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 March 31, 1996 Commission File No. 1-11166
- - --------------------------------------------------------------------------------
The Equitable Companies Incorporated
------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 13-3623351
- - --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
787 Seventh Avenue, New York, New York 10019
- - --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 554-1234
- - --------------------------------------------------------------------------------
None
- - --------------------------------------------------------------------------------
(Former name, former address, and former fiscal year if changed
since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) been subject to such filing requirements
for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Shares Outstanding
Class at May 10, 1996
- - --------------------------------------------------------------------------------
Common Stock, $.01 par value 185,253,930
Page 1 of 32
<PAGE>
THE EQUITABLE COMPANIES INCORPORATED
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1996
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page #
------
PART I FINANCIAL INFORMATION
<S> <C> <C>
Item 1: Unaudited Consolidated Financial Statements
Consolidated Balance Sheets as of March 31, 1996 and December 31, 1995.... 3
Consolidated Statements of Earnings for the Three Months Ended
March 31, 1996 and 1995................................................. 4
Consolidated Statements of Shareholders' Equity for the Three Months
Ended March 31, 1996 and 1995........................................... 5
Consolidated Statements of Cash Flows for the Three Months Ended
March 31, 1996 and 1995................................................. 6
Notes to Consolidated Financial Statements................................ 7
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations..................................................... 14
PART II OTHER INFORMATION
Item 1: Legal Proceedings......................................................... 31
Item 6: Exhibits and Reports on Form 8-K.......................................... 31
SIGNATURES................................................................................ 32
</TABLE>
2
<PAGE>
PART I FINANCIAL INFORMATION
Item 1: Unaudited Consolidated Financial Statements.
THE EQUITABLE COMPANIES INCORPORATED
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
------------ ------------
(In Millions)
<S> <C> <C>
ASSETS
Investments:
Fixed maturities:
Available for sale, at estimated fair value .............. $ 16,237.8 $ 16,069.5
Held to maturity, at amortized cost ...................... 223.8 241.2
Trading account securities, at market value ................ 11,058.7 10,911.4
Securities purchased under resale agreements ............... 18,971.4 18,567.4
Mortgage loans on real estate .............................. 3,551.3 3,638.3
Equity real estate ......................................... 3,816.0 3,916.2
Policy loans ............................................... 2,062.9 1,976.4
Other equity investments ................................... 931.1 952.4
Other invested assets ...................................... 808.6 890.8
------------ ------------
Total investments ...................................... 57,661.6 57,163.6
Cash and cash equivalents .................................... 1,035.1 1,200.4
Broker-dealer related receivables ............................ 13,988.7 13,134.0
Deferred policy acquisition costs ............................ 3,213.6 3,085.9
Amounts due from discontinued GIC Segment .................... 1,962.1 2,097.1
Other assets ................................................. 4,126.9 3,889.0
Closed Block assets .......................................... 8,425.0 8,612.8
Separate Accounts assets ..................................... 25,989.1 24,566.6
------------ ------------
Total Assets ................................................. $ 116,402.1 $ 113,749.4
============ ============
LIABILITIES
Policyholders' account balances .............................. $ 21,848.0 $ 21,908.6
Future policy benefits and other policyholders' liabilities .. 4,067.6 4,013.2
Securities sold under repurchase agreements .................. 25,789.4 26,744.8
Broker-dealer related payables ............................... 15,382.0 13,499.6
Short-term and long-term debt ................................ 5,834.9 4,604.5
Other liabilities ............................................ 4,558.5 5,089.1
Closed Block liabilities ..................................... 9,303.5 9,507.2
Separate Accounts liabilities ................................ 25,938.5 24,531.0
------------ ------------
Total liabilities ...................................... 112,722.4 109,898.0
------------ ------------
Commitments and contingencies (Note 12)
SHAREHOLDERS' EQUITY
Series C convertible preferred stock ......................... 24.4 24.4
Series D convertible preferred stock ......................... 289.6 286.6
Stock employee compensation trust ............................ (289.6) (286.6)
Series E convertible preferred stock ......................... 380.2 380.2
Common stock, at par value ................................... 1.8 1.8
Capital in excess of par value ............................... 2,568.3 2,561.1
Retained earnings ............................................ 658.1 590.7
Net unrealized investment gains .............................. 82.0 328.3
Minimum pension liability .................................... (35.1) (35.1)
------------ ------------
Total shareholders' equity ............................. 3,679.7 3,851.4
------------ ------------
Total Liabilities and Shareholders' Equity ................... $ 116,402.1 $ 113,749.4
============ ============
</TABLE>
See Notes to Consolidated Financial Statements.
3
<PAGE>
THE EQUITABLE COMPANIES INCORPORATED
CONSOLIDATED STATEMENTS OF EARNINGS
THREE MONTHS ENDED MARCH 31, 1996 AND 1995
(UNAUDITED)
<TABLE>
<CAPTION>
1996 1995
----------- -----------
(In Millions, Except Per
Share Amounts)
<S> <C> <C>
REVENUES
Universal life and investment-type product policy fee income ........... $ 212.9 $ 192.5
Premiums ............................................................... 141.0 148.4
Net investment income .................................................. 780.5 716.8
Investment gains, net .................................................. 170.3 116.5
Commissions, fees and other income ..................................... 599.3 443.6
Contribution from the Closed Block ..................................... 26.7 28.5
----------- -----------
Total revenues ................................................... 1,930.7 1,646.3
----------- -----------
BENEFITS AND OTHER DEDUCTIONS
Interest credited to policyholders' account balances ................... 320.6 295.9
Policyholders' benefits ................................................ 253.2 246.4
Other operating costs and expenses ..................................... 1,147.9 987.9
----------- -----------
Total benefits and other deductions .............................. 1,721.7 1,530.2
----------- -----------
Earnings before Federal income taxes, minority interest and
cumulative effect of accounting change ............................... 209.0 116.1
Federal income taxes ................................................... 62.9 32.7
Minority interest in net income of consolidated subsidiaries ........... 39.7 18.2
----------- -----------
Earnings before cumulative effect of accounting change ................. 106.4 65.2
Cumulative effect of accounting change, net of Federal income taxes .... (23.1) --
----------- -----------
Net earnings ........................................................... 83.3 65.2
Dividends on preferred stocks .......................................... 6.7 6.7
----------- -----------
Net Earnings Applicable to Common Shares ............................... $ 76.6 $ 58.5
=========== ===========
Per Common Share:
Assuming No Dilution:
Earnings before cumulative effect of accounting change ............. $ .53 $ .32
Cumulative effect of accounting change, net of Federal
income taxes...................................................... (.12) --
----------- -----------
Net Earnings ....................................................... $ .41 $ .32
=========== ===========
Assuming Full Dilution:
Earnings before cumulative effect of accounting change ............. $ .50 $ .31
Cumulative effect of accounting change, net of Federal
income taxes...................................................... (.11) --
=========== ===========
Net Earnings ....................................................... $ .39 $ .31
=========== ===========
Cash Dividend Per Common Share ......................................... $ .05 $ .05
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
4
<PAGE>
THE EQUITABLE COMPANIES INCORPORATED
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
THREE MONTHS ENDED MARCH 31, 1996 AND 1995
(UNAUDITED)
<TABLE>
<CAPTION>
1996 1995
---------- ----------
(In Millions)
<S> <C> <C>
Series C convertible preferred stock, beginning of year and end of period . $ 24.4 $ 24.4
---------- ----------
Series D convertible preferred stock, beginning of year ................... 286.6 216.4
Change in market value of shares .......................................... 3.0 46.3
---------- ----------
Series D convertible preferred stock, end of period ....................... 289.6 262.7
---------- ----------
Stock employee compensation trust, beginning of year ...................... (286.6) (216.4)
Change in market value of shares .......................................... (3.0) (46.3)
---------- ----------
Stock employee compensation trust, end of period .......................... (289.6) (262.7)
---------- ----------
Series E convertible preferred stock, beginning of year and end of period . 380.2 380.2
---------- ----------
Common stock, at par value, beginning of year and end of period ........... 1.8 1.8
---------- ----------
Capital in excess of par value, beginning of year ......................... 2,561.1 2,538.7
Additional capital in excess of par value ................................. 7.2 2.3
---------- ----------
Capital in excess of par value, end of period ............................. 2,568.3 2,541.0
---------- ----------
Retained earnings, beginning of year ...................................... 590.7 304.0
Net earnings .............................................................. 83.3 65.2
Dividends on preferred stocks ............................................. (6.7) (6.7)
Dividends on common stock ................................................. (9.2) (9.1)
---------- ----------
Retained earnings, end of period .......................................... 658.1 353.4
---------- ----------
Net unrealized investment gains (losses), beginning of year ............... 328.3 (232.6)
Change in unrealized investment (losses) gains ............................ (246.3) 130.8
---------- ----------
Net unrealized investment gains (losses), end of period ................... 82.0 (101.8)
---------- ----------
Minimum pension liability, beginning of year and end of period ............ (35.1) (2.7)
---------- ----------
Total Shareholders' Equity, End of Period ................................. $ 3,679.7 $ 3,196.3
========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
5
<PAGE>
THE EQUITABLE COMPANIES INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1996 AND 1995
(UNAUDITED)
<TABLE>
<CAPTION>
1996 1995
---------- ----------
(In Millions)
<S> <C> <C>
Net earnings ........................................................... $ 83.3 $ 65.2
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Interest credited to policyholders' account balances ............... 319.1 295.9
General Account policy charges ..................................... (208.0) (191.8)
Net change in trading activities and broker-dealer related
receivables/payables ............................................. 1,126.9 1,543.0
(Increase) decrease in matched resale agreements ................... (2,251.5) (4,968.1)
Increase (decrease) in matched repurchase agreements ............... 2,251.5 4,968.1
Investment gains, net of dealer and trading gains .................. (26.9) (48.9)
Changes in clearing association fees and regulatory deposits ....... (264.2) (83.0)
Change in accounts payable and accrued expenses .................... (286.9) (214.0)
Change in Federal income taxes payable ............................. (130.6) 21.8
Other, net ......................................................... (254.9) (2.4)
---------- ----------
Net cash provided by operating activities .............................. 357.8 1,385.8
---------- ----------
Cash flows from investing activities:
Maturities and repayments ............................................ 609.4 498.5
Sales ................................................................ 3,150.2 1,875.6
Return of capital from joint ventures and limited partnerships ....... 24.1 16.3
Purchases ............................................................ (4,216.6) (2,500.4)
Decrease in loans to discontinued GIC Segment ........................ 135.0 1,155.4
Other, net ........................................................... 114.9 (81.7)
---------- ----------
Net cash (used) provided by investing activities ....................... (183.0) 963.7
---------- ----------
Cash flows from financing activities:
Policyholders' account balances:
Deposits ........................................................... 474.1 850.9
Withdrawals ........................................................ (655.4) (782.0)
Net decrease in short-term financings ................................ (249.5) (1,388.9)
Additions to long-term debt .......................................... 249.9 250.6
Repayments of long-term debt ......................................... (136.0) (72.7)
Payment of obligation to fund accumulated deficit of discontinued
GIC Segment ........................................................ -- (1,215.4)
Other, net ........................................................... (23.2) (27.0)
---------- ----------
Net cash used by financing activities .................................. (340.1) (2,384.5)
---------- ----------
Change in cash and cash equivalents .................................... (165.3) (35.0)
Cash and cash equivalents, beginning of year ........................... 1,200.4 825.3
---------- ----------
Cash and Cash Equivalents, End of Period ............................... $ 1,035.1 $ 790.3
========== ==========
Supplemental cash flow information
Interest Paid ........................................................ $ 686.5 $ 614.1
========== ==========
Income Taxes Paid .................................................... $ 13.9 $ --
========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
6
<PAGE>
THE EQUITABLE COMPANIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1) BASIS OF PRESENTATION
The accompanying consolidated financial statements are prepared in
conformity with generally accepted accounting principles ("GAAP"). The
preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions (including normal, recurring
accruals) that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Such statements should be read in conjunction
with the consolidated financial statements of The Equitable for the year
ended December 31, 1995. The results of operations for the three months
ended March 31, 1996 are not necessarily indicative of the results to be
expected for the full year.
