Filed Pursuant to Rule 497(e)
Registration File No.: 33-83750
INCOME MANAGER(SERVICE MARK)
ACCUMULATOR
STATEMENT OF ADDITIONAL INFORMATION
APRIL 17, 1995
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COMBINATION VARIABLE AND
FIXED DEFERRED ANNUITY CERTIFICATES
FUNDED THROUGH THE
INVESTMENT FUNDS OF SEPARATE ACCOUNT NO. 45
ASSET ALLOCATION SERIES:
O CONSERVATIVE INVESTORS
O GROWTH INVESTORS
EQUITY SERIES:
O GROWTH & INCOME
O COMMON STOCK
O GLOBAL
O INTERNATIONAL
O AGGRESSIVE STOCK
FIXED INCOME SERIES:
O MONEY MARKET
O INTERMEDIATE GOVERNMENT SECURITIES
ISSUED BY:
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
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Home Office: 787 Seventh Avenue, New York, NY 10019
Processing Office: Post Office Box 1547, Secaucus, NJ 07096-1547
- ------------------------------------------------------------------------------
This statement of additional information (SAI) is not a prospectus. It should
be read in conjunction with the Separate Account No. 45 prospectus for the
Accumulator, dated April 17, 1995. Definitions of special terms used in the
SAI are found in the prospectus.
A copy of the prospectus is available free of charge by writing the
Processing Office, by calling 1-800-789-7771, toll-free, or by contacting
your Registered Representative.
STATEMENT OF ADDITIONAL INFORMATION
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
- ----------------------------------------------------------------------------------------- --------
<S> <C>
Part 1 Accumulation Unit Values 2
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Part 2 Annuity Unit Values 2
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Part 3 Custodian and Independent Accountants 3
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Part 4 Money Market Fund and Intermediate Government Securities Fund Yield Information 3
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Part 5 Long-Term Market Trends 4
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Part 6 Financial Statements 6
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</TABLE>
Copyright 1995
The Equitable Life Assurance Society of the United States, New York, New York
10019.
All rights reserved.
<PAGE>
PART 1 - ACCUMULATION UNIT VALUES
Accumulation Unit Values are determined at the end of each Valuation Period
for each of the Investment Funds. Other annuity contracts and certificates
which may be offered by us will have their own accumulation unit values for
the Investment Funds which may be different from those for the Accumulator.
The Accumulation Unit Value for an Investment Fund for any Valuation Period
is equal to the Accumulation Unit Value for the preceding Valuation Period
multiplied by the Net Investment Factor for that Investment Fund for that
Valuation Period. The NET INVESTMENT FACTOR is (a/b) - c where:
(a) is the value of the Investment Fund's shares of the corresponding
Portfolio at the end of the Valuation Period before giving effect to any
amounts allocated to or withdrawn from the Investment Fund for the
Valuation Period. For this purpose, we use the share value reported to us
by the Trust.
(b) is the value of the Investment Fund's shares of the corresponding
Portfolio at the end of the preceding Valuation Period (after any amounts
allocated or withdrawn for that Valuation Period).
(c) is the daily Separate Account mortality and expense risk charge and asset
based administrative charge relating to the Certificates, times the number
of calendar days in the Valuation Period. These daily charges are at an
effective annual rate not to exceed a total of 1.15%.
PART 2 - ANNUITY UNIT VALUES
The annuity unit value will be fixed on May 1, 1995 for Certificates with
assumed base rates of net investment return of both 5% and 3 1/2 % a year.
For each Valuation Period after that date, it is the annuity unit value for
the immediately preceding Valuation Period multiplied by the adjusted Net
Investment Factor under the Certificate. For each Valuation Period, the
adjusted Net Investment Factor is equal to the Net Investment Factor reduced
for each day in the Valuation Period by:
o .00013366 of the Net Investment Factor if the assumed base rate of net
investment return is 5% a year; or
o .00009425 of the Net Investment Factor if the assumed base rate of net
investment return is 3 1/2 %.
Because of this adjustment, the annuity unit value rises and falls depending
on whether the actual rate of net investment return (after deduction of
charges) is higher or lower than the assumed base rate.
All Certificates have a 5% assumed base rate of net investment return, except
in states where that rate is not permitted. Annuity payments under
Certificates with an assumed base rate of 3 1/2 % will at first be smaller
than those under Certificates with a 5% assumed base rate. Payments under the
3 1/2 % Certificates, however, will rise more rapidly when unit values are
rising, and payments will fall more slowly when unit values are falling than
those under 5% Certificates.
The amounts of variable annuity payments are determined as follows:
Payments normally start on the Business Day specified on your election form,
or on such other future date as specified therein and are made on a monthly
basis. The first three payments are of equal amounts. Each of the first three
payments will be based on the amount specified in the Tables of Guaranteed
Annuity Payments in the Certificate.
The first three payments depend on the assumed base rate of net investment
return and the form of annuity chosen (and any fixed period). If the annuity
involved a life contingency, the risk class and the age of the annuitants
will affect payments.
The amount of the fourth and each later payment will vary according to the
investment performance of the Common Stock Fund. Each monthly payment will be
calculated by multiplying the number of annuity units credited by the average
annuity unit value for the second calendar month immediately preceding the
due date of the payment. The number of units is calculated by dividing the
first monthly payment by the annuity unit value for the Valuation Period
which includes the due date of the first monthly payment. The average annuity
unit value is the average of the annuity unit values for the Valuation
Periods ending in that month. Variable income annuities may also be available
by separate prospectus through the Common Stock or other Funds of other
separate accounts we offer.
Illustration of Changes in Annuity Unit Values.
To show how we determine variable annuity payments from month to month,
assume that the Annuity Account Value on an Annuity Commencement Date is
<PAGE>
enough to fund an annuity with a monthly payment of $363 and that the annuity
unit value for the Valuation Period
2
<PAGE>
that includes the due date of the first annuity payment is $1.05. The number
of annuity units credited under the contract would be 345.71 (363 divided by
1.05 = 345.71).
If the fourth monthly payment is due in March, and the average annuity unit
value for January was $1.10, the annuity payment for March would be the
number of units (345.71) times the average annuity unit value ($1.10), or
$380.28. If the average annuity unit value was $1 in February, the annuity
payment for April would be 345.71 times $1, or $345.71.
PART 3 - CUSTODIAN AND INDEPENDENT ACCOUNTANTS
Equitable Life is the custodian for shares of the Trust owned by the Separate
Account.
The consolidated financial statements of Equitable Life for the years ended
December 31, 1994 and 1993 included in the SAI have been audited by Price
Waterhouse LLP, and for the year ended December 31, 1992 by Deloitte & Touche
LLP, as stated in their respective reports.
The consolidated financial statements of Equitable Life for the years ended
December 31, 1994 and 1993 included in this SAI have been so included in
reliance on the report of Price Waterhouse LLP, independent accountants,
given on the authority of such firm as experts in accounting and auditing.
The consolidated financial statements of Equitable Life for the year ended
December 31, 1992 included in this SAI have been so included in reliance on
the report of Deloitte & Touche LLP, independent accountants, given on the
authority of such firm as experts in accounting and auditing.
PART 4 - MONEY MARKET FUND AND INTERMEDIATE
GOVERNMENT SECURITIES FUND YIELD INFORMATION
Money Market Fund
The Money Market Fund calculates yield information for seven-day periods. The
seven-day current yield calculation is based on a hypothetical Certificate
with one Accumulation Unit at the beginning of the period. To determine the
seven-day rate of return, the net change in the Accumulation Unit Value is
computed by subtracting the Accumulation Unit Value at the beginning of the
period from an Accumulation Unit Value, exclusive of capital changes, at the
end of the period.
The net change is then reduced by the average contract fee factor (explained
below). This reduction is made to recognize the deduction of the annual
contract fee, which is not reflected in the unit value. See "Annual Contract
Fee" in Part 6 of the prospectus.
Accumulation Unit Values reflect all other accrued expenses of the Money
Market Fund but do not reflect the distribution fee, the withdrawal charge,
the guaranteed minimum death benefit charge or any premium taxes.
The adjusted net change is divided by the Accumulation Unit Value at the
beginning of the period to obtain the adjusted base period rate of return.
This seven-day adjusted base period return is then multiplied by 365/7 to
produce an annualized seven-day current yield figure carried to the nearest
one-hundredth of one percent.
The actual dollar amount of the annual contract fee that is deducted from the
Money Market Fund will vary for each Certificate depending upon the
percentage of the Annuity Account Value allocated to the Money Market Fund.
To determine the effect of the annual contract fee on the yield, we start
with the total dollar amounts of the charges deducted from the Fund during
the 12-month period ending on the last day of the prior year. The amount is
multiplied by 7/365 to produce an average contract fee factor which is used
in all weekly yield computations for the ensuing year. The average contract
fee factor is then divided by the number of Accumulator Money Market Fund
Accumulation Units as of the end of the prior calendar year, and the
resulting quotient is deducted from the net change in Accumulation Unit Value
for the seven-day period.
The effective yield is obtained by modifying the current yield to give effect
to the compounding nature of the Money Market Fund's investments, as follows:
the unannualized adjusted base period return is compounded by adding one to
the adjusted base period return, raising the sum to a power equal to 365
divided by 7, and subtracting one from the result, i.e., effective yield =
(base period return + 1 ) 365/7 -- 1. The Money Market Fund yields will
fluctuate daily. Accordingly, yields for any given period are not necessarily
representative of future results. In addition, the value of Accumulation
Units of the Money Market Fund will fluctuate and not remain constant.
3
<PAGE>
Intermediate Government Securities Fund
The Intermediate Government Securities Fund calculates yield information for
30-day periods. The 30-day current yield calculation is based on a
hypothetical Certificate with one Accumulation Unit at the beginning of the
period. To determine the 30-day rate of return, the net change in the
Accumulation Unit Value is computed by subtracting the Accumulation Unit
Value at the beginning of the period from an Accumulation Unit Value,
exclusive of capital changes, at the end of the period.
The net change is then reduced by the average contract fee factor (explained
below). This reduction is made to recognize the deduction of the annual
contract fee, which is not reflected in the unit value. See "Annual Contract
Fee" in Part 6 of the prospectus.
Accumulation Unit Values reflect all other accrued expenses of the
Intermediate Government Securities Fund but do not reflect the distribution
fee, the withdrawal charge, the guaranteed minimum death benefit charge or
any premium taxes.
The adjusted net change is divided by the Accumulation Unit Value at the
beginning of the period to obtain the adjusted base period rate of return.
This 30-day adjusted base period return is then multiplied by 365/30 to
produce an annualized 30-day current yield figure carried to the nearest
one-hundredth of one percent.
The actual dollar amount of the annual contract fee that is deducted from the
Intermediate Government Securities Fund will vary for each Certificate
depending upon the percentage of the Annuity Account Value allocated to the
Intermediate Government Securities Fund. To determine the effect of the
annual contract fee on the yield, we start with the total dollar amounts of
the charges deducted from the Fund during the 12-month period ending on the
last day of the prior year. The amount is multiplied by 30/365 to produce an
average contract fee factor which is used in all 30-day yield computations
for the ensuing year. The average contract fee is then divided by the number
of Accumulator Intermediate Government Securities Fund Accumulation Units as
of the end of the prior calendar year, and the resulting quotient is deducted
from the net change in Accumulation Unit Value for the 30-day period.
The effective yield is obtained by modifying the current yield to give effect
to the compounding nature of the Intermediate Government Securities Fund's
investments, as follows: the unannualized adjusted base period return is
compounded by adding one to the adjusted base period return, raising the sum
to a power equal to 365 divided by 30, and subtracting one from the result,
i.e., effective yield = (base period return + 1) 365/30 -- 1. Intermediate
Government Securities Fund yields will fluctuate daily. Accordingly, yields
for any given period are not necessarily representative of future results. In
addition, the value of the Accumulation Units of the Intermediate Government
Securities Fund will fluctuate and not remain constant.
Money Market Fund and Intermediate Government Securities Fund Yield
Information
Money Market Fund and the Intermediate Government Securities Fund yields
reflect charges that are not normally reflected in the yields of other
investments and therefore may be lower when compared with yields of other
investments. Money Market Fund and Intermediate Government Securities Fund
yields should not be compared to the return on fixed rate investments which
guarantee rates of interest for specified periods, such as the Guarantee
Periods. Nor should the yield be compared to the yield of money market funds
or government securities funds made available to the general public.
Because the Accumulator Certificates are being offered for the first time in
1995, yield information is not available.
PART 5 - LONG-TERM MARKET
TRENDS
As a tool for understanding how different investment strategies may affect
long-term results, it may be useful to consider the historical returns on
different types of assets. The following charts present historical return
trends for various types of securities. The information presented, while not
directly related to the performance of the Investment Funds, helps to provide
a perspective on the potential returns of different asset classes over
different periods of time. By combining this information with knowledge of
personal financial needs (e.g., the length of time until retirement,
financial requirements at retirement), you may be able to better determine
how to allocate contributions among the Accumulator Investment Funds.
4
<PAGE>
Historically, the long-term investment performance of common stocks has
generally been superior to that of long- or short-term debt securities. For
those investors who have many years until retirement, or whose primary focus
is on long-term growth potential and protection against inflation, there may
be advantages to allocating some or all of their Annuity Account Value to
those Investment Funds that invest in stocks.
Growth of $1 Invested on January 1, 1954
(Values as of the last business day)
[THE FOLLOWING TABLE WAS REPRESENTED AS A
STACKED AREA GRAPH IN THE PROSPECTUS]
<TABLE>
<CAPTION>
A B
Label Label Inflation Common Stocks
------- ------- --------- ---------------
<S> <C> <C> <C>
1 1954 1 1
2 1 1.32
3 1.03 1.4
4 1.06 1.25
5 1.08 1.79
6 1.1 2.01
7 1.11 2.02
8 1.12 2.56
9 1.14 2.34
10 1.15 2.87
11 1964 1.17 3.34
12 1.19 3.76
13 1.23 3.38
14 1.27 4.19
15 1.33 4.65
16 1.41 4.26
17 1.49 4.43
18 1.54 5.06
19 1.59 6.02
20 1.73 5.14
21 1974 1.94 3.78
22 2.08 5.18
23 2.18 6.42
24 2.32 5.96
25 2.53 6.35
26 2.87 7.52
27 3.23 9.96
28 3.51 9.47
29 3.65 11.5
30 3.79 14.09
31 1984 3.94 14.97
32 4.09 19.78
33 4.13 23.44
34 4.32 24.66
35 4.51 28.81
36 4.72 37.88
37 5 36.68
38 5.16 47.89
39 5.31 51.56
40 5.45 56.71
41 1994 5.6 57.45
</TABLE>
[END OF GRAPHICALLY REPRESENTED DATA]
Source: Ibbotson Associates, Inc. See discussion and information preceding
and following chart.
Over shorter periods of time, however, common stocks tend to be subject to
more dramatic changes in value than fixed income (debt) securities. Investors
who are nearing retirement age, or who have a need to limit short-term risk,
may find it preferable to allocate a smaller percentage of their Annuity
Account Value to those Investment Funds that invest in common stocks. The
following graph illustrates the monthly fluctuations in value of $1 based on
monthly returns of the Standard & Poor's 500 during 1990, a year that
represents more typical volatility than 1994.
CAPTION:
Growth of $1 Invested on January 1, 1990
(Values are as of the last business day)
[THE FOLLOWING TABLE WAS REPRESENTED AS A
SCATTER GRAPH IN THE PROSPECTUS]
<TABLE>
<CAPTION>
A B
Label Label Common Stocks Intermediate-Term
- ------- -------- -------------- -----------------
<S> <C> <C> <C>
1 1/1/90 $1.00 $1.00
2 Jan. $0.93 $0.99
3 Feb. $0.94 $0.99
4 Mar. $0.97 $0.99
5 Apr. $0.95 $0.98
6 May $1.04 $1.01
7 June $1.03 $1.02
8 July $1.03 $1.04
9 Aug. $0.93 $1.03
10 Sep. $0.89 $1.04
11 Oct. $0.89 $1.06
12 Nov. $0.94 $1.08
13 Dec. $0.97 $1.10
</TABLE>
[END OF GRAPHICALLY REPRESENTED DATA]
Source: Ibbotson Associates, Inc. See discussion and information preceding
and following chart.
The following chart illustrates average annual rates of return over selected
time periods between December 31, 1926 and December 31, 1994 for different types
of securities: common stocks, long-term government bonds, long-term corporate
bonds, intermediate-term government bonds and U.S. Treasury Bills. For
comparison purposes, the Consumer Price Index is shown as a measure of
inflation. The average annual returns shown in the chart reflect capital
appreciation and assume the reinvestment of dividends and interest.
No investment management fees or expenses, and no charges typically
associated with deferred annuity products, are reflected.
The information presented is merely a summary of past experience for
unmanaged groups of securities and is neither an estimate or guarantee of
future performance. Any investment in securities, whether equity or debt,
involves varying degrees of potential risk, in addition to offering varying
degrees of potential reward.
The rates of return illustrated do not represent returns of the Separate
Account. In addition, there is no assurance that the performance of the
Investment Funds will correspond to rates of return such as those illustrated
in the chart. For a comparative illustration of performance results of the
Investment Funds (which reflect the Trust and Separate Account charges), see
"Part 3: Investment Performance" in the prospectus.
5
<PAGE>
MARKET TRENDS:
ILLUSTRATIVE ANNUAL RATES OF RETURN
<TABLE>
<CAPTION>
LONG-TERM INTERMEDIATE-
FOR THE FOLLOWING PERIODS COMMON LONG-TERM CORPORATE TERM GOVT. U.S. TREASURY CONSUMER
ENDING 12/31/94 STOCKS GOVT. BONDS BONDS BONDS BILLS PRICE INDEX
- ----------------------------- -------- ------------- ----------- --------------- --------------- -------------
<S> <C> <C> <C> <C> <C> <C>
1 Year 1.31% (7.77)% (5.76)% (5.14)% 3.90% 2.78%
3 Years 6.26 5.62 5.28 4.19 3.43 2.81
5 Years 8.69 8.34 8.36 7.46 4.73 3.51
10 Years 14.40 11.86 11.57 9.40 5.76 3.59
20 Years 14.58 9.42 10.00 9.25 7.29 5.45
30 Years 9.95 6.96 7.31 7.84 6.66 5.36
40 Years 10.66 5.62 6.14 6.58 5.63 4.40
50 Years 11.92 4.99 5.34 5.59 4.69 4.35
60 Years 11.48 4.81 5.21 5.19 3.92 4.10
Since 12/31/26 10.19 4.83 5.41 5.09 3.69 3.13
Inflation adjusted since 1926 6.85 2.22 1.65 1.91 0.55 --
</TABLE>
SOURCE: Stocks, Bonds, Bills, and Inflation 1995 Yearbook(Trademark),
Ibbotson Associates, Chicago (annually updates work by Roger G. Ibbotson and
Rex A. Sinquefield). All rights reserved.
COMMON STOCKS (S&P 500)--Standard and Poor's Composite Index, an unmanaged
weighted index of the stock performance of 500 industrial, transportation,
utility and financial companies.
LONG-TERM GOVERNMENT BONDS--Measured using a one-bond portfolio constructed
each year containing a bond with approximately a twenty year maturity and a
reasonably current coupon.
LONG-TERM CORPORATE BONDS--For the period 1969-1994, represented by the
Salomon Brothers Index was backdated using Salomon Brothers monthly yield
data and a methodology similar to that used by Salomon Brothers for
1969-1994; for the period 1927-1945, the Standard and Poor's monthly
High-Grade Corporate Composite yield data were used, assuming a 4 percent
coupon and a twenty year maturity.
INTERMEDIATE-TERM GOVERNMENT BONDS--Measured by a one-bond portfolio
constructed each year containing a bond with approximately a five year
maturity.
U. S. TREASURY BILLS--Measured by rolling over each month a one-bill
portfolio containing, at the beginning of each month, the bill having the
shortest maturity not less than one month.
INFLATION--Measured by the Consumer Price Index for all Urban Consumers
(CPI-U), not seasonally adjusted.
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PART 6 - FINANCIAL STATEMENTS
The consolidated financial statements of The Equitable Life Assurance Society
of the United States included herein should be considered only
as bearing upon the ability of Equitable Life to meet its obligations under
the Certificates. There are no financial statements for the Separate Account
as it had not commenced operations as of the date of the prospectus and SAI.
6
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To The Board of Directors and Shareholders of
The Equitable Life Assurance Society of the United States
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of earnings, of shareholder's equity and of cash
flows present fairly, in all material respects, the financial position of The
Equitable Life Assurance Society of the United States and its subsidiaries
("Equitable Life") at December 31, 1994 and 1993, and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of Equitable Life's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with generally
accepted auditing standards which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
As discussed in Note 2 to the consolidated financial statements, Equitable
Life changed its methods of accounting for postemployment benefits in 1994
and for investment securities and for reinsurance in 1993.
PRICE WATERHOUSE LLP
New York, New York
February 8, 1995
7
<PAGE>
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INDEPENDENT AUDITORS' REPORT
The Board of Directors of The Equitable Life Assurance Society of the United
States:
We have audited the consolidated statements of earnings, shareholder's equity
and cash flows of The Equitable Life Assurance Society of the United States
("Equitable Life") for the year ended December 31, 1992. These consolidated
financial statements are the responsibility of Equitable Life's management.
Our responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the consolidated results of operations and consolidated
cash flows of The Equitable Life Assurance Society of the United States for
the year ended December 31, 1992 in conformity with generally accepted
accounting principles.
As discussed in Note 2 to the consolidated financial statements, in 1992
Equitable Life changed its method of accounting for foreclosed assets, income
taxes and postretirement benefits other than pensions.
