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, 1999 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 16, 1999
- -------------------------------------------------- --------------------------
Common Stock, $1.25 par value 2,000,000
Page 1 of 39
<PAGE>
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1999
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, 1999 and December 31, 1998.............. 3
Consolidated Statements of Earnings for the Three Months and Six
Months Ended June 30, 1999 and 1998.............................................. 4
Consolidated Statements of Shareholder's Equity for the Six Months
Ended June 30, 1999 and 1998..................................................... 5
Consolidated Statements of Cash Flows for the Six Months Ended
June 30, 1999 and 1998........................................................... 6
Notes to Consolidated Financial Statements......................................... 7
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations.............................................................. 17
Item 3. Quantitative and Qualitative Disclosures About Market Risk......................... 36
PART II OTHER INFORMATION
Item 1: Legal Proceedings.................................................................. 37
Item 6: Exhibits and Reports on Form 8-K................................................... 38
SIGNATURES......................................................................................... 39
</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,
1999 1998
----------------- -----------------
(In Millions)
<S> <C> <C>
ASSETS
Investments:
Fixed maturities:
Available for sale, at estimated fair value............................. $ 19,204.4 $ 18,993.7
Held to maturity, at amortized cost..................................... 128.9 125.0
Mortgage loans on real estate............................................. 3,269.7 2,809.9
Equity real estate........................................................ 1,522.4 1,676.9
Policy loans.............................................................. 2,160.3 2,086.7
Other equity investments.................................................. 758.0 713.3
Investment in and loans to affiliates..................................... 1,114.3 928.5
Other invested assets..................................................... 696.3 808.2
----------------- -----------------
Total investments..................................................... 28,854.3 28,142.2
Cash and cash equivalents................................................... 907.9 1,245.5
Deferred policy acquisition costs........................................... 3,714.4 3,563.8
Other assets................................................................ 3,428.8 3,054.6
Closed Block assets......................................................... 8,592.9 8,632.4
Separate Accounts assets.................................................... 48,440.4 43,302.3
----------------- -----------------
Total Assets................................................................ $ 93,938.7 $ 87,940.8
================= =================
LIABILITIES
Policyholders' account balances............................................. $ 21,184.4 $ 20,857.5
Future policy benefits and other policyholders' liabilities................. 4,761.2 4,726.4
Short-term and long-term debt............................................... 1,624.9 1,181.7
Other liabilities........................................................... 3,695.2 3,474.3
Closed Block liabilities.................................................... 9,041.3 9,077.0
Separate Accounts liabilities............................................... 48,333.0 43,211.3
----------------- -----------------
Total liabilities..................................................... 88,640.0 82,528.2
----------------- -----------------
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.............................................. 3,110.2 3,110.2
Retained earnings........................................................... 2,347.4 1,944.1
Accumulated other comprehensive (loss) income............................... (161.4) 355.8
----------------- -----------------
Total shareholder's equity............................................ 5,298.7 5,412.6
----------------- -----------------
Total Liabilities and Shareholder's Equity.................................. $ 93,938.7 $ 87,940.8
================= =================
</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,
--------------------------------- ---------------------------------
1999 1998 1999 1998
--------------- --------------- --------------- ---------------
(In Millions)
<S> <C> <C> <C> <C>
REVENUES
Universal life and investment-type
product policy fee income........................ $ 307.8 $ 257.5 $ 604.5 $ 517.1
Premiums........................................... 130.7 142.6 265.6 289.1
Net investment income.............................. 573.7 565.8 1,142.2 1,165.9
Investment gains, net.............................. 73.4 33.2 54.1 105.6
Commissions, fees and other income................. 511.7 395.9 996.3 773.0
Contribution from the Closed Block................. 23.0 27.9 41.9 42.4
--------------- --------------- --------------- ---------------
Total revenues............................... 1,620.3 1,422.9 3,104.6 2,893.1
--------------- --------------- --------------- ---------------
BENEFITS AND OTHER DEDUCTIONS
Interest credited to policyholders' account
balances......................................... 269.6 283.4 539.8 582.9
Policyholders' benefits............................ 253.9 258.2 494.7 520.4
Other operating costs and expenses................. 774.0 561.2 1,417.5 1,127.5
--------------- --------------- --------------- ---------------
Total benefits and other deductions.......... 1,297.5 1,102.8 2,452.0 2,230.8
--------------- --------------- --------------- ---------------
Earnings from continuing operations before
Federal income taxes and minority interest....... 322.8 320.1 652.6 662.3
Federal income taxes............................... 58.3 90.8 158.7 190.7
Minority interest in net income of
consolidated subsidiaries........................ 41.9 32.3 84.0 61.8
--------------- --------------- --------------- ---------------
Earnings from continuing operations................ 222.6 197.0 409.9 409.8
Discontinued operations, net of Federal income
taxes............................................ (1.3) 1.3 (6.6) 1.8
--------------- --------------- --------------- ---------------
Net Earnings....................................... $ 221.3 $ 198.3 $ 403.3 $ 411.6
=============== =============== =============== ===============
</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, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
1999 1998
----------------- -----------------
(In Millions)
<S> <C> <C>
SHAREHOLDER'S EQUITY
Common stock, at par value, beginning of year and end of period............. $ 2.5 $ 2.5
----------------- -----------------
Capital in excess of par value, beginning of year and end of period......... 3,110.2 3,105.8
----------------- -----------------
Retained earnings, beginning of year........................................ 1,944.1 1,235.9
Net earnings................................................................ 403.3 411.6
----------------- -----------------
Retained earnings, end of period............................................ 2,347.4 1,647.5
----------------- -----------------
Accumulated other comprehensive income, beginning of year................... 355.8 516.3
Other comprehensive (loss) income........................................... (517.2) 39.2
----------------- -----------------
Accumulated other comprehensive (loss) income, end of period................ (161.4) 555.5
----------------- -----------------
Total Shareholder's Equity, End of Period................................... $ 5,298.7 $ 5,311.3
================= =================
</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, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
1999 1998
----------------- -----------------
(In Millions)
<S> <C> <C>
Net earnings................................................................ $ 403.3 $ 411.6
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Interest credited to policyholders' account balances.................... 539.8 582.9
Universal life and investment-type policy fee income.................... (604.5) (517.1)
Investment gains........................................................ (54.1) (105.6)
Change in Federal income tax payable.................................... 78.8 44.9
Other, net.............................................................. (204.8) (50.1)
----------------- -----------------
Net cash provided by operating activities................................... 158.5 366.6
----------------- -----------------
Cash flows from investing activities:
Maturities and repayments................................................. 1,046.6 1,005.1
Sales.................................................................... 4,630.4 8,648.5
Purchases................................................................. (7,048.7) (9,779.6)
Decrease in short-term investments........................................ 193.5 215.5
Decrease in loans to discontinued operations.............................. - 300.0
Other, net................................................................ (190.8) (393.3)
----------------- -----------------
Net cash used by investing activities....................................... (1,369.0) (3.8)
----------------- -----------------
Cash flows from financing activities:
Policyholders' account balances:
Deposits................................................................ 1,191.1 618.9
Withdrawals............................................................. (806.3) (938.0)
Increase in short-term financings......................................... 559.5 443.9
Repayments of long-term debt.............................................. (6.2) (6.3)
Payment of obligation to fund accumulated deficit of
discontinued operations................................................. - (87.2)
Other, net................................................................ (65.2) (34.6)
----------------- -----------------
Net cash provided (used) by financing activities............................ 872.9 (3.3)
----------------- -----------------
Change in cash and cash equivalents......................................... (337.6) 359.5
Cash and cash equivalents, beginning of year................................ 1,245.5 300.5
----------------- -----------------
Cash and Cash Equivalents, End of Period.................................... $ 907.9 $ 660.0
================= =================
Supplemental cash flow information:
Interest Paid............................................................. $ 56.4 $ 84.5
================= =================
Income Taxes Paid......................................................... $ 26.3 $ 186.7
================= =================
</TABLE>
See Notes to Consolidated Financial Statements.
6
<PAGE>
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1) BASIS OF PRESENTATION
The accompanying consolidated financial statements are prepared in
conformity with GAAP which requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. These statements should be read in
conjunction with the consolidated financial statements of the Company for
the year ended December 31, 1998. The results of operations for the six
months ended June 30, 1999 are not necessarily indicative of the results
to be expected for the full year.
The terms "second quarter 1999" and "second quarter 1998" refer to the
three months ended June 30, 1999 and 1998, respectively. The terms "first
half of 1999" and "first half of 1998" refer to the six months ended June
30, 1999 and 1998, respectively.
Certain reclassifications have been made in the amounts presented for
prior periods to conform those periods with the current presentation.
2) NEW ACCOUNTING PRONOUNCEMENTS
In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities Deferral of the Effective Date of FASB
Statement No. 133," which defers the effective date of SFAS No. 133 to all
fiscal quarters of all fiscal years beginning after June 15, 2000. The
Company expects to adopt SFAS No. 133 effective January 1, 2001.
3) DEFERRED POLICY ACQUISITION COSTS
As part of its asset/liability management process, in second quarter 1999,
management initiated a review of the matching of invested assets to
Insurance product lines given their different liability characteristics
and liquidity requirements. As a result of this review, management
reallocated the current and prospective interests of the various product
lines in the invested assets. These asset reallocations and the related
changes in investment yields by product line, in turn, triggered a review
of and revisions to the estimated future gross profits used to determine
the amortization of DAC for universal life and investment-type products.
The revisions to estimated future gross profits resulted in an after-tax
writedown of DAC of $85.6 million (net of a Federal income tax benefit of
$46.1 million) for the three and six months ended June 30, 1999.
7
<PAGE>
4) INVESTMENTS
Investment valuation allowances and changes thereto are shown below:
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-----------------------------------
1999 1998
--------------- ---------------
(In Millions)
<S> <C> <C>
Balances, beginning of year............................................... $ 230.6 $ 384.5
Additions charged to income............................................... 23.9 50.4
Deductions for writedowns and asset dispositions.......................... (74.6) (80.6)
--------------- ---------------
Balances, End of Period................................................... $ 179.9 $ 354.3
=============== ===============
Balances, end of period:
Mortgage loans on real estate........................................... $ 31.3 $ 29.2
Equity real estate...................................................... 148.6 325.1
--------------- ---------------
Total..................................................................... $ 179.9 $ 354.3
=============== ===============
</TABLE>
For the second quarter and first half of 1999 and of 1998, investment
income is shown net of investment expenses of $53.1 million, $113.3
million, $64.3 million and $144.6 million, respectively.
As of June 30, 1999 and December 31, 1998, fixed maturities classified as
available for sale had amortized costs of $19,438.4 million and $18,453.8
million and fixed maturities in the held to maturity portfolio had
estimated fair values of $128.9 million and $125.0 million, respectively.
Other equity investments include equity securities with carrying values of
$140.5 million and $150.6 million and costs of $39.6 million and $58.3
million as of June 30, 1999 and December 31, 1998, respectively.
On January 1, 1999, investments in publicly-traded common equity
securities in the General Account portfolio within other equity
investments amounting to $102.3 million were transferred from available
for sale securities to trading securities. As a result of this transfer,
unrealized investment gains of $83.3 million ($43.2 million net of related
DAC and Federal income taxes) were recognized as realized investment gains
in the consolidated statements of earnings. In the second quarter and
first half of 1999, $27.8 million ($16.1 million net of related DAC and
Federal income taxes) and $99.2 million ($53.2 million net of related DAC
and Federal income taxes) of increases in fair value on the trading
portfolios were recognized as net investment income in the consolidated
statements of earnings. These trading securities had a carrying value of
$118.2 million and costs of $3.8 million at June 30, 1999.