Certain reclassifications have been made in the amounts presented for
prior periods to conform those periods with the current presentation.
2) ADOPTION OF SFAS NO. 121
The Equitable implemented SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of," as of
January 1, 1996. The statement requires long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever events or
changes in circumstances indicate the carrying value of such assets may
not be recoverable. Effective with SFAS No. 121's adoption, impaired real
estate is written down to fair value with the impairment loss being
included in Investment gains/losses, net. Before implementing SFAS No.
121, valuation allowances on real estate held for the production of income
were computed using the forecasted cash flows of the respective properties
discounted at a rate equal to The Equitable's cost of funds. The adoption
of the statement resulted in the release of existing valuation allowances
of $152.4 million and recognition of impairment losses of $144.0 million
on real estate held and used. Real estate which management has committed
to disposing of by sale or abandonment is classified as real estate to be
disposed of. Valuation allowances on real estate to be disposed of
continue to be computed using the lower of estimated fair value or
depreciated cost, net of disposition costs. Implementation of the SFAS No.
121 impairment requirements relative to other assets to be disposed of
resulted in a charge for the cumulative effect of an accounting change of
$23.1 million, net of a Federal income tax benefit of $12.4 million, due
to the writedown to fair value of building improvements relating to
facilities being vacated beginning in 1996.
3) FEDERAL INCOME TAXES
Federal income taxes for interim periods have been computed using an
estimated annual effective tax rate. This rate is revised, if necessary,
at the end of each successive interim period to reflect the current
estimate of the annual effective tax rate.
7
<PAGE>
4) INVESTMENTS
Investment valuation allowances and changes thereto are shown below:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------
1996 1995
-------- --------
(In Millions)
<S> <C> <C>
Balances, beginning of year ................................ $ 325.3 $ 284.9
SFAS No. 121 release ....................................... (152.4) --
Additions charged to income ................................ 38.5 24.9
Deductions for writedowns and asset dispositions ........... (82.0) (9.2)
-------- --------
Balances, End of Period .................................... $ 129.4 $ 300.6
======== ========
Balances, end of period:
Mortgage loans on real estate ............................ $ 85.3 $ 74.2
Equity real estate ....................................... 44.1 226.4
-------- --------
Total ...................................................... $ 129.4 $ 300.6
======== ========
</TABLE>
For the three months ended March 31, 1996 and 1995, investment income is
shown net of investment expenses (including interest expense to finance
short-term trading instruments) of $581.9 million and $563.3 million,
respectively.
As of March 31, 1996 and December 31, 1995, fixed maturities classified as
available for sale had amortized costs of $16,075.5 million and $15,453.5
million, fixed maturities in the held to maturity portfolio had estimated
fair values of $240.5 million and $262.9 million and trading account
securities had amortized costs of $11,170.3 million and $10,812.4 million,
respectively. Other equity investments included equity securities with
carrying values of $475.8 million and $459.7 million and costs of $432.7
million and $419.2 million as of March 31, 1996 and December 31, 1995,
respectively.
For the three months ended March 31, 1996 and 1995, proceeds received on
sales of fixed maturities classified as available for sale amounted to
$3,074.3 million and $1,728.2 million, respectively. Gross gains of $43.1
million and $15.4 million and gross losses of $19.3 million and $19.0
million were realized on these sales for the three months ended March 31,
1996 and 1995, respectively. The decrease in unrealized investment gains
related to fixed maturities classified as available for sale for the three
months ended March 31, 1996 amounted to $453.7 million.
During the three months ended March 31, 1995, six securities classified as
held to maturity were transferred to the available for sale portfolio. All
actions were taken as a result of significant deterioration in
creditworthiness. The aggregate amortized cost of the securities
transferred was $64.8 million with gross unrealized investment losses of
$5.4 million transferred to equity for the three months ended March 31,
1995.
Impaired mortgage loans along with the related provision for losses were
as follows:
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
--------- ------------
(In Millions)
<S> <C> <C>
Impaired mortgage loans with provision for losses ....... $ 387.8 $ 310.1
Impaired mortgage loans with no provision for losses .... 159.2 160.8
-------- --------
Recorded investment in impaired mortgage loans .......... 547.0 470.9
Provision for losses .................................... 83.1 62.7
-------- --------
Net Impaired Mortgage Loans ............................. $ 463.9 $ 408.2
======== ========
</TABLE>
8
<PAGE>
Impaired mortgage loans with no provision for losses are loans where the
fair value of the collateral or the net present value of the loans equals
or exceeds the recorded investment. Interest income earned on loans where
the collateral value is used to measure impairment is recorded using the
cash basis method. Interest income on loans where the present value method
is used to measure impairment is accrued on the net carrying value amount
of the loan at the interest rate used to discount the cash flows. Changes
in the present value attributable to changes in the amount or timing of
expected cash flows are reported as investment gains or losses.
During the three months ended March 31, 1996 and 1995, respectively, The
Equitable's average recorded investment in impaired mortgage loans was
$505.0 million and $327.3 million. Interest income recognized on these
impaired mortgage loans totaled $9.5 million and $6.6 million for the
three months ended March 31, 1996 and 1995, respectively, including $3.3
million and $5.3 million recognized on the cash basis method.
5) SECURITIES SOLD UNDER REPURCHASE AGREEMENTS
Securities sold under repurchase agreements are treated as financing
transactions and carried at the amounts at which the securities
subsequently will be reacquired in the respective agreements. These
agreements with counterparties were collateralized principally by U.S.
government securities. The weighted average interest rates on securities
sold under repurchase agreements were 5.17% and 5.69% at March 31, 1996
and December 31, 1995, respectively.
6) ALLIANCE - CURSITOR TRANSACTION
On February 29, 1996, Alliance acquired the business of Cursitor-Eaton
Asset Management Company and Cursitor Holdings Limited in exchange for
approximately 1.8 million Alliance Units, $84.9 million in cash, $21.5
million in notes which are payable ratably over the next four years and
substantial additional consideration which will be determined at a later
date. The Equitable recognized an investment gain of $20.6 million as a
result of this transaction. At March 31, 1996, The Equitable's ownership
of Alliance units was approximately 57.5%.