Deloitte & Touche LLP
New York, New York
February 16, 1993
8
<PAGE>
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1994 AND 1993
<TABLE>
<CAPTION>
1994 1993
----------- -----------
(IN MILLIONS)
<S> <C> <C>
ASSETS
Investments:
Fixed maturities:
Held to maturity, at amortized cost ........................ $ 5,223.0 $ 5,659.1
Available for sale, at estimated fair value ................ 7,586.0 7,829.3
Mortgage loans on real estate ............................... 4,018.0 4,592.1
Equity real estate .......................................... 4,446.4 4,452.6
Policy loans ................................................ 1,731.2 1,549.1
Other equity investments .................................... 678.5 851.0
Investment in and loans to affiliates ....................... 560.2 533.0
Other invested assets ....................................... 489.3 374.2
----------- -----------
Total investments .......................................... 24,732.6 25,840.4
Cash and cash equivalents ..................................... 693.6 593.4
Deferred policy acquisition costs ............................. 3,221.1 2,858.8
Amounts due from discontinued GIC Segment ..................... 2,108.6 2,125.9
Other assets .................................................. 2,078.6 1,900.8
Closed Block assets ........................................... 8,105.5 8,084.3
Separate Accounts assets ...................................... 20,469.5 19,684.1
----------- -----------
TOTAL ASSETS .................................................. $61,409.5 $61,087.7
===========
LIABILITIES
Policyholders' account balances ............................... $21,238.0 $21,499.1
Future policy benefits and other policyholders' liabilities .. 3,840.8 3,753.6
Short-term and long-term debt ................................. 1,337.4 1,659.5
Other liabilities ............................................. 2,300.1 2,450.3
Closed Block liabilities ...................................... 9,069.5 9,143.4
Separate Accounts liabilities ................................. 20,429.3 19,631.2
----------- -----------
Total liabilities ........................................... 58,215.1 58,137.1
----------- -----------
Commitments and contingencies (Notes 10, 12, 13, 14, 15 and 23)
SHAREHOLDER'S EQUITY
Common stock, $1.25 par value 2.0 million shares authorized,
issued and outstanding ...................................... 2.5 2.5
Capital in excess of par value ................................ 2,913.6 2,613.6
Retained earnings ............................................. 484.0 217.6
Net unrealized investment (losses) gains ...................... (203.0) 131.9
Minimum pension liability ..................................... (2.7) (15.0)
----------- -----------
Total shareholder's equity .................................. 3,194.4 2,950.6
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY .................... $61,409.5 $61,087.7
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
9
<PAGE>
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
CONSOLIDATED STATEMENTS OF EARNINGS
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
<TABLE>
<CAPTION>
1994 1993 1992
--------- --------- ---------
(IN MILLIONS)
<S> <C> <C> <C>
REVENUES
Universal life and investment-type product policy fee income $ 715.0 $ 644.5 $ 571.7
Premiums .................................................... 625.6 599.1 1,185.3
Net investment income ....................................... 2,030.9 2,599.3 2,689.5
Investment gains, net ....................................... 91.8 533.4 371.8
Commissions, fees and other income .......................... 845.4 1,717.2 1,407.4
Contribution from the Closed Block .......................... 151.0 128.3 59.3
--------- --------- ---------
Total revenues ............................................ 4,459.7 6,221.8 6,285.0
--------- --------- ---------
BENEFITS AND OTHER DEDUCTIONS
Interest credited to policyholders' account balances ....... 1,201.3 1,330.0 1,440.8
Policyholders' benefits ..................................... 920.6 1,003.9 1,755.7
Other operating costs and expenses .......................... 1,943.1 3,584.2 3,095.7
--------- --------- ---------
Total benefits and other deductions ....................... 4,065.0 5,918.1 6,292.2
--------- --------- ---------
Earnings (loss) before Federal income taxes, extraordinary
item and cumulative effect of accounting changes .......... 394.7 303.7 (7.2)
Federal income taxes ........................................ 101.2 91.3 19.2
--------- --------- ---------
Earnings (loss) before extraordinary item and cumulative
effect of accounting changes ............................... 293.5 212.4 (26.4)
Extraordinary charge for demutualization expenses .......... -- -- (93.8)
Cumulative effect of accounting changes, net of Federal
income taxes ............................................... (27.1) -- 4.9
--------- --------- ---------
Net Earnings (Loss) ......................................... $ 266.4 $ 212.4 $ (115.3)
========= ========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
10
APITAL PRINTING SYSTEMS]
<PAGE>
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
<TABLE>
<CAPTION>
1994 1993 1992
---------- ---------- -----------
(IN MILLIONS)
<S> <C> <C> <C>
Common stock, at par value, beginning of year ........ $ 2.5 $ 2.0 $ --
Issuance of common stock .............................. -- -- 2.0
Increase in par value ................................. -- .5 --
---------- ---------- -----------
Common stock, at par value, end of year ............... 2.5 2.5 2.0
---------- ---------- -----------
Capital in excess of par value, beginning of year .... 2,613.6 2,273.9 --
Additional capital in excess of par value ............. 300.0 340.2 2,273.9
Increase in par value ................................. -- (.5) --
---------- ---------- -----------
Capital in excess of par value, end of year .......... 2,913.6 2,613.6 2,273.9
---------- ---------- -----------
Retained earnings, beginning of year .................. 217.6 5.2 1,290.0
Net loss before demutualization ....................... -- -- (120.5)
Demutualization transaction ........................... -- -- (1,169.5)
Net earnings after demutualization .................... 266.4 212.4 5.2
---------- ---------- -----------
Retained earnings, end of year ........................ 484.0 217.6 5.2
---------- ---------- -----------
Net unrealized investment gains, beginning of year ... 131.9 78.8 65.5
Change in unrealized investment (losses) gains ....... (334.9) (9.5) 13.3
Effect of adopting new accounting standard ............ -- 62.6 --
---------- ---------- -----------
Net unrealized investment (losses) gains, end of year (203.0) 131.9 78.8
---------- ---------- -----------
Minimum pension liability, beginning of year ......... (15.0) --
Change in minimum pension liability ................... 12.3 (15.0)
---------- ----------
Minimum pension liability, end of year ................ (2.7) (15.0)
---------- ----------
TOTAL SHAREHOLDER'S EQUITY, END OF YEAR ............... $3,194.4 $2,950.6 $ 2,359.9
========== ========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
11
<PAGE>
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
<TABLE>
<CAPTION>
1994 1993 1992
----------- ------------ -----------
(IN MILLIONS)
<S> <C> <C> <C>
Net earnings (loss) ................................ $ 266.4 $ 212.4 $ (115.3)
Adjustments to reconcile net earnings (loss) to net
cash provided (used) by operating activities:
Net change in trading activities and broker-dealer
related receivables/payables ................... -- (4,177.8) (2,872.9)
Increase in matched resale agreements ............ -- (2,900.5) (1,692.4)
Increase in matched repurchase agreements ........ -- 2,900.5 1,692.4
Investment gains, net of dealer and trading gains (91.8) (160.8) (101.6)
Change in amounts due from discontinued GIC
Segment ........................................ 57.3 47.8 76.4
General Account policy charges ................... (711.9) (623.4) (542.9)
Interest credited to policyholders' account
balances ....................................... 1,201.3 1,330.0 1,440.8
Changes in Closed Block assets and liabilities,
net ............................................ (95.1) (73.3) (156.6)
Change in postretirement benefits liability ...... .5 (8.5) 386.7
Other, net ....................................... 7.3 (407.6) 60.9
----------- ------------ -----------
Net cash provided (used) by operating activities .. 634.0 (3,861.2) (1,824.5)
----------- ------------ -----------
Cash flows from investing activities:
Maturities and repayments ........................ 2,319.7 3,479.6 2,395.8
Sales ............................................ 5,661.9 7,399.2 5,947.1
Return of capital from joint ventures and limited
partnerships ................................... 39.0 119.5 216.7
Purchases ........................................ (7,417.6) (11,184.2) (9,009.5)
Net increase in loans to discontinued GIC Segment (40.0) (880.0) (1,448.6)
Cash received on sale of 61% interest in DLJ ..... -- 346.7 --
Other, net ....................................... (371.1) (317.0) 287.6
----------- ------------ -----------
Net cash provided (used) by investing activities .. 191.9 (1,036.2) (1,610.9)
----------- ------------ -----------
Cash flows from financing activities:
Policyholders' account balances:
Deposits ....................................... 2,082.7 2,410.7 2,411.6
Withdrawals .................................... (2,887.4) (2,433.5) (2,912.0)
Net (decrease) increase in short-term financings . (173.0) 4,717.2 1,786.3
Additions to long-term debt ...................... 51.8 97.7 477.3
Repayments of long-term debt ..................... (199.8) (64.4) (281.4)
Proceeds from issuance of Alliance units ......... 100.0 -- --
Capital contribution from the Holding Company .... 300.0 -- 177.8
----------- ------------ -----------
Net cash (used) provided by financing activities .. (725.7) 4,727.7 1,659.6
----------- ------------ -----------
Change in cash and cash equivalents ................ 100.2 (169.7) (1,775.8)
Cash and cash equivalents, beginning of year ...... 593.4 763.1 2,538.9
----------- ------------ -----------
Cash and Cash Equivalents, End of Year ............. $ 693.6 $ 593.4 $ 763.1
=========== ============ ===========
Supplemental cash flow information
Interest Paid .................................... $ 34.9 $ 1,437.2 $ 1,244.0
=========== ============ ===========
Income Taxes Paid (Refunded) ..................... $ 49.2 $ 41.0 $ (21.3)
=========== ============ ===========
</TABLE>
See Notes to Consolidated Financial Statements.
12
<PAGE>
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1) ORGANIZATION
The Equitable Life Assurance Society of the United States ("Equitable
Life") converted to a stock life insurance company on July 22, 1992 and
became a wholly owned subsidiary of The Equitable Companies Incorporated (the
"Holding Company"). In connection with the conversion, Equitable Life's
eligible policyholders received cash, policy credits or common stock of the
Holding Company. The costs incurred in connection with the demutualization
have been presented as an extraordinary charge.
At conversion, on July 22, 1992, AXA Group ("AXA") became the owner of 49%
of the Holding Company's common shares outstanding.
On December 19, 1994, the Holding Company exchanged all its outstanding
redeemable preferred stock and substantially all of its convertible preferred
stock for common stock, a new series of convertible preferred stock and
convertible debentures. As a result of this transaction, AXA's ownership of
the Holding Company increased to 60.5% (63.6% assuming conversion of
Convertible Preferred Stock held by AXA and 54.1% if all securities
convertible into, or options on, common stock were to be converted or
exercised).
2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Principles of Consolidation
After July 22, 1992, Equitable Life commenced preparing its general
purpose financial statements in conformity with generally accepted accounting
principles ("GAAP") for stock life insurance companies. Such principles have
been applied retroactively in the preparation of these consolidated financial
statements for all periods prior to conversion.
The accompanying consolidated financial statements include the accounts of
Equitable Life and its wholly owned life insurance subsidiaries
(collectively, the "Insurance Group"); non-insurance subsidiaries,
principally Alliance Capital Management L.P. ("Alliance"), an investment
advisory subsidiary and Equitable Real Estate Investment Management, Inc.
("EREIM"), a real estate investment management subsidiary; and those
partnerships and joint ventures (collectively, including its consolidated
subsidiaries the "Company") in which the Company has control and a majority
economic interest. The consolidated statements of earnings and cash flows for
the years ended December 31, 1993 and 1992 include the results of operations
and cash flows of Donaldson, Lufkin & Jenrette, Inc. ("DLJ"), an investment
banking and brokerage affiliate, on a consolidated basis through December 15,
1993, the date of sale (see Note 21). Subsequent to the date of sale, DLJ is
accounted for on the equity basis. The Closed Block assets and liabilities
and results of operations subsequent to demutualization are presented in the
consolidated financial statements as single line items. Prior to
demutualization such amounts were presented line by line in the consolidated
financial statements (see Note 6). Unless specifically stated, all
disclosures contained herein supporting the consolidated financial statements
exclude the Closed Block related amounts.
All significant intercompany transactions and balances have been
eliminated in consolidation other than intercompany transactions and balances
with the Closed Block and the discontinued Guaranteed Interest Contract
("GIC") Segment (see Note 7).
Certain reclassifications have been made in the amounts presented for
prior periods to conform those periods with the 1994 presentation.
13
<PAGE>
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Closed Block
As of July 22, 1992, Equitable Life established the Closed Block for the
benefit of certain classes of individual participating policies for which
Equitable Life had a dividend scale payable in 1991 and which were in force
on that date. Assets were allocated to the Closed Block in an amount which,
together with anticipated revenues from policies included in the Closed
Block, was reasonably expected to be sufficient to support such business,
including provision for payment of claims, certain expenses and taxes, and
for continuation of dividend scales payable in 1991, assuming the experience
underlying such scales continues.
Assets allocated to the Closed Block inure solely to the benefit of the
holders of policies included in the Closed Block and will not revert to the
benefit of Equitable Life's shareholder. The plan of demutualization
prohibits the reallocation, transfer, borrowing or lending of assets between
the Closed Block and other portions of Equitable Life's General Account, any
of its Separate Accounts or to any affiliate of Equitable Life without the
approval of the New York Superintendent of Insurance. Closed Block assets and
liabilities are carried on the same basis as similar assets and liabilities
held in the General Account.
The excess of Closed Block liabilities over Closed Block assets represents
the expected future post-tax contribution from the Closed Block which would
be recognized in income over the period the policies and contracts in the
Closed Block remain in force.
If the actual contribution from the Closed Block in any given period
equals or exceeds the expected contribution for such period as determined at
the establishment of the Closed Block, the expected contribution would be
recognized in income for that period. Any excess of the actual contribution
over the expected contribution would also be recognized in income to the
extent that the aggregate expected contribution for all prior periods
exceeded the aggregate actual contribution. Any remaining excess of actual
contribution over expected contributions would be accrued in the Closed Block
as a liability for future dividends to be paid to the Closed Block
policyholders.
If, over the period the policies and contracts in the Closed Block remain
in force, the actual contribution from the Closed Block is less than the
expected contribution from the Closed Block, only such actual contribution
would be recognized in income.
Discontinued Operations
In 1991, the Company's management adopted a plan to discontinue the
business operations of the GIC Segment, consisting of the Guaranteed Interest
Contract and Group Non-Participating Wind-Up Annuities lines of business. The
Company established a pre-tax provision for the estimated future losses of
the GIC line of business and a premium deficiency reserve for the Group
Non-Participating Wind-Up Annuities. Losses incurred subsequently have been
charged to the allowance for future losses and the premium deficiency
reserve. Total allowances are based upon management's best judgment and there
is no assurance that the ultimate losses will not differ.
Accounting Changes
In the fourth quarter of 1994 (effective as of January 1, 1994), the
Company adopted Statement of Financial Accounting Standards ("SFAS") No. 112,
Employers' Accounting for Postemployment Benefits,
14
<PAGE>
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
which requires employers to recognize the obligation to provide
postemployment benefits. Implementation of this statement resulted in a
charge for the cumulative effect of accounting change of $27.1 million, net
of a Federal income tax benefit of $14.6 million. The current year impact
from the implementation of this statement had no material effect on the 1994
consolidated statements of earnings.
In the first quarter of 1993, the Company adopted SFAS No. 113,
"Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration
Contracts," which establishes the conditions for reinsurance accounting. With
the adoption of this statement, certain reinsurance contracts were
reclassified in 1993 and are presented on a gross basis. Implementation of
this statement had no material effect on the Company's consolidated financial
statements.
At December 31, 1993, the Company adopted SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities," which expanded the use of
fair value accounting for those securities that a company does not have
positive intent and ability to hold to maturity. Implementation of this
statement increased consolidated shareholder's equity by $62.6 million net of
deferred policy acquisition costs, amounts attributable to participating
group annuity contracts and deferred Federal income tax.
In the fourth quarter of 1992 (effective as of January 1, 1992), the
Company adopted SFAS No. 109, "Accounting for Income Taxes," and SFAS No.
106, "Employers' Accounting for Postretirement Benefits Other Than Pensions."
The cumulative effect of accounting changes of $4.9 million is comprised of a
credit of $252.3 million related to the income tax statement and a charge of
$247.4 million, net of a Federal income tax benefit of $130.9 million,
related to the postretirement benefit statement.
In 1992, effective in the fourth quarter, the Company changed its method
of accounting for foreclosed assets to comply with AICPA Statement of
Position No. 92-3, "Accounting for Foreclosed Assets." This change resulted
in a charge of $34.5 million which is reflected in investment gains, net.
New Accounting Pronouncements
In the first quarter of 1995, the Company intends to adopt SFAS No. 114,
"Accounting by Creditors for Impairment of a Loan." This statement applies to
all creditors and addresses the accounting for impairment of a loan by
specifying how allowances for credit losses should be determined. The
statement also applies to all loans that are restructured in a troubled debt
restructuring involving a modification of terms. It requires that impaired
loans that are within the scope of this statement be measured based on the
present value of expected future cash flows discounted at the loan's
effective interest rate or, as a practical expedient, at the loan's
observable market price or the fair value of the collateral if the loan is
collateral dependent. The Company is currently providing for impairment of
loans through an allowance for possible losses, and the implementation of
this statement is not expected to have a significant effect on the level of
this allowance. As a result, there should be no material effect on the
Company's consolidated statements of earnings or shareholder's equity upon
adoption.
Valuation of Investments
Fixed maturities which the Company has both the ability and the intent to
hold to maturity are stated principally at amortized cost. For publicly
traded fixed maturities and for directly negotiated fixed maturities the
amortized cost is adjusted for impairments in value deemed to be other than
temporary. Fixed maturities which have been identified as available for sale
are reported at estimated fair value.
15
<PAGE>
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Mortgage loans on real estate are stated at unpaid principal balances, net
of unamortized discounts and valuation allowances. The valuation allowances
are based on losses expected by management to be realized on transfers of
mortgage loans to real estate (upon foreclosure or in-substance foreclosure),
on the disposition or settlement of mortgage loans and on mortgage loans
which management believes may not be collectible in full. In establishing
valuation allowances, management considers, among other things, the estimated
fair value of the underlying collateral.
Real estate, including real estate acquired in satisfaction of debt, is
stated at depreciated cost less valuation allowances. At the date of
foreclosure (including in-substance foreclosure), real estate acquired in
satisfaction of debt is valued at estimated fair value. Valuation allowances
on real estate held for the production of income are computed using the
forecasted cash flows of the respective properties discounted at a rate equal
to the Company's cost of funds; valuation allowances on real estate available
for sale are computed using the lower of estimated current fair value or
depreciated cost, net of disposition costs.
Policy loans are stated at unpaid principal balances.
Partnerships and joint venture interests in which the Company does not
have control and a majority economic interest are reported using the equity
basis of accounting and are included with either equity real estate or other
equity investments, as appropriate.
Equity securities, comprised of common stock and non-redeemable preferred
stocks, are carried at estimated fair value and are included in other equity
investments.
Short-term investments are stated at amortized cost which approximates
fair value and are included with other invested assets.
Cash and cash equivalents included cash on hand, amounts due from banks
and highly liquid debt instruments purchased with an original maturity of
three months or less.
All securities are recorded in the consolidated financial statements on a
trade date basis.
Investment Results and Unrealized Investment Gains (Losses)
Net investment income excludes net investment income of Separate Accounts
on which the Insurance Group does not bear the investment risk. Net
investment income and realized investment gains and losses (collectively,
"investment results") related to certain participating group annuity
contracts are passed through to the contractholders as interest credited to
policyholders' account balances.
Realized investment gains and losses, other than those related to Separate
Accounts on which the Insurance Group does not bear the investment risk, are
determined by specific identification and are presented as a component of
revenue. Valuation allowances are netted against the asset categories to
which they apply and changes in the valuation allowances are included in
investment gains or losses.
Unrealized investment gains and losses on fixed maturities available for
sale and equity securities held by the Company are accounted for as a
separate component of shareholder's equity, net of related deferred Federal
income taxes, amounts attributable to the discontinued GIC Segment, Closed
Block, participating group annuity contracts and deferred policy acquisition
costs related to universal life and investment-type products.
16
<PAGE>
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Recognition of Insurance Income and Related Expenses
Premiums from universal life and investment-type contracts are reported as
deposits to policyholders' account balances. Revenues from these contracts
consist of amounts assessed during the period against policyholders' account
balances for mortality charges, policy administration charges and surrender
charges. Policy benefits and claims that are charged to expense include
benefit claims incurred in the period in excess of related policyholders'
account balances.
Premiums from traditional life and annuity policies with life
contingencies are recognized generally as income when due. Benefits and
expenses are matched with such income so as to result in the recognition of
profits over the life of the contracts. This match is accomplished by means
of the provision for liabilities for future policy benefits and the deferral
and subsequent amortization of policy acquisition costs.
For contracts with a single premium or a limited number of premium
payments due over a significantly shorter period than the total period over
which benefits are provided, premiums are recorded as income when due with
any excess profit deferred and recognized in income in a constant
relationship to insurance in force or, for annuities, the amount of expected
future benefit payments.
Premiums from individual health contracts are recognized as income over
the period to which the premiums relate in proportion to the amount of
insurance protection provided.
Deferred Policy Acquisition Costs
The costs of acquiring new business, principally commissions,
underwriting, agency and policy issue expenses, all of which vary with and
are primarily related to the production of new business, are deferred.
Deferred policy acquisition costs are subject to recoverability testing at
the time of policy issue and loss recognition testing at the end of each
accounting period.
For universal life and investment-type products, deferred policy
acquisition costs are amortized over the expected average life of the
contracts (periods ranging from 15 to 35 years and 5 to 17 years,
respectively) as a constant percentage of estimated gross profits arising
principally from investment results, mortality and expense margins and
surrender charges based on historical and anticipated future experience,
updated at the end of each accounting period. The effects of revisions to
experience on previous amortization of deferred policy acquisition costs are
reflected in earnings and change in unrealized investment gains (losses) in
the period estimated gross profits are revised.
For traditional life and annuity policies with life contingencies,
deferred policy acquisition costs are amortized in proportion to anticipated
premiums. Assumptions as to anticipated premiums are estimated at the date of
policy issue and are consistently applied during the life of the contracts.
Deviations from estimated experience are reflected in earnings in the period
such deviations occur. For these contracts, the amortization periods
generally are for the estimated life of the policy.
For individual health benefit insurance, deferred policy acquisition costs
are amortized over the expected average life of the contracts (10 years for
major medical policies and 20 years for disability income products) in
proportion to anticipated premium revenue at time of issue.
17
<PAGE>
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Policyholders' Account Balances and Future Policy Benefits
Policyholders' account balances for universal life and investment-type
contracts are equal to the policy account values. The policy account values
represent an accumulation of gross premium payments plus credited interest
less expense and mortality charges and withdrawals.
For traditional life insurance policies, future policy benefit and
dividend liabilities are computed using a net level premium method on the
basis of actuarial assumptions as to mortality, persistency and interest
established at policy issue. Assumptions established at policy issue as to
mortality and persistency are based on the Insurance Group's experience
which, together with interest and expense assumptions, provide a margin for
adverse deviation. When the liabilities for future policy benefits plus the
present value of expected future gross premiums are insufficient to provide
for expected future policy benefits and expenses, unrecoverable deferred
policy acquisition costs are written off and thereafter, if required, a
premium deficiency reserve is established by a charge to earnings. Benefit
liabilities for traditional annuities during the accumulation period are
equal to accumulated contractholders' fund balances and after annuitization
are equal to the present value of expected future payments. Interest rates
used in establishing such liabilities range from 2.25% to 11.5% for life
insurance liabilities and from 2.25% to 13.5% for annuity liabilities.
Individual health benefit liabilities for active lives are calculated
using the net level premium method, and assumptions as to future morbidity,
withdrawals and interest which provide a margin for adverse deviation.
Benefit liabilities for disabled lives are calculated using the present value
of benefits method and experience assumptions as to claim terminations,
expenses, and interest which also provide a margin for adverse deviation.
Claim reserves and associated liabilities for individual disability income
and major medical policies were $291.3 million, $402.2 million, $529.3
million and $570.6 million at January 1, 1992, December 31, 1992, 1993 and
1994, respectively. Incurred benefits (benefits paid plus changes in claim
reserves) and benefits paid for individual disability income and major
medical policies are summarized as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1994 1993 1992
-------- -------- --------
(IN MILLIONS)
<S> <C> <C> <C>
Incurred benefits related to current year $188.6 $193.1 $183.0
Incurred benefits related to prior years 28.7 106.1 67.3
-------- -------- --------
Total Incurred Benefits .................. $217.3 $299.2 $250.3
======== ========
Benefits paid related to current year ... $ 43.7 $ 48.9 $ 39.7
Benefits paid related to prior years .... 132.3 123.1 99.7
-------- -------- --------
Total Benefits Paid ...................... $176.0 $172.0 $139.4
======== ======== ========
</TABLE>
The amount of policyholders' dividends to be paid (including those on
policies included in the Closed Block) is determined annually by Equitable
Life's Board of Directors. The aggregate amount of policyholders' dividends
is related to actual interest, mortality, morbidity and expense experience
for the year and judgment as to the appropriate level of statutory surplus to
be retained by Equitable Life.
18
<PAGE>
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Equitable Life is subject to limitations on the amount of statutory
profits which can be retained by Equitable Life with respect to certain
classes of individual participating policies that were in force on July 22,
1992 which are not included in the Closed Block and with respect to
participating policies issued subsequent to July 22, 1992. Excess statutory
profits, if any, will be distributed over time to such policyholders and will
not be available to Equitable Life's shareholder. Earnings in excess of
limitations are accrued as policyholders' dividends.
At December 31, 1994, participating policies including those in the Closed
Block represent approximately 31.0% ($64.4 billion) of direct written life
insurance in force, net of amounts ceded. Participating policies represent
substantially all of the premium income as reflected in the consolidated
statements of earnings and in the results of the Closed Block.
Federal Income Taxes
Equitable Life and its life insurance and non-life insurance subsidiaries
file a consolidated Federal income tax return with the Holding Company and
its non-life insurance subsidiaries. Current Federal income taxes are charged
or credited to operations based upon amounts estimated to be payable or
recoverable as a result of taxable operations for the current year. Effective
January 1, 1992, deferred income tax assets and liabilities are recognized
based on the difference between financial statement carrying amounts and
income tax bases of assets and liabilities using enacted income tax rates and
laws.
Separate Accounts
Separate Accounts are established in conformity with the New York State
Insurance Law and are generally not chargeable with liabilities that arise
from any other business of the Insurance Group. Separate Accounts assets are
subject to General Account claims only to the extent the value of such assets
exceeds the Separate Accounts liabilities.
Assets and liabilities of the Separate Accounts, representing net deposits
and accumulated net investment earnings less fees, held primarily for the
benefit of contractholders, are shown as separate captions in the
consolidated balance sheets. The Insurance Group bears the investment risk on
assets held in one Separate Account, therefore, such assets are carried on
the same basis as similar assets held in the General Account portfolio.
Assets held in the other Separate Accounts are carried at quoted market
values or, where quoted values are not available, at estimated fair values as
determined by the Insurance Group.
The investment results of Separate Accounts on which the Insurance Group
does not bear the investment risk are reflected directly in Separate Accounts
liabilities. For the years ended December 31, 1994, 1993 and 1992, investment
results of such Separate Accounts were $676.3 million, $1,676.5 million and
$1,447.4 million, respectively.
The investment results of a Separate Account on which the Insurance Group
bears the investment risk and which are included in revenues, amounted to
$13.7 million, $12.6 million and $14.5 million for the years ended December
31, 1994, 1993 and 1992, respectively.
19
<PAGE>
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Deposits to all Separate Accounts are reported as increases in Separate
Accounts liabilities and are not reported in revenues. Mortality, policy
administration and surrender charges of all Separate Accounts are included in
revenues.
3) INVESTMENTS
The following tables provide additional information relating to fixed
maturities and equity securities:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
----------- ------------ ------------ ------------
(IN MILLIONS)
<S> <C> <C> <C> <C>
DECEMBER 31, 1994
- -----------------------------------
Fixed Maturities:
Held to Maturity:
Corporate ........................ $4,661.0 $67.9 $233.8 $4,495.1
U.S. Treasury securities and
U.S. government and agency
securities ...................... 428.9 4.6 44.2 389.3
States and political subdivisions 63.4 .9 3.7 60.6
Foreign governments .............. 69.7 4.2 2.0 71.9
----------- ------------ ------------ ------------
Total Held to Maturity ............. $5,223.0 $77.6 $283.7 $5,016.9
=========== ============ ============ ============
Available for Sale:
Corporate ........................ $5,663.4 $34.6 $368.0 $5,330.0
Mortgage-backed .................. 686.0 2.9 44.8 644.1
U.S. Treasury securities and
U.S. government and agency
securities ...................... 1,519.3 6.7 71.9 1,454.1
States and political subdivisions 23.4 .1 .7 22.8
Foreign governments .............. 43.8 .3 4.2 39.9
Redeemable preferred stock ...... 108.4 .4 13.7 95.1
----------- ------------ ------------ ------------
Total Available for Sale ........... $8,044.3 $45.0 $503.3 $7,586.0
=========== ============ ============ ============
Equity Securities:
Common stock ...................... $ 126.4 $31.2 $ 23.5 $ 134.1
=========== ============ ============ ============
</TABLE>
20
<PAGE>
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
----------- ------------ ------------ ------------
(IN MILLIONS)
<S> <C> <C> <C> <C>
December 31, 1993
- -----------------------------------
Fixed Maturities:
Held to Maturity:
Corporate ........................ $5,155.0 $390.7 $17.7 $5,528.0
Mortgage-backed .................. 89.1 4.3 .1 93.3
U.S. Treasury securities and
U.S. government and agency
securities ...................... 91.2 16.8 -- 108.0
States and political subdivisions 274.7 29.4 .1 304.0
Foreign governments .............. 49.1 5.3 -- 54.4
----------- ------------ ------------ ------------
Total Held to Maturity ............. $5,659.1 $446.5 $17.9 $6,087.7
=========== ============ ============ ============
Available for Sale:
Corporate ........................ $4,909.0 $218.2 $31.0 $5,096.2
Mortgage-backed .................. 1,093.7 34.8 1.4 1,127.1
U.S. Treasury securities and
U.S. government and agency
securities ...................... 881.0 44.1 1.7 923.4
States and political subdivisions 590.6 26.5 1.6 615.5
Foreign governments .............. 40.0 1.8 .2 41.6
Redeemable preferred stock ...... 31.1 .1 5.7 25.5
----------- ------------ ------------ ------------
Total Available for Sale ........... $7,545.4 $325.5 $41.6 $7,829.3
=========== ============ ============ ============
Equity Securities:
Common stock ...................... $ 110.0 $ 78.8 $ 2.8 $ 186.0
Non-redeemable preferred stock ... 6.9 .3 .5 6.7
----------- ------------ ------------ ------------
Total Equity Securities ............ $ 116.9 $ 79.1 $ 3.3 $ 192.7
=========== ============ ============ ============
</TABLE>
For publicly traded fixed maturities and equity securities, estimated fair
value is determined using quoted market prices. For fixed maturities without
a readily ascertainable market value, the Company has determined an estimated
fair value using a discounted cash flow approach, including provisions for
credit risk, generally based upon the assumption that such securities will be
held to maturity. Estimated fair value for equity securities, substantially
all of which do not have a readily ascertainable market value, has been
determined by the Company. Such estimated fair values do not necessarily
represent the values for which these securities could have been sold at the
dates of the consolidated balance sheets. At December 31, 1994 and 1993,
securities without a readily ascertainable market value having an amortized
cost of $3,854.0 million and $4,751.5 million, respectively, had estimated
fair values of $3,724.6 million and $5,016.6 million, respectively.