For the first half of 1999 and of 1998, proceeds received on sales of
fixed maturities classified as available for sale amounted to $4,390.9
million and $8,380.5 million, respectively. Gross gains of $40.0 million
and $89.9 million and gross losses of $89.5 million and $47.0 million were
realized on these sales for the first half of 1999 and of 1998,
respectively. Unrealized investment gains related to fixed maturities
classified as available for sale decreased by $773.9 million in the first
half of 1999, resulting in a balance of $234.0 million of unrealized
investment losses at June 30, 1999.
8
<PAGE>
Impaired mortgage loans along with the related provision for losses were
as follows:
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
--------------- -----------------
(In Millions)
<S> <C> <C>
Impaired mortgage loans with provision for losses....................... $ 117.6 $ 125.4
Impaired mortgage loans without provision for losses.................... 1.8 8.6
--------------- -----------------
Recorded investment in impaired mortgage loans.......................... 119.4 134.0
Provision for losses.................................................... (25.9) (29.0)
--------------- -----------------
Net Impaired Mortgage Loans............................................. $ 93.5 $ 105.0
=============== =================
</TABLE>
During the first half of 1999 and of 1998, respectively, the Company's
average recorded investment in impaired mortgage loans was $129.0 million
and $188.5 million. Interest income recognized on these impaired mortgage
loans totaled $4.5 million and $6.6 million ($.1 million and $.9 million
recognized on a cash basis) for the first half of 1999 and 1998,
respectively.
5) SALE OF DLJ STOCK
During the second quarter of 1999, DLJ completed its offering of a new
class of its common stock to track the financial performance of DLJdirect,
its online brokerage business. As a result of this offering, the Company
recorded a non-cash pre-tax realized gain of $95.8 million.
6) CLOSED BLOCK
Summarized financial information for the Closed Block is as follows:
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
----------------- -----------------
(In Millions)
<S> <C> <C>
Assets
Fixed maturities:
Available for sale, at estimated fair value (amortized cost of
$4,068.9 and $4,149.0)............................................. $ 4,062.3 $ 4,373.2
Mortgage loans on real estate.......................................... 1,709.3 1,633.4
Policy loans........................................................... 1,615.1 1,641.2
Cash and other invested assets......................................... 128.5 86.5
Deferred policy acquisition costs...................................... 834.8 676.5
Other assets........................................................... 242.9 221.6
----------------- -----------------
Total Assets........................................................... $ 8,592.9 $ 8,632.4
================= =================
Liabilities
Future policy benefits and other policyholders' account balances....... $ 9,010.3 $ 9,013.1
Other liabilities...................................................... 31.0 63.9
----------------- -----------------
Total Liabilities...................................................... $ 9,041.3 $ 9,077.0
================= =================
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------------- ---------------------------------
1999 1998 1999 1998
--------------- --------------- --------------- ---------------
(In Millions)
<S> <C> <C> <C> <C>
Revenues
Premiums and other income................ $ 156.4 $ 165.9 $ 312.4 $ 333.0
Investment income (net of investment
expenses of $4.8, $5.4, $10.0 and
$10.8)................................. 145.2 145.3 287.2 281.7
Investment gains (losses), net........... 3.4 2.8 1.5 (1.9)
--------------- --------------- --------------- ---------------
Total revenues........................... 305.0 314.0 601.1 612.8
--------------- --------------- --------------- ---------------
Benefits and Other Deductions
Policyholders' benefits and dividends.... 260.5 267.5 526.9 544.8
Other operating costs and expenses....... 21.5 18.6 32.3 25.6
--------------- --------------- --------------- ---------------
Total benefits and other deductions...... 282.0 286.1 559.2 570.4
--------------- --------------- --------------- ---------------
Contribution from the Closed Block....... $ 23.0 $ 27.9 $ 41.9 $ 42.4
=============== =============== =============== ===============
</TABLE>
Investment valuation allowances amounted to $8.5 million and $11.1 million
on mortgage loans and $13.7 million and $15.4 million on equity real
estate at June 30, 1999 and December 31, 1998, respectively.
Impaired mortgage loans along with the related provision for losses were
as follows:
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
----------------- -----------------
(In Millions)
<S> <C> <C>
Impaired mortgage loans with provision for losses...................... $ 32.4 $ 55.5
Impaired mortgage loans without provision for losses................... 4.4 7.6
----------------- -----------------
Recorded investment in impaired mortgages.............................. 36.8 63.1
Provision for losses................................................... (7.5) (10.1)
----------------- -----------------
Net Impaired Mortgage Loans............................................ $ 29.3 $ 53.0
================= =================
</TABLE>
During the first half of 1999 and of 1998, respectively, the Closed
Block's average recorded investment in impaired mortgage loans was $45.4
million and $108.8 million. Interest income recognized on these impaired
mortgage loans totaled $1.5 million and $3.1 million ($1.5 million
recognized on a cash basis for the first half of 1998) for the first half
of 1999 and 1998, respectively.
10
<PAGE>
7) DISCONTINUED OPERATIONS
Summarized financial information for discontinued operations follows:
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
----------------- -----------------
(In Millions)
<S> <C> <C>
Assets
Mortgage loans on real estate.......................................... $ 518.5 $ 553.9
Equity real estate..................................................... 563.2 611.0
Other equity investments............................................... 89.1 115.1
Other invested assets.................................................. 51.7 24.9
----------------- -----------------
Total investments.................................................... 1,222.5 1,304.9
Cash and cash equivalents.............................................. - 34.7
Other assets........................................................... 222.1 219.0
----------------- -----------------
Total Assets........................................................... $ 1,444.6 $ 1,558.6
================= =================
Liabilities
Policyholders liabilities.............................................. $ 1,008.8 $ 1,021.7
Allowance for future losses............................................ 291.2 305.1
Other liabilities...................................................... 144.6 231.8
----------------- -----------------
Total Liabilities...................................................... $ 1,444.6 $ 1,558.6
================= =================
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------------- ---------------------------------
1999 1998 1999 1998
--------------- --------------- --------------- ---------------
(In Millions)
<S> <C> <C> <C> <C>
Revenues
Investment income (net of investment
expenses of $12.4, $18.0, $25.5
and $37.5)............................. $ 22.9 $ 50.5 $ 42.5 $ 78.5
Investment (losses) gains, net........... (3.5) 27.6 (10.5) 33.2
Other income, net........................ - - - (.1)
--------------- --------------- --------------- ---------------
Total revenues........................... 19.4 78.1 32.0 111.6
Benefits and Other Deductions............ 29.0 36.1 54.4 74.6
(Losses charged) earnings credited
to allowance for future losses......... (9.6) 42.0 (22.4) 37.0
--------------- --------------- --------------- ---------------
Pre-tax loss from operations............. - - - -
Pre-tax (loss from strengthening)
earnings from releasing the
allowance for future losses............ (1.9) 2.0 (10.1) 2.7
Federal income tax benefit (expense)..... .6 (.7) 3.5 (.9)
--------------- --------------- --------------- ---------------
(Loss) Earnings from Discontinued
Operations............................. $ (1.3) $ 1.3 $ (6.6) $ 1.8
=============== =============== =============== ===============
</TABLE>
The Company's quarterly process for evaluating the allowance for future
losses applies the current period's results of discontinued operations
against the allowance, re-estimates future losses, and adjusts the
allowance, if appropriate. The evaluations performed as of June 30, 1999
and 1998 resulted in management's decision to strengthen the allowance by
$10.1 million and release the allowance by $2.7 million for the six months
ended June 30, 1999 and 1998, respectively. This resulted in after-tax
losses of $6.6 million for the first half of 1999 and after-tax earnings
of $1.8 million for the first half of 1998.
11
<PAGE>
Management believes the allowance for future losses at June 30, 1999 is
adequate to provide for all future losses; however, the determination of
the allowance involves 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 estimates and assumptions underlying the allowance for future
losses, the difference would be reflected in the consolidated statements
of earnings in discontinued operations. In particular, to the extent
income, sales proceeds and holding periods for equity real estate differ
from management's previous assumptions, periodic adjustments to the
allowance are likely to result.
Investment valuation allowances amounted to $4.5 million and $3.0 million
on mortgage loans and $42.0 million and $34.8 million on equity real
estate at June 30, 1999 and December 31, 1998, respectively.
Impaired mortgage loans along with the related provision for losses were
as follows:
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
----------------- -----------------
(In Millions)
<S> <C> <C>
Impaired mortgage loans with provision for losses...................... $ 19.6 $ 6.7
Impaired mortgage loans without provision for losses................... - 8.5
----------------- -----------------
Recorded investment in impaired mortgages.............................. 19.6 15.2
Provision for losses................................................... (3.6) (2.1)
----------------- -----------------
Net Impaired Mortgage Loans............................................ $ 16.0 $ 13.1
================= =================
</TABLE>
During the first half of 1999 and of 1998, discontinued operations'
average recorded investment in impaired mortgage loans was $16.6 million
and $121.5 million, respectively. Interest income recognized on these
impaired mortgage loans totaled $.9 million and $4.0 million ($3.4 million
recognized on a cash basis for the first half of 1998) in the first half
of 1999 and 1998, respectively.
Benefits and other deductions included $5.8 million and $15.9 million of
interest expense related to amounts borrowed from continuing operations
for the second quarter and first half of 1998.
8) 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.
9) RESTRUCTURING COSTS
At June 30, 1999, the restructuring 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 $15.6 million. The amounts paid during the first half of 1999
totaled $8.7 million.
10) LITIGATION
There have been no new material legal proceedings and no material
developments in specific litigations previously reported in the Company's
Notes to Consolidated Financial Statements for the year ended December 31,
1998, except as follows:
12
<PAGE>
In Rickel, the complaint was dismissed in April 1999 by the Court.
Plaintiff has filed an appeal. Although there can be no assurance, DLJ's
management does not believe that the ultimate outcome of this litigation
will have a material adverse effect on DLJ's consolidated financial
condition or DLJ's results of operations in any particular period.
The Dayton Monetary Associates and Mid-American Waste Systems actions have
been settled without a material adverse effect on DLJ's consolidated
financial condition or results of operation in any particular period.
In November 1998, three purported class actions (Gillet v. Goldman, Sachs
& Co. et al., Prager v. Goldman, Sachs & Co. et al. and Holzman v.
Goldman, Sachs & Co. et al.) were filed in the U.S. District Court for the
Southern District of New York against more than 25 underwriters of initial
public offering securities, including DLJSC. The complaints allege that
defendants conspired to fix the "fee" paid for underwriting initial public
offering securities by setting the underwriters' discount or "spread" at
7%, in violation of the federal antitrust laws. The complaints seek treble
damages in an unspecified amount and injunctive relief as well as
attorneys' fees and costs. On March 15, 1999, the plaintiffs filed a
Consolidated Amended Complaint captioned In re Public Offering Fee
Antitrust Litigation. A motion by all defendants to dismiss the complaints
on several grounds is pending. Separately, the U.S. Department of Justice
has issued a Civil Investigative Demand to several investment banking
firms, including DLJSC, seeking documents and information relating to
"alleged" price-fixing with respect to underwriting spreads in initial
public offerings. The government has not made any charges against DLJSC or
the other investment banking firms. DLJSC is cooperating with the Justice
Department in providing the requested information and believes that no
violation of law by DLJSC has occurred. Although there can be no
assurance, DLJ's management does not believe that the ultimate outcome of
these matters will have a material adverse effect on DLJ's consolidated
financial condition. Based upon the information currently available to it,
DLJ's management cannot predict whether or not these matters will have a
material adverse effect on DLJ's results of operations in any particular
period.