7) BUSINESS SEGMENT INFORMATION
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-----------------------
1996 1995
---------- ----------
(In Millions)
<S> <C> <C>
Revenues
Individual insurance and annuities ............. $ 819.3 $ 794.6
Group pension .................................. 62.7 57.4
Attributed insurance capital ................... 18.3 14.6
---------- ----------
Insurance operations ......................... 900.3 866.6
Investment services ............................ 1,027.3 780.0
Corporate and other ............................ 13.8 12.0
Consolidation/elimination ...................... (10.7) (12.3)
---------- ----------
Total .......................................... $ 1,930.7 $ 1,646.3
========== ==========
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------
1996 1995
-------- --------
(In Millions)
<S> <C> <C>
Earnings (Loss) Before Federal Income Taxes, Minority
Interest and Cumulative Effect of Accounting Change
Individual insurance and annuities ...................... $ 84.0 $ 58.9
Group pension ........................................... (11.7) (11.7)
Attributed insurance capital ............................ 7.2 6.9
-------- --------
Insurance operations .................................. 79.5 54.1
Investment services ..................................... 159.5 85.7
Corporate and other ..................................... 5.1 .7
Consolidation/elimination ............................... (.5) (.4)
-------- --------
Subtotal .............................................. 243.6 140.1
Corporate interest expense .............................. (34.6) (24.0)
-------- --------
Total ................................................... $ 209.0 $ 116.1
======== ========
</TABLE>
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
------------ ------------
(In Millions)
<S> <C> <C>
Assets
Individual insurance and annuities ......... $ 51,468.7 $ 50,328.8
Group pension .............................. 3,763.0 4,033.3
Attributed insurance capital ............... 1,996.8 2,391.6
------------ ------------
Insurance operations ..................... 57,228.5 56,753.7
Investment services ........................ 59,017.8 56,785.7
Corporate and other ........................ 797.2 826.7
Consolidation/elimination .................. (641.4) (616.7)
----------- ------------
Total ...................................... $ 116,402.1 $ 113,749.4
============ ============
</TABLE>
8) DISCONTINUED OPERATIONS
Summarized financial information of the discontinued GIC Segment is as
follows:
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
---------- -----------
(In Millions)
<S> <C> <C>
Assets
Mortgage loans on real estate .................... $ 1,422.2 $ 1,485.8
Equity real estate ............................... 1,110.4 1,122.1
Cash and other invested assets ................... 953.6 665.2
Other assets ..................................... 204.2 579.3
---------- ----------
Total Assets ..................................... $ 3,690.4 $ 3,852.4
========== ==========
Liabilities
Policyholders' liabilities ....................... $ 1,397.1 $ 1,399.8
Allowance for future losses ...................... 151.2 164.2
Amounts due to continuing operations ............. 1,962.1 2,097.1
Other liabilities ................................ 180.0 191.3
---------- ----------
Total Liabilities ................................ $ 3,690.4 $ 3,852.4
========== ==========
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------
1996 1995
------- -------
(In Millions)
<S> <C> <C>
Revenues
Investment income (net of investment expenses of $30.7
and $35.8) ............................................ $ 72.5 $ 78.9
Investment losses, net .................................. (11.0) (13.2)
Policy fees, premiums and other income, net ............. .1 .1
------- -------
Total revenues .......................................... 61.6 65.8
Benefits and Other Deductions ........................... 72.0 85.4
------- -------
Losses Charged to Allowance for Future Losses ........... $ (10.4) $ (19.6)
======= =======
</TABLE>
Investment valuation allowances amounted to $20.1 million on mortgage
loans and $6.0 million on equity real estate for an aggregate of $26.1
million at March 31, 1996. As of January 1, 1996, the adoption of SFAS No.
121 resulted in a release of existing valuation allowances of $71.9
million on equity real estate and recognition of impairment losses of
$69.8 million on real estate held and used. At December 31, 1995,
valuation allowances amounted to $19.2 million on mortgage loans and $77.9
million on equity real estate for an aggregate of $97.1 million.
Benefits and other deductions includes $37.6 million and $38.7 million of
interest expense related to amounts borrowed from continuing operations
for the three months ended March 31, 1996 and 1995, respectively.
The allowance for future losses is based upon management's best judgment
and there can be no assurance ultimate losses will not differ.
9) CLOSED BLOCK
Summarized financial information of the Closed Block is as follows:
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
---------- -----------
(In Millions)
<S> <C> <C>
Assets
Fixed maturities:
Available for sale, at estimated fair value (amortized
cost of $3,661.1 and $3,662.8) ........................... $ 3,726.8 $ 3,896.2
Mortgage loans on real estate ................................ 1,383.0 1,368.8
Policy loans ................................................. 1,792.2 1,797.2
Cash and other invested assets ............................... 395.6 440.9
Deferred policy acquisition costs ............................ 809.4 823.6
Other assets ................................................. 318.0 286.1
---------- ----------
Total Assets ................................................. $ 8,425.0 $ 8,612.8
========== ==========
Liabilities
Future policy benefits and other policyholders'
account balances ............................................ $ 9,185.6 $ 9,346.7
Other liabilities ............................................ 117.9 160.5
---------- ----------
Total Liabilities ............................................ $ 9,303.5 $ 9,507.2
========== ==========
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------
1996 1995
-------- --------
(In Millions)
<S> <C> <C>
Revenues
Premiums and other income ....................................... $ 184.9 $ 191.1
Investment income (net of investment expenses of $6.9 and $6.9) . 136.8 131.7
Investment losses, net .......................................... (4.2) (4.1)
-------- --------
Total revenues .................................................. 317.5 318.7
-------- --------
Benefits and Other Deductions
Policyholders' benefits and dividends ........................... 273.9 274.6
Other operating costs and expenses .............................. 16.9 15.6
-------- --------
Total benefits and other deductions ............................. 290.8 290.2
-------- --------
Contribution from the Closed Block .............................. $ 26.7 $ 28.5
======== ========
</TABLE>
Investment valuation allowances amounted to $24.6 million and $18.4
million on mortgage loans and $4.9 million and $4.3 million on equity real
estate for an aggregate of $29.5 million and $22.7 million at March 31,
1996 and December 31, 1995, respectively. As of January 1, 1996, the
adoption of SFAS No. 121 resulted in the recognition of impairment losses
of $5.6 million on real estate held and used.
10) COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------
1996 1995
-------- --------
(In Millions, Except Per
Share Amounts)
<S> <C> <C>
Net earnings ..................................................... $ 83.3 $ 65.2
Less - dividends on preferred stocks ............................. 6.7 6.7
-------- --------
Net earnings applicable to common shares - assuming no dilution .. 76.6 58.5
Add - dividends on convertible preferred stock and interest on
convertible subordinated debt, when dilutive ................... 10.4 3.8
-------- --------
Net Earnings Applicable to Common Shares -
Assuming Full Dilution ......................................... $ 87.0 $ 62.3
======== ========
Weighted average common shares outstanding -
assuming no dilution(1) ........................................ 185.0 183.8
Add - assumed exercise of stock options, when dilutive ........... 1.1 .6
Add - assumed conversion of convertible preferred stock,
when dilutive .................................................. 17.8 --
Add - assumed conversion of convertible subordinated debt,
when dilutive .................................................. 14.7 14.7
-------- --------
Weighted Average Shares Outstanding - Assuming Full Dilution ..... 218.6 199.1
======== ========
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------
1996 1995
--------- -------
(In Millions, Except Per
Share Amounts)
<S> <C> <C>
Net Earnings Per Common Share:
Assuming No Dilution:
Net earnings before cumulative effect of accounting change .. $ .53 $ .32
Cumulative effect of accounting change, net of Federal
income taxes .............................................. (.12) --
------- -------
Net Earnings ................................................ $ .41 $ .32
======= =======
Assuming Full Dilution:
Net earnings before cumulative effect of accounting change .. $ .50 $ .31
Cumulative effect of accounting change, net of Federal
income taxes .............................................. (.11) --
------- -------
Net Earnings ................................................ $ .39 $ .31
======= =======
<FN>
(1) Stock options are not included because their effect is less than 3%.
</FN>
</TABLE>
Shares of the Series D Convertible Preferred Stock (or common stock issued
on conversion thereof) are not considered to be outstanding in the
computation of weighted average shares of common stock until the shares
are allocated to fund the obligations for which the SECT was established.
11) RESTRUCTURE COSTS
At March 31, 1996, liabilities associated with 1994 and 1995 cost
reduction programs totaled $33.2 million. During the three months ended
March 31, 1996 and 1995, The Equitable restructured certain operations in
connection with cost reduction programs and incurred costs of $.7 million
and $11.2 million, respectively, primarily associated with severance
related benefits. Amounts paid during the three months ended March 31,
1996 and charged against the liabilities for the 1994 and 1995 cost
reduction programs totaled $5.3 million.
13
<PAGE>
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following analysis of the consolidated results of operations and financial
condition of The Equitable should be read in conjunction with the Consolidated
Financial Statements and the related Notes to Consolidated Financial Statements
included elsewhere herein, and with the Management's Discussion and Analysis
section included in The Equitable's 1995 Report on Form 10-K.
COMBINED RESULTS OF OPERATIONS
The contribution from the Closed Block is reported on one line in the
consolidated statements of earnings. The following table presents the results of
operations of the Closed Block for the three months ended March 31, 1996 and
1995 combined with the results of operations outside of the Closed Block. See
Closed Block results as combined herein on page 16. Management's discussion and
analysis addresses the combined results of operations unless noted otherwise.
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------
1996 1995
---------- ----------
(In Millions)
Combined Results of Operations
<S> <C> <C>
Policy fee income and premiums ............................... $ 538.6 $ 531.6
Net investment income ........................................ 917.3 848.5
Investment gains, net ........................................ 166.1 112.4
Commissions, fees and other income ........................... 599.5 444.0
---------- ----------
Total revenues ............................................. 2,221.5 1,936.5
Total benefits and other deductions .......................... 2,012.5 1,820.4
---------- ----------
Earnings before Federal income taxes, minority interest and
cumulative effect of accounting change ..................... 209.0 116.1
Federal income taxes ......................................... 62.9 32.7
Minority interest in net income of consolidated subsidiaries . 39.7 18.2
---------- ----------
Earnings before Cumulative Effect of Accounting Change ....... $ 106.4 $ 65.2
========== ==========
</TABLE>
Continuing Operations
Compared to the comparable prior year period, the higher pre-tax results of
operations for the three months ended March 31, 1996 reflected increased
earnings in the Investment Services and Individual Insurance and Annuities
segments partially offset by higher losses in the Corporate and Other segment.
The increase in Federal income taxes was attributed to higher pre-tax results of
operations. The increase in minority interest in net income of consolidated
subsidiaries was attributable to the third party interest in DLJ resulting from
its October 1995 IPO and increased earnings at both DLJ and Alliance.
The $285.0 million increase in revenues for the three months ended March 31,
1996 compared to the corresponding period in 1995 was attributed primarily to a
$155.5 million increase in commissions, fees and other income principally due to
increased business activity within the Investment Services segment and a $122.5
million increase in investment results.
14
<PAGE>
Net investment income increased $68.8 million for the three months ended March
31, 1996 principally due to increases of $34.8 million and $27.3 million,
respectively, for the Investment Services and the Individual Insurance and
Annuities segments. The Individual Insurance and Annuities increase was due to
higher overall yields on a larger investment asset base while the Investment
Services increase was attributed to higher business activity.
Investment gains increased by $53.7 million for the three months ended March 31,
1996 from $112.4 million for the same period in 1995. Investment gains at DLJ
increased by $41.8 million with increased dealer and trading gains of $75.9
million partially offset by lower gains of $34.1 million on other equity
investments. There were investment losses of $23.9 million on General Account
Investment Assets as compared to $17.0 million in the first quarter of 1995.