21
<PAGE>
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The contractual maturity of bonds at December 31, 1994 is shown below:
<TABLE>
<CAPTION>
HELD TO MATURITY AVAILABLE FOR SALE
------------------------- -------------------------
AMORTIZED ESTIMATED AMORTIZED ESTIMATED
COST FAIR VALUE COST FAIR VALUE
----------- ------------ ----------- ------------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Due in one year or less ..... $ 216.2 $ 216.1 $ 214.9 $ 214.8
Due in years two through five 1,442.1 1,419.1 1,895.2 1,855.0
Due in years six through ten 1,733.5 1,634.3 2,763.8 2,549.7
Due after ten years .......... 1,831.2 1,747.4 2,376.0 2,227.3
Mortgage-backed securities .. -- -- 686.0 644.1
----------- ------------ ----------- ------------
Total ........................ $5,223.0 $5,016.9 $7,935.9 $7,490.9
=========== ============ =========== ============
</TABLE>
Bonds not due at a single maturity date have been included in the above
table in the year of final maturity. Actual maturities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
Investment valuation allowances and changes thereto are shown below:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1994 1993 1992
--------- --------- ---------
(IN MILLIONS)
<S> <C> <C> <C>
Balances, beginning of year ..................... $ 355.6 $ 512.0 $ 565.1
Additions charged to income ..................... 51.0 92.8 265.0
Deductions for writedowns and asset dispositions (121.7) (249.2) (239.3)
Transfers of allowances to discontinued GIC
Segment and Closed Block ....................... -- -- (78.8)
--------- --------- ---------
Balances, End of Year ........................... $ 284.9 $ 355.6 $ 512.0
========= ========= =========
Balances, end of year comprise:
Mortgage loans on real estate .................. $ 64.2 $ 144.4 $ 198.3
Equity real estate ............................. 220.7 211.2 195.1
Fixed maturities ............................... -- -- 118.6
--------- --------- ---------
Total ........................................... $ 284.9 $ 355.6 $ 512.0
========= ========= =========
</TABLE>
Deductions for writedowns and asset dispositions for 1993 include an $87.1
million writedown of fixed maturity investments at December 31, 1993 as a
result of adopting a new accounting statement for the valuation of these
investments that requires specific writedowns instead of valuation
allowances.
At December 31, 1994, the carrying values of investments held for the
production of income which were non-income producing for the twelve months
preceding the consolidated balance sheet date were $33.7 million of fixed
maturities, $42.5 million of mortgage loans on real estate and $.9 million of
equity real estate.
The Insurance Group's fixed maturity investment portfolio includes
corporate high yield securities consisting of public high yield bonds,
redeemable preferred stocks and directly negotiated debt in leveraged buyout
transactions. The Insurance Group seeks to minimize the higher than normal
credit risks associated with such securities by monitoring the total
investments in any single issuer or total
22
<PAGE>
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
investment in a particular industry group. Certain of these corporate high
yield securities are classified as other than investment grade by the various
rating agencies, i.e., a rating below Baa or an NAIC (National Association of
Insurance Commissioners) designation of 3 (medium grade), 4 or 5 (below
investment grade) or 6 (in or near default). At December 31, 1994,
approximately 12.4% of the $13,017.0 million aggregate amortized cost of
bonds held by the Insurance Group were considered to be other than investment
grade.
In addition to its holdings of corporate high yield securities, the
Insurance Group is an equity investor in limited partnership interests which
invest primarily in securities considered to be other than investment grade.
The Company has restructured or modified the terms of certain fixed
maturity investments. The fixed maturity portfolio, based on amortized cost,
includes $30.5 million and $55.3 million at December 31, 1994 and 1993,
respectively, of such restructured securities. These amounts include fixed
maturities which are in default as to principal and/or interest payments, are
to be restructured pursuant to commenced negotiations or where the borrowers
went into bankruptcy subsequent to acquisition (collectively, "problem fixed
maturities") of $9.7 million and $32.7 million as of December 31, 1994 and
1993, respectively. Gross interest income that would have been recorded in
accordance with the original terms of restructured fixed maturities amounted
to $7.5 million, $11.7 million and $35.4 million in 1994, 1993 and 1992,
respectively. Gross interest income on these fixed maturities included in net
investment income aggregated $6.8 million, $9.7 million and $28.2 million in
1994, 1993 and 1992, respectively.
At December 31, 1994 and 1993, mortgage loans on real estate with
scheduled payments 60 days (90 days for agricultural mortgages) or more past
due or in foreclosure (collectively, "problem mortgage loans on real estate")
had an amortized cost of $96.9 million (2.3% of total mortgage loans on real
estate) and $292.1 million (6.2% of total mortgage loans on real estate),
respectively.
The payment terms of mortgage loans on real estate may from time to time
be restructured or modified. The investment in restructured mortgage loans on
real estate, based on amortized cost, amounted to $447.9 million and $508.4
million at December 31, 1994 and 1993, respectively. These amounts include
$1.0 million and $28.1 million of problem mortgage loans on real estate at
December 31, 1994 and 1993, respectively. Gross interest income on
restructured mortgage loans on real estate that would have been recorded in
accordance with the original terms of such loans amounted to $44.9 million,
$51.8 million and $59.8 million in 1994, 1993 and 1992, respectively. Gross
interest income on these loans included in net investment income aggregated
$32.8 million, $46.0 million and $44.9 million in 1994, 1993 and 1992,
respectively.
At December 31, 1994, investments owned of any one issuer, including its
affiliates, that aggregate 10% or more of total shareholder's equity were
$596.0 million, principally in mortgage loans, to Trammell Crow and
affiliates (including holdings of the Closed Block and the discontinued GIC
Segment). The amount includes restructured mortgage loans on real estate and
potential problem mortgage loans on real estate with amortized costs of $4.9
million and $294.0 million, respectively. Partnerships affiliated with
Trammell Crow, which are borrowers pursuant to commercial mortgage loans with
an amortized cost of $294.0 million at December 31, 1994, filed for Chapter
11 bankruptcy on January 3, 1995. The loan package consists of first mortgage
interests in 48 properties. The borrowing groups consist of 46 individual
partnerships and the loans are substantially cross-collateralized.
23
<PAGE>
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Insurance Group's investment in equity real estate is through direct
ownership and through investments in real estate joint ventures. At December
31, 1994 and 1993, the carrying value of equity real estate available for
sale amounted to $447.8 million and $402.5 million, respectively. At December
31, 1994 and 1993, the Company owned $1,086.9 million and $947.0 million,
respectively, of real estate acquired in satisfaction of debt.
Depreciation of real estate is computed using the straight-line method
over the estimated useful lives of the properties, which generally range from
40 to 50 years. Accumulated depreciation on real estate was $703.1 million
and $624.7 million at December 31, 1994 and 1993, respectively. Depreciation
expense on real estate totaled $117.0 million, $115.3 million and $117.7
million for the years ended December 31, 1994, 1993 and 1992, respectively.
4) JOINT VENTURES AND PARTNERSHIPS
Summarized combined financial information of real estate joint ventures
(47 and 53 individual ventures as of December 31, 1994 and 1993,
respectively) and of limited partnership interests accounted for under the
equity method, in which the Company has an investment of $10.0 million or
greater and an equity interest of 10% or greater is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1994 1993
----------- -----------
(IN MILLIONS)
<S> <C> <C>
FINANCIAL POSITION
Investments in real estate, at depreciated cost ........................ $2,786.7 $3,160.2
Investments in securities, generally at estimated fair value .......... 3,071.2 3,633.6
Cash and cash equivalents .............................................. 359.8 195.0
Other assets ........................................................... 398.7 753.8
----------- -----------
Total assets ........................................................... 6,616.4 7,742.6
----------- -----------
Funds borrowed -- third party .......................................... 1,759.6 1,826.5
Funds borrowed -- the Company .......................................... 238.0 594.1
Other liabilities ...................................................... 987.7 1,041.0
----------- -----------
Total liabilities ...................................................... 2,985.3 3,461.6
----------- -----------
Partners' Capital ...................................................... $3,631.1 $4,281.0
=========== ===========
Equity in partners' capital included above ............................. $ 964.2 $1,044.1
Equity in limited partnership interests not included above ............ 224.6 259.3
(Deficit) excess of equity in partners' capital over investment cost
and equity earnings .................................................. (1.8) 18.1
Notes receivable from joint venture .................................... 6.1 38.7
Negative equity in certain joint ventures presented as other
liabilities .......................................................... -- 57.1
----------- -----------
Carrying Value ......................................................... $1,193.1 $1,417.3
=========== ===========
</TABLE>
24
<PAGE>
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1994 1993 1992
--------- --------- ---------
(IN MILLIONS)
<S> <C> <C> <C>
STATEMENTS OF EARNINGS
Revenues of real estate joint ventures .................... $ 537.7 $ 602.7 $ 719.0
Revenues of other limited partnership interests .......... 103.4 319.1 270.1
Interest expense -- third party ........................... (114.9) (118.8) (119.8)
Interest expense -- the Company ........................... (36.9) (52.1) (83.4)
Other expenses ............................................ (430.9) (531.7) (592.1)
--------- --------- ---------
Net Earnings .............................................. $ 58.4 $ 219.2 $ 193.8
========= ========= =========
Equity in net earnings included above ..................... $ 18.9 $ 71.6 $ 40.6
Equity in net earnings of limited partnerships not
included above ........................................... 25.3 46.3 50.9
Excess of earnings in joint ventures over equity ownership
percentage and amortization of differences in bases ..... 1.8 9.2 5.7
Interest on notes receivable .............................. -- .5 3.3
--------- --------- ---------
Total Equity in Net Earnings .............................. $ 46.0 $ 127.6 $ 100.5
========= ========= =========
</TABLE>
5) NET INVESTMENT INCOME AND INVESTMENT GAINS (LOSSES)
The sources of net investment income are summarized as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1994 1993 1992
---------- ---------- ----------
(IN MILLIONS)
<S> <C> <C> <C>
Fixed maturities .............................. $1,024.5 $ 981.7 $1,061.4
Trading account securities .................... -- 709.3 474.3
Securities purchased under resale agreements . -- 533.8 543.2
Mortgage loans on real estate ................. 384.3 457.4 646.1
Equity real estate ............................ 561.8 539.1 396.5
Other equity investments ...................... 35.7 110.4 104.8
Policy loans .................................. 122.7 117.0 183.2
Broker-dealer related receivables ............. -- 292.2 276.3
Other investment income ....................... 336.3 304.9 297.9
---------- ---------- ----------
Gross investment income ...................... 2,465.3 4,045.8 3,983.7
---------- ---------- ----------
Interest expense to finance short-term trading
instruments .................................. -- 983.4 918.4
Other investment expenses ..................... 434.4 463.1 375.8
---------- ---------- ----------
Investment expenses .......................... 434.4 1,446.5 1,294.2
---------- ---------- ----------
Net Investment Income ......................... $2,030.9 $2,599.3 $2,689.5
========== ========== ==========
</TABLE>
25
<PAGE>
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Investment gains, net, including changes in the valuation allowances, are
summarized as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1994 1993 1992
--------- -------- ---------
(IN MILLIONS)
<S> <C> <C> <C>
Fixed maturities .................... $(14.1) $123.1 $ 49.1
Mortgage loans on real estate ...... (43.1) (65.1) (148.9)
Equity real estate .................. 20.6 (18.5) (48.1)
Other equity investments ............ 76.0 119.5 246.2
Dealer and trading gains ............ -- 372.5 272.0
Sales of newly issued Alliance units 52.4 -- --
Other ............................... -- 1.9 1.5
--------- -------- ---------
Investment Gains, Net ............... $ 91.8 $533.4 $ 371.8
========= ======== =========
</TABLE>
Gross gains of $116.8 million, $188.5 million and $141.0 million and gross
losses of $100.1 million, $145.0 million and $123.4 million were realized on
sales of investments in fixed maturities for the years ended December 31,
1994, 1993 and 1992, respectively. In addition, writedowns of fixed
maturities amounted to $30.8 million, $5.4 million and $13.6 million for the
years ended December 31, 1994, 1993 and 1992, respectively.
For the year ended December 31, 1994, proceeds received on sales of fixed
maturities classified as available for sale amounted to $5,253.9 million.
Gross gains of $63.8 million and gross losses of $59.1 million were realized
on these sales. The increase in unrealized investment losses related to fixed
maturities classified as available for sale for the year ended December 31,
1994 amounted to $742.2 million.
During the year ended December 31, 1994, one security classified as held
to maturity was sold and six securities so classified were transferred to the
available for sale portfolio. These actions were taken as a result of a
significant deterioration in creditworthiness. The amortized cost of the
security sold was $19.9 million with a related investment gain of $.8 million
recognized; the aggregate amortized cost of the securities transferred was
$42.8 million with gross unrealized investment losses of $3.1 million charged
to consolidated shareholder's equity.
Investment gains from other equity investments include gains generated by
DLJ's involvement in long-term corporate development investments amounting to
$79.9 million and $195.9 million for the years ended December 31, 1993 and
1992, respectively.
For the years ended December 31, 1994, 1993 and 1992, investment results
passed through to certain participating group annuity contracts as interest
credited to policyholders' account balances amounted to $175.8 million,
$243.2 million and $286.8 million, respectively.
In 1994, Alliance sold 4.96 million newly issued units to third parties at
prevailing market prices. The sales decreased the Company's ownership of
Alliance's publicly traded units from 63.2% to 59.2%. In addition, the
Company continues to hold its 1% general partnership interest in Alliance.
The Company recognized an investment gain of $52.4 million as a result of
these transactions.
26
<PAGE>
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The unrealized investment gains (losses), included in the consolidated
balance sheets as a component of equity and the changes for the corresponding
years, are summarized as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1994 1993 1992
---------- --------- --------
(IN MILLIONS)
<S> <C> <C> <C>
Balance, beginning of year ...................... $ 131.9 $ 78.8 $ 65.5
Changes in unrealized investment (losses) gains (823.8) (14.1) 6.0
Effect of adopting SFAS No. 115 ................. -- 283.9 --
Changes in unrealized investment (gains) losses
attributable to:
Participating group annuity contracts ........ 40.8 (36.2) 19.4
Deferred policy acquisition costs ............. 269.5 (150.5) --
Deferred Federal income taxes ................. 178.6 (30.0) (12.1)
---------- --------- --------
Balance, End of Year ............................ $(203.0) $ 131.9 $ 78.8
========== ========= ========
Balance, end of year comprises:
Unrealized investment (losses) gains on:
Fixed maturities .............................. $(461.3) $ 283.9 $ (3.9)
Other equity investments ...................... 7.7 75.8 81.6
Other ......................................... 14.5 25.0 37.2
---------- --------- --------
Total ........................................ (439.1) 384.7 114.9
Amounts of unrealized investment (gains) losses
attributable to:
Participating group annuity contracts ....... 5.9 (34.9) 1.3
Deferred policy acquisition costs ............ 119.0 (150.5) --
Deferred Federal income taxes ................ 111.2 (67.4) (37.4)
---------- --------- --------
Total ........................................... $(203.0) $ 131.9 $ 78.8
========== ========= ========
</TABLE>
27
<PAGE>
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6) CLOSED BLOCK
Summarized financial information of the Closed Block is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1994 1993
---------- ----------
(IN MILLIONS)
<S> <C> <C>
Assets
Fixed Maturities:
Held to maturity, at amortized cost (estimated fair value,
$1,785.0 and $1,971.5) ................................. $1,927.8 $1,871.5
Available for sale, at estimated fair value (amortized
cost, $1,270.3 and $984.4) ............................. 1,197.0 1,030.6
Mortgage loans on real estate .............................. 1,543.7 1,692.3
Policy loans ............................................... 1,827.9 1,877.1
Cash and other invested assets ............................. 442.5 426.2
Deferred policy acquisition costs .......................... 878.1 940.3
Other assets ............................................... 288.5 246.3
---------- ----------
Total Assets ............................................... $8,105.5 $8,084.3
==========
Liabilities
Future policy benefits and policyholders' account balances $8,965.3 $9,067.3
Other liabilities .......................................... 104.2 76.1
---------- ----------
Total Liabilities .......................................... $9,069.5 $9,143.4
========== ==========
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED JULY 22
DECEMBER 31, THROUGH
------------------- DECEMBER 31,
1994 1993 1994
--------- --------- ----------
(IN MILLIONS)
<S> <C> <C> <C>
Revenues
Premiums and other revenue ...................... $ 798.1 $ 860.2 $303.7
Investment income (net of investment expenses of
$19.0, $17.3 and $2.7) ......................... 523.0 526.5 209.7
Investment losses, net .......................... (24.0) (15.0) (2.4)
--------- --------- --------
Total revenues ................................ 1,297.1 1,371.7 511.0
--------- --------- --------
Benefits and Other Deductions
Policyholders' benefits and dividends ........... 1,075.6 1,141.4 402.3
Other operating costs and expenses .............. 70.5 102.0 49.4
--------- --------- --------
Total benefits and other deductions ........... 1,146.1 1,243.4 451.7
--------- --------- --------
Contribution from the Closed Block .............. $ 151.0 $ 128.3 $ 59.3
========= ========= ========
</TABLE>
The fixed maturity portfolio, based on amortized cost, includes $23.8
million and $22.0 million at December 31, 1994 and 1993, respectively, of
restructured securities which includes problem fixed maturities of $6.4
million and $10.4 million, respectively.
28
<PAGE>
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
At December 31, 1994 and 1993, problem mortgage loans on real estate had
an amortized cost of $27.6 million and $130.0 million, respectively, and
mortgage loans on real estate for which the payment terms have been
restructured had an amortized cost of $179.2 million and $199.9 million,
respectively. At December 31, 1994 and 1993, the restructured mortgage loans
on real estate amount included $.7 million and $9.7 million, respectively, of
problem mortgage loans on real estate.
Valuation allowances amounted to $46.2 million and $72.2 million on
mortgage loans on real estate and $2.6 million and $.6 million on equity real
estate at December 31, 1994 and 1993, respectively. Writedowns of fixed
maturities amounted to $15.9 million and $1.7 million for the years ended
December 31, 1994 and 1993, respectively, and $2.2 million for the period
July 22, 1992 to December 31, 1992.
Implementation of a new accounting statement for the valuation of fixed
maturities at December 31, 1993, resulted in the recognition of a deferred
dividend liability of $49.6 million.
Many expenses related to Closed Block operations are charged to operations
outside of the Closed Block; accordingly, the contribution from the Closed
Block does not represent the actual profitability of the Closed Block
operations. Operating costs and expenses outside of the Closed Block are,
therefore, disproportionate to the business outside of the Closed Block.
7) DISCONTINUED OPERATIONS
Summarized financial information of the GIC Segment is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1994 1993
---------- ----------
(IN MILLIONS)
<S> <C> <C>
Assets
Mortgage loans on real estate ...... $1,730.5 $2,076.0
Equity real estate .................. 1,194.8 1,445.2
Other invested assets ............... 978.8 1,132.4
Other assets ........................ 529.5 660.3
---------- ----------
Total Assets ........................ $4,433.6 $5,313.9
========== ==========
Liabilities
Policyholders' liabilities .......... $1,924.0 $2,698.5
Allowance for future losses ......... 185.6 236.4
Amounts due to continuing operations 2,108.6 2,125.9
Other liabilities ................... 215.4 253.1
---------- ----------
Total Liabilities ................... $4,433.6 $5,313.9
========== ==========
</TABLE>
29
<PAGE>
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1994 1993 1992
--------- --------- ---------
(IN MILLIONS)
<S> <C> <C> <C>
Revenues
Investment income (net of investment expenses of
$174.0, $175.8 and $117.4) ..................... $368.4 $526.4 $ 559.1
Investment gains (losses), net .................. 26.8 (22.6) (21.7)
Policy fees, premiums and other income ......... .3 8.7 3.4
--------- --------- ---------
Total revenues .................................. 395.5 512.5 540.8
Benefits and other deductions ................... 417.2 537.2 701.7
--------- --------- ---------
Losses Charged to Allowance for Future Losses .. $(21.7) $(24.7) $(160.9)
========= ========= =========
</TABLE>
In 1991, the Company established a pre-tax provision of $396.7 million for
the estimated future losses of the GIC Segment. In 1992, implementation of a
new accounting statement for income taxes resulted in a benefit which was
offset by a pre-tax $33.6 million addition to the allowance for future
losses. Additionally, at December 31, 1993, implementation of a new
accounting statement for the valuation of fixed maturities resulted in a
benefit of $13.1 million which was offset by a corresponding addition to the
allowance for future losses.
The amounts due to continuing operations at December 31, 1994 and 1993
consist of $3,324.0 million and $3,284.0 million, respectively, borrowed by
the GIC Segment from continuing operations, offset by $1,215.4 million and
$1,158.1 million, respectively, representing an obligation of continuing
operations to provide assets to fund the accumulated deficit of the GIC
Segment.
In January 1995, continuing operations transferred $1,215.4 million in
cash to the GIC Segment in settlement of its obligation. Subsequently, the
GIC Segment remitted $1,155.4 million in cash to continuing operations in
partial repayment of borrowings by the GIC Segment. No gains or losses were
recognized on these transactions.
Investment income includes $88.2 million, $97.7 million and $94.2 million
of interest income in 1994, 1993 and 1992, respectively, on amounts due from
continuing operations. Benefits and other deductions includes $193.1 million,
$188.4 million and $132.8 million of interest expense related to amounts
borrowed from continuing operations in 1994, 1993 and 1992, respectively.
Valuation allowances amounted to $50.2 million and $61.4 million on
mortgage loans on real estate and $74.7 million and $61.5 million on equity
real estate at December 31, 1994 and 1993, respectively. Writedowns of fixed
maturities amounted to $17.8 million, $1.1 million and $5.2 million for the
years ended December 31, 1994, 1993 and 1992, respectively.
The fixed maturity portfolio, based on amortized cost, includes $43.3
million and $59.8 million at December 31, 1994 and 1993, respectively, of
restructured securities. These amounts include problem fixed maturities of
$9.7 million and $21.3 million at December 31, 1994 and 1993, respectively.
At December 31, 1994 and 1993, problem mortgage loans on real estate had
amortized costs of $14.9 million and $64.8 million, respectively, and
mortgage loans on real estate for which the payment
30
<PAGE>
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
terms have been restructured had amortized costs of $371.2 million and $373.3
million, respectively. At December 31, 1993, the restructured mortgage loans
on real estate amount included $.2 million of problem mortgage loans on real
estate.
At December 31, 1994 and 1993, the GIC Segment had $312.2 million and
$325.9 million, respectively, of real estate acquired in satisfaction of
debt.
8) SHORT-TERM AND LONG-TERM DEBT
Short-term and long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1994 1993
---------- ---------
(IN MILLIONS)
<S> <C> <C>
Short-term debt ................................. $ 20.0 $ 200.7
---------- ---------
Long-term debt:
Equitable Life:
Eurodollar notes, 10.375% due 1995 ............. 34.6 66.0
Eurodollar notes, 10.5% due 1997 ............... 76.2 76.2
Zero coupon note, 11.25% due 1997 .............. 107.8 96.6
Other .......................................... 48.7 37.4
---------- ---------
Total Equitable Life .......................... 267.3 276.2
---------- ---------
Wholly Owned and Joint Venture Real Estate:
Mortgage notes, 3.89% - 12.75% due through 2019 1,046.2 1,073.2
---------- ---------
Alliance:
Direct placement notes ........................ -- 105.0
Other ......................................... 3.9 4.4
---------- ---------
Total Alliance ............................... 3.9 109.4
---------- ---------
Total long-term debt ............................ 1,317.4 1,458.8
---------- ---------
Total Short-term and Long-term Debt ............. $1,337.4 $1,659.5
========== =========
</TABLE>
Short-term Debt
On July 11, 1994, Equitable Life established a three-year $350.0 million
bank credit facility which replaced a similar $550.0 million credit facility
scheduled to mature in August 1994. This facility is available to fund
short-term working capital needs and to facilitate the securities settlement
process. The credit facility consists of two types of borrowing options with
varying interest rates. The interest rates are based on external indices
dependent on the type of borrowing and at December 31, 1994 range from 5.5%
(the Federal Funds rate plus 50 basis points) to 8.5% (the prime rate). No
amounts have been borrowed under this bank credit facility at December 31,
1994.
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 used
to support Equitable Life's liquidity needs and
31
<PAGE>
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
is supported by Equitable Life's existing $350.0 million three-year bank
credit facility. No amounts have been borrowed under this program through
December 31, 1994.
Alliance established a $100.0 million revolving credit facility with
several banks during 1994. On March 31, 1997, the revolving credit facility
converts into a term loan payable quarterly in equal installments through
March 31, 1999. Outstanding borrowings generally bear interest at the
Eurodollar rate plus .875% per annum through March 31, 1997 and at the
Eurodollar rate plus 1.125% per annum after conversion through March 31,
1999. In addition, a quarterly commitment fee of .25% per annum is paid on
the average daily unused amount. At December 31, 1994, there were no amounts
outstanding under the facility.
During 1994, Alliance authorized a $100.0 million commercial paper program
and entered into a three-year $100.0 million revolving credit facility with a
group of commercial banks to support commercial paper to be issued under the
program. Amounts outstanding under the facility bear interest at an annual
rate ranging from the Eurodollar rate plus .225% to the Eurodollar rate plus
.2875%. A fee of .1250% per annum is paid quarterly on the entire facility.