In addition to the matters previously reported and the matters described
above, Equitable Life and its subsidiaries and DLJ and its subsidiaries
are involved in various legal actions and proceedings in connection with
their businesses. Some of the actions and proceedings have been brought on
behalf of various alleged classes of claimants and certain of these
claimants seek damages of unspecified amounts. While the ultimate outcome
of such matters cannot be predicted with certainty, in the opinion of
management no such matter is likely to have a material adverse effect on
the Company's consolidated financial position or results of operations.
13
<PAGE>
11) BUSINESS SEGMENT INFORMATION
<TABLE>
<CAPTION>
Investment
Insurance Services Elimination Total
--------------- ----------------- --------------- -----------------
(In Millions)
Three Months Ended
June 30, 1999
---------------------------------------
<S> <C> <C> <C> <C>
Segment revenues..................... $ 1,075.6 $ 469.0 $ (1.5) $ 1,543.1
Investment (losses) gains and other.. (21.2) 98.4 - 77.2
--------------- ----------------- --------------- -----------------
Total Revenues....................... $ 1,054.4 $ 567.4 $ (1.5) $ 1,620.3
=============== ================= =============== =================
Pre-tax operating earnings........... $ 226.3 $ 105.3 $ - $ 331.6
Investment (losses) gains, net of
related DAC and other charges...... (21.9) 98.2 - 76.3
Non-recurring DAC adjustments........ (131.7) - - (131.7)
Pre-tax minority interest............ - 46.6 - 46.6
--------------- ----------------- --------------- -----------------
Earnings from Continuing
Operations......................... $ 72.7 $ 250.1 $ - $ 322.8
=============== ================= =============== =================
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended
June 30, 1998
---------------------------------------
<S> <C> <C> <C> <C>
Segment revenues..................... $ 1,012.2 $ 379.0 $ (1.5) $ 1,389.7
Investment gains..................... 33.1 .1 - 33.2
--------------- ----------------- --------------- -----------------
Total Revenues....................... $ 1,045.3 $ 379.1 $ (1.5) $ 1,422.9
=============== ================= =============== =================
Pre-tax operating earnings........... $ 179.8 $ 86.4 $ - $ 266.2
Investment gains (losses) net of
related DAC and other charges...... 17.2 (.4) - 16.8
Pre-tax minority interest............ - 37.1 - 37.1
--------------- ----------------- --------------- -----------------
Earnings from Continuing
Operations......................... $ 197.0 $ 123.1 $ - $ 320.1
=============== ================= =============== =================
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
Investment
Insurance Services Elimination Total
--------------- ----------------- --------------- -----------------
(In Millions)
Six Months Ended
June 30, 1999
---------------------------------------
<S> <C> <C> <C> <C>
Segment revenues..................... $ 2,118.2 $ 925.2 $ (2.9) $ 3,040.5
Investment (losses) gains and other.. (44.7) 108.8 - 64.1
--------------- ----------------- --------------- -----------------
Total Revenues....................... $ 2,073.5 $ 1,034.0 $ (2.9) $ 3,104.6
=============== ================= =============== =================
Pre-tax operating earnings........... $ 447.5 $ 191.4 $ - $ 638.9
Investment (losses) gains, net of
related DAC and other charges...... (56.9) 108.4 - 51.5
Non-recurring DAC adjustments........ (131.7) - - (131.7)
Pre-tax minority interest............ - 93.9 - 93.9
--------------- ----------------- --------------- -----------------
Earnings from Continuing
Operations......................... $ 258.9 $ 393.7 $ - $ 652.6
=============== ================= =============== =================
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended
June 30, 1998
---------------------------------------
<S> <C> <C> <C> <C>
Segment revenues..................... $ 2,053.5 $ 736.7 $ (2.7) $ 2,787.5
Investment gains..................... 74.0 31.6 - 105.6
--------------- ----------------- --------------- -----------------
Total Revenues....................... $ 2,127.5 $ 768.3 $ (2.7) $ 2,893.1
=============== ================= =============== =================
Pre-tax operating earnings........... $ 354.1 $ 163.9 $ - $ 518.0
Investment gains, net of related
DAC and other charges.............. 49.7 24.0 - 73.7
Pre-tax minority interest............ - 70.6 - 70.6
--------------- ----------------- --------------- -----------------
Earnings from Continuing
Operations......................... $ 403.8 $ 258.5 $ - $ 662.3
=============== ================= =============== =================
Total Assets:
June 30, 1999........................ $ 81,206.5 $ 12,844.0 $ (111.8) $ 93,938.7
=============== ================= =============== =================
December 31, 1998.................... $ 75,626.0 $ 12,379.2 $ (64.4) $ 87,940.8
=============== ================= =============== =================
</TABLE>
15
<PAGE>
12) COMPREHENSIVE INCOME
The components of comprehensive income (loss) for the second quarter 1999
and 1998 and the first half of 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------------- ---------------------------------
1999 1998 1999 1998
--------------- --------------- --------------- ---------------
(In Millions)
<S> <C> <C> <C> <C>
Net earnings............................. $ 221.3 $ 198.3 $ 403.3 $ 411.6
--------------- --------------- --------------- ---------------
Change in unrealized (losses) gains,
net of reclassification adjustment..... (274.2) 16.1 (517.2) 39.2
--------------- --------------- --------------- ---------------
Other comprehensive (loss) income........ (274.2) 16.1 (517.2) 39.2
--------------- --------------- --------------- ---------------
Comprehensive (Loss) Income.............. $ (52.9) $ 214.4 $ (113.9) $ 450.8
=============== =============== =============== ===============
</TABLE>
16
<PAGE>
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following analysis of the consolidated operating results 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
("MD&A") section included in the Company's 1998 Report on Form 10-K.
COMBINED OPERATING RESULTS
The combined and segment level discussions in this MD&A are on an operating
basis; amounts reported in the GAAP financial statements have been adjusted to
exclude the effect of unusual or non-recurring events and transactions and to
exclude certain revenue and expense categories. The following table presents the
combined operating results outside of the Closed Block combined on a
line-by-line basis with the contribution of the Closed Block. The Insurance
analysis, which begins on page 19, likewise reflects the Closed Block amounts on
a line-by-line basis. The Investment Services discussion begins on page 22. The
MD&A addresses the combined operating results unless noted otherwise.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------------- --------------------------------
1999 1998 1999 1998
--------------- --------------- --------------- ---------------
(In Millions)
<S> <C> <C> <C> <C>
Operating Results:
Policy fee income and premiums................ $ 591.4 $ 565.8 $ 1,178.5 $ 1,139.2
Net investment income......................... 718.4 711.1 1,422.9 1,447.6
Commissions, fees and other income............ 515.3 398.9 998.3 771.1
--------------- --------------- --------------- ---------------
Total revenues.............................. 1,825.1 1,675.8 3,599.7 3,357.9
Total benefits and other deductions......... 1,446.9 1,372.5 2,866.9 2,769.3
--------------- --------------- --------------- ---------------
Pre-tax operating earnings before
minority interest........................... 378.2 303.3 732.8 588.6
Minority interest............................. (46.6) (37.1) (93.9) (70.6)
--------------- --------------- --------------- ---------------
Pre-tax operating earnings.................... 331.6 266.2 638.9 518.0
Pre-tax Adjustments:
Investment gains, net of related DAC
and other charges........................... 76.3 16.8 51.5 73.7
Non-recurring DAC adjustments................. (131.7) - (131.7)
Minority interest............................. 46.6 37.1 93.9 70.6
-------------- ------------- ------------- -------------
GAAP Reported:
Earnings from continuing operations
before Federal income taxes and
minority interest........................... 322.8 320.1 652.6 662.3
Federal income taxes.......................... 58.3 90.8 158.7 190.7
Minority interest in net income of
consolidated subsidiaries................... 41.9 32.3 84.0 61.8
--------------- --------------- --------------- ---------------
Earnings from Continuing Operations............. $ 222.6 $ 197.0 $ 409.9 $ 409.8
=============== =============== =============== ===============
</TABLE>
17
<PAGE>
On a GAAP reported basis, Federal income taxes decreased due to lower Insurance
earnings from continuing operations principally due to the effect of the
non-recurring DAC adjustments in the first half of 1999 (discussed below).
Minority interest in net income of consolidated subsidiaries was higher due to
increased earnings at Alliance.
Adjustments to GAAP reported earnings in the first half of 1999 excluded net
investment gains of $51.5 million as compared to net investment gains of $73.7
million in the first half of 1998. The 1999 gains were primarily due to the
$95.8 million gain related to the sale of an approximately 18% interest in
DLJdirect's financial performance through the sale of a new class of DLJ common
stock in second quarter 1999. Also in the first half of 1999, there was a $131.7
million non-recurring DAC adjustment resulting from the revisions to estimated
future gross profits related to the investment asset reallocation in second
quarter 1999 (see Note 3 of Notes to Consolidated Financial Statements found
elsewhere herein). In addition, $83.5 million of gains were recognized upon
reclassification of publicly-traded common equities to a trading portfolio (see
page 29) and $10.4 million of gains resulted from the exercise of subsidiaries'
options and conversion of DLJ restricted stock units ("RSU"). Losses of $149.3
million on writedowns and sales of General Account fixed maturities partially
offset these 1999 gains. The 1998 gains principally resulted from gains of $72.2
million on General Account Investment Assets and from gross gains of $41.6
million on the exercise of Alliance units and DLJ stock options and on RSU
conversions.
Continuing Operations
Compared to the first half of 1998, the higher pre-tax operating results for the
first half of 1999 were due to increased earnings in both the Insurance and
Investment Services segments. The $241.8 million increase in revenues for the
first half of 1999 from the first half of 1998 was attributed primarily to a
$227.2 million increase in commissions, fees and other income principally due to
increased business activity within the Investment Services segment and to a
$39.3 million increase in policy fee income and premiums in Insurance. These
increases were partially offset by a $24.7 million decrease in net investment
income for the first half of 1999 principally due to a decrease of $18.8 million
for Insurance.
For the first half of 1999, total benefits and other deductions increased by
$97.6 million from the comparable period in 1998, reflecting increases in other
operating costs and expenses of $184.3 million partially offset by decreases in
interest credited to policyholders' accounts and policyholder benefits. The
increase in other operating costs and expenses principally resulted from higher
costs associated with increased revenues.