Losses on mortgage loans increased $18.0 million to $26.7 million, while losses
on equity real estate totaled $18.7 million, $16.2 million higher than in the
first quarter of 1995. There were $4.0 million of losses on other equity
investments as compared to gains of $3.3 million during the first three months
of 1995. Partially offsetting these losses were gains of $25.5 million on fixed
maturities, an improvement of $34.6 million over the losses incurred in the
comparable 1995 period. The Holding Company Group investment portfolio had no
investment gains/losses during the first quarter of 1996; there were $2.1
million of investment gains realized during the first three months of 1995.
Additionally, a gain of $20.6 million was recognized as a result of the issuance
of Alliance Units to third parties upon completion of the Cursitor acquisition.
On January 1, 1996, The Equitable implemented SFAS No. 121. As a result,
existing valuation allowances of $152.4 million on equity real estate were
released and impairment losses of $149.6 million were recognized on real estate
held and used. Due to the adoption of this statement, equity real estate
classified as available for sale is no longer depreciated. See Note 2 of Notes
to Consolidated Financial Statements.
For the first three months of 1996, total benefits and other deductions
increased by $192.1 million from the comparable period in 1995, reflecting
increases in other operating costs and expenses of $161.3 million, a $24.4
million increase in interest credited to policyholders and a $6.4 million
increase in policyholders' benefits. The increase in other operating costs and
expenses was attributable to increased operating costs of $173.5 million in the
Investment Services segment associated with increased segment activities and a
$10.6 million increase in Corporate interest expense, offset by $30.4 million
lower amortization of DAC in the Individual Insurance and Annuities segment.
Higher Corporate interest expense resulted from the interest on the Surplus
Notes issued by Equitable Life in the fourth quarter of 1995. There was a $17.1
million increase in interest credited to policyholders for the Individual
Insurance and Annuities segment, primarily due to moderately higher crediting
rates applied to a larger in force book of business. The Group Pension segment's
$7.3 million increase in interest credited to policyholders was due to the
impact of pass-throughs of lower investment losses to participating pension
contractholders offset by smaller policyholders' account balances. The increase
in policyholders' benefits primarily resulted from higher mortality experience
on the larger in force book of business for variable and interest-sensitive life
policies and on policies within the Closed Block offset by improved mortality
experience on the individual life term business. Higher mortality experience
resulted in a decrease to the provision for future dividend payments on policies
within the Closed Block, and a decrease in the amortization of DAC on variable
and interest-sensitive life policies.
Discontinued GIC Segment
In the first three months of 1996, $10.4 million of pre-tax losses were incurred
and charged to the GIC Segment's allowance for future losses as compared to
pre-tax losses of $19.6 million in the first three months of 1995. Investment
results declined by $4.2 million in the first three months of 1996 as compared
to the year-earlier period. Net investment income declined by $6.4 million,
principally due to lower income on mortgage loans and fixed maturities partially
offset by higher income on equity real estate. Investment losses were $11.0
million in the first three months of 1996 compared to $13.2 million in the
comparable period in 1995 due to $1.0 million of gains on equity real estate as
compared to $11.0 million in losses in the first three months of 1995 and $2.4
million lower losses on mortgage loans, offset by $10.0 million of losses on
other equity investments versus $1.1 million in income during the year earlier
period. Benefits and other deductions declined by $13.4 million principally due
to the decrease in interest credited on a reduced GIC contract base.
15
<PAGE>
COMBINED RESULTS OF CONTINUING OPERATIONS BY SEGMENT
Individual Insurance and Annuities
The Closed Block is part of the Individual Insurance and Annuities segment. The
following table combines the Closed Block amounts with the reported results of
operations outside of the Closed Block on a line-by-line basis.
<TABLE>
<CAPTION>
Individual Insurance and Annuities
(In Millions)
Three Months Ended March 31,
-----------------------------------------
1996
------------------------------
As Closed 1995
Reported Block Combined Combined
-------- -------- ---------- ---------
<S> <C> <C> <C> <C>
Policy fees, premiums and other income . $ 366.3 $ 184.9 $ 551.2 $ 538.1
Net investment income .................. 429.4 136.8 566.2 538.9
Investment (losses) gains, net ......... (3.1) (4.2) (7.3) 7.8
Contribution from the Closed Block ..... 26.7 (26.7) -- --
-------- -------- ---------- ----------
Total revenues ....................... 819.3 290.8 1,110.1 1,084.8
Total benefits and other deductions .... 735.3 290.8 1,026.1 1,025.9
-------- -------- ---------- ----------
Earnings before Federal Income Taxes,
Minority Interest and Cumulative
Effect of Accounting Change .......... $ 84.0 $ -- $ 84.0 $ 58.9
======== ======== ========== ==========
</TABLE>
The earnings from operations in the Individual Insurance and Annuities segment
for the three months ended March 31, 1996 reflected an increase of $25.1 million
from the year-earlier period. Higher policy fees on variable and
interest-sensitive life and individual annuities contracts and favorable
mortality experience on term life insurance were offset by investment losses in
1996 versus gains in 1995, higher employee benefit costs and higher death claims
on assumed life reinsurance. The effect of moderately increased crediting rates
on interest-sensitive life and annuity contracts were more than offset by the
increase in investment income.
Total revenues increased by $25.3 million primarily due to a $22.0 million
increase in policy fees and a $12.2 million increase in investment results,
offset by a $13.4 million decline in premiums. The decrease in premiums
principally was due to lower traditional life and individual health premiums.
Total benefits and other deductions for the three months ended March 31, 1996
rose $0.2 million from the comparable 1995 period as higher interest credited on
policyholders' account balances and the effects of the higher mortality
experience on variable and interest-sensitive policies and policies within the
Closed Block were offset by decreases in the provision for future dividend
payments on policies within the Closed Block, lower amortization of DAC on
variable and interest-sensitive life and individual annuity policies and a
decrease in future policy benefits due to lower premiums. Interest credited on
policyholders' account balances in the segment increased by $17.1 million
reflecting moderately higher crediting rates applied to a larger in force book
of business.
Losses on the disability income business were $10.9 million for the three months
ended March 31, 1996, a $1.2 million decrease from the prior year's comparable
period. Incurred benefits (benefit payments plus additions to claims reserves)
for disability income products increased $0.6 million in the first three months
of 1996 from the comparable 1995 levels.
16
<PAGE>
Premiums and Deposits - The following table reflects premiums and deposits,
including universal life and investment-type contract deposits, for the
segment's major product lines.
<TABLE>
<CAPTION>
Premiums and Deposits
(In Millions)
Three Months Ended
March 31,
-------------------------
1996 1995
---------- ----------
<S> <C> <C>
Product Line:
Individual annuities
First year ..................................... $ 509.7 $ 476.4
Renewal ........................................ 330.1 284.7
---------- ----------
839.8 761.1
Variable and interest-sensitive life
First year recurring ........................... 44.9 48.6
First year optional ............................ 40.2 39.6
Renewal ........................................ 338.1 295.2
---------- ----------
423.2 383.4
Traditional life
First year recurring ........................... 4.9 6.1
First year optional ............................ 1.3 1.6
Renewal ........................................ 212.8 217.0
---------- ----------
219.0 224.7
Other(1)
First year ..................................... 7.1 29.0
Renewal ........................................ 89.6 92.9
---------- ----------
96.7 121.9
Total First Year ................................. 608.1 601.3
Total Renewal .................................... 970.6 889.8
---------- ----------
Grand Total ...................................... $ 1,578.7 $ 1,491.1
========== ==========
<FN>
(1) Includes health insurance and reinsurance assumed.
</FN>
</TABLE>
First year premiums and deposits for the three months ended March 31, 1996
increased from prior year levels by $6.8 million primarily due to higher sales
of individual annuities offset by lower reinsurance assumed on individual
annuity contracts. Renewal premiums and deposits increased by $80.8 million
during the three months ended March 31, 1996 over the prior year period as
increases in the larger block of variable and interest-sensitive life and
individual annuities policies were partially offset by decreases in traditional
life policies and other product lines. Traditional life premiums and deposits
for the first three months of 1996 decreased from the prior year's comparable
period by $5.7 million due to the marketing focus on variable and
interest-sensitive products and the decline in the traditional life book of
business. The 7.0% increase in first year individual annuities premiums and
deposits in 1996 over the prior year period included an approximately $66.0
million decrease in premiums related to an exchange program that offers
contractholders of existing SPDA contracts with no remaining surrender charges
an opportunity to exchange their contract for a new flexible premium variable
contract which retains assets in The Equitable and establishes new surrender
charge scales. Management believes the ongoing strategic positioning of The
Equitable's insurance operations continues to impact total first year premiums
and deposits. Particular emphasis has been devoted to the implementation of a
new needs based selling approach and the establishment of consultative financial
services as the cornerstone of the sales process. Changes in agent recruitment
and training practices have resulted in retention and productivity improvements,
which management expects will ultimately have a positive effect upon total
premium results.
17
<PAGE>
Surrenders and Withdrawals - The following table summarizes surrenders and
withdrawals, including universal life and investment-type contract withdrawals,
for the segment's major product lines.
<TABLE>
<CAPTION>
Surrenders and Withdrawals
(In Millions)
Three Months Ended
March 31,
----------------------
1996 1995
-------- --------
<S> <C> <C>
Product Line:
Individual annuities ............................... $ 610.5 $ 641.5
Variable and interest-sensitive life ............... 112.3 100.6
Traditional life ................................... 93.6 89.1
-------- --------
Total .............................................. $ 816.4 $ 831.2
======== ========
</TABLE>
Policy and contract surrenders and withdrawals decreased $14.8 million during
the three months ended March 31, 1996 compared to the same period in 1995 due to
the $31.0 million decrease in individual annuities surrenders and withdrawals.
Surrenders and withdrawals in the first quarter of 1996 included $88.0 million
paid in January 1996 for two small pension clients who terminated their
contracts. The overall decrease in surrenders was due to decreased surrenders of
Equi-Vest contracts and decreases in the volume of SPDA surrenders due to the
diminished effect of the aforementioned exchange program which was designed to
retain assets in The Equitable. Management expects the moderation in SPDA
exchange program volume to continue.