At December 31, 1994, Alliance had not issued any commercial paper and there
were no amounts outstanding under the revolving credit facility.
During 1994, EREIM established two bank lines of credit totaling $30.0
million of which $20.0 million was outstanding at December 31, 1994.
Long-term Debt
Several of the long-term debt agreements have restrictive covenants
related to the total amount of debt, net tangible assets and other matters.
The Company is in compliance with all debt covenants.
During 1994, Alliance repaid the direct placement notes.
The Company has pledged real estate, mortgage loans, cash and securities
amounting to $1,744.4 million and $1,855.6 million at December 31, 1994 and
1993, respectively, as collateral for certain long-term debt.
At December 31, 1994, aggregate maturities of the long-term debt based on
required principal payments at maturity for 1995 and the succeeding four
years are $39.9 million, $124.6 million, $467.2 million, $301.3 million and
$15.3 million, respectively, and $414.0 million thereafter.
9) FEDERAL INCOME TAXES
A summary of the Federal income tax expense (benefit) in the consolidated
statements of earnings is shown below:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1994 1993 1992
-------- -------- --------
(IN MILLIONS)
<S> <C> <C> <C>
Federal income tax expense
(benefit):
Current ............................ $ 4.0 $115.8 $ 30.7
Deferred ........................... 97.2 (24.5) (11.5)
-------- -------- --------
Total .............................. $101.2 $ 91.3 $ 19.2
======== ======== ========
</TABLE>
32
<PAGE>
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Federal income taxes attributable to consolidated operations are
different from the amounts determined by multiplying the earnings (loss) from
operations before Federal income taxes by the expected Federal income tax
rate (35% for 1994 and 1993 and 34% for 1992).
The sources of the difference and the tax effects of each are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1994 1993 1992
--------- --------- ---------
(IN MILLIONS)
<S> <C> <C> <C>
Expected Federal income tax expense (benefit) $138.1 $106.3 $(2.4)
Differential earnings amount ................. (16.8) (23.2) 6.4
Adjustment of tax audit reserves ............. (4.6) 22.9 22.5
Tax rate adjustment .......................... -- (5.0) --
Other ........................................ (15.5) (9.7) (7.3)
--------- --------- ---------
Federal Income Tax Expense ................... $101.2 $ 91.3 $19.2
========= ========= =========
</TABLE>
Prior to the date of demutualization, Equitable Life, as a mutual company,
reduced its deduction for policyholder dividends by the differential earnings
amount. This amount was computed, for each tax year, by multiplying Equitable
Life's average equity base, as determined for tax purposes, by an estimate of
the excess of an imputed earnings rate for stock life insurance companies
over the average mutual life insurance companies' earnings rate. The
differential earnings amount for each tax year was subsequently recomputed
when actual earnings rates were published by the Internal Revenue Service. As
a stock life insurance company, Equitable Life is no longer required to
reduce its policyholder dividend deduction by the differential earnings
amount, but differential earnings amounts for pre-demutualization years are
still being recomputed.
The Internal Revenue Service is in the process of examining Equitable
Life's Federal income tax returns for the years 1984 through 1988. Management
believes these audits will have no material adverse effect on the Company's
consolidated results of operations.
The components of the net deferred Federal income tax asset are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1994 DECEMBER 31, 1993
------------------------ ------------------------
ASSETS LIABILITIES ASSETS LIABILITIES
--------- ------------- --------- -------------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Deferred policy acquisition costs,
reserves and reinsurance ......... $-- $220.3 $ -- $200.9
Investments ....................... -- 18.7 -- 126.4
Compensation and related benefits 307.3 -- 288.5 --
Other ............................. -- 5.8 66.6 --
--------- ------------- --------- -------------
Total ............................. $307.3 $244.8 $355.1 $327.3
========= ============= ========= =============
</TABLE>
33
<PAGE>
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The deferred Federal income tax expense (benefit) impacting operations
reflect the net tax effects of temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and the
amounts used for income tax purposes. The sources of these temporary
differences and the tax effects of each are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1994 1993 1992
-------- ---------- --------
(IN MILLIONS)
<S> <C> <C> <C>
Deferred policy acquisition costs, reserves and
reinsurance ................................... $ 13.0 $(46.7) $ 26.9
Investments .................................... 89.3 60.4 (41.0)
Compensation and related benefits .............. 10.0 (50.1) (2.4)
Other .......................................... (15.1) 11.9 5.0
-------- ---------- --------
Deferred Federal Income Tax Expense (Benefit) . $ 97.2 $(24.5) $(11.5)
======== ========== ========
</TABLE>
10) REINSURANCE AGREEMENTS
The Insurance Group assumes and cedes reinsurance with other insurance
companies. The Insurance Group evaluates the financial condition of its
reinsurers to minimize its exposure to significant losses from reinsurer
insolvencies. The effect of reinsurance (excluding Group Life and Health) is
summarized as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31,
--------------------
1994 1993
--------- ---------
(IN MILLIONS)
<S> <C> <C>
Direct premiums .......................................... $476.7 $458.8
Reinsurance assumed ...................................... 180.5 169.9
Reinsurance ceded ........................................ (31.6) (29.6)
--------- ---------
Premiums ................................................. $625.6 $599.1
========= =========
Universal Life and Investment- type Product Policy Fee
Income Ceded ............................................ $ 27.5 $ 33.7
========= =========
Policyholders' Benefits Ceded ............................ $ 20.7 $ 72.3
========= =========
Interest Credited to Policyholders' Account Balances
Ceded ................................................... $ 25.4 $ 24.1
========= =========
</TABLE>
For the year ended December 31, 1992, reinsurance premiums assumed totaled
$151.0 million and reinsurance premiums ceded totaled $16.6 million.
Prior to 1993, the Insurance Group generally reinsured mortality risks in
excess of $10.0 million on any single life. In February 1993, management
established a practice limiting the risk retention on new policies issued by
the Insurance Group to a maximum of $5.0 million. In addition, effective
January 1, 1994, all in force business between $5.0 million and $10.0 million
was reinsured. The Insurance Group also reinsures the entire risk on certain
substandard underwriting risks as well as in certain other cases.
The Insurance Group cedes 100% of its Group Life and Health business to
CIGNA. Premiums ceded to CIGNA totaled $241.0 million, $895.1 million and
$1,126.7 million for the years ended
34
<PAGE>
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
December 31, 1994, 1993 and 1992, respectively. Ceded death and disability
benefits totaled $235.5 million and $787.8 million for the years ended
December 31, 1994 and 1993, respectively. Insurance liabilities ceded totaled
$833.4 million and $1,130.3 million at December 31, 1994 and 1993,
respectively.
11) EMPLOYEE BENEFIT PLANS
The Company sponsors qualified and non-qualified defined benefit plans
covering substantially all employees (including certain qualified part-time
employees), managers and agents. The pension plans are non-contributory and
benefits are based on a cash balance formula or years of service and final
average earnings, if greater, under certain grandfathering rules in the
plans. The Company's funding policy is to make the minimum contribution
required by the Employee Retirement Income Security Act of 1974.
Components of net periodic pension cost for the qualified and
non-qualified plans is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1994 1993 1992
--------- --------- --------
(IN MILLIONS)
<S> <C> <C> <C>
Service cost .................................. $ 30.3 $ 29.8 $ 30.6
Interest cost on projected benefit obligations 111.0 108.0 104.2
Actual return on assets ....................... 24.4 (178.6) (52.6)
Net amortization and deferrals ................ (142.5) 55.3 (67.4)
--------- --------- --------
Net Periodic Pension Cost ..................... $ 23.2 $ 14.5 $ 14.8
========= ========= ========
</TABLE>
The funded status of the qualified and non-qualified pension plans is as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1994 1993
---------- ----------
(IN MILLIONS)
<S> <C> <C>
Actuarial present value of obligations:
Vested .............................................................. $1,295.5 $1,403.5
Non-vested .......................................................... 8.7 10.4
---------- ----------
Accumulated Benefit Obligation ....................................... $1,304.2 $1,413.9
======== ==========
Plan assets at fair value ............................................ $1,193.5 $1,259.5
Projected benefit obligation ......................................... 1,403.4 1,488.9
---------- ----------
Projected benefit obligation in excess of plan assets ................ (209.9) (229.4)
Unrecognized prior service cost ...................................... (33.2) (39.0)
Unrecognized net loss from past experience different from that
assumed ............................................................. 298.9 309.8
Unrecognized net asset at transition ................................. (20.8) (34.2)
Additional minimum liability ......................................... (37.8) (56.8)
---------- ----------
Accrued Pension Cost ................................................. $ (2.8) $ (49.6)
========== ==========
</TABLE>
35
<PAGE>
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The discount rate and rate of increase in future compensation levels used
in determining the actuarial present value of projected benefit obligations
were 8.75% and 4.88% at December 31, 1994 and 7.5% and 4% at December 31,
1993, respectively. As of January 1, 1994 and 1993, the expected long-term
rate of return on assets for the retirement plan was 10%.
The Company recorded, as a reduction of shareholder's equity, an
additional minimum pension liability of $2.7 million, net of Federal income
taxes, at December 31, 1994 representing the excess of the accumulated
benefit obligation over the fair value of plan assets and accrued pension
liability.
The pension plan's assets include corporate and government debt
securities, equity securities, real estate, U.S. Treasury bonds and shares of
Alliance mutual funds.
As of December 31, 1993, the Company changed the method of estimating the
market-related value of plan assets, from fair value to a calculated value.
This change in estimate had no material effect on the Company's consolidated
financial position or statements of earnings.
Prior to 1987, the qualified plan funded participants' benefits through
the purchase of non- participating annuity contracts from Equitable Life.
Benefit payments under these contracts were approximately $38.1 million,
$39.9 million and $41.6 million for the years ended December 31, 1994, 1993
and 1992, respectively.
The Company provides certain medical and life insurance benefits
("postretirement benefits") for qualifying employees, managers and agents
retiring from the Company on or after attaining age 55 who have at least 10
years of service. The life insurance benefits are related to age and salary
at retirement. The costs of postretirement benefits are recognized in
accordance with the provisions of SFAS No. 106. The Company continues to fund
postretirement benefits costs on a pay-as-you-go basis and, for the years
ended December 31, 1994, 1993 and 1992, the Company made estimated
postretirement benefits payments of $29.8 million, $29.7 million and $31.6
million, respectively.
The following table sets forth the postretirement benefits plan's status,
reconciled to amounts recognized in the Company's consolidated financial
statements:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1994 1993 1992
------- ------- ------
(IN MILLIONS)
<S> <C> <C> <C>
Service cost ............................... $ 3.9 $ 5.3 $ 6.0
Interest cost on accumulated postretirement
benefits obligation ....................... 28.6 29.2 31.9
Unrecognized prior service cost ............ (3.9) (6.9) --
Net amortization and deferrals ............. -- 1.5 --
------- ------- ------
Net Periodic Postretirement Benefits Costs $28.6 $29.1 $37.9
======= ======= ======
</TABLE>
36
<PAGE>
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1994 1993
---------- ----------
(IN MILLIONS)
<S> <C> <C>
Accumulated postretirement benefits obligation:
Retirees ......................................... $(300.4) $(283.4)
Fully eligible active plan participants .......... (33.0) (38.7)
Other active plan participants ................... (44.0) (75.1)
---------- ----------
(377.4) (397.2)
Unrecognized benefit of plan amendments ............ (3.2) --
Unrecognized prior service cost .................... (61.9) (66.6)
Unrecognized net loss from past experience
different from that assumed and from changes in
assumptions ...................................... 64.7 85.5
---------- ----------
Accrued Postretirement Benefits Cost ............... $(377.8) $(378.3)
========== ==========
</TABLE>
In 1993, the Company amended the cost sharing provisions of postretirement
medical benefits. As of January 1, 1994, medical benefits available to
retirees under age 65 are the same as those offered to active employees and
medical benefits will be limited to 200% of 1993 costs for all participants.
The assumed health care cost trend rate used in measuring the accumulated
postretirement benefits obligation was 10% in 1994, gradually declining to 5%
in the year 2004 and in 1993 was 13%, gradually declining to 6% in the year
2007. The weighted average discount rate used in determining the accumulated
postretirement benefits obligation was 8.75%, 7.5% and 8.5% at December 31,
1994, 1993 and 1992, respectively.
If the health care cost trend rate assumptions were increased by 1%, the
accumulated postretirement benefits obligation as of December 31, 1994 would
be increased 6.6%. The effect of this change on the sum of the service cost
and interest cost would be an increase of 8.6%.
12) DERIVATIVES AND FAIR VALUE OF FINANCIAL INSTRUMENTS
Derivatives
The Insurance Group primarily uses derivatives for asset/liability risk
management and for hedging individual securities. Derivatives mainly are
utilized to reduce the Insurance Group's exposure to interest rate
fluctuations. Accounting for interest swap transactions are on an accrual
basis. Gains and losses related to hedge transactions are amortized as yield
adjustments for the remaining life of the underlying hedged item. Income and
expense resulting from derivative activities are reflected in net investment
income. The notional amount of matched interest rate swaps outstanding at
December 31, 1994 was $1,906.6 million. The average unexpired terms at
December 31, 1994 range from 2.2 to 2.9 years. At December 31, 1994, the cost
of terminating outstanding matched swaps in a loss position was $79.8 million
and the unrealized gain on outstanding matched swaps in a gain position was
$17.6 million. The Company has no intention of terminating these contracts
prior to maturity. During 1994, 1993 and 1992, net (losses) gains of $(.2)
million, $-0- million and $2.2 million, respectively, were recorded in
connection with interest rate swap activity.
37
<PAGE>
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Fair Value of Financial Instruments
The Company defines fair value as the quoted market prices for those
instruments that are actively traded in financial markets. In cases where
quoted market prices are not available, fair values are estimated using
present value or other valuation techniques. The fair value estimates are
made at a specific point in time, based on available market information and
judgments about the financial instrument, including estimates of timing,
amount of expected future cash flows and the credit standing of
counterparties. Such estimates do not reflect any premium or discount that
could result from offering for sale at one time the Company's entire holdings
of a particular financial instrument, nor do they consider the tax impact of
the realization of unrealized gains or losses. In many cases, the fair value
estimates cannot be substantiated by comparison to independent markets, nor
can the disclosed value be realized in immediate settlement of the
instrument.
Certain financial instruments are excluded, particularly insurance
liabilities other than financial guarantees and investment contracts. Fair
market value of off-balance-sheet financial instruments of the Insurance
Group was not material at December 31, 1994 and 1993.
Fair value for mortgage loans on real estate are estimated by discounting
future contractual cash flows using interest rates at which loans with
similar characteristics and credit quality would be made. Fair values for
foreclosed mortgage loans and problem mortgage loans are limited to the
estimated fair value of the underlying collateral if lower.
The estimated fair values for the Company's liabilities under GIC and
association plan contracts are estimated using contractual cash flows
discounted based on the T. Rowe Price GIC Index Rate for the appropriate
duration. For durations in excess of the published index rate, the
appropriate Treasury rate is used plus a spread equal to the longest duration
GIC rate spread published.
The estimated fair values for those group annuity contracts which are
classified as investment contracts are measured at the estimated fair value
of the underlying assets. Deposit administration contracts (included with
group annuity contracts) classified as insurance contracts are measured at
estimated fair value of the underlying assets. The estimated fair values for
single premium deferred annuities ("SPDA") are estimated using projected cash
flows discounted at current offering rates. The estimated fair values for
supplementary contracts not involving life contingencies ("SCNILC") and
annuities certain are derived using discounted cash flows based upon the
estimated current offering rate.
Fair value for long-term debt is determined using published market values,
where available, or contractual cash flows discounted at market interest
rates. The estimated fair values for non-recourse mortgage debt are
determined by discounting contractual cash flows at a rate which takes into
account the level of current market interest rates and collateral risk. The
estimated fair values for recourse mortgage debt are determined by
discounting contractual cash flows at a rate based upon current interest
rates of other companies with credit ratings similar to the Company. The
Company's fair value of short-term borrowings approximates their carrying
value.
38
<PAGE>
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table discloses carrying value and estimated fair value for
financial instruments not otherwise disclosed in Notes 3 and 6:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------
1994 1993
------------------------ ------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
VALUE FAIR VALUE VALUE FAIR VALUE
---------- ------------ ---------- ------------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Consolidated Financial Instruments:
- -----------------------------------
Mortgage loans on real estate ..... $4,018.0 $3,919.4 $4,592.1 $4,889.6
Other joint ventures ............... 544.4 544.4 658.3 658.3
Policy loans ....................... 1,731.2 1,676.6 1,549.1 1,622.3
Risk based Separate Account assets 269.8 269.0 283.4 283.6
Policyholders' account balances:
Association plans ................. 141.0 141.0 242.0 247.0
Group annuity contracts ........... 2,450.0 2,469.0 2,902.0 2,995.0
SPDA .............................. 1,744.3 1,732.7 2,129.5 2,143.0
Annuity certain and SCNILC ....... 599.1 624.7 580.4 632.6
Long-term debt ..................... 1,317.4 1,249.2 1,458.8 1,299.1
Closed Block Financial Instruments:
- -----------------------------------
Mortgage loans on real estate ..... 1,543.7 1,477.8 1,692.3 1,796.1
Other equity investments ........... 179.5 179.5 210.5 210.5
Policy loans ....................... 1,827.9 1,721.9 1,877.1 1,961.5
SCNILC liability ................... 39.5 37.0 45.0 45.8
GIC Segment Financial Instruments:
- -----------------------------------
Mortgage loans on real estate ..... 1,730.5 1,743.7 2,076.0 2,259.6
Fixed maturities ................... 219.3 219.3 373.0 373.0
Other equity investments ........... 591.8 591.8 711.0 711.0
Guaranteed interest contracts ..... 835.0 855.0 1,601.8 1,717.2
Long-term debt ..................... 134.8 127.9 142.8 137.4
</TABLE>
13) COMMITMENTS AND CONTINGENT LIABILITIES
The Company has provided, from time to time, certain guarantees or
commitments to affiliates, investors and others. These arrangements include
commitments by the Company, under certain conditions: to make liquidity
advances to cover delinquent principal and interest and property protection
expenses with respect to loan servicing agreements for securitized mortgage
loans which at December 31, 1994 totaled $1.9 billion (as of December 31,
1994, $2.0 million has been advanced under these commitments); to make
capital contributions of up to $249.5 million to affiliated real estate joint
ventures; to advance payments of interest and outstanding balances with
respect to certain commercial mortgage loans sold by the Company with
outstanding balances at December 31, 1994 of $25.9 million; to guarantee
interest on non-recourse debt on investments in real estate; to guarantee
$54.4 million of loans at December 31, 1994 made directly to real estate
partnerships in which the Company has an
39
<PAGE>
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
ownership interest; to provide equity financing to certain limited
partnerships of $67.5 million at December 31, 1994, under existing loan or
loan commitment agreements; and to fund its participation in various
partnerships which at December 31, 1994 totaled $3.3 million. Management
believes the Company will not incur any material losses as a result of these
commitments.
Equitable Life is the obligor under certain structured settlement
agreements which it had entered into with unaffiliated insurance companies
and beneficiaries. To satisfy its obligations under these agreements,
Equitable Life owns single premium annuities issued by previously wholly
owned life insurance subsidiaries. Equitable Life has directed payment under
these annuities to be made directly to the beneficiaries under the structured
settlement agreements. A contingent liability exists with respect to these
agreements should the previously wholly owned subsidiaries be unable to meet
their obligations. Management believes the satisfaction of those obligations
by Equitable Life is remote.
At December 31, 1994, two money market fund portfolios ("Portfolios")
sponsored by Alliance owned $30.0 million principal amount of Tax and Revenue
Anticipation Notes Series A issued by Orange County, California due July 19,
1995 ("Orange County Obligations"). On December 6, 1994, Orange County filed
a petition in bankruptcy under Chapter 9 of the Federal Bankruptcy Code.
Alliance arranged for the issuance of letters of credit by a commercial bank
in favor of the Portfolios which allow the Portfolios to draw down an
aggregate of up to $31.4 million if Orange County fails to pay principal and
interest due at maturity. Alliance is required to pay the bank, on demand,
all amounts drawn down by the Portfolios under the letters of credit. The
letters of credit will be reduced to reflect any sales of Orange County
Obligations by the Portfolios. The Company believes that its loss, if any,
resulting from the Orange County Obligations will not be material.
14) LITIGATION
The Company is a defendant in connection with various legal actions and
proceedings of a character normally incident to its business. Some of the
actions and proceedings have been brought on behalf of various alleged
classes of claimants and certain of these claimants seek damages of
unspecified amounts. While the ultimate outcome of such litigation cannot be
predicted with certainty, management believes, after consultation with
counsel responsible for such litigation, that the resolution of these actions
and proceedings will not result in losses that would have a material effect
on the consolidated financial statements.
15) LEASES
The Company has entered into operating leases for office space and certain
other assets, principally data processing equipment and office furniture and
equipment. Future minimum payments under noncancelable leases for 1995 and
the succeeding four years are $125.6 million, $103.7 million, $77.8 million,
$64.5 million, $53.4 million and $372.6 million thereafter. Minimum future
sublease rental income on these noncancelable leases for 1995 and the
succeeding four years are $9.1 million, $6.8 million, $6.4 million, $5.9
million, $3.9 million and $3.6 million thereafter.
At December 31, 1994, the minimum future rental income on noncancelable
operating leases for wholly owned investments in real estate for 1995 and the
succeeding four years are $306.9 million, $283.9 million, $254.6 million,
$223.1 million and $192.8 million and $876.1 million thereafter.
40
<PAGE>
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
16) SUPPLEMENTAL CASH FLOW INFORMATION
For the years ended December 31, 1994, 1993 and 1992, respectively, real
estate of $189.8 million, $261.8 million and $208.5 million was acquired in
satisfaction of debt.
On January 1, 1992, net assets of $517.6 million were transferred to the
discontinued GIC Segment. The transfer included investment assets at
amortized cost of $611.3 million and valuation allowances of $17.7 million.
In connection with the demutualization, certain significant non-cash
transactions occurred as follows: assets aggregating $7,714.5 million and
liabilities aggregating $8,889.5 million were transferred to the Closed Block
(additional detail is provided in Note 6); secured and surplus notes
aggregating $1.0 billion issued to AXA were exchanged for 69.8 million shares
of the Holding Company's common stock, 2.5 million shares of convertible
preferred stock and 2.989 million shares of the Holding Company's redeemable
preferred stock; policyholders received 22.6 million shares of common stock
for policyholders' membership interest and retained earnings of $1,089.4
million were transferred to common stock and capital in excess of par; and
policy credits of $48.5 million were credited to certain policyholders and
$19.7 million were accrued or paid to certain policyholders with such policy
credits and cash payments being charged to retained earnings.
17) OTHER OPERATING COSTS AND EXPENSES
Other operating costs and expenses consisted of the following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------
1994 1993 1992
----------- ----------- -----------
(IN MILLIONS)
<S> <C> <C> <C>
Compensation costs ........................ $ 690.0 $1,452.3 $1,302.2
Commissions ............................... 313.0 551.1 491.5
Short-term debt interest expense .......... 19.0 317.1 176.1
Long-term debt interest expense ........... 98.3 86.0 166.0
Amortization of policy acquisition costs . 318.1 275.9 144.7
Capitalization of policy acquisition costs (410.9) (397.8) (409.0)
Rent expense, net of sub-lease income .... 128.9 159.5 213.7
Other ..................................... 786.7 1,140.1 1,010.5
----------- ----------- -----------
Total ..................................... $1,943.1 $3,584.2 $3,095.7
=========== =========== ===========
</TABLE>
During the years ended December 31, 1994, 1993 and 1992, the Company
restructured certain operations in connection with cost reduction programs
and recorded pre-tax provisions of $20.4 million, $96.4 million and $24.8
million, respectively. The amounts paid during 1994, associated with the 1994
cost reduction program, totaled $5.0 million. At December 31, 1994, the
liabilities associated with the 1994 cost reduction program amounted to $15.4
million. The 1994 cost reduction program included costs associated with the
termination of operating leases and employee severance benefits in connection
with the consolidation of 16 insurance agencies. The 1993 cost reduction
program primarily reflected severance benefits of terminated employees in
connection with the combination of a wholly owned subsidiary of the Company
with Alliance.
41
<PAGE>
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
18) INSURANCE GROUP STATUTORY FINANCIAL INFORMATION
Equitable Life is restricted as to the amounts it may pay as dividends to
the Holding Company. Under the New York Insurance Law, the New York
Superintendent has broad discretion to determine whether the financial
condition of a stock life insurance company would support the payment of
dividends to its shareholders. The New York Insurance Department has
established informal guidelines for the Superintendent's determinations which
focus upon, among other things, the overall financial condition and
profitability of the insurer under statutory accounting practices. For the
years ended December 31, 1994, 1993 and 1992, statutory earnings (loss)
totaled $67.5 million, $324.0 million and $(288.6) million, respectively. No
amounts are expected to be available for dividends from Equitable Life to the
Holding Company in 1995.
At December 31, 1994, the Insurance Group, in accordance with various
government and state regulations, had $17.5 million of securities deposited
with such government or state agencies.