18
<PAGE>
COMBINED OPERATING RESULTS BY SEGMENT
Insurance
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 - Combined Operating Results
(In Millions)
Six Months Ended June 30,
------------------------------------------------------------------
1999
------------------------------------------------
Insurance Closed 1998
Operations Block Combined Combined
------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
Operating Results:
Policy fee income and premiums................ $ 866.5 $ 312.0 $ 1,178.5 $ 1,139.2
Net investment income......................... 1,107.6 287.2 1,394.8 1,413.6
Commissions, fees and other income............ 102.2 1.9 104.1 71.1
Contribution from the Closed Block............ 41.9 (41.9) - -
------------- -------------- ------------- -------------
Total revenues.............................. 2,118.2 559.2 2,677.4 2,623.9
Total benefits and other deductions......... 1,670.7 559.2 2,229.9 2,269.8
------------- -------------- ------------- -------------
Pre-tax operating earnings...................... 447.5 - 447.5 354.1
Pre-tax Adjustments:
Investment gains (losses), net of DAC
and other charges........................... (56.9) - (56.9) 49.7
Non-recurring DAC adjustments................. (131.7) - (131.7) -
------------- -------------- ------------- -------------
GAAP Reported:
Earnings from Continuing Operations
before Federal Income Taxes and
Minority Interest........................... $ 258.9 $ - $ 258.9 $ 403.8
============= ============== ============= =============
</TABLE>
For the first half of 1999, Insurance pre-tax operating earnings reflected an
increase of $93.4 million from the year earlier period. Higher policy fees on
variable and interest-sensitive life and individual annuities contracts, higher
margins between investment income and interest credited on policyholders'
account balances, improved life insurance mortality margins and improved health
morbidity all contributed to the improved earnings.
Total revenues increased by $53.5 million primarily due to a $39.3 million
increase in policy fee income and premiums and $33.0 million higher commissions,
fees and other income offset by an $18.8 million decrease in investment income.
Lower yields on General Account Investment Assets principally related to fixed
maturities and mortgages contributed to the decrease in investment income.
Policy fee income rose $83.8 million to $600.9 million due to higher insurance
and annuity account balances while premiums declined $44.5 million to $577.6
million.
Total benefits and other deductions for the first half of 1999 decreased $39.9
million from the comparable 1998 period reflecting decreases primarily resulting
from lower policyholders' benefits due to lower life insurance mortality and
health morbidity experience, and a decrease in interest credited on
policyholders' account balances due to lower crediting rates, partially offset
by an increase in operating expenses due to the timing of strategic initiative
expenses and higher corporate benefits.
19
<PAGE>
Premiums, Deposits and Mutual Fund Sales - The following table lists gross
premiums and deposits, including universal life and investment-type contract
deposits, as well as mutual fund sales for Insurance distribution channels and
major product lines.
<TABLE>
<CAPTION>
Premiums, Deposits and Mutual Fund Sales
(In Millions)
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------------- ---------------------------------
1999 1998 1999 1998
--------------- ---------------- --------------- ---------------
<S> <C> <C> <C> <C>
Retail:
Annuities
First year.................................. $ 901.0 $ 830.4 $ 1,720.0 $ 1,537.5
Renewal..................................... 480.5 447.8 957.5 906.5
--------------- ---------------- --------------- ---------------
1,381.5 1,278.2 2,677.5 2,444.0
Life(1)
First year 127.6 122.6 210.8 224.7
Renewal..................................... 565.3 528.4 1,128.8 1,088.6
--------------- ---------------- --------------- ---------------
692.9 651.0 1,339.6 1,313.3
Other(2)
First year.................................. 3.3 3.1 5.2 6.8
Renewal..................................... 86.6 95.1 183.6 195.5
Mutual fund sales........................... 734.6 664.5 1,405.0 1,258.1
--------------- ---------------- --------------- ---------------
824.5 762.7 1,593.8 1,460.4
--------------- ---------------- --------------- ---------------
Total retail.............................. 2,898.9 2,691.9 5,610.9 5,217.7
--------------- ---------------- --------------- ---------------
Wholesale:
Annuities
First year.................................. 506.2 464.5 910.9 738.6
Renewal..................................... 11.1 2.9 17.8 3.3
--------------- ---------------- --------------- ---------------
Total wholesale........................... 517.3 467.4 928.7 741.9
--------------- ---------------- --------------- ---------------
Total Premiums, Deposits
and Mutual Fund Sales....................... $ 3,416.2 $ 3,159.3 $ 6,539.6 $ 5,959.6
=============== ================ =============== ===============
<FN>
(1) Includes variable and interest-sensitive and traditional life products.
(2) Includes health insurance and reinsurance assumed.
</FN>
</TABLE>
First year premiums and deposits for insurance and annuity products for the
first half of 1999 increased from prior year levels by $339.3 million primarily
due to higher sales of individual annuities by both the retail and wholesale
distribution channels partially offset by a $13.8 million decline in life sales.
Renewal premiums and deposits increased by $93.8 million during the first half
of 1999 over the prior year period as increases in the larger block of
individual annuities and variable life business were partially offset by
decreases in traditional life policies. During second quarter 1999, a new series
of variable life products began to be introduced which management believes will
result in the fourth quarter.
20
<PAGE>
Surrenders and Withdrawals - The following table presents surrenders and
withdrawals, including universal life and investment-type contract withdrawals,
for major individual insurance and annuity product lines.
<TABLE>
<CAPTION>
Surrenders and Withdrawals
(In Millions)
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------------- ---------------------------------
1999 1998 1999 1998
--------------- ---------------- --------------- ---------------
<S> <C> <C> <C> <C>
Annuities..................................... $ 901.0 $ 747.5 $ 1,830.4 $ 1,441.7
Variable and interest-sensitive life.......... 148.0 135.1 316.1 832.4
Traditional life.............................. 89.4 90.6 182.3 189.2
--------------- ---------------- --------------- ---------------
Total......................................... $ 1,138.4 $ 973.2 $ 2,328.8 $ 2,463.3
=============== ================ =============== ===============
</TABLE>
Policy and contract surrenders and withdrawals decreased $134.5 million during
the first half of 1999 compared to the same period in 1998 principally due to
the first quarter 1998 surrender of $561.8 million related to a single large
COLI contract. Since there were outstanding policy loans on the surrendered
contract, there were no cash outflows. Excluding the effect of this one
surrender, the $427.3 million increase in the first half of 1999 compared to the
first half of 1998 resulted from $434.2 million higher surrenders and
withdrawals in the larger book of individual annuities and variable and
interest-sensitive life policies as well as an increase in the individual
annuities' surrender rate from 9.5% in the first half of 1998 to 10.1% in the
first half of 1999.
21
<PAGE>
Investment Services
The following table summarizes operating results for Investment Services.
<TABLE>
<CAPTION>
Investment Services - Operating Results
(In Millions)
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------------- --------------------------------
1999 1998 1999 1998
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Operating Results:
Investment advisory and service fees............ $ 291.3 $ 237.8 $ 596.7 $ 473.3
Distribution revenues........................... 105.2 76.1 198.8 142.3
Equity in DLJ's earnings........................ 50.8 44.1 87.9 85.8
Other revenues.................................. 21.7 21.0 41.8 35.3
--------------- --------------- --------------- ---------------
Total revenues................................ 469.0 379.0 925.2 736.7
--------------- --------------- --------------- ---------------
Promotion and servicing......................... 151.0 115.1 290.3 216.2
Employee compensation and benefits.............. 102.7 82.2 221.0 170.0
All other operating expenses.................... 63.4 58.2 128.6 116.0
--------------- --------------- --------------- ---------------
Total expenses................................ 317.1 255.5 639.9 502.2
--------------- --------------- --------------- ---------------
Pre-tax earnings before minority interest....... 151.9 123.5 285.3 234.5
Minority interest............................... (46.6) (37.1) (93.9) (70.6)
--------------- --------------- --------------- ---------------
Pre-tax operating earnings...................... 105.3 86.4 191.4 163.9
Pre-tax Adjustments:
Investment gains (losses), net of DAC........... 98.2 (.4) 108.4 24.0
Minority interest............................... 46.6 37.1 93.9 70.6
--------------- --------------- --------------- ---------------
GAAP Reported:
Earnings from Continuing Operations
before Federal Income Taxes and
and Minority Interest......................... $ 250.1 $ 123.1 $ 393.7 $ 258.5
=============== =============== =============== ===============
</TABLE>
Investment Services' pre-tax operating earnings for the first half of 1999 were
$191.4 million, an increase of $27.5 million from the prior year's comparable
period. Revenues totaled $925.2 million for the first half of 1999, an increase
of $188.5 million from the comparable period in 1998, due to a $123.4 million
increase in investment advisory and service fees and $56.5 million higher
distribution revenues. The increase in investment advisory and service fees
primarily resulted from increases in average assets under management which were
due to market appreciation and to $7.6 million higher performance fees,
reflecting favorable market activity. The growth in distribution revenues was
principally due to higher mutual fund assets under management from strong sales
and from market appreciation. DLJ's earnings contribution for the first six
months of 1999 was $2.1 million higher than in the 1998 period as the second
quarter 1999 increase of $6.7 million or 15.2% more than offset the decline
noted in the previous quarter. Investment Services' costs and expenses increased
$137.7 million for the first half of 1999 primarily due to increases in mutual
fund promotional expenditures and employee compensation and benefits. Promotion
and servicing increased 34.3% primarily due to increased distribution plan
payments resulting from higher average domestic, offshore and cash management
mutual fund assets under management and higher amortization of deferred sales
commissions, as well as higher travel, entertainment and promotional expenses
incurred in connection with mutual fund sales initiatives. Higher compensation
and benefits were due to higher incentive compensation due to the increased
operating earnings and to increased base compensation and commissions reflecting
increased headcount in the mutual fund and technology areas along with salary
increases. The 1998 expenses included a $10.0 million provision for the
estimated buyout price of the minority interest in Cursitor.
22
<PAGE>
Fees and Assets Under Management
As the following table illustrates, third party clients represent the primary
source of fees from assets under management.
<TABLE>
<CAPTION>
Fees and Assets Under Management
(In Millions)
At or For the
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------------- ---------------------------------
1999 1998 1999 1998
----------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
FEES:
Third parties................................. $ 300.6 $ 240.9 $ 616.1 $ 495.2
Equitable Life Separate Accounts.............. 26.6 26.1 51.8 48.5
Equitable Life General Account and other...... 11.2 14.3 22.1 25.2
----------------- --------------- --------------- ---------------
Total Fees.................................... $ 338.4 $ 281.3 $ 690.0 $ 568.9
================= =============== =============== ===============
ASSETS UNDER MANAGEMENT:
Assets by Manager
Alliance:
Third Party................................. $ 257,935 $ 204,067
Equitable Life General Account
and Holding Company Group................. 25,355 25,433
Equitable Life Separate Accounts........... 37,716 33,016
--------------- ---------------
Total......................................... 321,006 262,516
--------------- ---------------
DLJ:
Third Party................................. 27,352 23,085
DLJ Invested Assets......................... 18,720 19,837
--------------- ---------------
Total DLJ..................................... 46,072 42,922
--------------- ---------------
Equitable Life and Affiliates:
Equitable Life (non-Alliance) General
Account................................... 13,025 14,588
Equitable Life Separate
Accounts - EQAT(1)........................ 4,294 1,988
Equitable Life real estate related
Separate Accounts......................... 4,044 4,583
Equitable Life Separate Accounts - other.... 2,386 1,770
--------------- ---------------
Total Equitable Life and Affiliates........... 23,749 22,929
--------------- ---------------
Total by Account:
Third Party................................. 285,287 227,152
General Account and other................... 57,100 59,858
Separate Accounts........................... 48,440 41,357
--------------- ---------------
Total Assets Under Management................. $ 390,827 $ 328,367
=============== ===============
<FN>
(1) EQ Advisors Trust.
</FN>
</TABLE>
Fees from assets under management increased 21.3% for the first half of 1999
from the comparable 1998 period principally as a result of growth in assets
under management for third parties principally at Alliance. The Alliance growth
in the first half of 1999 was primarily due to market appreciation and net sales
of mutual funds and other products. DLJ's third party assets under management
increased in the first half of 1999 by $4.27 billion as compared to December 31,
1998 principally due to new business in its Asset Management Group.