Investment Services
The following table summarizes the results of operations for the Investment
Services segment.
<TABLE>
<CAPTION>
Investment Services
(In Millions)
Three Months Ended
March 31,
------------------
1996 1995
--------- --------
<S> <C> <C>
Third party commissions and fees ............................. $ 569.5 $ 416.4
Affiliate fees ............................................... 30.1 33.3
Other income(1) .............................................. 427.7 330.3
--------- --------
Total revenues ............................................... 1,027.3 780.0
Total costs and expenses ..................................... 867.8 694.3
--------- --------
Earnings before Federal Income Taxes, Minority Interest and
Cumulative Effect of Accounting Change ..................... $ 159.5 $ 85.7
========= ========
<FN>
(1) Includes net dealer and trading gains, investment results and other items.
</FN>
</TABLE>
For the three months ended March 31, 1996, pre-tax earnings for the Investment
Services segment increased by $73.8 million from the year-earlier period
primarily due to higher earnings for DLJ and Alliance. DLJ's earnings were
higher in 1996 largely due to strong merger and acquisition activity, increased
levels of underwriting, higher dealer and trading gains and the growth in
trading volume on most major exchanges. Total segment revenues were up $247.3
million principally due to higher revenues at DLJ. Other income for the first
quarter of 1996 included a gross gain of $20.6 million on the issuance of
Alliance Units.
18
<PAGE>
Total costs and expenses increased by $173.5 million for the three-month period
of 1996 as compared to the comparable period in 1996 principally reflecting
increases in compensation and interest expense at DLJ due to increased activity.
The following table summarizes results of operations by business unit.
<TABLE>
<CAPTION>
Investment Services
Results of Operations by Business Unit
(In Millions)
Three Months Ended
March 31,
------------------
1996 1995
-------- --------
<S> <C> <C>
Earnings before Federal income taxes, minority interest
and cumulative effect of accounting change:
DLJ(1) ..................................................... $ 98.8 $ 56.9
Alliance ................................................... 46.1 34.5
Equitable Real Estate ...................................... 7.5 5.7
Consolidation/elimination(2)(3) ............................ 7.1 (11.4)
-------- -------
Earnings before Federal Income Taxes, Minority Interest and
Cumulative Effect of Accounting Change ..................... $ 159.5 $ 85.7
======== =======
<FN>
(1) Excludes amortization expense of $0.9 million and $1.4 million for the three
months ended March 31, 1996 and 1995, respectively, on goodwill and
intangible assets related to Equitable Life's acquisition of DLJ in 1985,
which are included in consolidation/elimination.
(2) Includes interest expense of $3.2 million and $4.8 million related to
intercompany debt issued by intermediate holding companies payable to
Equitable Life for the three months ended March 31, 1996 and 1995,
respectively.
(3) Includes a gain of $16.9 million (net of $3.7 million related state income
tax) for the quarter ended March 31, 1996 on issuance of Alliance Units to
third parties upon the completion of the Cursitor transaction.
</FN>
</TABLE>
DLJ - DLJ's earnings from operations for the three months ended March 31, 1996
were $98.8 million, up $41.9 million from the comparable prior year period.
Revenues increased $195.5 million to $775.5 million primarily due to increased
underwriting revenues of $83.0 million, higher dealer and trading gains of $75.9
million and higher commissions of $39.3 million offset by lower gains on the
corporate development portfolio of $34.1 million. DLJ's expenses were $676.7
million for the three months ended March 31, 1996, up $153.6 million from the
comparable prior year period primarily due to a $77.6 million increase in
compensation and commissions, higher interest expense of $38.5 million and $10.5
million higher brokerage and exchange fees.
DLJ's derivative activities are not as extensive as many of its competitors.
Instead, DLJ has focused its derivative activities on writing over the counter
("OTC") options to accommodate its customers' needs, trading in forward
contracts in U.S. government and agency issued or guaranteed securities and in
futures contracts on equity based indices, interest rate instruments and
currencies, and issuing structured notes. DLJ's involvement in swap contracts is
not significant. As a result, DLJ's involvement in derivatives products is
related primarily to revenue generation through the provision of products to its
clients as opposed to hedges against DLJ's own positions.
Options contracts are typically written for a duration of less than thirteen
months. Revenues from these activities (net of related interest expense) were
approximately $8.8 million and $19.1 million for the three months ended March
31, 1996 and 1995, respectively. Option writing revenues are primarily from the
amortization of option premiums. The decrease in revenues primarily resulted
from lower levels of activity, both in size and number of transactions, by DLJ's
institutional customers. These reductions were caused by a number of factors,
including market conditions and competition from other financial institutions.
19
<PAGE>
The notional value of written options contracts outstanding was approximately
$4.9 billion and $3.9 billion at March 31, 1996 and 1995, respectively. The
overall increase in the notional value of all options is reflective of the
higher levels of interest in these products by DLJ's customers. The decrease in
the notional value of other options was primarily due to decreases in customer
activity related to U.S. government obligations. Such written options contracts
are substantially covered by various financial instruments that DLJ had
purchased or sold as principal.
As part of DLJ's trading activities, including trading activities in the related
cash market instruments, DLJ enters into forward and futures contracts primarily
involving securities, foreign currencies, indices and forward rate agreements.
Such forward and futures contracts are entered into as part of DLJ's covering
transactions and are generally not used for speculative purposes.
Net trading gains (losses) on forward contracts were $(23.9) million and $43.7
million and net trading gains (losses) on futures contracts were $8.7 million
and $(35.0) million for the three months ended March 31, 1996 and 1995,
respectively.
The notional contract and market values of the forward and futures contracts at
March 31, 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
March 31, 1996 March 31, 1995
----------------------- -----------------------
Purchases Sales Purchases Sales
----------- ----------- ----------- -----------
(In Millions)
<S> <C> <C> <C> <C>
Forward Contracts
(Notional Contract Value) .... $ 17,945.2 $ 17,297.3 $ 13,323.0 $ 14,762.0
=========== =========== =========== ===========
Futures Contracts
(Market Value) ............... $ 1,672.6 $ 1,001.7 $ 282.1 $ 1,218.8
=========== =========== =========== ===========
</TABLE>
Structured notes are customized derivative instruments in which the amount of
interest or principal paid on a debt obligation is linked to movements in the
value of cash market financial instruments. At March 31, 1996 and 1995, DLJ had
issued structured notes with principal amounts of $82.7 million and $65.1
million outstanding, respectively. DLJ expects the volume of this activity to
increase in the future. DLJ covers its obligations on structured notes primarily
by purchasing and selling the securities to which the value of its structured
notes are linked.
Alliance - Alliance's earnings from operations for the three months ended March
31, 1996 were $46.1 million, an increase of $11.6 million from the prior year's
comparable period. Revenues totaled $181.6 million for the first three months of
1996, an increase of $36.2 million from the comparable period in 1995, due to
increased investment advisory and service fees. Alliance's costs and expenses
increased $24.6 million for the three months ended March 31, 1996 primarily due
to increases in employee compensation and benefits and other promotional
expenditures.
In April 1996, Alliance acquired the U.S. investment management business of
National Mutual Funds Management (North America) ("NMFM") for approximately $4.6
million in cash. NMFM is an indirect wholly owned subsidiary of National Mutual
Holdings Limited ("NMH"), in which AXA owns a 40% equity interest. NMFM manages
investments in North American securities of approximately $1.2 billion for NMH
affiliates and third parties.
Equitable Real Estate - Equitable Real Estate's earnings from operations were
$7.5 million for the first three months of 1996, up $1.8 million from the
preceding year's comparable period. The increase primarily was due to lower
expenses.
20
<PAGE>
Fees From Assets Under Management - As the following table illustrates, third
party clients continued to represent an important source of revenues and
earnings.
<TABLE>
<CAPTION>
Fees and Assets Under Management
(In Millions)
At or For the
Three Months Ended
March 31,
---------------------------
1996 1995
----------- ------------
<S> <C> <C>
Fees:
Equitable .............................. $ 27.2 $ 30.4
Third Party ............................ 166.5 136.1
----------- ------------
Total .................................... $ 193.7 $ 166.5
=========== ============
Assets Under Management:
Equitable .............................. $ 50,819 $ 46,185
Third Party(1) ......................... 161,231 129,018
----------- -----------
Total .................................... $ 212,050 $ 175,203
=========== ===========
<FN>
(1) Included $2.0 billion of performing mortgages at March 31, 1995 under a
special stand-by services contract with the RTC which expired in 1995.
Stand-by fees were received on the entire portfolio under the contract;
servicing fees were earned only on those mortgages that were delinquent.
</FN>
</TABLE>
Fees from assets under management increased for the three months ended March 31,
1996 from the prior year's comparable period principally as a result of growth
in assets under management for third parties. Alliance's third party assets
under management increased by $36.9 billion primarily due to the completion of
the Cursitor acquisition in the first quarter of 1996 and market appreciation.
Third party assets at Equitable Real Estate decreased by $7.4 billion due to the
sale in October 1995 by EQ Services of mortgage servicing contracts.
Group Pension
The following table summarizes the results of operations for the Group Pension
segment.
<TABLE>
<CAPTION>
Group Pension
(In Millions)
Three Months Ended
March 31,
------------------
1996 1995
------- -------
<S> <C> <C>
Policy fees, premiums and other income ........................... $ 12.0 $ 13.6
Net investment income ............................................ 64.4 70.3
Investment losses, net ........................................... (13.7) (26.5)
------- -------
Total revenues ................................................... 62.7 57.4
Total benefits and other deductions .............................. 74.4 69.1
------- -------
(Loss) Before Federal Income Taxes, Minority Interest
and Cumulative Effect of Accounting Change ..................... $ (11.7) $ (11.7)
======= =======
</TABLE>
The results for the Group Pension segment reflected no overall change for the
three months ended March 31, 1996 compared to the same period a year ago.