Accounting practices used to prepare statutory financial statements for
regulatory filings of stock life insurance companies differ in certain
instances from GAAP. The following reconciles the Company's net change in
statutory surplus and capital stock and statutory surplus and capital stock
determined in accordance with accounting practices prescribed by the New York
Insurance Department with net earnings (loss) and equity on a GAAP basis.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------
1994 1993 1992
--------- --------- -----------
(IN MILLIONS)
<S> <C> <C> <C>
Net change in statutory surplus and capital stock ..... $ 292.4 $ 190.8 $ 534.2
Change in asset valuation reserves ..................... (285.2) 639.1 81.2
--------- --------- -----------
Net change in statutory surplus, capital stock and
asset valuation reserves .............................. 7.2 829.9 615.4
Adjustments:
Future policy benefits and policyholders' account
balances ........................................... (11.0) (171.0) (72.1)
Deferred policy acquisition costs .................... 92.8 121.8 264.3
Deferred Federal income taxes ........................ (59.7) (57.5) 394.2
Valuation of investments ............................. 45.2 202.3 (37.0)
Valuation of investment subsidiary ................... 396.6 (464.9) (37.8)
Limited risk reinsurance ............................. 74.9 85.2 (20.7)
Sale of subsidiary and joint venture ................. -- (366.5) --
Surplus note ......................................... -- -- 250.0
Contribution from the Holding Company ................ (300.0) -- --
Demutualization transaction .......................... -- -- (1,129.3)
Postretirement benefits .............................. 17.1 23.8 (357.5)
Other, net ........................................... (44.0) 60.3 (30.9)
GAAP adjustments of Closed Block ..................... 4.5 (16.0) (7.4)
GAAP adjustments of discontinued GIC Segment ......... 42.8 (35.0) 53.5
--------- --------- -----------
Net Earnings (Loss) .................................. $ 266.4 $ 212.4 $ (115.3)
========= ========= ===========
</TABLE>
42
<PAGE>
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------
1994 1993 1992
---------- ---------- -----------
(IN MILLIONS)
<S> <C> <C> <C>
Statutory surplus and capital stock ................. $2,124.8 $1,832.4 $ 1,641.6
Asset valuation reserves ............................ 980.2 1,265.4 626.3
---------- ---------- -----------
Statutory surplus, capital stock and asset valuation
reserves ........................................... 3,105.0 3,097.8 2,267.9
Adjustments:
Future policy benefits and policyholders' account
balances ........................................ (949.5) (938.5) (747.0)
Deferred policy acquisition costs ................. 3,221.1 2,858.8 2,887.5
Deferred Federal income taxes ..................... (26.8) (137.8) (52.9)
Valuation of investments .......................... (794.1) (29.8) (507.5)
Valuation of investment subsidiary ................ (476.5) (873.1) (408.2)
Limited risk reinsurance .......................... (845.9) (920.8) (1,006.0)
Postretirement benefits ........................... (316.6) (333.7) (357.5)
Other, net ........................................ (79.2) (81.9) (67.4)
GAAP adjustments of Closed Block .................. 578.8 574.2 577.0
GAAP adjustments of discontinued GIC Segment ...... (221.9) (264.6) (226.0)
---------- ---------- -----------
Total Shareholder's Equity ........................ $3,194.4 $2,950.6 $ 2,359.9
========== ========== ===========
</TABLE>
19) BUSINESS SEGMENT INFORMATION
The Company has three major business segments: Individual Insurance and
Annuities; Investment Services and Group Pension. Consolidation/elimination,
principally includes debt not specific to any business segment. Net assets of
$1,924.6 million at December 31, 1993 held within the Insurance Group and
previously presented in Consolidation/elimination are now presented as
Attributed Insurance Capital within insurance operations. Attributed
Insurance Capital represents net assets and related revenues and earnings of
the Insurance Group not assigned to the insurance segments. Interest expense
related to debt not specific to any business segment is presented within
Corporate interest expense. Information for all periods is presented on a
comparable basis.
Effective January 1, 1993, management changed the methodology for
determining the capital requirements of the Company's insurance business
segments. This new methodology requires the annual transfer of cash and cash
equivalents to and from Attributed Insurance Capital and the Individual
Insurance and Annuities and Group Pension segments to result in the insurance
business segments having assets equal to adjusted liabilities plus equity
maintained at Equitable Life and its life insurance subsidiaries determined
in accordance with statutory accounting practices. Had this methodology been
in place at January 1, 1992, investment income for the Individual Insurance
and Annuities and Group Pension segments would have been reduced by $80.4
million and $4.5 million, respectively, and other operating costs and
expenses for Attributed Insurance Capital would have been decreased by $84.9
million for the year ended December 31, 1992.
43
<PAGE>
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Individual Insurance and Annuities segment offers a variety of
traditional, variable and interest-sensitive life insurance products,
disability income, annuity products and mutual fund and other investment
products to individuals and small groups. This segment includes Separate
Accounts for certain individual insurance and annuity products.
The Investment Services segment provides investment fund management,
primarily to institutional clients. This segment includes Separate Accounts
which provide various investment options for group clients through pooled or
single group accounts.
Intersegment investment advisory and other fees of approximately $135.3
million, $128.6 million and $131.2 million for 1994, 1993 and 1992,
respectively, are included in total revenues of the Investment Services
segment. These fees, excluding amounts related to the discontinued GIC
Segment of $27.4 million, $17.0 million and $19.0 million for 1994, 1993 and
1992, respectively, are eliminated in consolidation.
The Group Pension segment administers traditional participating group
annuity contracts with conversion features, generally for corporate qualified
pension plans, and association plans which provide full service retirement
programs for individuals affiliated with professional and trade associations.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1994 1993 1992
---------- ---------- ----------
(IN MILLIONS)
<S> <C> <C> <C>
Revenues
Individual insurance and annuities .................... $3,110.7 $2,981.5 $3,479.6
Group pension ......................................... 359.1 426.6 512.0
Attributed insurance capital .......................... 79.4 61.6 85.2
---------- ---------- ----------
Insurance operations ................................. 3,549.2 3,469.7 4,076.8
Investment services ................................... 935.2 2,792.6 2,314.4
Consolidation/elimination ............................. (24.7) (40.5) (106.2)
---------- ---------- ----------
Total ................................................. $4,459.7 $6,221.8 $6,285.0
========== ========== ==========
Earnings (loss) before Federal income taxes,
extraordinary item and cumulative effect of
accounting changes
Individual insurance and annuities .................... $ 245.5 $ 76.2 $ (148.0)
Group pension ......................................... 15.8 2.0 16.2
Attributed insurance capital .......................... 69.8 49.0 (17.2)
---------- ---------- ----------
Insurance operations ................................. 331.1 127.2 (149.0)
Investment services ................................... 177.5 302.1 289.8
Consolidation/elimination ............................. .3 .5 4.6
---------- ---------- ----------
Subtotal ............................................ 508.9 429.8 145.4
Corporate interest expense ............................ (114.2) (126.1) (152.6)
---------- ---------- ----------
Total ................................................. $ 394.7 $ 303.7 $ (7.2)
========== ========== ==========
</TABLE>
44
<PAGE>
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1994 1993
----------- -----------
(IN MILLIONS)
<S> <C> <C>
Assets
Individual insurance and annuities $44,063.4 $42,667.1
Group pension ..................... 4,222.8 4,928.4
Attributed insurance capital ..... 2,609.8 2,852.4
----------- -----------
Insurance operations ............. 50,896.0 50,447.9
Investment services ............... 12,127.9 12,229.1
Consolidation/elimination ......... (1,614.4) (1,589.3)
----------- -----------
Total ............................. $61,409.5 $61,087.7
=========== ===========
</TABLE>
20) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The quarterly results of operations for the years ended December 31, 1994,
1993 and 1992, are summarized below:
<TABLE>
<CAPTION>
THREE MONTHS ENDED,
-----------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
---------- ---------- -------------- -------------
(IN MILLIONS)
<S> <C> <C> <C> <C>
1994
- ----------------------------
Total Revenues .............. $1,107.4 $1,075.0 $1,153.8 $1,123.5
Earnings before Cumulative
Effect of Accounting Change $ 64.0 $ 68.4 $ 89.1 $ 72.0
Net Earnings ................ $ 36.9 $ 68.4 $ 89.1 $ 72.0
1993
- ----------------------------
Total Revenues .............. $1,502.2 $1,539.7 $1,679.4 $1,500.5
========== ========== ============== =============
Net Earnings ................ $ 32.3 $ 47.1 $ 68.8 $ 64.2
========== ========== ============== =============
1992
- ----------------------------
Total Revenues .............. $1,781.7 $1,647.7 $1,484.4 $1,371.2
========== ========== ============== =============
(Loss) Earnings before
Extraordinary Item and
Cumulative Effect of
Accounting Changes ......... $ (3.6) $ (18.9) $ 25.0 $ (28.9)
========== ========== ============== =============
Net Loss .................... $ (18.6) $ (44.7) $ (23.1) $ (28.9)
========== ========== ============== =============
Net Earnings (Loss) After
Demutualization ............ $ 34.1 $ (28.9)
============== =============
</TABLE>
45
<PAGE>
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
21) INVESTMENT IN DLJ
On December 15, 1993, the Company sold a 61% interest in DLJ to the
Holding Company for $800.0 million in cash and securities. The excess of the
proceeds over the book value in DLJ at the date of sale of $340.2 million has
been reflected as a capital contribution. The results of operations and cash
flows of DLJ through the date of sale are included in the consolidated
statements of earnings and cash flows for the years ended December 31, 1993
and 1992. For the period subsequent to the date of sale, the results of
operations of DLJ are accounted for on the equity basis and are included in
commissions, fees and other income in the consolidated statements of
earnings. The Company's carrying value of DLJ is included in investment in
and loans to affiliates in the consolidated balance sheets.
Summarized balance sheets information for DLJ, reconciled to the Company's
carrying value of DLJ, are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1994 1993
----------- -----------
(IN MILLIONS)
<S> <C> <C>
Assets:
Trading account securities, at market value ............... $ 8,970.0 $11,589.8
Securities purchased under resale agreements .............. 10,476.4 11,547.7
Broker-dealer related receivables ......................... 11,784.8 13,745.2
Other assets .............................................. 1,884.9 1,884.0
----------- -----------
Total Assets .............................................. $33,116.1 $38,766.7
=========== ===========
Liabilities:
Securities sold under repurchase agreements ............... $18,356.7 $20,923.5
Broker-dealer related payables ............................ 10,618.0 13,450.3
Short-term and long-term debt ............................. 1,956.5 2,321.7
Other liabilities ......................................... 1,139.6 1,095.9
----------- -----------
Total liabilities ......................................... 32,070.8 37,791.4
Total shareholders' equity ................................ 1,045.3 975.3
----------- -----------
Total Liabilities, Cumulative Exchangeable Preferred Stock
and Shareholders' Equity ................................. $33,116.1 $38,766.7
=========== ===========
DLJ's equity as reported .................................. $ 1,045.3 $ 975.3
Unamortized cost in excess of net assets acquired in 1985 50.8 53.9
Reclassification of Cumulative Exchangeable Preferred
Stock .................................................... (225.0) (225.0)
The Holding Company's equity ownership in DLJ ............. (532.1) (490.6)
----------- -----------
The Company's Carrying Value of DLJ ....................... $ 339.0 $ 313.6
=========== ===========
</TABLE>
46
<PAGE>
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
Summarized statements of earnings information for DLJ reconciled to the
Company's equity earnings of DLJ is as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1994
--------------
(IN MILLIONS)
<S> <C>
Commission, fees and other income .............................. $ 953.5
Net investment income .......................................... 791.9
Dealer, trading and investment gains, net ...................... 263.3
--------------
Total Revenues ................................................. 2,008.7
Total Expenses ................................................. 1,885.7
--------------
Net Earnings ................................................... $ 123.0
DLJ's net earnings as reported ................................. $ 123.0
Amortization of cost in excess of net assets acquired in 1985 . (3.1)
Reclassification of Cumulative Exchange Preferred Stock
Dividend ...................................................... (20.9)
The Holding Company's equity in DLJ's earnings ................. (60.9)
--------------
The Company's Equity in DLJ's Earnings ......................... $ 38.1
==============
</TABLE>
22) RELATED PARTY TRANSACTIONS
On August 31, 1993, the Company sold $661.0 million of primarily privately
placed below investment grade fixed maturities to EQ Asset Trust 1993, a
limited purpose business trust, wholly owned by the Holding Company. The
Company recognized a $4.1 million gain net of related deferred policy
acquisition costs, deferred Federal income tax and amounts attributable to
participating group annuity contracts. In conjunction with this transaction,
the Company received $200.0 million of Class B Notes issued by EQ Asset Trust
1993. These notes have interest rates ranging from 6.85% to 9.45%. The Class
B Notes are reflected in investments in and loans to affiliates on the
consolidated balance sheets.
23) SUBSEQUENT EVENTS
In early 1995, seven complaints were filed by various groups of
shareholders of the Alliance North American Government Income Trust, Inc.
(the "Fund") alleging violations of Federal securities laws, fraud,
negligence, negligent misrepresentations and omissions, breach of fiduciary
duty and breach of contract in connection with the Fund's investments in
Mexican and Argentine securities. Each of the actions is brought against the
Fund, Alliance, which is the investment advisor to the Fund, and Alliance
Capital Management Corporation, a wholly owned subsidiary of the Company
which owns the 1% general partnership interest in Alliance. Other entities
and persons are named as defendants in certain of the complaints. Each of the
actions seeks to have a plaintiff class certified consisting of all
shareholders of the Fund who purchased or owned shares in the Fund at varying
times between February 1992 and December 1994. It is possible that one or
more additional actions making similar allegations may be filed against
Alliance and certain of the other entities and persons noted above. The
actions seek an unspecified amount of damages, costs and attorneys' fees.
Alliance believes that the allegations in each of the actions are without
merit and intends to vigorously defend against the claims in the actions.
While the ultimate results of these actions cannot be determined, management
of Alliance does not expect that these actions will have a material adverse
effect on Alliance's business.
47
<PAGE>
Filed Pursuant to Rule 497(e)
Registration File No.: 33-83750
INCOME MANAGER (SERVICE MARK)
ROLLOVER IRA
STATEMENT OF ADDITIONAL INFORMATION
APRIL 17, 1995
--------------
COMBINATION VARIABLE AND
FIXED DEFERRED ANNUITY CERTIFICATES
FUNDED THROUGH THE
INVESTMENT FUNDS OF SEPARATE ACCOUNT NO. 45
ASSET ALLOCATION SERIES:
O CONSERVATIVE INVESTORS
O GROWTH INVESTORS
EQUITY SERIES:
O GROWTH & INCOME
O COMMON STOCK
O GLOBAL
O INTERNATIONAL
O AGGRESSIVE STOCK
FIXED INCOME SERIES:
O MONEY MARKET
O INTERMEDIATE GOVERNMENT SECURITIES
ISSUED BY:
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
- -------------------------------------------------------------------------------
Home Office: 787 Seventh Avenue, New York, NY 10019
Processing Office: Post Office Box 1547, Secaucus, NJ 07096-1547
- -------------------------------------------------------------------------------
This statement of additional information (SAI) is not a prospectus. It should
be read in conjunction with the Separate Account No. 45 prospectus for the
Rollover IRA, dated April 17, 1995. Definitions of special terms used in the
SAI are found in the prospectus.
A copy of the prospectus is available free of charge by writing the
Processing Office, by calling 1-800-789-7771, toll-free, or by contacting
your Registered Representative.
- -------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION
TABLE OF CONTENTS
PAGE
- -------------------------------------------------------------------------------
Part 1 Minimum Distribution Withdrawals 2
- -------------------------------------------------------------------------------
Part 2 Accumulation Unit Values 2
- -------------------------------------------------------------------------------
Part 3 Annuity Unit Values 2
- -------------------------------------------------------------------------------
Part 4 Custodian and Independent Accountants 3
- -------------------------------------------------------------------------------
Part 5 Money Market Fund and Intermediate Government Securities Fund Yield
Information 3
- -------------------------------------------------------------------------------
Part 6 Long-Term Market Trends 5
- -------------------------------------------------------------------------------
Part 7 Financial Statements 7
- -------------------------------------------------------------------------------
Copyright 1995
The Equitable Life Assurance Society of the United States,
New York, New York 10019.
All rights reserved.
<PAGE>
PART 1 - MINIMUM DISTRIBUTION WITHDRAWALS
If you elect Minimum Distribution Withdrawals described in Part 5 of the
prospectus, each year we calculate the Minimum Distribution Withdrawal amount
by using the Annuity Account Value as of December 31 of the prior calendar
year. We then calculate the minimum distribution amount based on the various
choices you make. This calculation takes into account withdrawals made during
the current calendar year but prior to the date we determine your Minimum
Distribution Withdrawal amount, except that when Minimum Distribution
Withdrawals are elected in the year in which you attain age 71 1/2 , no
adjustment will be made for any withdrawals made between January 1 and April
1 in satisfaction of the minimum distribution requirement for the prior year.
An election can also be made (1) to have us recalculate your life expectancy,
or joint life expectancies, each year or (2) to have us determine your life
expectancy, or joint life expectancies, once and then subtract one year, each
year, from that amount. The joint life options are only available if the
spouse is the beneficiary. However, if you first elect Minimum Distribution
Withdrawals after April 1 of the year following the calendar year in which
you attain age 70 1/2 , option (1) will apply.
PART 2 - ACCUMULATION
UNIT VALUES
Accumulation Unit Values are determined at the end of each Valuation Period
for each of the Investment Funds. Other annuity contracts and certificates
which may be offered by us will have their own accumulation unit values for
the Investment Funds which may be different from those for the Rollover IRA.
The Accumulation Unit Value for an Investment Fund for any Valuation Period
is equal to the Accumulation Unit Value for the preceding Valuation Period
multiplied by the Net Investment Factor for that Investment Fund for that
Valuation Period. The NET INVESTMENT FACTOR is (a) - c where:
-
b
(a) is the value of the Investment Fund's shares of the corresponding
Portfolio at the end of the Valuation Period before giving effect to any
amounts allocated to or withdrawn from the Investment Fund for the
Valuation Period. For this purpose, we use the share value reported to us
by the Trust.
(b) is the value of the Investment Fund's shares of the corresponding
Portfolio at the end of the preceding Valuation Period (after any amounts
allocated or withdrawn for that Valuation Period).
(c) is the daily Separate Account mortality and expense risk charge and asset
based administrative charge relating to the Certificates, times the number
of calendar days in the Valuation Period. These daily charges are at an
effective annual rate not to exceed a total of 1.15%.
PART 3 - ANNUITY UNIT VALUES
The annuity unit value will be fixed on May 1, 1995 for Certificates with
assumed base rates of net investment return of both 5% and 3 1/2 % a year.
For each Valuation Period after that date, it is the annuity unit value for
the immediately preceding Valuation Period multiplied by the adjusted Net
Investment Factor under the Certificate. For each Valuation Period, the
adjusted Net Investment Factor is equal to the Net Investment Factor reduced
for each day in the Valuation Period by:
o .00013366 of the Net Investment Factor if the assumed base rate of net
investment return is 5% a year; or
o .00009425 of the Net Investment Factor if the assumed base rate of net
investment return is 3 1/2 %.
Because of this adjustment, the annuity unit value rises and falls depending
on whether the actual rate of net investment return (after deduction of
charges) is higher or lower than the assumed base rate.
All Certificates have a 5% assumed base rate of net investment return, except
in states where that rate is not permitted. Annuity payments under
Certificates with an assumed base rate of 3 1/2 % will at first be smaller
than those under Certificates with a 5% assumed base rate. Payments under the
3 1/2 % Certificates, however, will rise more rapidly when unit values are
rising, and payments will fall more slowly when unit values are falling than
those under 5% Certificates.
2
<PAGE>
The amounts of variable annuity payments are determined as follows:
Payments normally start on the Business Day specified on your election form,
or on such other future date as specified therein and are made on a monthly
basis. The first three payments are of equal amounts. Each of the first three
payments will be based on the amount specified in the Tables of Guaranteed
Annuity Payments in the Certificate.
The first three payments depend on the assumed base rate of net investment
return and the form of annuity chosen (and any fixed period). If the annuity
involved a life contingency, the risk class and the age of the annuitants
will affect payments.
The amount of the fourth and each later payment will vary according to the
investment performance of the Common Stock Fund. Each monthly payment will be
calculated by multiplying the number of annuity units credited by the average
annuity unit value for the second calendar month immediately preceding the
due date of the payment. The number of units is calculated by dividing the
first monthly payment by the annuity unit value for the Valuation Period
which includes the due date of the first monthly payment. The average annuity
unit value is the average of the annuity unit values for the Valuation
Periods ending in that month. Variable income annuities may also be available
by separate prospectus through the Common Stock or other Funds of other
separate accounts we offer.
Illustration of Changes in Annuity Unit Values. To show how we determine
variable annuity payments from month to month, assume that the Annuity
Account Value on an Annuity Commencement Date is enough to fund an annuity
with a monthly payment of $363 and that the annuity unit value for the
Valuation Period that includes the due date of the first annuity payment is
$1.05. The number of annuity units credited under the contract would be
345.71 (363 divided by 1.05 = 345.71).
If the fourth monthly payment is due in March, and the average annuity unit
value for January was $1.10, the annuity payment for March would be the
number of units (345.71) times the average annuity unit value ($1.10), or
$380.28. If the average annuity unit value was $1 in February, the annuity
payment for April would be 345.71 times $1, or $345.71.
PART 4 - CUSTODIAN AND
INDEPENDENT ACCOUNTANTS
Equitable Life is the custodian for shares of the Trust owned by the Separate
Account.
The consolidated financial statements of Equitable Life for the years ended
December 31, 1994 and 1993 included in the SAI have been audited by Price
Waterhouse LLP, and for the year ended December 31, 1992 by Deloitte & Touche
LLP, as stated in their respective reports.
The consolidated financial statements of Equitable Life for the years ended
December 31, 1994 and 1993 included in this SAI have been so included in
reliance on the report of Price Waterhouse LLP, independent accountants,
given on the authority of such firm as experts in accounting and auditing.
The consolidated financial statements of Equitable Life for the year ended
December 31, 1992 included in this SAI have been so included in reliance on
the report of Deloitte & Touche LLP, independent accountants, given on the
authority of such firm as experts in accounting and auditing.
PART 5 - MONEY MARKET
FUND AND INTERMEDIATE
GOVERNMENT SECURITIES
FUND YIELD INFORMATION
Money Market Fund
The Money Market Fund calculates yield information for seven-day periods. The
seven-day current yield calculation is based on a hypothetical Certificate
with one Accumulation Unit at the beginning of the period. To determine the
seven-day rate of return, the net change in the Accumulation Unit Value is
computed by subtracting the Accumulation Unit Value at the beginning of the
period from an Accumulation Unit Value, exclusive of capital changes, at the
end of the period.
The net change is then reduced by the average contract fee factor (explained
below). This reduction is made to recognize the deduction of the annual
contract fee, which is not reflected in the unit value. See "Annual Contract
Fee" in Part 6 of the prospectus.
Accumulation Unit Values reflect all other accrued expenses of the Money
Market Fund but do not reflect the withdrawal charge, the guaranteed minimum
death benefit charge or any premium taxes.
3
<PAGE>
The adjusted net change is divided by the Accumulation Unit Value at the
beginning of the period to obtain the adjusted base period rate of return.
This seven-day adjusted base period return is then multiplied by 365/7 to
produce an annualized seven-day current yield figure carried to the nearest
one-hundredth of one percent.
The actual dollar amount of the annual contract fee that is deducted from the
Money Market Fund will vary for each Certificate depending upon the
percentage of the Annuity Account Value allocated to the Money Market Fund.
To determine the effect of the annual contract fee on the yield, we start
with the total dollar amounts of the charges deducted from the Fund during
the 12-month period ending on the last day of the prior year. The amount is
multiplied by 7/365 to produce an average contract fee factor which is used
in all weekly yield computations for the ensuing year. The average contract
fee factor is then divided by the number of Rollover IRA Money Market Fund
Accumulation Units as of the end of the prior calendar year, and the
resulting quotient is deducted from the net change in Accumulation Unit Value
for the seven-day period.
The effective yield is obtained by modifying the current yield to give effect
to the compounding nature of the Money Market Fund's investments, as follows:
the unannualized adjusted base period return is compounded by adding one to
the adjusted base period return, raising the sum to a power equal to 365
divided by 7, and subtracting one from the result, i.e., effective yield =
(base period return + 1 ) 365/7 -- 1. The Money Market Fund yields will
fluctuate daily. Accordingly, yields for any given period are not necessarily
representative of future results. In addition, the value of Accumulation
Units of the Money Market Fund will fluctuate and not remain constant.
Intermediate Government Securities Fund
The Intermediate Government Securities Fund calculates yield information for
30-day periods. The 30-day current yield calculation is based on a
hypothetical Certificate with one Accumulation Unit at the beginning of the
period. To determine the 30-day rate of return, the net change in the
Accumulation Unit Value is computed by subtracting the Accumulation Unit
Value at the beginning of the period from an Accumulation Unit Value,
exclusive of capital changes, at the end of the period.
The net change is then reduced by the average contract fee factor (explained
below). This reduction is made to recognize the deduction of the annual
contract fee, which is not reflected in the unit value. See "Annual Contract
Fee" in Part 6 of the prospectus.
Accumulation Unit Values reflect all other accrued expenses of the
Intermediate Government Securities Fund but do not reflect the withdrawal
charge, the guaranteed minimum death benefit charge or any premium taxes.
The adjusted net change is divided by the Accumulation Unit Value at the
beginning of the period to obtain the adjusted base period rate of return.
This 30-day adjusted base period return is then multiplied by 365/30 to
produce an annualized 30-day current yield figure carried to the nearest
one-hundredth of one percent.
The actual dollar amount of the annual contract fee that is deducted from the
Intermediate Government Securities Fund will vary for each Certificate
depending upon the percentage of the Annuity Account Value allocated to the
Intermediate Government Securities Fund. To determine the effect of the
annual contract fee on the yield, we start with the total dollar amounts of
the charges deducted from the Fund during the 12-month period ending on the
last day of the prior year. The amount is multiplied by 30/365 to produce an
average contract fee factor which is used in all 30-day yield computations
for the ensuing year. The average contract fee is then divided by the number
of Rollover IRA Intermediate Government Securities Fund Accumulation Units as
of the end of the prior calendar year, and the resulting quotient is deducted
from the net change in Accumulation Unit Value for the 30-day period.
The effective yield is obtained by modifying the current yield to give effect
to the compounding nature of the Intermediate Government Securities Fund's
investments, as follows: the unannualized adjusted base period return is
compounded by adding one to the adjusted base period return, raising the sum
to a power equal to 365 divided by 30, and subtracting one from the result,
i.e., effective yield = (base period return + 1) 365/30 -- 1. Intermediate
Government Securities Fund yields will fluctuate daily. Accordingly, yields
for any given period are not
4
<PAGE>
necessarily representative of future results. In addition, the value of
Accumulation Units of the Intermediate Government Securities Fund will
fluctuate and not remain constant.
Money Market Fund and Intermediate Government Securities Fund Yield
Information
The Money Market Fund and Intermediate Government Securities Fund yields
reflect charges that are not normally reflected in the yields of other
investments and therefore may be lower when compared with yields of other
investments. Money Market Fund and Intermediate Government Securities Fund
yields should not be compared to the return on fixed rate investments which
guarantee rates of interest for specified periods, such as the Guarantee
Periods. Nor should the yield be compared to the yield of money market funds
or government securities funds made available to the general public.
