a 3.5% tax on
partnership gross income. On August 6, 1997, Alliance announced its intention to
utilize this option and remain a publicly traded limited partnership and that it
would not implement the previously announced change to a public corporate
ownership structure.
Consolidated Cash Flows
The net cash provided by operating activities was $633.8 million for the first
half of 1997 compared to $78.5 million for the first half of 1996.
Net cash used by investing activities was $326.5 million for the first half of
1997 as compared to net cash provided by investing activities of $70.5 million
for the same period in 1996. During the first half of 1997, investment purchases
exceeded sales, maturities, repayments and return of capital by $317.9 million.
The EREIM sale produced net proceeds of approximately $261.0 million.
Discontinued operations reduced its outstanding loans by $185.2 million during
the first six months of 1997. Cash provided by investing activities during the
first half of 1996 primarily was attributable to the $492.5 billion decrease in
loans to the GIC Segment during the first quarter of 1996. Investment purchases
exceeded sales, maturities, repayments and return of capital by approximately
$805.6 million, partially offsetting the effect of the GIC repayment.
Net cash used by financing activities was $88.6 million for the first half of
1997 as compared to $281.1 million for the same period in 1996. In the first
half of 1997, withdrawals from General Account policyholders' account balances
exceeded deposits by $205.0 million. There was a net increase of $169.4 million
in short-term financing. Net cash used by financing activities during the first
half of 1996 primarily resulted from withdrawals from General Account
policyholders' account balances exceeding deposits by $351.9 million.
The operating, investing and financing activities described above resulted in an
increase in cash and cash equivalents during the first half of 1997 of $218.7
million to $757.5 million.
32
<PAGE>
PART II OTHER INFORMATION
Item 1. Legal Proceedings
There have been no new material legal proceedings and no material developments
in matters which were previously reported in the Registrant's Form 10-K for the
year ended December 31, 1996, except 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 June 30, 1997.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
10.1 Second Amendment of Lease, dated as of May
1, 1997, between 1290 Partners L.P. and
Equitable Life, filed as Exhibit 10.1 to the
Holding Company's quarterly report on Form
10-Q for the quarter ended June 30, 1997 and
incorporated herein by reference.
10.2 Letter Agreement dated July 8, 1997, from
the Holding Company and Equitable Life to
Mr. Edward D. Miller, filed as Exhibit 10.2
to the Holding Company's quarterly report on
Form 10-Q for the quarter ended June 30,
1997 and incorporated herein by reference.
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K
A Current Report on Form 8-K was filed July 10, 1997; Item 5
therein discussed (a) the selection of Edward D. Miller as
President and Chief Executive Officer of both the Holding
Company and Equitable Life and his expected election to both
companies' boards of directors, (b) the redemption of
certain debt and preferred stock of the Holding Company for
Common Stock, (c) the announcement by Alliance regarding (1)
its plans for a transaction responsive to a potential change
in Alliance's tax status and (2) its taking of a
non-recurring non-cash charge to reduce the recorded value
of goodwill and contracts associated with Alliance's
acquisition of Cursitor and (d) the closing of the
previously announced sale of certain subsidiaries. No
financial statements were filed.
33
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, The
Equitable Life Assurance Society of the United States has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: August 11, 1997 THE EQUITABLE LIFE ASSURANCE SOCIETY
OF THE UNITED STATES
By: /s/Stanley B. Tulin
----------------------------------------------
Name: Stanley B. Tulin
Title: Senior Executive Vice President and
Chief Financial Officer
Date: August 11, 1997 /s/Alvin H. Fenichel
----------------------------------------------
Name: Alvin H. Fenichel
Title: Senior Vice President and Controller
34
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<PERIOD-START> JAN-01-1997
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