Investment losses in 1996 were $13.7 million, a $12.8 million improvement from
21
<PAGE>
comparable quarter losses in 1995. After reflecting the effect of pass-throughs
to participating pension contractholders, however, this reduction of investment
losses in the first three months of 1996 had no net effect on results of
operations. The investment losses principally resulted from additions to asset
valuation allowances on mortgage loans and writedowns of equity real estate.
Investment income for the three months ended March 31, 1996 decreased by $5.9
million from the comparable period of the prior year primarily due to a smaller
asset base. Policy fees, premiums and other income declined by $1.6 million in
the first quarter of 1996 when compared to the same 1995 period due to the
smaller book of business.
CONTINUING OPERATIONS INVESTMENT PORTFOLIO
The continuing operations investment portfolio is composed of the General
Account investment portfolio and investment assets of the Holding Company and
its non-operating subsidiaries, the Trust and the SECT. The General Account
investment portfolio is discussed first, followed by a separate discussion on
the Holding Company Group investment portfolio.
General Account Investment Portfolio
The following table reconciles the consolidated balance sheet asset amounts to
the amounts of General Account Investment Assets.
<TABLE>
<CAPTION>
General Account Investment Assets Carrying Values
March 31, 1996
(In Millions)
General
Balance Holding Account
Sheet Closed Company Investment
Balance Sheet Captions: Total Block Other(1) Group (2) Assets
- - ---------------------------------- ----------- --------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Fixed maturities:
Available for sale.............. $ 16,237.8 $ 3,726.8 $ (206.3) $ 368.3 $ 19,802.6
Held to maturity................ 223.8 -- -- 223.8 --
Trading account securities........ 11,058.7 -- 11,058.7 -- --
Securities purchased under
resale agreements............... 18,971.4 -- 18,971.4 -- --
Mortgage loans on real estate..... 3,551.3 1,383.0 -- -- 4,934.3
Equity real estate................ 3,816.0 187.9 (19.0) -- 4,022.9
Policy loans...................... 2,062.9 1,792.2 -- -- 3,855.1
Other equity investments.......... 931.1 122.8 318.1 45.9 689.9
Other invested assets............. 808.6 87.7 703.1 5.2 188.0
----------- ----------- ----------- ---------- ----------
Total investments............... 57,661.6 7,300.4 30,826.0 643.2 33,492.8
Cash and cash equivalents......... 1,035.1 (5.3) 319.7 98.5 611.6
----------- ----------- ----------- ---------- ----------
Total............................. $ 58,696.7 $ 7,295.1 $ 31,145.7 $ 741.7 $ 34,104.4
=========== =========== =========== ========== ==========
<FN>
(1) Assets listed in the "Other" category principally consist of assets held in
portfolios other than the Holding Company Group and the General Account
(primarily securities held in inventory or for resale by DLJ) which are not
managed as part of General Account Investment Assets and certain
reclassifications and intercompany adjustments. The "Other" category is
deducted in arriving at the General Account Investment Assets.
(2) The Holding Company Group investment assets are not managed as part of
General Account Investment Assets and are deducted in arriving at General
Account Investment Assets.
</FN>
</TABLE>
22
<PAGE>
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.
Writedowns on fixed maturities were $19.8 million and $8.5 million for the three
months ended March 31, 1996 and 1995, respectively. The following table shows
asset valuation allowances and additions to and deductions from such allowances
for mortgages and equity real estate for the three months ended March 31, 1996
and 1995.
<TABLE>
<CAPTION>
General Account Investment Assets
Valuation Allowances
(In Millions)
Equity Real
Mortgages Estate Total
--------- ----------- --------
<S> <C> <C> <C>
March 31, 1996
Assets Outside of the Closed Block:
Beginning balances ......................... $ 65.5 $ 259.8 $ 325.3
SFAS No. 121 release(1) .................... -- (152.4) (152.4)
Additions .................................. 20.1 18.4 38.5
Deductions(2) .............................. (0.3) (81.7) (82.0)
-------- -------- --------
Ending Balances ............................ $ 85.3 $ 44.1 $ 129.4
======== ======== ========
Closed Block:
Beginning balances ......................... $ 18.4 $ 4.3 $ 22.7
Additions .................................. 6.4 0.8 7.2
Deductions(2) .............................. (0.2) (0.2) (0.4)
-------- -------- --------
Ending Balances ............................ $ 24.6 $ 4.9 $ 29.5
======== ======== ========
Total:
Beginning balances ......................... $ 83.9 $ 264.1 $ 348.0
SFAS No. 121 release(1) .................... -- (152.4) (152.4)
Additions .................................. 26.5 19.2 45.7
Deductions(2) .............................. (0.5) (81.9) (82.4)
-------- -------- --------
Ending Balances ............................ $ 109.9 $ 49.0 $ 158.9
======== ======== ========
March 31, 1995 Total:
Beginning balances ......................... $ 110.4 $ 223.3 $ 333.7
Additions .................................. 18.6 9.7 28.3
Deductions(2) .............................. (7.8) (3.6) (11.4)
-------- -------- --------
Ending Balances ............................ $ 121.2 $ 229.4 $ 350.6
======== ======== ========
<FN>
(1) As a result of the adoption of SFAS No. 121, $152.4 million of allowances on
assets held for investment were released and impairment losses of $149.6
million were recognized on real estate held and used.
(2) Primarily reflected releases of allowances due to asset dispositions and
writedowns.
</FN>
</TABLE>
23
<PAGE>
General Account Investment Assets by Category
The following table shows the amortized cost, valuation allowances and carrying
value of the major categories of General Account Investment Assets at March 31,
1996 and carrying value at December 31, 1995.
<TABLE>
<CAPTION>
General Account Investment Assets
(Dollars In Millions)
March 31, 1996 December 31, 1995
-------------------------------------------------- ------------------------
% of % of
Net Total Net Net Total Net
Amortized Valuation Amortized Amortized Amortized Amortized
Cost Allowances Cost Cost Cost Cost
------------ ----------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Fixed maturities(1).......... $ 19,570.8 $ -- $ 19,570.8 57.8% $ 19,149.9 56.7%
Mortgages.................... 5,044.2 109.9 4,934.3 14.6 5,007.1 14.8
Equity real estate........... 4,071.9 49.0 4,022.9 11.9 4,130.3 12.2
Other equity investments..... 689.9 -- 689.9 2.0 764.1 2.3
Policy loans................. 3,855.1 -- 3,855.1 11.4 3,773.6 11.2
Cash and short-term
investments(2)............. 799.6 -- 799.6 2.3 952.1 2.8
---------- ---------- ----------- ------ ---------- ------
Total........................ $ 34,031.5 $ 158.9 $ 33,872.6 100.0% $ 33,777.1 100.0%
========== ========== =========== ====== ========== ======
<FN>
(1) Excludes unrealized gains of $231.8 million and $857.9 million in fixed
maturities classified as available for sale at March 31, 1996 and December
31, 1995, respectively.
(2) Comprised of "Cash and cash equivalents" and short-term investments included
within the "Other invested assets" caption on the consolidated balance
sheet.
</FN>
</TABLE>
Management has a policy of not investing substantial new funds in equity real
estate except to safeguard values in existing investments or to honor
outstanding commitments. It is management's continuing objective to reduce the
size of the equity real estate portfolio relative to total assets over the next
several years. Management anticipates that reductions will depend on real estate
market conditions, the level of mortgage foreclosures and expenditures required
to fund necessary or desired improvements to properties.
24
<PAGE>
Investment Results of General Account Investment Assets
<TABLE>
<CAPTION>
Investment Results by Asset Category(1)
(Dollars In Millions)
Three Months Ended March 31,
---------------------------------------------------
1996 1995
------------------------ ------------------------
(1) (1)
Yield Amount Yield Amount
--------- ------------ --------- ------------
<S> <C> <C> <C> <C>
Fixed Maturities:
Income................................. 7.92% $ 383.4 8.05% $ 344.5
Investment Gains/(Losses).............. 0.53% 25.5 (0.22)% (9.1)
--------- ------------ --------- ------------
Total.................................. 8.45% $ 408.9 7.83% $ 335.4
Ending Assets.......................... $ 19,570.8 $ 17,383.5
Mortgages:
Income................................. 8.74% $ 108.6 8.60% $ 117.0
Investment Gains/(Losses).............. (2.15)% (26.7) (0.64)% (8.7)
--------- ------------ --------- ------------
Total.................................. 6.59% $ 81.9 7.96% $ 108.3
Ending Assets.......................... $ 4,934.3 $ 5,304.2
Equity Real Estate Estate (2):
Income................................. 3.28% $ 25.9 2.97% $ 27.6
Investment Gains/(Losses).............. (2.37)% (18.7) (0.27)% (2.5)
--------- ------------ --------- ------------
Total.................................. 0.91% $ 7.2 2.70% $ 25.1
Ending Assets.......................... $ 3,105.7 $ 3,722.7
Other Equity Investments:
Income................................. 11.55% $ 21.0 11.82% $ 24.5
Investment Gains/(Losses).............. (2.20)% (4.0) 1.59% 3.3
--------- ------------ --------- ------------
Total.................................. 9.35% $ 17.0 13.41% $ 27.8
Ending Assets.......................... $ 689.9 $ 812.2
Policy Loans:
Income................................. 6.83% $ 65.1 6.78% $ 61.3
Ending Assets.......................... $ 3,855.1 $ 3,676.4
Cash and Short-term Investments:
Income................................. 10.32% $ 22.6 7.90% $ 16.1
Ending Assets.......................... $ 799.6 $ 806.9
Total:
Income................................. 7.62% $ 626.6 7.49% $ 591.0
Investment Gains/(Losses).............. (0.29)% (23.9) (0.21)% (17.0)
--------- ------------ --------- ------------
Total(3)............................... 7.33% $ 602.7 7.28% $ 574.0
Ending Assets.......................... $ 32,955.4 $ 31,705.9
<FN>
(1) Yields have been annualized and calculated based on the quarterly average
asset carrying values excluding unrealized gains (losses) in fixed
maturities. Annualized yields are not necessarily indicative of a full
year's results.