Because the Rollover IRA Certificates are being offered for the first time in
1995, yield information is not available.
PART 6 - LONG-TERM MARKET
TRENDS
As a tool for understanding how different investment strategies may affect
long-term results, it may be useful to consider the historical returns on
different types of assets. The following charts present historical return
trends for various types of securities. The information presented, while not
directly related to the performance of the Investment Funds, helps to provide
a perspective on the potential returns of different asset classes over
different periods of time. By combining this information with knowledge of
personal financial needs (e.g., the length of time until retirement,
financial requirements at retirement), you may be able to better determine
how to allocate contributions among the Rollover IRA Investment Funds.
Historically, the long-term investment performance of common stocks has
generally been superior to that of long- or short-term debt securities. For
those investors who have many years until retirement, or whose primary focus
is on long-term growth potential and protection against inflation, there may
be advantages to allocating some or all of their Annuity Account Value to
those Investment Funds that invest in stocks.
<PAGE>
Growth of $1 Invested on January 1, 1954
(Values are as of the last business day)
[THE FOLLOWING TABLE WAS REPRESENTED AS
A STACKED AREA GRAPH IN THE PROSPECTUS]
<TABLE>
<CAPTION>
A B
LABEL LABEL INFLATION COMMON STOCKS
- ------- ------- ----------- ---------------
<S> <C> <C> <C>
1 1954 1 1
2 1 1.32
3 1.03 1.4
4 1.06 1.25
5 1.08 1.79
6 1.1 2.01
7 1.11 2.02
8 1.12 2.56
9 1.14 2.34
10 1.15 2.87
11 1964 1.17 3.34
12 1.19 3.76
13 1.23 3.38
14 1.27 4.19
15 1.33 4.65
16 1.41 4.26
17 1.49 4.43
18 1.54 5.06
19 1.59 6.02
20 1.73 5.14
21 1974 1.94 3.78
22 2.08 5.18
23 2.18 6.42
24 2.32 5.96
25 2.53 6.35
26 2.87 7.52
27 3.23 9.96
28 3.51 9.47
29 3.65 11.5
30 3.79 14.09
31 1984 3.94 14.97
32 4.09 19.78
33 4.13 23.44
34 4.32 24.66
35 4.51 28.81
36 4.72 37.88
37 5 36.68
38 5.16 47.89
39 5.31 51.56
40 5.45 56.71
41 1994 5.6 57.45
</TABLE>
[END OF GRAPHICALLY REPRESENTED DATA]
Source: Ibbotson Associates, Inc. See discussion and information preceding
and following chart.
<PAGE>
Over shorter periods of time, however, common stocks tend to be subject to
more dramatic changes in value than fixed income (debt) securities. Investors
who are nearing retirement age, or who have a need to limit short-term risk,
may find it preferable to allocate a smaller percentage of their Annuity
Account Value to those Investment Funds that invest in common stocks. The
following graph illustrates the monthly fluctuations in value of $1 based on
monthly returns of the Standard & Poor's 500 during 1990, a year that
represents more typical volatility than 1994.
Growth of $1 Invested on January 1, 1990
(Values are as of the last business day)
[THE FOLLOWING TABLE WAS REPRESENTED AS
A SCATTER GRAPH IN THE PROSPECTUS]
<TABLE>
<CAPTION>
A B
LABEL LABEL COMMON STOCKS INTERMEDIATE-TERM
- ------- -------- --------------- -----------------
<S> <C> <C> <C>
1 1/1/90 $1.00 $1.00
2 Jan. $0.93 $0.99
3 Feb. $0.94 $0.99
4 Mar. $0.97 $0.99
5 Apr. $0.95 $0.98
6 May $1.04 $1.01
7 June $1.03 $1.02
8 July $1.03 $1.04
9 Aug. $0.93 $1.03
10 Sep. $0.89 $1.04
11 Oct. $0.89 $1.06
12 Nov. $0.94 $1.08
13 Dec. $0.97 $1.10
</TABLE>
[END OF GRAPHICALLY REPRESENTED DATA]
Source: Ibbotson Associates, Inc. See discussion and information preceding
and following chart.
5
<PAGE>
The following chart illustrates average annual rates of return over selected
time periods between December 31, 1926 and December 31, 1994 for different
types of securities: common stocks, long-term government bonds, long-term
corporate bonds, intermediate-term govern- ment bonds and U.S. Treasury
Bills. For comparison purposes, the Consumer Price Index is shown as a
measure of inflation. The average annual returns shown in the chart reflect
capital appreciation and assume the reinvestment of dividends and interest.
No investment management fees or expenses, and no charges typically
associated with deferred annuity products, are reflected.
The information presented is merely a summary of past experience for
unmanaged groups of securities and is neither an estimate or guarantee of
future performance. Any invest- ment in securities, whether equity or debt,
involves varying degrees of potential risk, in addition to offering varying
degrees of potential reward.
The rates of return illustrated do not represent returns of the Separate
Account. In addition, there is no assurance that the performance of the
Investment Funds will correspond to rates of return such as those illustrated
in the chart. For a comparative illustration of performance results of the
Investment Funds (which reflect the Trust and Separate Account charges), see
"Part 3: Investment Performance" in the prospectus.
MARKET TRENDS:
ILLUSTRATIVE ANNUAL RATES OF RETURN
<TABLE>
<CAPTION>
LONG-TERM INTERMEDIATE-
FOR THE FOLLOWING PERIODS COMMON LONG-TERM CORPORATE TERM GOVT. U.S. TREASURY CONSUMER
ENDING 12/31/94 STOCKS GOVT. BONDS BONDS BONDS BILLS PRICE INDEX
- ----------------------------- -------- ------------- ----------- --------------- --------------- -------------
<S> <C> <C> <C> <C> <C> <C>
1 Year 1.31% (7.77)% (5.76)% (5.14)% 3.90% 2.78%
3 Years 6.26 5.62 5.28 4.19 3.43 2.81
5 Years 8.69 8.34 8.36 7.46 4.73 3.51
10 Years 14.40 11.86 11.57 9.40 5.76 3.59
20 Years 14.58 9.42 10.00 9.25 7.29 5.45
30 Years 9.95 6.96 7.31 7.84 6.66 5.36
40 Years 10.66 5.62 6.14 6.58 5.63 4.40
50 Years 11.92 4.99 5.34 5.59 4.69 4.35
60 Years 11.48 4.81 5.21 5.19 3.92 4.10
Since 12/31/26 10.19 4.83 5.41 5.09 3.69 3.13
Inflation adjusted since 1926 6.85 2.22 1.65 1.91 0.55 --
</TABLE>
SOURCE: Stocks, Bonds, Bills, and Inflation 1995 Yearbook(Trademark),
Ibbotson Associates, Chicago (annually updates work by Roger G. Ibbotson and
Rex A. Sinquefield). All rights reserved.
COMMON STOCKS (S&P 500)--Standard and Poor's Composite Index, an unmanaged
weighted index of the stock performance of 500 industrial, transportation,
utility and financial companies.
LONG-TERM GOVERNMENT BONDS--Measured using a one-bond portfolio constructed
each year containing a bond with approximately a twenty year maturity and a
reasonably current coupon.
LONG-TERM CORPORATE BONDS--For the period 1969-1994, represented by the
Salomon Brothers Index was backdated using Salomon Brothers monthly yield
data and a methodology similar to that used by Salomon Brothers for
1969-1994; for the period 1927-1945, the Standard and Poor's monthly
High-Grade Corporate Composite yield data were used, assuming a 4 percent
coupon and a twenty year maturity.
INTERMEDIATE-TERM GOVERNMENT BONDS--Measured by a one-bond portfolio
constructed each year containing a bond with approximately a five year
maturity.
U. S. TREASURY BILLS--Measured by rolling over each month a one-bill
portfolio containing, at the beginning of each month, the bill having the
shortest maturity not less than one month.
INFLATION--Measured by the Consumer Price Index for all Urban Consumers
(CPI-U), not seasonally adjusted.
6
<PAGE>
PART 7 - FINANCIAL
STATEMENTS
The consolidated financial statements of The Equitable Life Assurance Society
of the United States included herein should be considered only as bearing
upon the ability of Equitable Life to meet its obligations under the
Certificates. There are no financial statements for the Separate Account as
it had not commenced operations as of the date of the prospectus and SAI.
7
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To The Board of Directors and Shareholders of
The Equitable Life Assurance Society of the United States
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of earnings, of shareholder's equity and of cash
flows present fairly, in all material respects, the financial position of The
Equitable Life Assurance Society of the United States and its subsidiaries
("Equitable Life") at December 31, 1994 and 1993, and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of Equitable Life's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with generally
accepted auditing standards which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
As discussed in Note 2 to the consolidated financial statements, Equitable
Life changed its methods of accounting for postemployment benefits in 1994
and for investment securities and for reinsurance in 1993.
PRICE WATERHOUSE LLP
New York, New York
February 8, 1995
8
<PAGE>
- -----------------------------------------------------------------------------
INDEPENDENT AUDITORS' REPORT
The Board of Directors of The Equitable Life Assurance Society of the United
States:
We have audited the consolidated statements of earnings, shareholder's equity
and cash flows of The Equitable Life Assurance Society of the United States
("Equitable Life") for the year ended December 31, 1992. These consolidated
financial statements are the responsibility of Equitable Life's management.
Our responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the consolidated results of operations and consolidated
cash flows of The Equitable Life Assurance Society of the United States for
the year ended December 31, 1992 in conformity with generally accepted
accounting principles.
As discussed in Note 2 to the consolidated financial statements, in 1992
Equitable Life changed its method of accounting for foreclosed assets, income
taxes and postretirement benefits other than pensions.
Deloitte & Touche LLP
New York, New York
February 16, 1993
9
<PAGE>
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1994 AND 1993
<TABLE>
<CAPTION>
1994 1993
----------- -----------
(IN MILLIONS)
<S> <C> <C>
ASSETS
Investments:
Fixed maturities:
Held to maturity, at amortized cost ........................ $ 5,223.0 $ 5,659.1
Available for sale, at estimated fair value ................ 7,586.0 7,829.3
Mortgage loans on real estate ............................... 4,018.0 4,592.1
Equity real estate .......................................... 4,446.4 4,452.6
Policy loans ................................................ 1,731.2 1,549.1
Other equity investments .................................... 678.5 851.0
Investment in and loans to affiliates ....................... 560.2 533.0
Other invested assets ....................................... 489.3 374.2
----------- -----------
Total investments .......................................... 24,732.6 25,840.4
Cash and cash equivalents ..................................... 693.6 593.4
Deferred policy acquisition costs ............................. 3,221.1 2,858.8
Amounts due from discontinued GIC Segment ..................... 2,108.6 2,125.9
Other assets .................................................. 2,078.6 1,900.8
Closed Block assets ........................................... 8,105.5 8,084.3
Separate Accounts assets ...................................... 20,469.5 19,684.1
----------- -----------
TOTAL ASSETS .................................................. $61,409.5 $61,087.7
===========
LIABILITIES
Policyholders' account balances ............................... $21,238.0 $21,499.1
Future policy benefits and other policyholders' liabilities .. 3,840.8 3,753.6
Short-term and long-term debt ................................. 1,337.4 1,659.5
Other liabilities ............................................. 2,300.1 2,450.3
Closed Block liabilities ...................................... 9,069.5 9,143.4
Separate Accounts liabilities ................................. 20,429.3 19,631.2
----------- -----------
Total liabilities ........................................... 58,215.1 58,137.1
----------- -----------
Commitments and contingencies (Notes 10, 12, 13, 14, 15 and 23)
SHAREHOLDER'S EQUITY
Common stock, $1.25 par value 2.0 million shares authorized,
issued and outstanding ...................................... 2.5 2.5
Capital in excess of par value ................................ 2,913.6 2,613.6
Retained earnings ............................................. 484.0 217.6
Net unrealized investment (losses) gains ...................... (203.0) 131.9
Minimum pension liability ..................................... (2.7) (15.0)
----------- -----------
Total shareholder's equity .................................. 3,194.4 2,950.6
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY .................... $61,409.5 $61,087.7
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
10
<PAGE>
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
CONSOLIDATED STATEMENTS OF EARNINGS
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
<TABLE>
<CAPTION>
1994 1993 1992
--------- --------- ---------
(IN MILLIONS)
<S> <C> <C> <C>
REVENUES
Universal life and investment-type product policy fee income $ 715.0 $ 644.5 $ 571.7
Premiums .................................................... 625.6 599.1 1,185.3
Net investment income ....................................... 2,030.9 2,599.3 2,689.5
Investment gains, net ....................................... 91.8 533.4 371.8
Commissions, fees and other income .......................... 845.4 1,717.2 1,407.4
Contribution from the Closed Block .......................... 151.0 128.3 59.3
--------- --------- ---------
Total revenues ............................................ 4,459.7 6,221.8 6,285.0
--------- --------- ---------
BENEFITS AND OTHER DEDUCTIONS
Interest credited to policyholders' account balances ....... 1,201.3 1,330.0 1,440.8
Policyholders' benefits ..................................... 920.6 1,003.9 1,755.7
Other operating costs and expenses .......................... 1,943.1 3,584.2 3,095.7
--------- --------- ---------
Total benefits and other deductions ....................... 4,065.0 5,918.1 6,292.2
--------- --------- ---------
Earnings (loss) before Federal income taxes, extraordinary
item and cumulative effect of accounting changes .......... 394.7 303.7 (7.2)
Federal income taxes ........................................ 101.2 91.3 19.2
--------- --------- ---------
Earnings (loss) before extraordinary item and cumulative
effect of accounting changes ............................... 293.5 212.4 (26.4)
Extraordinary charge for demutualization expenses .......... -- -- (93.8)
Cumulative effect of accounting changes, net of Federal
income taxes ............................................... (27.1) -- 4.9
--------- --------- ---------
Net Earnings (Loss) ......................................... $ 266.4 $ 212.4 $ (115.3)
========= ========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
11
<PAGE>
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
<TABLE>
<CAPTION>
1994 1993 1992
---------- ---------- -----------
(IN MILLIONS)
<S> <C> <C> <C>
Common stock, at par value, beginning of year ........ $ 2.5 $ 2.0 $ --
Issuance of common stock .............................. -- -- 2.0
Increase in par value ................................. -- .5 --
---------- ---------- -----------
Common stock, at par value, end of year ............... 2.5 2.5 2.0
---------- ---------- -----------
Capital in excess of par value, beginning of year .... 2,613.6 2,273.9 --
Additional capital in excess of par value ............. 300.0 340.2 2,273.9
Increase in par value ................................. -- (.5) --
---------- ---------- -----------
Capital in excess of par value, end of year .......... 2,913.6 2,613.6 2,273.9
---------- ---------- -----------
Retained earnings, beginning of year .................. 217.6 5.2 1,290.0
Net loss before demutualization ....................... -- -- (120.5)
Demutualization transaction ........................... -- -- (1,169.5)
Net earnings after demutualization .................... 266.4 212.4 5.2
---------- ---------- -----------
Retained earnings, end of year ........................ 484.0 217.6 5.2
---------- ---------- -----------
Net unrealized investment gains, beginning of year ... 131.9 78.8 65.5
Change in unrealized investment (losses) gains ....... (334.9) (9.5) 13.3
Effect of adopting new accounting standard ............ -- 62.6 --
---------- ---------- -----------
Net unrealized investment (losses) gains, end of year (203.0) 131.9 78.8
---------- ---------- -----------
Minimum pension liability, beginning of year ......... (15.0) --
Change in minimum pension liability ................... 12.3 (15.0)
---------- ----------
Minimum pension liability, end of year ................ (2.7) (15.0)
---------- ----------
TOTAL SHAREHOLDER'S EQUITY, END OF YEAR ............... $3,194.4 $2,950.6 $ 2,359.9
========== ========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
12
<PAGE>
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
<TABLE>
<CAPTION>
1994 1993 1992
----------- ------------ -----------
(IN MILLIONS)
<S> <C> <C> <C>
Net earnings (loss) ................................ $ 266.4 $ 212.4 $ (115.3)
Adjustments to reconcile net earnings (loss) to net
cash provided (used) by operating activities:
Net change in trading activities and broker-dealer
related receivables/payables ................... -- (4,177.8) (2,872.9)
Increase in matched resale agreements ............ -- (2,900.5) (1,692.4)
Increase in matched repurchase agreements ........ -- 2,900.5 1,692.4
Investment gains, net of dealer and trading gains (91.8) (160.8) (101.6)
Change in amounts due from discontinued GIC
Segment ........................................ 57.3 47.8 76.4
General Account policy charges ................... (711.9) (623.4) (542.9)
Interest credited to policyholders' account
balances ....................................... 1,201.3 1,330.0 1,440.8
Changes in Closed Block assets and liabilities,
net ............................................ (95.1) (73.3) (156.6)
Change in postretirement benefits liability ...... .5 (8.5) 386.7
Other, net ....................................... 7.3 (407.6) 60.9
----------- ------------ -----------
Net cash provided (used) by operating activities .. 634.0 (3,861.2) (1,824.5)
----------- ------------ -----------
Cash flows from investing activities:
Maturities and repayments ........................ 2,319.7 3,479.6 2,395.8
Sales ............................................ 5,661.9 7,399.2 5,947.1
Return of capital from joint ventures and limited
partnerships ................................... 39.0 119.5 216.7
Purchases ........................................ (7,417.6) (11,184.2) (9,009.5)
Net increase in loans to discontinued GIC Segment (40.0) (880.0) (1,448.6)
Cash received on sale of 61% interest in DLJ ..... -- 346.7 --
Other, net ....................................... (371.1) (317.0) 287.6
----------- ------------ -----------
Net cash provided (used) by investing activities .. 191.9 (1,036.2) (1,610.9)
----------- ------------ -----------
Cash flows from financing activities:
Policyholders' account balances:
Deposits ....................................... 2,082.7 2,410.7 2,411.6
Withdrawals .................................... (2,887.4) (2,433.5) (2,912.0)
Net (decrease) increase in short-term financings . (173.0) 4,717.2 1,786.3
Additions to long-term debt ...................... 51.8 97.7 477.3
Repayments of long-term debt ..................... (199.8) (64.4) (281.4)
Proceeds from issuance of Alliance units ......... 100.0 -- --
Capital contribution from the Holding Company .... 300.0 -- 177.8
----------- ------------ -----------
Net cash (used) provided by financing activities .. (725.7) 4,727.7 1,659.6
----------- ------------ -----------
Change in cash and cash equivalents ................ 100.2 (169.7) (1,775.8)
Cash and cash equivalents, beginning of year ...... 593.4 763.1 2,538.9
----------- ------------ -----------
Cash and Cash Equivalents, End of Year ............. $ 693.6 $ 593.4 $ 763.1
=========== ============ ===========
Supplemental cash flow information
Interest Paid .................................... $ 34.9 $ 1,437.2 $ 1,244.0
=========== ============ ===========
Income Taxes Paid (Refunded) ..................... $ 49.2 $ 41.0 $ (21.3)
=========== ============ ===========
</TABLE>
See Notes to Consolidated Financial Statements.
13
<PAGE>
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1) ORGANIZATION
The Equitable Life Assurance Society of the United States ("Equitable
Life") converted to a stock life insurance company on July 22, 1992 and
became a wholly owned subsidiary of The Equitable Companies Incorporated (the
"Holding Company"). In connection with the conversion, Equitable Life's
eligible policyholders received cash, policy credits or common stock of the
Holding Company. The costs incurred in connection with the demutualization
have been presented as an extraordinary charge.
At conversion, on July 22, 1992, AXA Group ("AXA") became the owner of 49%
of the Holding Company's common shares outstanding.
On December 19, 1994, the Holding Company exchanged all its outstanding
redeemable preferred stock and substantially all of its convertible preferred
stock for common stock, a new series of convertible preferred stock and
convertible debentures. As a result of this transaction, AXA's ownership of
the Holding Company increased to 60.5% (63.6% assuming conversion of
Convertible Preferred Stock held by AXA and 54.1% if all securities
convertible into, or options on, common stock were to be converted or
exercised).
2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Principles of Consolidation
After July 22, 1992, Equitable Life commenced preparing its general
purpose financial statements in conformity with generally accepted accounting
principles ("GAAP") for stock life insurance companies. Such principles have
been applied retroactively in the preparation of these consolidated financial
statements for all periods prior to conversion.
The accompanying consolidated financial statements include the accounts of
Equitable Life and its wholly owned life insurance subsidiaries
(collectively, the "Insurance Group"); non-insurance subsidiaries,
principally Alliance Capital Management L.P. ("Alliance"), an investment
advisory subsidiary and Equitable Real Estate Investment Management, Inc.
("EREIM"), a real estate investment management subsidiary; and those
partnerships and joint ventures (collectively, including its consolidated
subsidiaries the "Company") in which the Company has control and a majority
economic interest. The consolidated statements of earnings and cash flows for
the years ended December 31, 1993 and 1992 include the results of operations
and cash flows of Donaldson, Lufkin & Jenrette, Inc. ("DLJ"), an investment
banking and brokerage affiliate, on a consolidated basis through December 15,
1993, the date of sale (see Note 21). Subsequent to the date of sale, DLJ is
accounted for on the equity basis. The Closed Block assets and liabilities
and results of operations subsequent to demutualization are presented in the
consolidated financial statements as single line items. Prior to
demutualization such amounts were presented line by line in the consolidated
financial statements (see Note 6). Unless specifically stated, all
disclosures contained herein supporting the consolidated financial statements
exclude the Closed Block related amounts.
All significant intercompany transactions and balances have been
eliminated in consolidation other than intercompany transactions and balances
with the Closed Block and the discontinued Guaranteed Interest Contract
("GIC") Segment (see Note 7).
Certain reclassifications have been made in the amounts presented for
prior periods to conform those periods with the 1994 presentation.
14
<PAGE>
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Closed Block
As of July 22, 1992, Equitable Life established the Closed Block for the
benefit of certain classes of individual participating policies for which
Equitable Life had a dividend scale payable in 1991 and which were in force
on that date. Assets were allocated to the Closed Block in an amount which,
together with anticipated revenues from policies included in the Closed
Block, was reasonably expected to be sufficient to support such business,
including provision for payment of claims, certain expenses and taxes, and
for continuation of dividend scales payable in 1991, assuming the experience
underlying such scales continues.
Assets allocated to the Closed Block inure solely to the benefit of the
holders of policies included in the Closed Block and will not revert to the
benefit of Equitable Life's shareholder. The plan of demutualization
prohibits the reallocation, transfer, borrowing or lending of assets between
the Closed Block and other portions of Equitable Life's General Account, any
of its Separate Accounts or to any affiliate of Equitable Life without the
approval of the New York Superintendent of Insurance. Closed Block assets and
liabilities are carried on the same basis as similar assets and liabilities
held in the General Account.
The excess of Closed Block liabilities over Closed Block assets represents
the expected future post-tax contribution from the Closed Block which would
be recognized in income over the period the policies and contracts in the
Closed Block remain in force.
If the actual contribution from the Closed Block in any given period
equals or exceeds the expected contribution for such period as determined at
the establishment of the Closed Block, the expected contribution would be
recognized in income for that period. Any excess of the actual contribution
over the expected contribution would also be recognized in income to the
extent that the aggregate expected contribution for all prior periods
exceeded the aggregate actual contribution. Any remaining excess of actual
contribution over expected contributions would be accrued in the Closed Block
as a liability for future dividends to be paid to the Closed Block
policyholders.
If, over the period the policies and contracts in the Closed Block remain
in force, the actual contribution from the Closed Block is less than the
expected contribution from the Closed Block, only such actual contribution
would be recognized in income.
Discontinued Operations
In 1991, the Company's management adopted a plan to discontinue the
business operations of the GIC Segment, consisting of the Guaranteed Interest
Contract and Group Non-Participating Wind-Up Annuities lines of business. The
Company established a pre-tax provision for the estimated future losses of
the GIC line of business and a premium deficiency reserve for the Group
Non-Participating Wind-Up Annuities. Losses incurred subsequently have been
charged to the allowance for future losses and the premium deficiency
reserve. Total allowances are based upon management's best judgment and there
is no assurance that the ultimate losses will not differ.
Accounting Changes
In the fourth quarter of 1994 (effective as of January 1, 1994), the
Company adopted Statement of Financial Accounting Standards ("SFAS") No. 112,
Employers' Accounting for Postemployment Benefits,
15
<PAGE>
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
which requires employers to recognize the obligation to provide
postemployment benefits. Implementation of this statement resulted in a
charge for the cumulative effect of accounting change of $27.1 million, net
of a Federal income tax benefit of $14.6 million. The current year impact
from the implementation of this statement had no material effect on the 1994
consolidated statements of earnings.
In the first quarter of 1993, the Company adopted SFAS No. 113,
"Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration
Contracts," which establishes the conditions for reinsurance accounting. With
the adoption of this statement, certain reinsurance contracts were
reclassified in 1993 and are presented on a gross basis. Implementation of
this statement had no material effect on the Company's consolidated financial
statements.
At December 31, 1993, the Company adopted SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities," which expanded the use of
fair value accounting for those securities that a company does not have
positive intent and ability to hold to maturity. Implementation of this
statement increased consolidated shareholder's equity by $62.6 million net of
deferred policy acquisition costs, amounts attributable to participating
group annuity contracts and deferred Federal income tax.
In the fourth quarter of 1992 (effective as of January 1, 1992), the
Company adopted SFAS No. 109, "Accounting for Income Taxes," and SFAS No.
106, "Employers' Accounting for Postretirement Benefits Other Than Pensions."
The cumulative effect of accounting changes of $4.9 million is comprised of a
credit of $252.3 million related to the income tax statement and a charge of
$247.4 million, net of a Federal income tax benefit of $130.9 million,
related to the postretirement benefit statement.
In 1992, effective in the fourth quarter, the Company changed its method
of accounting for foreclosed assets to comply with AICPA Statement of
Position No. 92-3, "Accounting for Foreclosed Assets." This change resulted
in a charge of $34.5 million which is reflected in investment gains, net.