23
<PAGE>
GENERAL ACCOUNT INVESTMENT PORTFOLIO
This discussion of the General Account portfolio analyzes the results of major
investment asset categories, including the Closed Block's investments. The
following table reconciles the consolidated balance sheet asset amounts to
General Account Investment Assets.
<TABLE>
<CAPTION>
General Account Investment Asset Carrying Values
June 30, 1999
(In Millions)
General
Account
Balance Closed Investment
Balance Sheet Captions: Sheet Block Other Assets(1)
- ---------------------------------------------- --------------- ------------- --------------- -------------
<S> <C> <C> <C> <C>
Fixed maturities:
Available for sale........................ $ 19,204.4 $ 4,129.7 $ (252.5) $ 23,586.6
Held to maturity.......................... 128.9 - - 128.9
Mortgage loans on real estate............... 3,269.7 1,773.3 25.0 5,018.0
Equity real estate.......................... 1,522.4 111.4 (24.9) 1,658.7
Policy loans................................ 2,160.3 1,615.1 - 3,775.4
Other equity investments.................... 758.0 42.9 (95.2) 896.1
Other invested assets....................... 1,810.6 (60.8) 1455.7 294.1
----------------- ------------- --------------- -------------
Total investments......................... 28,854.3 7,611.6 1,108.1 35,357.8
Cash and cash equivalents................... 907.9 37.7 538.1 407.5
Equitable Life debt and other(2)............ - - 600.1 (600.1)
----------------- ------------- --------------- -------------
Total....................................... $ 29,762.2 $ 7,649.3 $ 2,246.3 $ 35,165.2
================= ============= =============== =============
<FN>
(1) General Account Investment Assets are computed by adding the Balance Sheet
and Closed Block and deducting the Other amounts.
(2) Includes Equitable Life debt and other miscellaneous assets and
liabilities related to General Account Investment Assets and reclassified
from various balance sheet lines.
</FN>
</TABLE>
The General Account Investment Assets presentation set forth in the following
pages includes the investments of the Closed Block on a line-by-line basis.
Management believes it is appropriate to discuss the information on a combined
basis in view of the similar asset quality characteristics of major asset
categories in the portfolios.
24
<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,
-------------------------------------------------- --------------------------------------------------
1999 1998 1999 1998
------------------------ ------------------------ ------------------------ ------------------------
(1) (1) (1) (1)
Yield Amount Yield Amount Yield Amount Yield Amount
---------- ------------- ---------- ------------- --------- -------------- ------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed Maturities:
Income.............. 7.78% $ 447.9 8.17% $ 467.2 7.87% $ 896.9 8.06% $ 927.4
Investment
Gains/(Losses).... (0.49)% (27.2) 0.39% 21.6 (1.33)% (149.3) 0.33% 36.7
---------- ------------- ---------- ------------- --------- -------------- ---------- -------------
Total............... 7.29% $ 420.7 8.56% $ 488.8 6.54% $ 747.6 8.39% $ 964.1
Ending Assets(2).... $ 23,937.9 $ 23,934.5 $ 23,937.9 $ 23,934.5
Mortgages:
Income.............. 8.98% $ 104.7 9.03% $ 85.8 8.89% $ 202.2 9.63% $ 183.4
Investment
Gains/(Losses).... (0.39)% (4.4) 0.27% 2.5 (0.11)% (2.6) (0.24)% (4.4)
---------- ------------- ---------- ------------- --------- --------------- --------- --------------
Total............... 8.59% $ 100.3 9.30% $ 88.3 8.78% $ 199.6 9.39% $ 179.0
Ending Assets(3).... $ 5,018.2 $ 3,974.2 $ 5,018.2 $ 3,974.2
Equity Real
Estate:
Income(4)........... 7.65% $ 25.3 7.46% $ 35.5 7.22% $ 48.2 6.49% $ 62.0
Investment
Gains/(Losses).... 2.82% 9.0 0.85% 3.9 2.69% 17.5 0.68% 6.4
--------- -------------- ----------- ------------- -------- --------------- ---------- --------------
Total............... 10.47% $ 34.3 8.31% $ 39.4 9.91% $ 65.7 7.17% $ 68.4
Ending Assets(4).... $ 1,384.3 $ 1,978.5 $ 1,384.3 $ 1,978.5
Other Equity
Investments:
Income.............. 34.38% $ 66.4 13.58% $ 46.3 36.45% $ 130.2 18.25% $ 114.8
Investment
Gains/(Losses).... 0.52% 0.9 2.45% 7.9 23.96% 76.2 5.62% 33.5
--------- -------------- ----------- ------------- --------- --------------- ---------- -------------
Total............... 34.90% $ 67.3 16.03% $ 54.2 60.41% $ 206.4 23.87% $ 148.3
Ending Assets(5).... $ 896.1 $ 1,504.7 $ 896.1 $ 1,504.7
Policy Loans:
Income.............. 6.78% $ 61.6 6.52% $ 57.6 6.69% $ 121.5 6.77% $ 127.5
Ending Assets(6).... $ 3,775.4 $ 3,660.5 $ 3,775.4 $ 3,660.5
Cash and Short-term
Investments:
Income.............. 8.29% $ 16.0 15.41% $ 11.6 6.38% $ 36.0 25.15% $ 27.1
Ending Assets(6).... $ 701.6 $ 156.5 $ 701.6 $ 156.5
Equitable Life
Debt and Other:
Interest expense
and other......... 10.74% $ (16.2) 7.99% $ (14.2) 9.58% $ (27.4) 6.58% $ (24.5)
Ending Liabilities $ (600.1) $ (890.6) $ (600.1) $ (890.6)
Total:
Income(7)........... 8.40% $ 705.7 8.34% $ 689.7 8.38% $ 1,407.6 8.53% $ 1,417.7
Investment
Gains/(Losses).... (0.27)% (21.7) 0.45% 35.9 (0.35)% (58.2) 0.44% 72.2
---------- ------------- ----------- ------------- --------- ------------- ----------- --------------
Total(8)............ 8.13% $ 684.0 8.79% $ 725.6 8.03% $ 1,349.4 8.97% $ 1,489.9
Ending Net Assets... $ 35,113.4 $ 34,318.3 $ 35,113.4 $ 34,318.3
25
<PAGE>
<FN>
(1) Yields have been calculated on a compound annual effective rate basis
using the quarterly average asset carrying values excluding unrealized
gains (losses) in fixed maturities and adjusted for the current periods'
income, gains and fees. Annualized yields are not necessarily indicative
of a full year's results.
(2) Fixed maturities investment assets are shown net of securities purchased
but not yet paid for of $235.0 million and $756.2 million, and include
accrued income of $379.1 million and $389.4 million, amounts due from
securities sales of $59.7 million and $59.7 million and other assets of
$25.6 million and $34.5 million as of June 30, 1999 and 1998,
respectively.
(3) Mortgage investment assets include accrued income of $63.6 million and
$57.5 million and are adjusted for related liability balances of $(24.4)
million and $(25.9) million as of June 30, 1999 and 1998, respectively.
(4) Equity real estate investment assets are shown net of third party debt and
minority interest in real estate of $274.4 million and $542.6 million, and
include accrued income of $25.4 million and $33.4 million and are adjusted
for related liability balances of $(0.8) million and $(32.9) million as of
June 30, 1999 and 1998, 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 $5.1 million, $9.5 million, $11.1 million and $20.5 million for
the second quarter and first half of 1999 and of 1998, respectively.
(5) Other equity investment assets include adjustment for accrued income and
pending settlements of $(0.1) million and $(12.0) million as of June 30,
1999 and 1998, respectively.
(6) Cash and short-term investments are shown net of financing arrangements of
$388.5 million and $424.8 million and other adjustments for accrued income
and cash in transit of $1.3 million and $1.3 million as of June 30, 1999
and 1998, respectively.
(7) Total investment income includes non-cash income from amortization,
payments-in-kind distributions and undistributed equity earnings of $8.8
million, $33.3 million, $16.8 million and $31.9 million for the second
quarters and first half of 1999 and of 1998, respectively. Investment
income is shown net of depreciation of $5.1 million, $10.6 million, $7.8
million and $19.4 million for the same respective periods.
(8) Total yields are shown before deducting investment fees paid to its
investment advisors. These fees include asset management, acquisition,
disposition, accounting and legal fees. If investment fees had been
deducted, total yields would have been 7.87%, 8.56%, 7.78% and 8.69% for
the second quarter and the first half of 1999 and of 1998, respectively.
</FN>
</TABLE>
Asset Valuation Allowances and Writedowns
Writedowns on fixed maturities were $104.4 million and $23.9 million for the
first half of 1999 and 1998, respectively. 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 1999 and 1998.
<TABLE>
<CAPTION>
General Account Investment Assets
Valuation Allowances
(In Millions)
Equity Real
Mortgages Estate Total
--------------- --------------- --------------
<S> <C> <C> <C>
June 30, 1999
Beginning balances............................................ $ 45.4 $ 211.8 $ 257.2
Additions..................................................... 3.7 21.6 25.3
Deductions(1)................................................. (9.3) (71.1) (80.4)
--------------- --------------- --------------
Ending Balances............................................... $ 39.8 $ 162.3 $ 202.1
=============== =============== ==============
June 30, 1998
Beginning balances............................................ $ 74.3 $ 345.5 $ 419.8
Additions..................................................... 11.7 46.6 58.3
Deductions(1)................................................. (46.9) (44.9) (91.8)
--------------- --------------- --------------
Ending Balances............................................... $ 39.1 $ 347.2 $ 386.3
=============== =============== ==============
<FN>
(1) Primarily reflected releases of allowances due to asset dispositions and writedowns.
</FN>
</TABLE>
26
<PAGE>
General Account Investment Assets
The following table shows the major categories of General Account Investment
Assets by amortized cost, valuation allowances and net amortized cost at June
30, 1999 and by net amortized cost at December 31, 1998.
<TABLE>
<CAPTION>
General Account Investment Assets
(In Millions)
June 30, 1999 December 31, 1998
------------------------------------------------ ----------------------
Net Net
Amortized Valuation Amortized Amortized
Cost Allowances Cost Cost
--------------- ------------- --------------- ----------------------
<S> <C> <C> <C> <C>
Fixed maturities(1)...................... $ 23,708.5 $ - $ 23,708.5 $ 22,805.8
Mortgages................................ 5,018.8 (39.8) 4,979.0 4,443.3
Equity real estate....................... 1,796.4 (162.3) 1,634.1 1,774.1
Other equity investments................. 896.1 - 896.1 859.1
Policy loans............................. 3,775.4 - 3,775.4 3,727.9
Cash and short-term investments.......... 1,088.8 - 1,088.8 1,619.7
Corporate debt and other................. (600.1) - (600.1) (598.1)
--------------- ------------- --------------- ----------------------
Total.................................... $ 35,683.9 $ (202.1) $ 35,481.8 $ 34,631.8
=============== ============== =============== ======================
<FN>
(1) Excludes unrealized losses of $222.6 million and unrealized gains of
$814.3 million in fixed maturities classified as available for sale at
June 30, 1999 and December 31, 1998, respectively. At June 30, 1999 and
December 31, 1998, the amortized cost of the available for sale and held
to maturity portfolios was $23.59 billion, $128.9 million, $22.68 billion
and $125.0 million, respectively, compared to estimated market values of
$23.36 billion, $128.9 million, $23.49 billion and $125.0 million,
respectively.