(2) Equity real estate carrying values are shown net of third party debt and
minority interest in real estate of $917.2 million and $931.9 million as of
March 31, 1996 and 1995, respectively. Equity real estate income is shown
net of operating expenses, depreciation, third party interest expense and
minority interest. Third party interest expense and minority interest
totaled $14.3 and $13.4 million for the three months ended March 31, 1996
and 1995, respectively.
(3) Total yields are shown before deducting investment fees paid to the
Investment Subsidiaries (which include asset management, acquisition,
disposition, accounting and legal fees). If such fees had been deducted,
total yields would have been 7.04% and 6.98% for the three months ended
March 31, 1996 and 1995, respectively.
</FN>
</TABLE>
25
<PAGE>
For the three months ended March 31, 1996, General Account investment results
were up $28.7 million or 5.0% from the year-earlier period reflecting higher
income and gains on fixed maturities. On an annualized basis, total investment
yield increased to 7.33% from 7.28%. Investment income increased by $35.6
million or 6.0%, resulting in an increase in the annualized income yield to
7.62% from 7.49%. Excluding SFAS No. 121 related permanent impairment writedowns
of $149.6 million and releases of valuation allowances totaling $152.4 million
relating to equity real estate, additions to asset valuation allowances and
writedowns of fixed maturities were $65.5 million in the three months ended
March 31, 1996 compared to $36.8 million in the three months ended March 31,
1995.
Total investment results for fixed maturities increased $73.5 million or 21.9%
for the three months ended March 31, 1996 compared to the year-earlier period.
Investment income increased by $38.9 million reflecting a higher asset base,
primarily from the reinvestment of nearly all available funds into fixed
maturities. Investment gains were $25.5 million for the three months ended March
31, 1996 compared to the year-earlier losses of $9.1 million. Writedowns on
fixed maturities were $19.8 million in the first three months of 1996 as
compared to $8.5 million in the comparable period of 1995. Total investment
results on mortgages declined by $26.4 million or 24.4% in the three months
ended March 31, 1996 compared to the same period a year ago largely due to lower
investment income attributable to a lower asset base and higher additions to
asset valuation allowances. Equity real estate investment results were $17.9
million lower during the three months ended March 31, 1996 than the year-earlier
period reflecting higher additions to asset valuation allowances. During the
first three months of 1996, $0.9 million of losses were recognized on equity
real estate with amortized cost of $202.4 million which was sold as compared to
first quarter 1995 when $7.3 million of gains were recognized on properties with
an amortized cost of $35.4 million which were sold. The lower results for other
equity investments primarily reflect a reduced asset base and a loss realized on
the disposition of a limited partnership interest.
Fixed Maturities. Fixed maturities consist of publicly traded debt securities,
privately placed debt securities and small amounts of redeemable preferred
stock, which represented 70.6%, 28.7% and 0.7%, respectively, of the amortized
cost of this asset category at March 31, 1996.
<TABLE>
<CAPTION>
Fixed Maturities By Credit Quality
(Dollars In Millions)
March 31, 1996 December 31, 1995
Rating Agency ------------------------------------- --------------------------------------
NAIC Equivalent Amortized % of Estimated Amortized % of Estimated
Rating Designation Cost Total Fair Value Cost Total Fair Value
- - ------- ---------------------- -------------- ------- ------------ ------------- ------- -------------
<S> <C> <C> <C> <C> <C> <C>
1-2 Aaa/Aa/A and Baa...... $ 17,107.8(1) 87.4% $ 17,347.4 $ 16,536.0(1) 86.4% $ 17,423.9
3-6 Ba and lower.......... 2,328.0(2) 11.9 2,322.2 2,483.4(2) 13.0 2,448.3
------------ ------ ------------ ----------- ------ -----------
Subtotal........................ 19,435.8 99.3 19,669.6 19,019.4 99.4 19,872.2
Redeemable preferred stock
and other..................... 135.0 0.7 133.0 130.5 0.6 126.5
------------ ------ ----------- ----------- ------ -----------
Total........................... $ 19,570.8 100.0% $ 19,802.6 $ 19,149.9 100.0% $ 19,998.7
============ ====== =========== =========== ====== ===========
<FN>
(1) Includes Class B Notes with an amortized cost of $100.0 million, eliminated
in consolidation.
(2) Includes Class B Notes with an amortized cost of $100.0 million, eliminated
in consolidation.
</FN>
</TABLE>
At March 31, 1996, The Equitable held collateralized mortgage obligations
("CMOs") with an amortized cost of $2.50 billion, including $2.15 billion in
publicly traded CMOs. About 70.3% of the public CMO holdings were collateralized
by GNMA, FNMA and FHLMC securities. Approximately 46.8% of the public CMO
holdings were in planned amortization class ("PAC") bonds. At March 31, 1996,
interest only ("IO") strips amounted to $7.9 million at amortized cost. There
were no holdings of principal only ("PO") strips at that date. In addition, at
March 31, 1996, The Equitable held $2.31 billion of mortgage pass-through
securities (GNMA, FNMA or FHLMC securities) and also held $460.3 million of Aa
or higher rated public asset backed securities, primarily backed by home equity
and credit card receivables.
26
<PAGE>
The amount of potential problem fixed maturities decreased $36.4 million from
December 31, 1995 to March 31, 1996 primarily due to asset sales.
<TABLE>
<CAPTION>
Fixed Maturities
Problems, Potential Problems and Restructureds
Amortized Cost
(In Millions)
March 31, December 31,
1996 1995
----------- ------------
<S> <C> <C>
FIXED MATURITIES ............................ $ 19,570.8 $ 19,149.9
Problem fixed maturities .................... 75.7 70.8
Potential problem fixed maturities .......... 7.0 43.4
Restructured fixed maturities(1) ............ 6.6 7.6
<FN>
(1) Excludes restructured fixed maturities of $3.5 million and $3.5 million that
are shown as problems at March 31, 1996 and December 31, 1995, respectively,
and excludes $0.0 million and $9.2 million of restructured fixed maturities
that are shown as potential problems at March 31, 1996 and December 31,
1995, respectively.
</FN>
</TABLE>
Mortgages. Mortgages consist of commercial, agricultural and residential loans.
At March 31, 1996, commercial mortgages totaled $3.34 billion (66.2% of the
amortized cost of the category), agricultural loans were $1.66 billion (32.8%)
and residential loans were $49.4 million (1.0%).
<TABLE>
<CAPTION>
Mortgages
Problems, Potential Problems and Restructureds
Amortized Cost
(Dollars In Millions)
March 31, December 31,
1996 1995
----------- -----------
<S> <C> <C>
COMMERCIAL MORTGAGES .......................................... $ 3,338.0 $ 3,413.7
Problem commercial mortgages .................................. 158.1 41.3
Potential problem commercial mortgages ........................ 141.0 194.7
Restructured commercial mortgages(1) .......................... 508.5 522.2
VALUATION ALLOWANCES .......................................... $ 100.9 $ 79.9
As a percent of commercial mortgages ........................ 3.0% 2.3%
As a percent of problem commercial mortgages ................ 63.8% 193.5%
As a percent of problem and potential problem commercial
mortgages ................................................. 33.7% 33.9%
As a percent of problem, potential problem and
restructured commercial mortgages ......................... 12.5% 10.5%
AGRICULTURAL MORTGAGES ........................................ $ 1,656.8 $ 1,624.1
Problem agricultural mortgages ................................ 80.1 82.9
Potential problem agricultural mortgages ...................... 0.0 0.0
Restructured agricultural mortgages ........................... 2.0 2.0
VALUATION ALLOWANCES .......................................... $ 9.0 $ 4.0
<FN>
(1) Excludes restructured commercial mortgages of $111.6 million and $12.6
million that are shown as problems at March 31, 1996 and December 31, 1995,
respectively, and excludes $49.2 million and $148.3 million of restructured
commercial mortgages that are shown as potential problems at March 31, 1996
and December 31, 1995, respectively.
</FN>
</TABLE>
27
<PAGE>
Problem commercial mortgages increased by $116.8 million from December 31, 1995
to March 31, 1996 primarily attributed to previously identified potential
problem loans which became delinquent. Potential problem loans declined as
mortgages reclassified as problems exceeded the amount of newly identified
potential problem loans. During the three months ended March 31, 1996, the
amortized cost of foreclosed commercial mortgages totaled $0.8 million with no
reduction in amortized cost required at the time of foreclosure.
The original weighted average coupon rate on the $508.5 million of restructured
mortgages was 10.0%. As a result of these restructurings, the restructured
weighted average coupon rate was 8.9% and the restructured weighted average cash
payment rate was 7.4%. The foregone interest on restructured commercial
mortgages (including restructured commercial mortgages presented as problem or
potential problem commercial mortgages) for the three months ended March 31,
1996 was $1.9 million.
The following table shows the distribution of problem and potential problem
commercial mortgages by property type and by state.
<TABLE>
<CAPTION>
March 31, 1996
------------------------
(Dollars In Millions)
Amortized % of
Cost Total
---------- ------
<S> <C> <C>
Problem Commercial Mortgages
Property Type:
Office ............................................. $ 109.2 69.1%
Industrial ......................................... 18.6 11.8
Retail ............................................. 16.9 10.7
Hotel .............................................. 10.9 6.9
Apartment .......................................... 2.5 1.5
-------- ------
Total .............................................. $ 158.1 100.0%
======== ======
State:
California ......................................... $ 67.9 42.9%
Virginia ........................................... 50.8 32.1
Puerto Rico ........................................ 19.8 12.5
Pennsylvania ....................................... 13.1 8.3
Other (no state larger than 5.0%) .................. 6.5 4.2
-------- ------
Total .............................................. $ 158.1 100.0%
======== ======
Potential Problem Commercial Mortgages
Property Type:
Retail ............................................. $ 83.7 59.4%
Office ............................................. 33.5 23.8
Hotel .............................................. 23.8 16.8
-------- ------
Total .............................................. $ 141.0 100.0%
======== ======
State:
South Carolina ..................................... $ 31.2 22.1%
Massachusetts ...................................... 26.8 19.0
Texas .............................................. 22.9 16.2
California ......................................... 13.8 9.8
New York ........................................... 10.5 7.4
Other (no state larger than 5.0%) .................. 35.8 25.5
-------- ------
Total .............................................. $ 141.0 100.0%
======== ======
</TABLE>
28
<PAGE>
At March 31, 1996, management identified impaired loans as defined under SFAS
No. 114 with a carrying value of $514.6 million. The provision for losses for
these impaired mortgage loans was $98.4 million at March 31, 1996. Income
accrued on these loans in the first three months of 1996 was $12.0 million,
including cash received of $9.6 million.