New Accounting Pronouncements
In the first quarter of 1995, the Company intends to adopt SFAS No. 114,
"Accounting by Creditors for Impairment of a Loan." This statement applies to
all creditors and addresses the accounting for impairment of a loan by
specifying how allowances for credit losses should be determined. The
statement also applies to all loans that are restructured in a troubled debt
restructuring involving a modification of terms. It requires that impaired
loans that are within the scope of this statement be measured based on the
present value of expected future cash flows discounted at the loan's
effective interest rate or, as a practical expedient, at the loan's
observable market price or the fair value of the collateral if the loan is
collateral dependent. The Company is currently providing for impairment of
loans through an allowance for possible losses, and the implementation of
this statement is not expected to have a significant effect on the level of
this allowance. As a result, there should be no material effect on the
Company's consolidated statements of earnings or shareholder's equity upon
adoption.
Valuation of Investments
Fixed maturities which the Company has both the ability and the intent to
hold to maturity are stated principally at amortized cost. For publicly
traded fixed maturities and for directly negotiated fixed maturities the
amortized cost is adjusted for impairments in value deemed to be other than
temporary. Fixed maturities which have been identified as available for sale
are reported at estimated fair value.
16
<PAGE>
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Mortgage loans on real estate are stated at unpaid principal balances, net
of unamortized discounts and valuation allowances. The valuation allowances
are based on losses expected by management to be realized on transfers of
mortgage loans to real estate (upon foreclosure or in-substance foreclosure),
on the disposition or settlement of mortgage loans and on mortgage loans
which management believes may not be collectible in full. In establishing
valuation allowances, management considers, among other things, the estimated
fair value of the underlying collateral.
Real estate, including real estate acquired in satisfaction of debt, is
stated at depreciated cost less valuation allowances. At the date of
foreclosure (including in-substance foreclosure), real estate acquired in
satisfaction of debt is valued at estimated fair value. Valuation allowances
on real estate held for the production of income are computed using the
forecasted cash flows of the respective properties discounted at a rate equal
to the Company's cost of funds; valuation allowances on real estate available
for sale are computed using the lower of estimated current fair value or
depreciated cost, net of disposition costs.
Policy loans are stated at unpaid principal balances.
Partnerships and joint venture interests in which the Company does not
have control and a majority economic interest are reported using the equity
basis of accounting and are included with either equity real estate or other
equity investments, as appropriate.
Equity securities, comprised of common stock and non-redeemable preferred
stocks, are carried at estimated fair value and are included in other equity
investments.
Short-term investments are stated at amortized cost which approximates
fair value and are included with other invested assets.
Cash and cash equivalents included cash on hand, amounts due from banks
and highly liquid debt instruments purchased with an original maturity of
three months or less.
All securities are recorded in the consolidated financial statements on a
trade date basis.
Investment Results and Unrealized Investment Gains (Losses)
Net investment income excludes net investment income of Separate Accounts
on which the Insurance Group does not bear the investment risk. Net
investment income and realized investment gains and losses (collectively,
"investment results") related to certain participating group annuity
contracts are passed through to the contractholders as interest credited to
policyholders' account balances.
Realized investment gains and losses, other than those related to Separate
Accounts on which the Insurance Group does not bear the investment risk, are
determined by specific identification and are presented as a component of
revenue. Valuation allowances are netted against the asset categories to
which they apply and changes in the valuation allowances are included in
investment gains or losses.
Unrealized investment gains and losses on fixed maturities available for
sale and equity securities held by the Company are accounted for as a
separate component of shareholder's equity, net of related deferred Federal
income taxes, amounts attributable to the discontinued GIC Segment, Closed
Block, participating group annuity contracts and deferred policy acquisition
costs related to universal life and investment-type products.
17
<PAGE>
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Recognition of Insurance Income and Related Expenses
Premiums from universal life and investment-type contracts are reported as
deposits to policyholders' account balances. Revenues from these contracts
consist of amounts assessed during the period against policyholders' account
balances for mortality charges, policy administration charges and surrender
charges. Policy benefits and claims that are charged to expense include
benefit claims incurred in the period in excess of related policyholders'
account balances.
Premiums from traditional life and annuity policies with life
contingencies are recognized generally as income when due. Benefits and
expenses are matched with such income so as to result in the recognition of
profits over the life of the contracts. This match is accomplished by means
of the provision for liabilities for future policy benefits and the deferral
and subsequent amortization of policy acquisition costs.
For contracts with a single premium or a limited number of premium
payments due over a significantly shorter period than the total period over
which benefits are provided, premiums are recorded as income when due with
any excess profit deferred and recognized in income in a constant
relationship to insurance in force or, for annuities, the amount of expected
future benefit payments.
Premiums from individual health contracts are recognized as income over
the period to which the premiums relate in proportion to the amount of
insurance protection provided.
Deferred Policy Acquisition Costs
The costs of acquiring new business, principally commissions,
underwriting, agency and policy issue expenses, all of which vary with and
are primarily related to the production of new business, are deferred.
Deferred policy acquisition costs are subject to recoverability testing at
the time of policy issue and loss recognition testing at the end of each
accounting period.
For universal life and investment-type products, deferred policy
acquisition costs are amortized over the expected average life of the
contracts (periods ranging from 15 to 35 years and 5 to 17 years,
respectively) as a constant percentage of estimated gross profits arising
principally from investment results, mortality and expense margins and
surrender charges based on historical and anticipated future experience,
updated at the end of each accounting period. The effects of revisions to
experience on previous amortization of deferred policy acquisition costs are
reflected in earnings and change in unrealized investment gains (losses) in
the period estimated gross profits are revised.
For traditional life and annuity policies with life contingencies,
deferred policy acquisition costs are amortized in proportion to anticipated
premiums. Assumptions as to anticipated premiums are estimated at the date of
policy issue and are consistently applied during the life of the contracts.
Deviations from estimated experience are reflected in earnings in the period
such deviations occur. For these contracts, the amortization periods
generally are for the estimated life of the policy.
For individual health benefit insurance, deferred policy acquisition costs
are amortized over the expected average life of the contracts (10 years for
major medical policies and 20 years for disability income products) in
proportion to anticipated premium revenue at time of issue.
18
<PAGE>
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Policyholders' Account Balances and Future Policy Benefits
Policyholders' account balances for universal life and investment-type
contracts are equal to the policy account values. The policy account values
represent an accumulation of gross premium payments plus credited interest
less expense and mortality charges and withdrawals.
For traditional life insurance policies, future policy benefit and
dividend liabilities are computed using a net level premium method on the
basis of actuarial assumptions as to mortality, persistency and interest
established at policy issue. Assumptions established at policy issue as to
mortality and persistency are based on the Insurance Group's experience
which, together with interest and expense assumptions, provide a margin for
adverse deviation. When the liabilities for future policy benefits plus the
present value of expected future gross premiums are insufficient to provide
for expected future policy benefits and expenses, unrecoverable deferred
policy acquisition costs are written off and thereafter, if required, a
premium deficiency reserve is established by a charge to earnings. Benefit
liabilities for traditional annuities during the accumulation period are
equal to accumulated contractholders' fund balances and after annuitization
are equal to the present value of expected future payments. Interest rates
used in establishing such liabilities range from 2.25% to 11.5% for life
insurance liabilities and from 2.25% to 13.5% for annuity liabilities.
Individual health benefit liabilities for active lives are calculated
using the net level premium method, and assumptions as to future morbidity,
withdrawals and interest which provide a margin for adverse deviation.
Benefit liabilities for disabled lives are calculated using the present value
of benefits method and experience assumptions as to claim terminations,
expenses, and interest which also provide a margin for adverse deviation.
Claim reserves and associated liabilities for individual disability income
and major medical policies were $291.3 million, $402.2 million, $529.3
million and $570.6 million at January 1, 1992, December 31, 1992, 1993 and
1994, respectively. Incurred benefits (benefits paid plus changes in claim
reserves) and benefits paid for individual disability income and major
medical policies are summarized as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1994 1993 1992
-------- -------- --------
(IN MILLIONS)
<S> <C> <C> <C>
Incurred benefits related to current year $188.6 $193.1 $183.0
Incurred benefits related to prior years 28.7 106.1 67.3
-------- -------- --------
Total Incurred Benefits .................. $217.3 $299.2 $250.3
======== ========
Benefits paid related to current year ... $ 43.7 $ 48.9 $ 39.7
Benefits paid related to prior years .... 132.3 123.1 99.7
-------- -------- --------
Total Benefits Paid ...................... $176.0 $172.0 $139.4
======== ======== ========
</TABLE>
The amount of policyholders' dividends to be paid (including those on
policies included in the Closed Block) is determined annually by Equitable
Life's Board of Directors. The aggregate amount of policyholders' dividends
is related to actual interest, mortality, morbidity and expense experience
for the year and judgment as to the appropriate level of statutory surplus to
be retained by Equitable Life.
19
<PAGE>
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Equitable Life is subject to limitations on the amount of statutory
profits which can be retained by Equitable Life with respect to certain
classes of individual participating policies that were in force on July 22,
1992 which are not included in the Closed Block and with respect to
participating policies issued subsequent to July 22, 1992. Excess statutory
profits, if any, will be distributed over time to such policyholders and will
not be available to Equitable Life's shareholder. Earnings in excess of
limitations are accrued as policyholders' dividends.
At December 31, 1994, participating policies including those in the Closed
Block represent approximately 31.0% ($64.4 billion) of direct written life
insurance in force, net of amounts ceded. Participating policies represent
substantially all of the premium income as reflected in the consolidated
statements of earnings and in the results of the Closed Block.
Federal Income Taxes
Equitable Life and its life insurance and non-life insurance subsidiaries
file a consolidated Federal income tax return with the Holding Company and
its non-life insurance subsidiaries. Current Federal income taxes are charged
or credited to operations based upon amounts estimated to be payable or
recoverable as a result of taxable operations for the current year. Effective
January 1, 1992, deferred income tax assets and liabilities are recognized
based on the difference between financial statement carrying amounts and
income tax bases of assets and liabilities using enacted income tax rates and
laws.
Separate Accounts
Separate Accounts are established in conformity with the New York State
Insurance Law and are generally not chargeable with liabilities that arise
from any other business of the Insurance Group. Separate Accounts assets are
subject to General Account claims only to the extent the value of such assets
exceeds the Separate Accounts liabilities.
Assets and liabilities of the Separate Accounts, representing net deposits
and accumulated net investment earnings less fees, held primarily for the
benefit of contractholders, are shown as separate captions in the
consolidated balance sheets. The Insurance Group bears the investment risk on
assets held in one Separate Account, therefore, such assets are carried on
the same basis as similar assets held in the General Account portfolio.
Assets held in the other Separate Accounts are carried at quoted market
values or, where quoted values are not available, at estimated fair values as
determined by the Insurance Group.
The investment results of Separate Accounts on which the Insurance Group
does not bear the investment risk are reflected directly in Separate Accounts
liabilities. For the years ended December 31, 1994, 1993 and 1992, investment
results of such Separate Accounts were $676.3 million, $1,676.5 million and
$1,447.4 million, respectively.
The investment results of a Separate Account on which the Insurance Group
bears the investment risk and which are included in revenues, amounted to
$13.7 million, $12.6 million and $14.5 million for the years ended December
31, 1994, 1993 and 1992, respectively.
20
<PAGE>
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Deposits to all Separate Accounts are reported as increases in Separate
Accounts liabilities and are not reported in revenues. Mortality, policy
administration and surrender charges of all Separate Accounts are included in
revenues.
3) INVESTMENTS
The following tables provide additional information relating to fixed
maturities and equity securities:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
----------- ------------ ------------ ------------
(IN MILLIONS)
<S> <C> <C> <C> <C>
DECEMBER 31, 1994
- -----------------------------------
Fixed Maturities:
Held to Maturity:
Corporate ........................ $4,661.0 $67.9 $233.8 $4,495.1
U.S. Treasury securities and
U.S. government and agency
securities ...................... 428.9 4.6 44.2 389.3
States and political subdivisions 63.4 .9 3.7 60.6
Foreign governments .............. 69.7 4.2 2.0 71.9
----------- ------------ ------------ ------------
Total Held to Maturity ............. $5,223.0 $77.6 $283.7 $5,016.9
=========== ============ ============ ============
Available for Sale:
Corporate ........................ $5,663.4 $34.6 $368.0 $5,330.0
Mortgage-backed .................. 686.0 2.9 44.8 644.1
U.S. Treasury securities and
U.S. government and agency
securities ...................... 1,519.3 6.7 71.9 1,454.1
States and political subdivisions 23.4 .1 .7 22.8
Foreign governments .............. 43.8 .3 4.2 39.9
Redeemable preferred stock ...... 108.4 .4 13.7 95.1
----------- ------------ ------------ ------------
Total Available for Sale ........... $8,044.3 $45.0 $503.3 $7,586.0
=========== ============ ============ ============
Equity Securities:
Common stock ...................... $ 126.4 $31.2 $ 23.5 $ 134.1
=========== ============ ============ ============
</TABLE>
21
<PAGE>
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
----------- ------------ ------------ ------------
(IN MILLIONS)
<S> <C> <C> <C> <C>
December 31, 1993
- -----------------------------------
Fixed Maturities:
Held to Maturity:
Corporate ........................ $5,155.0 $390.7 $17.7 $5,528.0
Mortgage-backed .................. 89.1 4.3 .1 93.3
U.S. Treasury securities and
U.S. government and agency
securities ...................... 91.2 16.8 -- 108.0
States and political subdivisions 274.7 29.4 .1 304.0
Foreign governments .............. 49.1 5.3 -- 54.4
----------- ------------ ------------ ------------
Total Held to Maturity ............. $5,659.1 $446.5 $17.9 $6,087.7
=========== ============ ============ ============
Available for Sale:
Corporate ........................ $4,909.0 $218.2 $31.0 $5,096.2
Mortgage-backed .................. 1,093.7 34.8 1.4 1,127.1
U.S. Treasury securities and
U.S. government and agency
securities ...................... 881.0 44.1 1.7 923.4
States and political subdivisions 590.6 26.5 1.6 615.5
Foreign governments .............. 40.0 1.8 .2 41.6
Redeemable preferred stock ...... 31.1 .1 5.7 25.5
----------- ------------ ------------ ------------
Total Available for Sale ........... $7,545.4 $325.5 $41.6 $7,829.3
=========== ============ ============ ============
Equity Securities:
Common stock ...................... $ 110.0 $ 78.8 $ 2.8 $ 186.0
Non-redeemable preferred stock ... 6.9 .3 .5 6.7
----------- ------------ ------------ ------------
Total Equity Securities ............ $ 116.9 $ 79.1 $ 3.3 $ 192.7
=========== ============ ============ ============
</TABLE>
For publicly traded fixed maturities and equity securities, estimated fair
value is determined using quoted market prices. For fixed maturities without
a readily ascertainable market value, the Company has determined an estimated
fair value using a discounted cash flow approach, including provisions for
credit risk, generally based upon the assumption that such securities will be
held to maturity. Estimated fair value for equity securities, substantially
all of which do not have a readily ascertainable market value, has been
determined by the Company. Such estimated fair values do not necessarily
represent the values for which these securities could have been sold at the
dates of the consolidated balance sheets. At December 31, 1994 and 1993,
securities without a readily ascertainable market value having an amortized
cost of $3,854.0 million and $4,751.5 million, respectively, had estimated
fair values of $3,724.6 million and $5,016.6 million, respectively.
22
<PAGE>
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The contractual maturity of bonds at December 31, 1994 is shown below:
<TABLE>
<CAPTION>
HELD TO MATURITY AVAILABLE FOR SALE
------------------------- -------------------------
AMORTIZED ESTIMATED AMORTIZED ESTIMATED
COST FAIR VALUE COST FAIR VALUE
----------- ------------ ----------- ------------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Due in one year or less ..... $ 216.2 $ 216.1 $ 214.9 $ 214.8
Due in years two through five 1,442.1 1,419.1 1,895.2 1,855.0
Due in years six through ten 1,733.5 1,634.3 2,763.8 2,549.7
Due after ten years .......... 1,831.2 1,747.4 2,376.0 2,227.3
Mortgage-backed securities .. -- -- 686.0 644.1
----------- ------------ ----------- ------------
Total ........................ $5,223.0 $5,016.9 $7,935.9 $7,490.9
=========== ============ =========== ============
</TABLE>
Bonds not due at a single maturity date have been included in the above
table in the year of final maturity. Actual maturities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
Investment valuation allowances and changes thereto are shown below:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1994 1993 1992
--------- --------- ---------
(IN MILLIONS)
<S> <C> <C> <C>
Balances, beginning of year ..................... $ 355.6 $ 512.0 $ 565.1
Additions charged to income ..................... 51.0 92.8 265.0
Deductions for writedowns and asset dispositions (121.7) (249.2) (239.3)
Transfers of allowances to discontinued GIC
Segment and Closed Block ....................... -- -- (78.8)
--------- --------- ---------
Balances, End of Year ........................... $ 284.9 $ 355.6 $ 512.0
========= ========= =========
Balances, end of year comprise:
Mortgage loans on real estate .................. $ 64.2 $ 144.4 $ 198.3
Equity real estate ............................. 220.7 211.2 195.1
Fixed maturities ............................... -- -- 118.6
--------- --------- ---------
Total ........................................... $ 284.9 $ 355.6 $ 512.0
========= ========= =========
</TABLE>
Deductions for writedowns and asset dispositions for 1993 include an $87.1
million writedown of fixed maturity investments at December 31, 1993 as a
result of adopting a new accounting statement for the valuation of these
investments that requires specific writedowns instead of valuation
allowances.
At December 31, 1994, the carrying values of investments held for the
production of income which were non-income producing for the twelve months
preceding the consolidated balance sheet date were $33.7 million of fixed
maturities, $42.5 million of mortgage loans on real estate and $.9 million of
equity real estate.
The Insurance Group's fixed maturity investment portfolio includes
corporate high yield securities consisting of public high yield bonds,
redeemable preferred stocks and directly negotiated debt in leveraged buyout
transactions. The Insurance Group seeks to minimize the higher than normal
credit risks associated with such securities by monitoring the total
investments in any single issuer or total
23
<PAGE>
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
investment in a particular industry group. Certain of these corporate high
yield securities are classified as other than investment grade by the various
rating agencies, i.e., a rating below Baa or an NAIC (National Association of
Insurance Commissioners) designation of 3 (medium grade), 4 or 5 (below
investment grade) or 6 (in or near default). At December 31, 1994,
approximately 12.4% of the $13,017.0 million aggregate amortized cost of
bonds held by the Insurance Group were considered to be other than investment
grade.
In addition to its holdings of corporate high yield securities, the
Insurance Group is an equity investor in limited partnership interests which
invest primarily in securities considered to be other than investment grade.
The Company has restructured or modified the terms of certain fixed
maturity investments. The fixed maturity portfolio, based on amortized cost,
includes $30.5 million and $55.3 million at December 31, 1994 and 1993,
respectively, of such restructured securities. These amounts include fixed
maturities which are in default as to principal and/or interest payments, are
to be restructured pursuant to commenced negotiations or where the borrowers
went into bankruptcy subsequent to acquisition (collectively, "problem fixed
maturities") of $9.7 million and $32.7 million as of December 31, 1994 and
1993, respectively. Gross interest income that would have been recorded in
accordance with the original terms of restructured fixed maturities amounted
to $7.5 million, $11.7 million and $35.4 million in 1994, 1993 and 1992,
respectively. Gross interest income on these fixed maturities included in net
investment income aggregated $6.8 million, $9.7 million and $28.2 million in
1994, 1993 and 1992, respectively.
At December 31, 1994 and 1993, mortgage loans on real estate with
scheduled payments 60 days (90 days for agricultural mortgages) or more past
due or in foreclosure (collectively, "problem mortgage loans on real estate")
had an amortized cost of $96.9 million (2.3% of total mortgage loans on real
estate) and $292.1 million (6.2% of total mortgage loans on real estate),
respectively.
The payment terms of mortgage loans on real estate may from time to time
be restructured or modified. The investment in restructured mortgage loans on
real estate, based on amortized cost, amounted to $447.9 million and $508.4
million at December 31, 1994 and 1993, respectively. These amounts include
$1.0 million and $28.1 million of problem mortgage loans on real estate at
December 31, 1994 and 1993, respectively. Gross interest income on
restructured mortgage loans on real estate that would have been recorded in
accordance with the original terms of such loans amounted to $44.9 million,
$51.8 million and $59.8 million in 1994, 1993 and 1992, respectively. Gross
interest income on these loans included in net investment income aggregated
$32.8 million, $46.0 million and $44.9 million in 1994, 1993 and 1992,
respectively.
At December 31, 1994, investments owned of any one issuer, including its
affiliates, that aggregate 10% or more of total shareholder's equity were
$596.0 million, principally in mortgage loans, to Trammell Crow and
affiliates (including holdings of the Closed Block and the discontinued GIC
Segment). The amount includes restructured mortgage loans on real estate and
potential problem mortgage loans on real estate with amortized costs of $4.9
million and $294.0 million, respectively. Partnerships affiliated with
Trammell Crow, which are borrowers pursuant to commercial mortgage loans with
an amortized cost of $294.0 million at December 31, 1994, filed for Chapter
11 bankruptcy on January 3, 1995. The loan package consists of first mortgage
interests in 48 properties. The borrowing groups consist of 46 individual
partnerships and the loans are substantially cross-collateralized.
24
<PAGE>
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Insurance Group's investment in equity real estate is through direct
ownership and through investments in real estate joint ventures. At December
31, 1994 and 1993, the carrying value of equity real estate available for
sale amounted to $447.8 million and $402.5 million, respectively. At December
31, 1994 and 1993, the Company owned $1,086.9 million and $947.0 million,
respectively, of real estate acquired in satisfaction of debt.
Depreciation of real estate is computed using the straight-line method
over the estimated useful lives of the properties, which generally range from
40 to 50 years. Accumulated depreciation on real estate was $703.1 million
and $624.7 million at December 31, 1994 and 1993, respectively. Depreciation
expense on real estate totaled $117.0 million, $115.3 million and $117.7
million for the years ended December 31, 1994, 1993 and 1992, respectively.
4) JOINT VENTURES AND PARTNERSHIPS
Summarized combined financial information of real estate joint ventures
(47 and 53 individual ventures as of December 31, 1994 and 1993,
respectively) and of limited partnership interests accounted for under the
equity method, in which the Company has an investment of $10.0 million or
greater and an equity interest of 10% or greater is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1994 1993
----------- -----------
(IN MILLIONS)
<S> <C> <C>
FINANCIAL POSITION
Investments in real estate, at depreciated cost ........................ $2,786.7 $3,160.2
Investments in securities, generally at estimated fair value .......... 3,071.2 3,633.6
Cash and cash equivalents .............................................. 359.8 195.0
Other assets ........................................................... 398.7 753.8
----------- -----------
Total assets ........................................................... 6,616.4 7,742.6
----------- -----------
Funds borrowed -- third party .......................................... 1,759.6 1,826.5
Funds borrowed -- the Company .......................................... 238.0 594.1
Other liabilities ...................................................... 987.7 1,041.0
----------- -----------
Total liabilities ...................................................... 2,985.3 3,461.6
----------- -----------
Partners' Capital ...................................................... $3,631.1 $4,281.0
=========== ===========
Equity in partners' capital included above ............................. $ 964.2 $1,044.1
Equity in limited partnership interests not included above ............ 224.6 259.3
(Deficit) excess of equity in partners' capital over investment cost
and equity earnings .................................................. (1.8) 18.1
Notes receivable from joint venture .................................... 6.1 38.7
Negative equity in certain joint ventures presented as other
liabilities .......................................................... -- 57.1
----------- -----------
Carrying Value ......................................................... $1,193.1 $1,417.3
=========== ===========
</TABLE>
25
<PAGE>
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1994 1993 1992
--------- --------- ---------
(IN MILLIONS)
<S> <C> <C> <C>
STATEMENTS OF EARNINGS
Revenues of real estate joint ventures .................... $ 537.7 $ 602.7 $ 719.0
Revenues of other limited partnership interests .......... 103.4 319.1 270.1
Interest expense -- third party ........................... (114.9) (118.8) (119.8)
Interest expense -- the Company ........................... (36.9) (52.1) (83.4)
Other expenses ............................................ (430.9) (531.7) (592.1)
--------- --------- ---------
Net Earnings .............................................. $ 58.4 $ 219.2 $ 193.8
========= ========= =========
Equity in net earnings included above ..................... $ 18.9 $ 71.6 $ 40.6
Equity in net earnings of limited partnerships not
included above ........................................... 25.3 46.3 50.9
Excess of earnings in joint ventures over equity ownership
percentage and amortization of differences in bases ..... 1.8 9.2 5.7
Interest on notes receivable .............................. -- .5 3.3
--------- --------- ---------
Total Equity in Net Earnings .............................. $ 46.0 $ 127.6 $ 100.5
========= ========= =========
</TABLE>
5) NET INVESTMENT INCOME AND INVESTMENT GAINS (LOSSES)
The sources of net investment income are summarized as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1994 1993 1992
---------- ---------- ----------
(IN MILLIONS)
<S> <C> <C> <C>
Fixed maturities .............................. $1,024.5 $ 981.7 $1,061.4
Trading account securities .................... -- 709.3 474.3
Securities purchased under resale agreements . -- 533.8 543.2
Mortgage loans on real estate ................. 384.3 457.4 646.1
Equity real estate ............................ 561.8 539.1 396.5
Other equity investments ...................... 35.7 110.4 104.8
Policy loans .................................. 122.7 117.0 183.2
Broker-dealer related receivables ............. -- 292.2 276.3
Other investment income ....................... 336.3 304.9 297.9
---------- ---------- ----------
Gross investment income ...................... 2,465.3 4,045.8 3,983.7
---------- ---------- ----------
Interest expense to finance short-term trading
instruments .................................. -- 983.4 918.4
Other investment expenses ..................... 434.4 463.1 375.8
---------- ---------- ----------
Investment expenses .......................... 434.4 1,446.5 1,294.2
---------- ---------- ----------
Net Investment Income ......................... $2,030.9 $2,599.3 $2,689.5
========== ========== ==========
</TABLE>
26
<PAGE>
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Investment gains, net, including changes in the valuation allowances, are
summarized as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1994 1993 1992
--------- -------- ---------
(IN MILLIONS)
<S> <C> <C> <C>
Fixed maturities .................... $(14.1) $123.1 $ 49.1
Mortgage loans on real estate ...... (43.1) (65.1) (148.9)
Equity real estate .................. 20.6 (18.5) (48.1)
Other equity investments ............ 76.0 119.5 246.2
Dealer and trading gains ............ -- 372.5 272.0
Sales of newly issued Alliance units 52.4 -- --
Other ............................... -- 1.9 1.5
--------- -------- ---------
Investment Gains, Net ............... $ 91.8 $533.4 $ 371.8
========= ======== =========
</TABLE>
Gross gains of $116.8 million, $188.5 million and $141.0 million and gross
losses of $100.1 million, $145.0 million and $123.4 million were realized on
sales of investments in fixed maturities for the years ended December 31,
1994, 1993 and 1992, respectively. In addition, writedowns of fixed
maturities amounted to $30.8 million, $5.4 million and $13.6 million for the
years ended December 31, 1994, 1993 and 1992, respectively.