</FN>
</TABLE>
Fixed Maturities. Fixed maturities consist of publicly-traded debt and privately
placed debt securities and small amounts of redeemable preferred stock, which
represented 75.2%, 23.6% and 1.2%, respectively, of the amortized cost of this
asset category at June 30, 1999. The $149.3 million of investment losses in the
first half of 1999 were due to $104.4 million of writedowns primarily on high
yield and emerging market securities and $44.9 million of losses on sales.
<TABLE>
<CAPTION>
Fixed Maturities By Credit Quality
(In Millions)
June 30, 1999 December 31, 1998
-------------------------------------- -------------------------------------
Rating Agency
NAIC Equivalent Amortized Estimated Amortized Estimated
Rating Designation Cost Fair Value Cost Fair Value
- -------------- ---------------------- ------------------- ----------------- ------------------ ----------------
<S> <C> <C> <C> <C> <C>
1-2 Aaa/Aa/A and Baa...... $ 20,656.0 $ 20,687.0 $ 19,588.1 $ 20,712.6
3-6 BBa and lower......... 3,052.5 2,798.9 3,217.7 2,907.5
------------------- ----------------- ------------------ ----------------
Total Fixed Maturities............... $ 23,708.5 $ 23,485.9 $ 22,805.8 $ 23,620.1
=================== ================= ================== ================
</TABLE>
At June 30, 1999, the Company held mortgage pass-through securities with an
amortized cost of $2.59 billion, $2.31 billion of CMOs, including $2.17 billion
in publicly-traded CMOs, and $1.61 billion of public and private asset backed
securities, primarily backed by home equity, mortgage, airline and other
equipment, and credit card receivables.
The amortized cost of problem and potential problem fixed maturities was $101.1
million (0.4% of the amortized cost of this category) and $49.3 million (0.2%)
at June 30, 1999, respectively, compared to $94.9 million (0.4%) and $74.9
million (0.3%) at December 31, 1998, respectively.
27
<PAGE>
Mortgages. Mortgages consist of commercial, agricultural and residential loans.
At June 30, 1999, commercial mortgages totaled $3.06 billion (61.1% of the
amortized cost of the category), agricultural loans were $1.95 billion (38.9%)
and residential loans were $0.9 million.
<TABLE>
<CAPTION>
Problem, Potential Problem and Restructured Mortgages
Amortized Cost
(In Millions)
June 30, December 31,
1999 1998
--------------- -----------------
<S> <C> <C>
COMMERCIAL MORTGAGES.......................................................... $ 3,063.9 $ 2,660.7
Problem commercial mortgages(1)............................................... 0.0 0.4
Potential problem commercial mortgages........................................ 92.3 170.7
Restructured commercial mortgages(2).......................................... 154.6 116.4
AGRICULTURAL MORTGAGES........................................................ $ 1,954.0 $ 1,826.9
Problem agricultural mortgages................................................ 20.1 11.7
<FN>
(1) Includes delinquent mortgage loans of $0.4 million at December 31, 1998.
(2) Excludes $19.6 million and $24.5 million of restructured commercial
mortgages that are shown as potential problems at June 30, 1999 and
December 31, 1998, respectively.
</FN>
</TABLE>
The original weighted average coupon rate on the $154.6 million of restructured
mortgages was 9.0%. As a result of these restructurings, the restructured
weighted average coupon rate was 8.2% and the restructured weighted average cash
payment rate was 8.2%.
At June 30, 1999 and 1998, respectively, management identified impaired mortgage
loans with carrying values of $122.7 million and $228.8 million. The provisions
for losses for these impaired mortgage loans were $33.4 million and $33.8
million at June 30, 1999 and 1998, respectively. For the first half of 1999 and
of 1998, respectively, income accrued on these loans was $5.9 million and $9.5
million, including cash received of $5.9 million and $7.7 million.
For the first six months of 1999, scheduled principal amortization payments and
prepayments on commercial mortgage loans received aggregated $55.4 million. In
addition, $52.3 million of commercial mortgage loan maturity payments were
scheduled, of which $4.0 million were paid as due. Of the amount not paid, $48.3
million were granted short-term extensions; none was in default.
Equity Real Estate. As of June 30, 1999, on the basis of amortized cost, the
equity real estate category included $1.17 billion (65.3%) acquired as
investment real estate and $622.1 million (34.7%) acquired through or in lieu of
foreclosure (including in-substance foreclosures).
During the first half of 1999 and 1998, respectively, proceeds from the sale of
equity real estate totaled $180.8 million and $114.9 million, with gains of
$32.3 million and $30.4 million. The carrying value of the equity real estate at
the date of sale reflected total writedowns and additions to valuation
allowances on the properties taken in periods prior to their sale of $64.3
million and $30.4 million, respectively.
At June 30, 1999, the vacancy rate for the Company's office properties was 7.3%
in total, with a vacancy rate of 6.3% for properties acquired as investment real
estate and 13.3% for properties acquired through foreclosure. The national
commercial office vacancy rate was 9.7% (as of March 31, 1999) as measured by CB
Commercial.
28
<PAGE>
Other Equity Investments. Other equity investments consist of private equity,
LBO, mezzanine, venture capital and other limited partnership interests ($456.1
million or 50.9% of the amortized cost of this portfolio at June 30, 1999),
alternative limited partnerships ($195.5 million or 21.8%) and common stock and
other equity securities, including the excess of Separate Account assets over
Separate Account liabilities, ($244.5 million or 27.3%). Alternative funds
utilize trading strategies that may be leveraged; they attempt to protect
against market risk through a variety of methods, including short sales,
financial futures, options and other derivative instruments. Effective January
1, 1999, the Company designated all direct investments in publicly-traded common
equity securities in the General Account portfolio as "trading securities" as
defined by SFAS No. 115. Investment gains of $83.5 million were recognized at
that date on the portfolio. Changes in the investments' fair value for the first
half of 1999 totaled $98.4 million and are included in investment income. Other
equity investments can produce significant volatility in investment income since
these investments are accounted for using the estimated fair value of the
underlying assets (or allocable portion thereof, in the case of partnerships),
and increases and decreases in fair value, whether realized or unrealized, on
substantially all of the portfolio are reflected as investment income or loss to
the Company. Returns on all equity investments are very volatile and investment
results for any period are not representative of any other period.
YEAR 2000
Equitable Life, DLJ and Alliance continue their Year 2000 compliance efforts;
related costs are being funded by operating cash flows with costs being expensed
as incurred.
Equitable Life - Equitable Life began addressing the Year 2000 issue in 1995. In
addition to significant internal resources, third parties have been assisting in
renovating and testing computer hardware and software ("computer systems") and
embedded systems and in overall project control. The following process has been
undertaken:
(1) Equitable Life established a Year 2000 project office, which developed a
strategic approach and created broad awareness of the Year 2000 issues at
Equitable Life through meetings with the Audit Committee of the Board of
Directors and executive and senior management, presentations to business
areas and employee newsletters.
(2) Corporate-developed computer systems were inventoried and assessed for
Year 2000 compliance. Third party providers of computer systems and
services, including embedded systems, were contacted. Of the 99% who have
responded, approximately 80% indicated their systems or services are Year
2000 compliant, approximately 5% have indicated that they will be
compliant, and 14% have been or are in the process of being replaced with
compliant systems or eliminated. Management believes it is on schedule for
the remaining one percent to be confirmed by the end of third quarter 1999
as either Year 2000 compliant or the subject of a satisfactory plan for
compliance.
(3) The renovation or replacement of all corporate-developed computer systems
was completed by June 30, 1999. After renovation or replacement,
management subjects these systems to Year 2000 compliance testing as
described in the following paragraph, and continues to monitor Year 2000
compliance by third party providers of computer systems, including
embedded systems, and services. Substantially all such systems and
services, including those considered mission-critical, have been confirmed
as either Year 2000 compliant or the subject of a satisfactory plan for
compliance. With respect to real estate investment properties owned by
Equitable Life and managed by third parties, the renovation or replacement
and testing of building operation systems (e.g., elevators, escalators,
fire, security and heating, ventilation and air conditioning) is in
process and management expects that such systems will be confirmed as Year
2000 compliant by September 30, 1999. Additionally, Equitable Life is in
the process of implementing an upgrade of its personal computer
workstations and local area network servers with the latest release of
compliant versions of third party hardware and software and expects to
complete the nationwide upgrade by September 1, 1999.
29
<PAGE>
(4) Year 2000 compliance testing is an ongoing three-part process: after a
system has been renovated, it is tested to determine if it still performs
its intended business function correctly; next, it undergoes a simulation
test using dates occurring after December 31, 1999; last, integrated
systems tests are conducted to verify that the systems continue to work
together with the computers' internal clocks set to post December 31, 1999
dates. The first two phases of the process have been completed and all
systems have been confirmed through such testing as Year 2000 compliant.
Integrated systems testing will continue throughout 1999 as needed. All
significant automated data interfaces with third parties are in the
process of being tested for Year 2000 compliance, including those with
Lend Lease, Alliance, The Chase Manhattan Bank, Sunguard, Pershing and
Computer Science Corporation, who provide, among other services, material
investment management, accounting, banking, annuity processing and
securities clearance services for Equitable Life's General and certain of
its Separate Accounts. Equitable Life has retained third parties to assist
with selective verification of the Year 2000 renovation of certain
systems.
(5) Existing business continuity and disaster recovery plans cover certain
categories of contingencies that could arise as a result of Year 2000
related failures. These plans have been supplemented to address
contingencies unique to the millennium change. Equitable Life retained a
consulting firm to assist with planning for Year 2000 contingencies.
Equitable Life's Year 2000 compliance project is currently estimated to cost $35
million through the end of 1999, of which approximately $29.9 million was
incurred through June 30, 1999. Equitable Life's new computer application
development and procurement have not been subject to any delay caused in whole
or part by Year 2000 efforts that is expected to have a material adverse effect
on the Company's financial condition or results of operations.
Investment Subsidiaries - DLJ and Alliance's Year 2000 related activities and
progress to date are summarized below. For further information, see their
respective filings on Form 10-K for the year ended December 31, 1998.
DLJ - DLJ's plans for preparing for Year 2000 are in writing and address all
mission critical computer systems globally. Such systems have been remediated,
tested and implemented. DLJ has also remediated, implemented and tested all
non-mission critical systems. Throughout the Year 2000 process, none of DLJ's
major technology projects have been significantly impacted.
DLJ currently estimates its Year 2000 costs at approximately $90 million, with
$88 million incurred through June 30, 1999. DLJ has assessed Year 2000
contingency requirements and has developed a formal contingency plan. The
contingency plan addresses procedures to be implemented in the event of problems
concerning mission-critical systems, electronic interfaces and third parties.
This plan includes written Year 2000 specific contingency plans that will
address DLJ-wide shared services (i.e., communications systems and physical
facilities), as well as its mission critical business units.
Alliance - During 1997, Alliance began a formal Year 2000 initiative, managed by
a Year 2000 project office and focusing on both IT and non-IT systems. Alliance
has retained a number of consulting firms with expertise in advising and
assisting clients with regard to Year 2000 issues. By June 30, 1998, Alliance
had completed an inventory and assessment of its domestic and international
computer systems, identified its mission-critical and non-mission-critical
systems, and determined which of these systems were not Year 2000 compliant. All
third party suppliers of mission-critical systems and services and
30
<PAGE>
non-mission-critical systems have been contacted; substantially all of those
contacted have responded. Approximately 90% of the responses indicate their
systems are or will be Year 2000 compliant. All mission critical and non-mission
critical systems supplied by third parties have been tested except for those
third parties who were not able to comply with Alliance's testing schedule.