For the three months ended March 31, 1996, scheduled principal amortization
payments and prepayments on commercial mortgage loans received aggregated $83.6
million. In addition, for the three months ended March 31, 1996, $130.0 million
of commercial mortgage loan maturity payments were scheduled, of which $21.7
million were paid as due. Of the amount not paid, $71.2 million were granted
short term extensions of up to three months, $19.3 million were delinquent or in
default for non-payment of principal and $17.8 million were extended for a
weighted average of 7.0 years at a weighted average interest rate of 7.6% .
There were no foreclosures of maturing loans.
Equity Real Estate. As of March 31, 1996, on the basis of amortized cost, the
equity real estate category included $3.06 billion (or 75.2%) acquired as
investment real estate and $1.01 billion (or 24.8%) acquired through or in lieu
of foreclosure (including in-substance foreclosures).
As of January 1, 1996, The Equitable adopted SFAS No. 121. At March 31, 1996,
allowances totaling $49.0 million were held on properties identified as
available for sale with an amortized cost of $336.7 million.
At March 31, 1996, the vacancy rate for The Equitable's office properties was
15.1% in total, with a vacancy rate of 11.2% for properties acquired as
investment real estate and 25.4% for properties acquired through foreclosure.
The national commercial office vacancy rate was 14.1% (as of December 31, 1995)
as measured by CB Commercial.
Holding Company Group Investment Portfolio - Continuing Operations
For the three months ended March 31, 1996, Holding Company Group investment
results were $13.9 million, as compared to $12.0 million in the year-earlier
period. The increase was due to higher investment income on the Holding
Company's portfolio reflecting income on the proceeds received from the October
1995 DLJ IPO, partially offset by lower investment results on the Trust's
investment assets.
At March 31, 1996, the Holding Company Group investment portfolio's $741.7
million carrying value was made up of $592.1 million of fixed maturities ($342.9
million with an NAIC 1 rating), $103.7 million of cash and short-term
investments and $45.9 million of other equity investments. At December 31, 1995,
the portfolio's carrying value was $773.1 million, which included $410.8 million
of fixed maturities ($143.3 million with an NAIC 1 rating), $315.5 million of
cash and short-term investments and $46.8 million of other equity investments.
<TABLE>
<CAPTION>
Holding Company Group Fixed Maturities
By Credit Quality
(Dollars In Millions)
March 31, 1996 December 31, 1995
Rating Agency -------------------------------- --------------------------------
NAIC Equivalent Amortized % of Estimated Amortized % of Estimated
Rating Designation Cost Total Fair Value Cost Total Fair Value
- - -------- ---------------------- ---------- ------- ---------- ---------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
1-2 Aaa/Aa/A and Baa...... $ 418.4 70.4% $ 430.7 $ 222.5 54.2% $ 241.9
3-6 Ba and lower.......... 175.8 29.6 178.0 188.1 45.8 190.6
----------- ------ --------- ---------- ------ ---------
Total......................... $ 594.2 100.0% $ 608.7 $ 410.6 100.0% $ 432.5
=========== ====== ========= ========== ====== =========
</TABLE>
At March 31, 1996, the amortized cost of problem fixed maturities was $8.9
million, $9.9 million for potential problem fixed maturities and $8.7 million
for restructured fixed maturities.
LIQUIDITY AND CAPITAL RESOURCES
Since becoming a public company in 1992, The Equitable's Board of Directors has
declared quarterly cash dividends of $0.05 per share on the outstanding shares
of its Common Stock. Equitable has three series of preferred stock outstanding.
29
<PAGE>
The annual dividend rate on the Series C Convertible Preferred Stock is fixed at
6% and dividends amounted to $0.4 million for the three months ended March 31,
1996. The Series D Convertible Preferred Stock will increase shareholders'
equity only when shares are released from the SECT. No shares of Series D
Convertible Preferred Stock were released from the SECT during the first three
months of 1996. The Series E Convertible Preferred Stock's dividend rate is
fixed at 6.125% and dividends totaled $6.3 million for the three months ended
March 31, 1996. The Series E Preferred Stock dividends are payable quarterly in
Common Stock.
In April 1996, The Equitable filed a shelf registration statement with the SEC
to register approximately 11.9 million shares of The Equitable's Common Stock
issuable upon conversion of shares of the Series D Convertible Preferred Stock
held by the SECT. The SECT was established in 1993 to provide a source of
funding for a portion of the obligations arising under various employee
compensation and benefit programs of certain of The Equitable's subsidiaries.
The aggregate market value of the securities to be registered was $282.1 million
on April 30, 1996, based on the closing market price on the NYSE.
Equitable Life has a commercial paper program with an issue limit of up to
$500.0 million. This program is available for general corporate purposes and is
supported by Equitable Life's existing $350.0 million bank credit facility,
which expires in June 2000. Equitable Life uses this program from time to time
in its liquidity management. At March 31, 1996, no amounts were outstanding
under either the commercial paper program or the revolving credit facility.
Consolidated Cash Flows
The net cash provided by operating activities was $357.8 million for the three
months ended March 31, 1996 compared to $1.39 billion for the three months ended
March 31, 1995. The 1996 cash provided by operations principally was due to the
$1.13 billion net change in trading activities and broker-dealer related
receivables/payables at DLJ as its level of business activity continued to
increase, partially offset by the $264.2 million change in clearing association
fees and regulatory deposits and the $130.6 million change in Federal income
taxes payable. Cash provided by operating activities in 1995 principally was
attributable to the $1.54 billion net change in trading activities and
broker-dealer related receivables/payables at DLJ reflecting its increased level
of business activity.
Net cash used by investing activities was $183.0 million for the three months
ended March 31, 1996 as compared to net cash provided by investing activities of
$963.7 million for the same period in 1995. In 1996, investment purchases
exceeded sales, maturities, repayment and returns of capital by $432.9 million.
Loans to the discontinued GIC segment were reduced by $135.0 million during the
first quarter of 1996. Cash provided by investing activities during the first
three months of 1995 primarily was attributable to the $1.16 billion decrease in
loans to the GIC Segment. In January 1995, the GIC Segment partially repaid
borrowings from continuing operations. Investment purchases exceeded sales,
maturities and repayments by approximately $110.0 million, partially offsetting
the effect of the GIC repayment.
Net cash used by financing activities was $340.1 million for the three months
ended March 31, 1996 as compared to $2.38 billion in the first quarter of 1995.
During the first quarter of 1996, cash used for the repayment of long-term debt
of $136.0 million and the net decrease of $249.5 million in short-term
financing, principally at DLJ, was partially offset by the net cash proceeds of
$247.8 million from DLJ's February 1996 Medium Term Notes offering. Net cash
used by financing activities during the first three months of 1995 primarily
resulted from a $1.39 billion decrease in short-term financings, principally due
to net repurchase agreement activity and by the $1.22 billion decrease in the
amount due to the discontinued GIC Segment as a result of continuing operations'
$1.22 billion cash settlement at the beginning of the year of its obligation to
fund the GIC Segment's accumulated deficit. Withdrawals from policyholders'
account balances exceeded deposits by $181.3 million during the three months
ended March 31, 1996.
The operating, investing and financing activities described above resulted in a
decrease in cash and cash equivalents during the first three months of 1996 of
$165.3 million to $1.04 billion.
30
<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, 1995, except that in one matter previously reported
therein, Golomb et al. v. The Equitable Life Assurance Society of the United
States, the New York County Supreme Court issued a decision in March, 1996
granting Equitable Life's motion to dismiss the plaintiff's complaint. Equitable
Life has submitted a proposed order to the court and the plaintiffs have
objected to one portion of the proposed order. Management has been advised that
plaintiffs plan to appeal the court's decision.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
None
31
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
The Equitable Companies Incorporated
-------------------------------------------
(Registrant)
Date: May 10, 1996 /s/ Jerry M. de St. Paer
------------------------ -------------------------------------------
Executive Vice President and
Chief Financial Officer
Date: May 10, 1996 /s/ Alvin H. Fenichel
------------------------ -------------------------------------------
Senior Vice President and Controller
32
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<DEBT-HELD-FOR-SALE> 16,237,800
<DEBT-CARRYING-VALUE> 223,800
<DEBT-MARKET-VALUE> 240,500
<EQUITIES> 931,100
<MORTGAGE> 3,551,300
<REAL-ESTATE> 3,816,000
<TOTAL-INVEST> 57,661,600
<CASH> 1,035,100
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 3,213,600
<TOTAL-ASSETS> 116,402,100
<POLICY-LOSSES> 0
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 4,067,600
<POLICY-HOLDER-FUNDS> 21,848,000
<NOTES-PAYABLE> 5,834,900
0
404,600
<COMMON> 1,800
<OTHER-SE> 3,273,300
<TOTAL-LIABILITY-AND-EQUITY> 116,402,100
353,900
<INVESTMENT-INCOME> 780,500
<INVESTMENT-GAINS> 170,300
<OTHER-INCOME> 626,000
<BENEFITS> 253,200
<UNDERWRITING-AMORTIZATION> 60,200
<UNDERWRITING-OTHER> 1,087,700
<INCOME-PRETAX> 209,000
<INCOME-TAX> 62,900
<INCOME-CONTINUING> 106,400
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (23,100)
<NET-INCOME> 83,300
<EPS-PRIMARY> 0.41
<EPS-DILUTED> 0.39
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