Alliance expects all testing with the third parties will be completed before the
end of 1999 Alliance has remediated, replaced or retired all of its
non-compliant mission-critical systems and applications with the exception of
one portfolio management system which will be replaced by a Year 2000 compliant
system by August 31, 1999. All non-mission-critical systems have been
remediated. Alliance has completed the business functionality and the
post-December 31, 1999 testing for approximately 98% of its mission-critical
systems and 100% of its non-mission-critical systems. Integrated systems tests
were then conducted to verify that the systems would continue to work together.
Full integration testing of all remediated systems have been completed. Testing
of interfaces with third party suppliers has begun and will continue throughout
1999. Alliance has completed an inventory of its technical infrastructure and
corporate facilities and has begun to evaluate and test these systems. Alliance
expects them to be fully operable in the Year 2000. Certain other planned IT
projects have been deferred until after the Year 2000 initiative is completed.
Such delay is not expected to have a material adverse effect on Alliance's
financial condition or results of operations. Assisted by a consulting firm,
Alliance has developed its Year 2000 specific contingency plans with emphasis on
mission-critical functions. These plans seek to provide alternative methods of
processing in the event of a failure that is outside of Alliance's control.
Alliance estimates its cost of the Year 2000 initiative will range between $40
million and $45 million. Such costs consist principally of remediation costs and
costs to develop formal Year 2000 specific contingency plans. Through June 30,
1999, Alliance has incurred approximately $36 million of those costs.
Risks - There are many risks associated with Year 2000 issues, including the
risk that the Company's computer systems will not operate as intended. There can
be no assurance that the systems, services and products of third parties will be
Year 2000 compliant. Likewise, there can be no assurance the compliance
schedules outlined above will be met.
Any significant unresolved difficulties related to the Year 2000 compliance
initiatives could result in an interruption in, or a failure of, normal business
activities or operations, or the incurrence of unanticipated expenses related to
resolving such difficulties, regulatory actions, damage to the Company's
franchise, and legal liabilities and, accordingly, could have a material adverse
effect on the Company's business operations and financial results. Due to the
pervasive nature, the external as well as internal interdependencies and the
inherent risks and uncertainties of Year 2000 issues, the Company cannot
determine which risks are most reasonably likely to occur, if any, nor the
effects of any particular failure to be Year 2000 compliant.
The forward-looking statements under "Year 2000" should be read in conjunction
with the disclosure set forth under "Forward-Looking Statements" on page 33. To
the fullest extent permitted by law, the foregoing Year 2000 discussion is a
"Year 2000 Readiness Disclosure" within the meaning of The Year 2000 Information
and Readiness Disclosure Act.
31
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
On August 10, 1999, General American Life Insurance Company ("General American")
announced that it is unable to meet substantial demands for surrenders arising
from its funding agreement business. General American has indicated that it has
adequate assets to meet its obligations, but is unable to raise sufficient cash
to meet these demands on short notice. Four money market mutual funds sponsored
by Alliance (the "Funds") own an aggregate of $570.0 million in funding
agreements issued by General American. These funding agreements mature on July
10, 2000, but are subject to earlier redemption on seven days written notice at
the option of the holders. As of Friday, August 13, 1999, General American had
not honored the Funds' redemption requests on those funding agreements.
These funding agreements comprise no more than approximately 3.8% of the assets
of any of the four Funds. Equitable Life has obtained letters of credit under
which the Funds may first draw on July 10, 2000, the maturity date of the
funding agreements, to pay principal in an amount up to the face amount of the
funding agreements, if General American continues not to honor the redemption
requests. Equitable Life will be responsible for the amount of each draw under a
letter of credit, and Alliance will be obligated to reimburse Equitable Life, in
cash or the equivalent value in Alliance Units, for the amount of each such draw
and to pay certain fees and expenses to Equitable Life. These letters of credit
are intended to prevent the net asset value in any Fund from dropping below
$1.00 per share in the event General American continues not to honor the
redemption requests. While the ultimate outcome of this matter cannot be
determined at this time, the Company does not expect this matter to have a
material adverse effect on its consolidated financial position.
In late May 1999, DLJ issued a new class of common stock to track the financial
performance of DLJdirect, its online brokerage business, selling shares
representing an approximately 18% interest in DLJdirect's financial performance
to the public. The offering raised more than $343 million of equity and resulted
in Equitable Life recognizing a non-cash pre-tax gain of $95.8 million.
In March 1999, DLJ filed a registration statement with the SEC, establishing a
$2.0 billion shelf of senior or subordinated debt securities or preferred stock.
In first quarter 1999, DLJ issued $650 million 5 7/8% Senior Notes due 2002 and,
in second quarter 1999, issued $290 million medium term notes that mature
through 2004 from this shelf.
On September 22, 1999, Alliance will hold a special meeting of Unitholders for
the purposes of voting on a proposed reorganization of its business that will
give Alliance Unitholders the choice between (1) continuing to hold liquid
Alliance Units listed on the New York Stock Exchange that are subject to a
Federal tax on Alliance's gross business income and (2) holding a highly
illiquid interest in a new private limited partnership that is not subject to
the tax. The proposed reorganization requires the approval of a majority of
Alliance's unaffiliated public Unitholders and certain other contractual and
regulatory approvals. Alliance expects that the reorganization and public
exchange offer will be completed in the fourth quarter of 1999. Equitable Life
and its subsidiaries intend to exchange substantially all of their Alliance
Units for limited partnership interests and a general partnership interest in
the new private limited partnership immediately following, and subject to the
same terms and conditions as, the public exchange offer.
In July 1999, the Board of Directors authorized an increase in Equitable Life's
commercial paper program to a maximum of $1.00 billion up from $500.0 million.
This program is available for general corporate purposes. The Board also
authorized increasing Equitable Life's existing $350.0 million bank credit
facility to $700.0 million. Equitable Life uses this program from time to time
in its liquidity management. At June 30, 1999, no amounts were outstanding under
the commercial paper program or the revolving credit facility.
Also in July 1999, Alliance entered into a new $200 million three year revolving
credit facility, increasing its borrowing capacity to $625 million. The new
credit facility will be sued to fund commission payments to financial
intermediaries for certain mutual fund sales and for general working capital
purposes.
In March 1998, the NAIC approved its Codification project. Equitable Life will
be subject to Codification to the extent and in the form adopted in New York
State, which would require action by both the New York legislature and the New
York Insurance Department. It is not possible to predict whether, in what form,
or when Codification will be adopted in New York, and accordingly it is not
possible to predict the effect of Codification on Equitable Life.
32
<PAGE>
Consolidated Cash Flows
The net cash provided by operating activities was $158.5 million for the first
half of 1999 compared to $366.6 million for the first half of 1998.
Net cash used by investing activities was $1.37 billion for the first half of
1999 as compared to $3.8 million for the same period in 1998. Cash used by
investing activities during the first six months of 1999 primarily was
attributable to the increase in invested assets as purchases exceeded sales,
maturities and repayments by approximately $1.37 billion. In 1998, investment
purchases exceeded sales, maturities and repayments by $126.0 million. Loans to
discontinued operations were reduced by $300.0 million during the first half of
1998.
Net cash provided by financing activities totaled $872.9 million for the first
half of 1999 as compared to net cash used by financing operations of $3.3
million in the first half of 1998. Net cash provided by financing activities
during the first half of 1999 primarily resulted from a $559.5 million increase
in short-term financings. Deposits to policyholders' account balances exceeded
withdrawals by $384.8 million during the first half of 1999. During the first
half of 1998, withdrawals from General Account policyholders' accounts exceeding
additions by $319.1 million and continuing operations made an $87.2 million
payment to settle its obligation to discontinued operations. Short-term
financing, principally at Equitable Life, increased of $443.9 million during the
1998 period.
The operating, investing and financing activities described above resulted in a
decrease in cash and cash equivalents during the first six months of 1999 of
$337.6 million to $907.9 million.
FORWARD-LOOKING STATEMENTS
The Company's management has made in this report, and from time to time may make
in its public filings and press releases as well as in oral presentations and
discussions, forward-looking statements concerning the Company's operations,
economic performance and financial condition. Forward-looking statements
include, among other things, discussions concerning the Company's potential
exposure to market risks, as well as statements expressing management's
expectations, beliefs, estimates, forecasts, projections and assumptions, as
indicated by words such as "believes," "estimates," "intends," "anticipates,"
"expects," "projects," "should," "probably," "risk," "target," "goals,"
"objectives," or similar expressions. The Company claims the protection afforded
by the safe harbor for forward-looking statements contained in the Private
Securities Litigation Reform Act of 1995, and assumes no duty to update any
forward-looking statement. Forward-looking statements are based on management's
expectations and beliefs concerning future developments and their potential
effects and are subject to risks and uncertainties. Actual results could differ
materially from those anticipated by forward-looking statements due to a number
of important factors including those discussed elsewhere in this report and in
the Company's other public filings, press releases, oral presentations and
discussions. The following discussion highlights some of the more important
factors that could cause such differences.
Market Risk. The businesses of the Company and its Investment subsidiaries are
subject to market risks arising from its insurance asset/liability management,
asset management and trading activities. Primary market risk exposures exist in
the insurance and investment banking segments and result from interest rate
fluctuations, equity price movements, changes in credit quality and, at DLJ,
foreign currency exchange exposure. Returns on equity securities are very
volatile. Effective January 1, 1999, management designated all direct
investments in publicly-traded common equity securities in Equitable Life's
General Account and the Holding Company Group portfolios as "trading securities"
and all subsequent changes in fair value of such investments are being reported
through earnings. The nature of each of these risks is discussed under the
captions "Investment Results of General Account Investment Assets - Other Equity
Investments" and "Market Risk, Risk Management and Derivative Financial
Instruments" as well as in Note 16 of Notes to Consolidated Financial Statements
in the Company's 1998 report on Form 10-K.
33
<PAGE>
Year 2000. Equitable Life, DLJ and Alliance continue to address Year 2000
compliance issues. There can be no assurance that compliance schedules will be
met; that the Company's computer systems will operate as intended; that the
systems, services and products of third parties will be Year 2000 compliant or
that cost estimates will be met. Any significant unresolved difficulties related
to the Year 2000 compliance initiatives could result in an interruption in, or a
failure of, normal business activities or operations, or the incurrence of
unanticipated expenses related to resolving such difficulties, regulatory
actions, damage to the Company's franchise, and legal liabilities and,
accordingly, could have a material adverse effect on the Company's business
operations and financial results. See "Year 2000" for a detailed discussion of
the Company's compliance initiatives.
Strategic Initiatives. The Company continues to implement certain strategic
initiatives identified after a comprehensive review of its organization and
strategy conducted in late 1997. These initiatives are designed to make the
Company a premier provider of financial planning, insurance and asset management
products and services. The "branding" initiative, which consists in part of a
reorganization of certain wholly owned subsidiaries and changes to the names of
such subsidiaries and the Holding Company, is designed to separate product
manufacturing under the "Equitable" name from product distribution under the
"AXA Advisors" name. Implementation of these strategic initiatives is subject to
various uncertainties, including those relating to timing and expense, and the
results of the implementation of these initiatives could be other than what
management intends. The Company may, from time to time, explore selective
acquisition opportunities in its core insurance and asset management businesses.
Insurance. The Insurance Group's future sales of life insurance and annuity
products are dependent on numerous factors including successful implementation
of the strategic initiatives referred to above, the intensity of competition
from other insurance companies, banks and other financial institutions, the
strength and professionalism of distribution channels, the continued development
of additional channels, the financial and claims paying ratings of Equitable
Life, its reputation and visibility in the market place, its ability to develop,
distribute and administer competitive products and services in a timely,
cost-effective manner and its investment management performance. In addition,
the markets for products sold by the Insurance Group may be materially affected
by changes in laws and regulations, including changes relating to savings,
retirement funding and taxation. The Administration's year 2000 budget proposals
contain provisions which, if enacted, could have a material adverse impact on
sales of certain insurance products and would adversely affect the taxation of
insurance companies. See "Business - Segment Information - Insurance" and
"Business - Regulation - Federal Initiatives" in the Company's 1998 report on
Form 10-K. In addition, legislation under discussion in Congress contains
provisions which could negatively impact sales of life insurance and annuities,
and other provisions which could beneficially impact sales of qualified plans.
The profitability of Insurance depends on a number of factors, including levels
of operating expenses, secular trends and the Company's mortality, morbidity,
persistency and claims experience, and profit margins between investment results
from General Account Investment Assets and interest credited on individual
insurance and annuity products. The performance of General Account Investment
Assets depends, among other things, on levels of interest rates and the markets
for equity securities and real estate, the need for asset valuation allowances
and writedowns, and the performance of equity investments which have, and in the
future may, create significant volatility in investment income. See "Investment
Results of General Account Investment Assets" in this report and in the 1998
Form 10-K. The ability of the Company to continue its accelerated real estate
sales program during 1999 without incurring net losses will depend on real
estate markets for the remaining properties held for sale and the negotiation of
transactions which confirm management's expectations regarding property values.
For further information, including information concerning the writedown in the
fourth quarter of 1997 in connection with management's decision to accelerate
the sale of certain real estate assets, see "Investment Results of General
Account Investment Assets Equity Real Estate" in the 1998 Form 10-K. The
Company's disability income ("DI") and group pension businesses produced pre-tax
losses in 1995 and 1996. In late 1996, loss recognition studies for the DI and
group pension businesses were completed. As a result, $145.0 million of
unamortized DAC on DI policies at December 31, 1996 was written off; reserves
for directly written DI policies and DI reinsurance assumed were strengthened by
$175.0 million; and a Pension Par premium deficiency reserve was established
which resulted in a $73.0 million pre-tax charge to results of continuing
operations at December 31, 1996. Based on the experience that emerged on these
two books of business during 1998 and 1997, management continues to believe the
assumptions and estimates used to develop the 1996 DI and Pension Par reserve
strengthenings are reasonable. However, there can be no assurance that they will
be sufficient to provide for all future liabilities. Equitable Life no longer
underwrites new DI policies. Equitable Life is exploring its ability to dispose
of the DI business through reinsurance. See "Combined Operating Results by
Segment - Insurance" in the 1998 Form 10-K.
34
<PAGE>
Investment Services. Alliance's revenues are largely dependent on the total
value and composition of assets under its management and are therefore affected
by market appreciation or depreciation, additions and withdrawals of assets,
purchases and redemptions of mutual funds and shifts of assets between accounts
or products with different fee structures. See "Combined Operating Results by
Segment - Investment Services" and "- Fees and Assets Under Management" in this
report and in the 1998 Form 10-K. DLJ's business activities include securities
underwriting, sales and trading, merchant banking, financial advisory services,
investment research, venture capital, correspondent brokerage services, online
interactive brokerage services and asset management. These activities are
subject to various risks, including volatile trading markets and fluctuations in
the volume of market activity. Consequently, DLJ's net income and revenues have
been, and may continue to be, subject to wide fluctuations, reflecting the
impact of many factors beyond DLJ's control, including securities market
conditions, the level and volatility of interest rates, competitive conditions
and the size and timing of transactions. Over the last several years DLJ's
results have been at historically high levels. See "Combined Operating Results
by Segment - Investment Services" in this report and in the 1998 Form 10-K for a
discussion of the negative impact on equity in DLJ's earnings from emerging
markets. Potential losses could result from DLJ's merchant banking activities as
a result of their capital intensive nature.
Discontinued Operations. The determination of the allowance for future losses
for the discontinued Wind-Up Annuities and GIC lines of business continues to
involve numerous estimates and subjective judgments including those regarding
expected performance of investment assets, ultimate mortality experience and
other factors which affect investment and benefit projections. There can be no
assurance that 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
underlying the allowance, the difference would be reflected as earnings or loss
from discontinued operations within 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 allowance are likely to result. See "Discontinued Operations" in the 1998
Form 10-K for further information including discussion of significant reserve
strengthening in 1997 and 1996 and the assumptions used in making cash flow
projections.
Technology and Information Systems. The Company's information systems are
central to, among other things, designing and pricing products, marketing and
selling products and services, processing policyholder and investor
transactions, client recordkeeping, communicating with agents, employees and
clients, and recording information for accounting and management information
purposes. Any significant difficulty associated with the operation of such
systems, or any material delay or inability to develop needed system
capabilities, could have a material adverse affect on the results of operations
of the Company and its Investment subsidiaries and, ultimately, its ability to
achieve its strategic goals.
Legal Environment. A number of lawsuits have been filed against life and health
insurers involving insurers' sales practices, alleged agent misconduct, failure
to properly supervise agents and other matters. Some of the lawsuits have
resulted in the award of substantial judgments against other insurers, including
material amounts of punitive damages, or in substantial settlements. In some
states, juries have substantial discretion in awarding punitive damages. The
Company, like other life and health insurers, is involved in such litigation.
While no such lawsuit has resulted in an award or settlement of any material
amount against the Company to date, its results of operations and financial
condition could be affected by defense and settlement costs and any unexpected
material adverse outcomes in such litigations as well as in other material
litigations pending against its other subsidiaries and DLJ and its subsidiaries.
In addition, examinations by Federal and state regulators could result in
adverse publicity, sanctions and fines. For further information see "Business -
Regulation" and "Legal Proceedings" in the 1998 Form 10-K and "Legal
Proceedings" in Part II, Item 1 of this report.
Future Accounting Pronouncements. In the future, new accounting pronouncements
may have material effects on the Company's consolidated statements of earnings
and shareholders' equity. See Note 2 of Notes to Consolidated Financial
Statements in the 1998 Form 10-K for pronouncements issued but not implemented.
In addition, the NAIC approved its Codification project providing regulators and
insurers with uniform statutory guidance, addressing areas where statutory
accounting previously was silent and changing certain existing statutory
positions. Equitable Life will be subject to Codification to the extent and in
the form adopted in New York State, which would require action by both the New
York legislature and the New York Insurance Department. It is not possible to
predict whether, in what form, or when Codification will be adopted in New York,
and accordingly it is not possible to predict the effect of Codification on
Equitable Life.
35
<PAGE>
Regulation and Statutory Capital and Surplus. The businesses conducted by the
Company and its subsidiaries and affiliates are subject to extensive regulation
and supervision by state insurance departments and Federal and state agencies
regulating, among other things, insurance and annuities, securities
transactions, investment banking, investment companies and investment advisors.
Changes in the regulatory environment could have a material impact on operations
and results. The activities of the Insurance Group are subject to the
supervision of the insurance regulators of each of the 50 states. Such
regulators have the discretionary authority, in connection with the continual
licensing of members of the Insurance Group, to limit or prohibit new issuances
of business to policyholders within their jurisdiction when, in their judgment,
such regulators determine that such member is not maintaining adequate statutory
surplus or capital. See "Liquidity and Capital Resources Insurance" in the 1998
Form 10-K.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
See "MD&A - Combined Operating Results by Segment - Investment
Services."
36
<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, 1998, except as described below:
In Bradley, a hearing on plaintiff's motions to compel discovery and for class
certification, and on EVLICO's and EOC's motion for summary judgment, has been
re-scheduled.
In Hallabrin, the parties entered into an agreement settling on an individual
basis, with prejudice, all claims against Equitable Life and EQ Financial. The
court has dismissed all claims against Equitable Life and EQ Financial with
prejudice.
In Greenwald, in April 1999, Equitable Life filed a motion to dismiss the
complaint and oral argument is scheduled for September 1999.
In Hill, in April 1999, Equitable Life and EVLICO filed a motion to dismiss the
complaint.
In Franze, in May 1999, the Magistrate Judge issued a Report and Recommendation
recommending that the District Judge deny Equitable Life's motion for summary
judgment and grant plaintiffs' motion for class certification. In July,
Equitable Life filed Objections to the Report and Recommendation and urged that
the District Judge reject the Magistrate's recommendations and grant Equitable
Life's motion for summary judgment and deny plaintiffs' motion for class
certification.
In Duncan, pursuant to court order, the parties have until September 1999 to
submit supplemental briefing.
In Rickel, the complaint was dismissed in April 1999 by the Court. Plaintiff has
filed an appeal. Although there can be no assurance, DLJ's management does not
believe that the ultimate outcome of this litigation will have a material
adverse effect on DLJ's consolidated financial condition or DLJ's results of
operations in any particular period.
In National Gypsum, the plaintiffs have filed an appeal.
The Dayton Monetary Associates and Mid-American Waste Systems actions have been
settled without a material adverse effect on DLJ's consolidated financial
condition or results of operation in any particular period.
In November 1998, three purported class actions (Gillet v. Goldman, Sachs & Co.
et al., Prager v. Goldman, Sachs & Co. et al. and Holzman v. Goldman, Sachs &
Co. et al.) were filed in the U.S. District Court for the Southern District of
New York against more than 25 underwriters of initial public offering
securities, including DLJSC. The complaints allege that defendants conspired to
fix the "fee" paid for underwriting initial public offering securities by
setting the underwriters' discount or "spread" at 7%, in violation of the
federal antitrust laws. The complaints seek treble damages in an unspecified
amount and injunctive relief as well as attorneys' fees and costs. On March 15,
1999, the plaintiffs filed a Consolidated Amended Complaint captioned In re
Public Offering Fee Antitrust Litigation. A motion by all defendants to dismiss
the complaints on several grounds is pending. Separately, the U.S. Department of
Justice has issued a Civil Investigative Demand to several investment banking
firms, including DLJSC, seeking documents and information relating to "alleged"
price fixing with respect to underwriting spreads in initial public offerings.
The government has not made any charges against DLJSC or the other investment
banking firms. DLJSC is cooperating with the Justice Department in providing the
requested information and believes that no violation of law by DLJSC has
occurred. Although there can be no assurance, DLJ's management does not believe
that the ultimate outcome of these matters will have a material adverse effect
on DLJ's consolidated financial condition. Based upon the information currently
available to it, DLJ's management cannot predict whether or not these matters
will have a material adverse effect on DLJ's results of operations in any
particular period.
37
<PAGE>
In addition to the matters previously reported and the matters described above,
the Company and its subsidiaries and affiliates 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.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K
On April 9, 1999, the Company filed a Current Report on Form
8-K describing the proposed reorganization of Alliance.
38
<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 16, 1999 THE EQUITABLE LIFE ASSURANCE SOCIETY
OF THE UNITED STATES
By: /s/Stanley B. Tulin
--------------------------------------------
Name: Stanley B. Tulin
Title: Vice Chairman and Chief Financial
Officer
Date: August 16, 1999 /s/Alvin H. Fenichel
--------------------------------------------
Alvin H. Fenichel
Senior Vice President and Controller
39
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