For the year ended December 31, 1994, proceeds received on sales of fixed
maturities classified as available for sale amounted to $5,253.9 million.
Gross gains of $63.8 million and gross losses of $59.1 million were realized
on these sales. The increase in unrealized investment losses related to fixed
maturities classified as available for sale for the year ended December 31,
1994 amounted to $742.2 million.
During the year ended December 31, 1994, one security classified as held
to maturity was sold and six securities so classified were transferred to the
available for sale portfolio. These actions were taken as a result of a
significant deterioration in creditworthiness. The amortized cost of the
security sold was $19.9 million with a related investment gain of $.8 million
recognized; the aggregate amortized cost of the securities transferred was
$42.8 million with gross unrealized investment losses of $3.1 million charged
to consolidated shareholder's equity.
Investment gains from other equity investments include gains generated by
DLJ's involvement in long-term corporate development investments amounting to
$79.9 million and $195.9 million for the years ended December 31, 1993 and
1992, respectively.
For the years ended December 31, 1994, 1993 and 1992, investment results
passed through to certain participating group annuity contracts as interest
credited to policyholders' account balances amounted to $175.8 million,
$243.2 million and $286.8 million, respectively.
In 1994, Alliance sold 4.96 million newly issued units to third parties at
prevailing market prices. The sales decreased the Company's ownership of
Alliance's publicly traded units from 63.2% to 59.2%. In addition, the
Company continues to hold its 1% general partnership interest in Alliance.
The Company recognized an investment gain of $52.4 million as a result of
these transactions.
27
<PAGE>
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The unrealized investment gains (losses), included in the consolidated
balance sheets as a component of equity and the changes for the corresponding
years, are summarized as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1994 1993 1992
---------- --------- --------
(IN MILLIONS)
<S> <C> <C> <C>
Balance, beginning of year ...................... $ 131.9 $ 78.8 $ 65.5
Changes in unrealized investment (losses) gains (823.8) (14.1) 6.0
Effect of adopting SFAS No. 115 ................. -- 283.9 --
Changes in unrealized investment (gains) losses
attributable to:
Participating group annuity contracts ........ 40.8 (36.2) 19.4
Deferred policy acquisition costs ............. 269.5 (150.5) --
Deferred Federal income taxes ................. 178.6 (30.0) (12.1)
---------- --------- --------
Balance, End of Year ............................ $(203.0) $ 131.9 $ 78.8
========== ========= ========
Balance, end of year comprises:
Unrealized investment (losses) gains on:
Fixed maturities .............................. $(461.3) $ 283.9 $ (3.9)
Other equity investments ...................... 7.7 75.8 81.6
Other ......................................... 14.5 25.0 37.2
---------- --------- --------
Total ........................................ (439.1) 384.7 114.9
Amounts of unrealized investment (gains) losses
attributable to:
Participating group annuity contracts ....... 5.9 (34.9) 1.3
Deferred policy acquisition costs ............ 119.0 (150.5) --
Deferred Federal income taxes ................ 111.2 (67.4) (37.4)
---------- --------- --------
Total ........................................... $(203.0) $ 131.9 $ 78.8
========== ========= ========
</TABLE>
28
<PAGE>
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6) CLOSED BLOCK
Summarized financial information of the Closed Block is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1994 1993
---------- ----------
(IN MILLIONS)
<S> <C> <C>
Assets
Fixed Maturities:
Held to maturity, at amortized cost (estimated fair value,
$1,785.0 and $1,971.5) ................................. $1,927.8 $1,871.5
Available for sale, at estimated fair value (amortized
cost, $1,270.3 and $984.4) ............................. 1,197.0 1,030.6
Mortgage loans on real estate .............................. 1,543.7 1,692.3
Policy loans ............................................... 1,827.9 1,877.1
Cash and other invested assets ............................. 442.5 426.2
Deferred policy acquisition costs .......................... 878.1 940.3
Other assets ............................................... 288.5 246.3
---------- ----------
Total Assets ............................................... $8,105.5 $8,084.3
==========
Liabilities
Future policy benefits and policyholders' account balances $8,965.3 $9,067.3
Other liabilities .......................................... 104.2 76.1
---------- ----------
Total Liabilities .......................................... $9,069.5 $9,143.4
========== ==========
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED JULY 22
DECEMBER 31, THROUGH
------------------- DECEMBER 31,
1994 1993 1994
--------- --------- ----------
(IN MILLIONS)
<S> <C> <C> <C>
Revenues
Premiums and other revenue ...................... $ 798.1 $ 860.2 $303.7
Investment income (net of investment expenses of
$19.0, $17.3 and $2.7) ......................... 523.0 526.5 209.7
Investment losses, net .......................... (24.0) (15.0) (2.4)
--------- --------- --------
Total revenues ................................ 1,297.1 1,371.7 511.0
--------- --------- --------
Benefits and Other Deductions
Policyholders' benefits and dividends ........... 1,075.6 1,141.4 402.3
Other operating costs and expenses .............. 70.5 102.0 49.4
--------- --------- --------
Total benefits and other deductions ........... 1,146.1 1,243.4 451.7
--------- --------- --------
Contribution from the Closed Block .............. $ 151.0 $ 128.3 $ 59.3
========= ========= ========
</TABLE>
The fixed maturity portfolio, based on amortized cost, includes $23.8
million and $22.0 million at December 31, 1994 and 1993, respectively, of
restructured securities which includes problem fixed maturities of $6.4
million and $10.4 million, respectively.
29
<PAGE>
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
At December 31, 1994 and 1993, problem mortgage loans on real estate had
an amortized cost of $27.6 million and $130.0 million, respectively, and
mortgage loans on real estate for which the payment terms have been
restructured had an amortized cost of $179.2 million and $199.9 million,
respectively. At December 31, 1994 and 1993, the restructured mortgage loans
on real estate amount included $.7 million and $9.7 million, respectively, of
problem mortgage loans on real estate.
Valuation allowances amounted to $46.2 million and $72.2 million on
mortgage loans on real estate and $2.6 million and $.6 million on equity real
estate at December 31, 1994 and 1993, respectively. Writedowns of fixed
maturities amounted to $15.9 million and $1.7 million for the years ended
December 31, 1994 and 1993, respectively, and $2.2 million for the period
July 22, 1992 to December 31, 1992.
Implementation of a new accounting statement for the valuation of fixed
maturities at December 31, 1993, resulted in the recognition of a deferred
dividend liability of $49.6 million.
Many expenses related to Closed Block operations are charged to operations
outside of the Closed Block; accordingly, the contribution from the Closed
Block does not represent the actual profitability of the Closed Block
operations. Operating costs and expenses outside of the Closed Block are,
therefore, disproportionate to the business outside of the Closed Block.
7) DISCONTINUED OPERATIONS
Summarized financial information of the GIC Segment is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1994 1993
---------- ----------
(IN MILLIONS)
<S> <C> <C>
Assets
Mortgage loans on real estate ...... $1,730.5 $2,076.0
Equity real estate .................. 1,194.8 1,445.2
Other invested assets ............... 978.8 1,132.4
Other assets ........................ 529.5 660.3
---------- ----------
Total Assets ........................ $4,433.6 $5,313.9
========== ==========
Liabilities
Policyholders' liabilities .......... $1,924.0 $2,698.5
Allowance for future losses ......... 185.6 236.4
Amounts due to continuing operations 2,108.6 2,125.9
Other liabilities ................... 215.4 253.1
---------- ----------
Total Liabilities ................... $4,433.6 $5,313.9
========== ==========
</TABLE>
30
<PAGE>
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1994 1993 1992
--------- --------- ---------
(IN MILLIONS)
<S> <C> <C> <C>
Revenues
Investment income (net of investment expenses of
$174.0, $175.8 and $117.4) ..................... $368.4 $526.4 $ 559.1
Investment gains (losses), net .................. 26.8 (22.6) (21.7)
Policy fees, premiums and other income ......... .3 8.7 3.4
--------- --------- ---------
Total revenues .................................. 395.5 512.5 540.8
Benefits and other deductions ................... 417.2 537.2 701.7
--------- --------- ---------
Losses Charged to Allowance for Future Losses .. $(21.7) $(24.7) $(160.9)
========= ========= =========
</TABLE>
In 1991, the Company established a pre-tax provision of $396.7 million for
the estimated future losses of the GIC Segment. In 1992, implementation of a
new accounting statement for income taxes resulted in a benefit which was
offset by a pre-tax $33.6 million addition to the allowance for future
losses. Additionally, at December 31, 1993, implementation of a new
accounting statement for the valuation of fixed maturities resulted in a
benefit of $13.1 million which was offset by a corresponding addition to the
allowance for future losses.
The amounts due to continuing operations at December 31, 1994 and 1993
consist of $3,324.0 million and $3,284.0 million, respectively, borrowed by
the GIC Segment from continuing operations, offset by $1,215.4 million and
$1,158.1 million, respectively, representing an obligation of continuing
operations to provide assets to fund the accumulated deficit of the GIC
Segment.
In January 1995, continuing operations transferred $1,215.4 million in
cash to the GIC Segment in settlement of its obligation. Subsequently, the
GIC Segment remitted $1,155.4 million in cash to continuing operations in
partial repayment of borrowings by the GIC Segment. No gains or losses were
recognized on these transactions.
Investment income includes $88.2 million, $97.7 million and $94.2 million
of interest income in 1994, 1993 and 1992, respectively, on amounts due from
continuing operations. Benefits and other deductions includes $193.1 million,
$188.4 million and $132.8 million of interest expense related to amounts
borrowed from continuing operations in 1994, 1993 and 1992, respectively.
Valuation allowances amounted to $50.2 million and $61.4 million on
mortgage loans on real estate and $74.7 million and $61.5 million on equity
real estate at December 31, 1994 and 1993, respectively. Writedowns of fixed
maturities amounted to $17.8 million, $1.1 million and $5.2 million for the
years ended December 31, 1994, 1993 and 1992, respectively.
The fixed maturity portfolio, based on amortized cost, includes $43.3
million and $59.8 million at December 31, 1994 and 1993, respectively, of
restructured securities. These amounts include problem fixed maturities of
$9.7 million and $21.3 million at December 31, 1994 and 1993, respectively.
At December 31, 1994 and 1993, problem mortgage loans on real estate had
amortized costs of $14.9 million and $64.8 million, respectively, and
mortgage loans on real estate for which the payment
31
<PAGE>
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
terms have been restructured had amortized costs of $371.2 million and $373.3
million, respectively. At December 31, 1993, the restructured mortgage loans
on real estate amount included $.2 million of problem mortgage loans on real
estate.
At December 31, 1994 and 1993, the GIC Segment had $312.2 million and
$325.9 million, respectively, of real estate acquired in satisfaction of
debt.
8) SHORT-TERM AND LONG-TERM DEBT
Short-term and long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1994 1993
---------- ---------
(IN MILLIONS)
<S> <C> <C>
Short-term debt ................................. $ 20.0 $ 200.7
---------- ---------
Long-term debt:
Equitable Life:
Eurodollar notes, 10.375% due 1995 ............. 34.6 66.0
Eurodollar notes, 10.5% due 1997 ............... 76.2 76.2
Zero coupon note, 11.25% due 1997 .............. 107.8 96.6
Other .......................................... 48.7 37.4
---------- ---------
Total Equitable Life .......................... 267.3 276.2
---------- ---------
Wholly Owned and Joint Venture Real Estate:
Mortgage notes, 3.89% - 12.75% due through 2019 1,046.2 1,073.2
---------- ---------
Alliance:
Direct placement notes ........................ -- 105.0
Other ......................................... 3.9 4.4
---------- ---------
Total Alliance ............................... 3.9 109.4
---------- ---------
Total long-term debt ............................ 1,317.4 1,458.8
---------- ---------
Total Short-term and Long-term Debt ............. $1,337.4 $1,659.5
========== =========
</TABLE>
Short-term Debt
On July 11, 1994, Equitable Life established a three-year $350.0 million
bank credit facility which replaced a similar $550.0 million credit facility
scheduled to mature in August 1994. This facility is available to fund
short-term working capital needs and to facilitate the securities settlement
process. The credit facility consists of two types of borrowing options with
varying interest rates. The interest rates are based on external indices
dependent on the type of borrowing and at December 31, 1994 range from 5.5%
(the Federal Funds rate plus 50 basis points) to 8.5% (the prime rate). No
amounts have been borrowed under this bank credit facility at December 31,
1994.
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 used
to support Equitable Life's liquidity needs and
32
<PAGE>
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
is supported by Equitable Life's existing $350.0 million three-year bank
credit facility. No amounts have been borrowed under this program through
December 31, 1994.
Alliance established a $100.0 million revolving credit facility with
several banks during 1994. On March 31, 1997, the revolving credit facility
converts into a term loan payable quarterly in equal installments through
March 31, 1999. Outstanding borrowings generally bear interest at the
Eurodollar rate plus .875% per annum through March 31, 1997 and at the
Eurodollar rate plus 1.125% per annum after conversion through March 31,
1999. In addition, a quarterly commitment fee of .25% per annum is paid on
the average daily unused amount. At December 31, 1994, there were no amounts
outstanding under the facility.
During 1994, Alliance authorized a $100.0 million commercial paper program
and entered into a three-year $100.0 million revolving credit facility with a
group of commercial banks to support commercial paper to be issued under the
program. Amounts outstanding under the facility bear interest at an annual
rate ranging from the Eurodollar rate plus .225% to the Eurodollar rate plus
.2875%. A fee of .1250% per annum is paid quarterly on the entire facility.
At December 31, 1994, Alliance had not issued any commercial paper and there
were no amounts outstanding under the revolving credit facility.
During 1994, EREIM established two bank lines of credit totaling $30.0
million of which $20.0 million was outstanding at December 31, 1994.
Long-term Debt
Several of the long-term debt agreements have restrictive covenants
related to the total amount of debt, net tangible assets and other matters.
The Company is in compliance with all debt covenants.
During 1994, Alliance repaid the direct placement notes.
The Company has pledged real estate, mortgage loans, cash and securities
amounting to $1,744.4 million and $1,855.6 million at December 31, 1994 and
1993, respectively, as collateral for certain long-term debt.
At December 31, 1994, aggregate maturities of the long-term debt based on
required principal payments at maturity for 1995 and the succeeding four
years are $39.9 million, $124.6 million, $467.2 million, $301.3 million and
$15.3 million, respectively, and $414.0 million thereafter.
9) FEDERAL INCOME TAXES
A summary of the Federal income tax expense (benefit) in the consolidated
statements of earnings is shown below:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1994 1993 1992
-------- -------- --------
(IN MILLIONS)
<S> <C> <C> <C>
Federal income tax expense
(benefit):
Current ............................ $ 4.0 $115.8 $ 30.7
Deferred ........................... 97.2 (24.5) (11.5)
-------- -------- --------
Total .............................. $101.2 $ 91.3 $ 19.2
======== ======== ========
</TABLE>
33
<PAGE>
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Federal income taxes attributable to consolidated operations are
different from the amounts determined by multiplying the earnings (loss) from
operations before Federal income taxes by the expected Federal income tax
rate (35% for 1994 and 1993 and 34% for 1992).
The sources of the difference and the tax effects of each are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1994 1993 1992
--------- --------- ---------
(IN MILLIONS)
<S> <C> <C> <C>
Expected Federal income tax expense (benefit) $138.1 $106.3 $(2.4)
Differential earnings amount ................. (16.8) (23.2) 6.4
Adjustment of tax audit reserves ............. (4.6) 22.9 22.5
Tax rate adjustment .......................... -- (5.0) --
Other ........................................ (15.5) (9.7) (7.3)
--------- --------- ---------
Federal Income Tax Expense ................... $101.2 $ 91.3 $19.2
========= ========= =========
</TABLE>
Prior to the date of demutualization, Equitable Life, as a mutual company,
reduced its deduction for policyholder dividends by the differential earnings
amount. This amount was computed, for each tax year, by multiplying Equitable
Life's average equity base, as determined for tax purposes, by an estimate of
the excess of an imputed earnings rate for stock life insurance companies
over the average mutual life insurance companies' earnings rate. The
differential earnings amount for each tax year was subsequently recomputed
when actual earnings rates were published by the Internal Revenue Service. As
a stock life insurance company, Equitable Life is no longer required to
reduce its policyholder dividend deduction by the differential earnings
amount, but differential earnings amounts for pre-demutualization years are
still being recomputed.
The Internal Revenue Service is in the process of examining Equitable
Life's Federal income tax returns for the years 1984 through 1988. Management
believes these audits will have no material adverse effect on the Company's
consolidated results of operations.
The components of the net deferred Federal income tax asset are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1994 DECEMBER 31, 1993
------------------------ ------------------------
ASSETS LIABILITIES ASSETS LIABILITIES
--------- ------------- --------- -------------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Deferred policy acquisition costs,
reserves and reinsurance ......... $-- $220.3 $ -- $200.9
Investments ....................... -- 18.7 -- 126.4
Compensation and related benefits 307.3 -- 288.5 --
Other ............................. -- 5.8 66.6 --
--------- ------------- --------- -------------
Total ............................. $307.3 $244.8 $355.1 $327.3
========= ============= ========= =============
</TABLE>
34
<PAGE>
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The deferred Federal income tax expense (benefit) impacting operations
reflect the net tax effects of temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and the
amounts used for income tax purposes. The sources of these temporary
differences and the tax effects of each are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1994 1993 1992
-------- ---------- --------
(IN MILLIONS)
<S> <C> <C> <C>
Deferred policy acquisition costs, reserves and
reinsurance ................................... $ 13.0 $(46.7) $ 26.9
Investments .................................... 89.3 60.4 (41.0)
Compensation and related benefits .............. 10.0 (50.1) (2.4)
Other .......................................... (15.1) 11.9 5.0
-------- ---------- --------
Deferred Federal Income Tax Expense (Benefit) . $ 97.2 $(24.5) $(11.5)
======== ========== ========
</TABLE>
10) REINSURANCE AGREEMENTS
The Insurance Group assumes and cedes reinsurance with other insurance
companies. The Insurance Group evaluates the financial condition of its
reinsurers to minimize its exposure to significant losses from reinsurer
insolvencies. The effect of reinsurance (excluding Group Life and Health) is
summarized as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31,
--------------------
1994 1993
--------- ---------
(IN MILLIONS)
<S> <C> <C>
Direct premiums .......................................... $476.7 $458.8
Reinsurance assumed ...................................... 180.5 169.9
Reinsurance ceded ........................................ (31.6) (29.6)
--------- ---------
Premiums ................................................. $625.6 $599.1
========= =========
Universal Life and Investment- type Product Policy Fee
Income Ceded ............................................ $ 27.5 $ 33.7
========= =========
Policyholders' Benefits Ceded ............................ $ 20.7 $ 72.3
========= =========
Interest Credited to Policyholders' Account Balances
Ceded ................................................... $ 25.4 $ 24.1
========= =========
</TABLE>
For the year ended December 31, 1992, reinsurance premiums assumed totaled
$151.0 million and reinsurance premiums ceded totaled $16.6 million.
Prior to 1993, the Insurance Group generally reinsured mortality risks in
excess of $10.0 million on any single life. In February 1993, management
established a practice limiting the risk retention on new policies issued by
the Insurance Group to a maximum of $5.0 million. In addition, effective
January 1, 1994, all in force business between $5.0 million and $10.0 million
was reinsured. The Insurance Group also reinsures the entire risk on certain
substandard underwriting risks as well as in certain other cases.
The Insurance Group cedes 100% of its Group Life and Health business to
CIGNA. Premiums ceded to CIGNA totaled $241.0 million, $895.1 million and
$1,126.7 million for the years ended
35
<PAGE>
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
December 31, 1994, 1993 and 1992, respectively. Ceded death and disability
benefits totaled $235.5 million and $787.8 million for the years ended
December 31, 1994 and 1993, respectively. Insurance liabilities ceded totaled
$833.4 million and $1,130.3 million at December 31, 1994 and 1993,
respectively.
11) EMPLOYEE BENEFIT PLANS
The Company sponsors qualified and non-qualified defined benefit plans
covering substantially all employees (including certain qualified part-time
employees), managers and agents. The pension plans are non-contributory and
benefits are based on a cash balance formula or years of service and final
average earnings, if greater, under certain grandfathering rules in the
plans. The Company's funding policy is to make the minimum contribution
required by the Employee Retirement Income Security Act of 1974.
Components of net periodic pension cost for the qualified and
non-qualified plans is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1994 1993 1992
--------- --------- --------
(IN MILLIONS)
<S> <C> <C> <C>
Service cost .................................. $ 30.3 $ 29.8 $ 30.6
Interest cost on projected benefit obligations 111.0 108.0 104.2
Actual return on assets ....................... 24.4 (178.6) (52.6)
Net amortization and deferrals ................ (142.5) 55.3 (67.4)
--------- --------- --------
Net Periodic Pension Cost ..................... $ 23.2 $ 14.5 $ 14.8
========= ========= ========
</TABLE>
The funded status of the qualified and non-qualified pension plans is as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1994 1993
---------- ----------
(IN MILLIONS)
<S> <C> <C>
Actuarial present value of obligations:
Vested .............................................................. $1,295.5 $1,403.5
Non-vested .......................................................... 8.7 10.4
---------- ----------
Accumulated Benefit Obligation ....................................... $1,304.2 $1,413.9
======== ==========
Plan assets at fair value ............................................ $1,193.5 $1,259.5
Projected benefit obligation ......................................... 1,403.4 1,488.9
---------- ----------
Projected benefit obligation in excess of plan assets ................ (209.9) (229.4)
Unrecognized prior service cost ...................................... (33.2) (39.0)
Unrecognized net loss from past experience different from that
assumed ............................................................. 298.9 309.8
Unrecognized net asset at transition ................................. (20.8) (34.2)
Additional minimum liability ......................................... (37.8) (56.8)
---------- ----------
Accrued Pension Cost ................................................. $ (2.8) $ (49.6)
========== ==========
</TABLE>
36
<PAGE>
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The discount rate and rate of increase in future compensation levels used
in determining the actuarial present value of projected benefit obligations
were 8.75% and 4.88% at December 31, 1994 and 7.5% and 4% at December 31,
1993, respectively. As of January 1, 1994 and 1993, the expected long-term
rate of return on assets for the retirement plan was 10%.
The Company recorded, as a reduction of shareholder's equity, an
additional minimum pension liability of $2.7 million, net of Federal income
taxes, at December 31, 1994 representing the excess of the accumulated
benefit obligation over the fair value of plan assets and accrued pension
liability.
The pension plan's assets include corporate and government debt
securities, equity securities, real estate, U.S. Treasury bonds and shares of
Alliance mutual funds.
As of December 31, 1993, the Company changed the method of estimating the
market-related value of plan assets, from fair value to a calculated value.
This change in estimate had no material effect on the Company's consolidated
financial position or statements of earnings.
Prior to 1987, the qualified plan funded participants' benefits through
the purchase of non- participating annuity contracts from Equitable Life.
Benefit payments under these contracts were approximately $38.1 million,
$39.9 million and $41.6 million for the years ended December 31, 1994, 1993
and 1992, respectively.
The Company provides certain medical and life insurance benefits
("postretirement benefits") for qualifying employees, managers and agents
retiring from the Company on or after attaining age 55 who have at least 10
years of service. The life insurance benefits are related to age and salary
at retirement. The costs of postretirement benefits are recognized in
accordance with the provisions of SFAS No. 106. The Company continues to fund
postretirement benefits costs on a pay-as-you-go basis and, for the years
ended December 31, 1994, 1993 and 1992, the Company made estimated
postretirement benefits payments of $29.8 million, $29.7 million and $31.6
million, respectively.
The following table sets forth the postretirement benefits plan's status,
reconciled to amounts recognized in the Company's consolidated financial
statements:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1994 1993 1992
------- ------- ------
(IN MILLIONS)
<S> <C> <C> <C>
Service cost ............................... $ 3.9 $ 5.3 $ 6.0
Interest cost on accumulated postretirement
benefits obligation ....................... 28.6 29.2 31.9
Unrecognized prior service cost ............ (3.9) (6.9) --
Net amortization and deferrals ............. -- 1.5 --
------- ------- ------
Net Periodic Postretirement Benefits Costs $28.6 $29.1 $37.9
======= ======= ======
</TABLE>
37
<PAGE>
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1994 1993
---------- ----------
(IN MILLIONS)
<S> <C> <C>
Accumulated postretirement benefits obligation:
Retirees ......................................... $(300.4) $(283.4)
Fully eligible active plan participants .......... (33.0) (38.7)
Other active plan participants ................... (44.0) (75.1)
---------- ----------
(377.4) (397.2)
Unrecognized benefit of plan amendments ............ (3.2) --
Unrecognized prior service cost .................... (61.9) (66.6)
Unrecognized net loss from past experience
different from that assumed and from changes in
assumptions ...................................... 64.7 85.5
---------- ----------
Accrued Postretirement Benefits Cost ............... $(377.8) $(378.3)
========== ==========
</TABLE>
In 1993, the Company amended the cost sharing provisions of postretirement
medical benefits. As of January 1, 1994, medical benefits available to
retirees under age 65 are the same as those offered to active employees and
medical benefits will be limited to 200% of 1993 costs for all participants.
The assumed health care cost trend rate used in measuring the accumulated
postretirement benefits obligation was 10% in 1994, gradually declining to 5%
in the year 2004 and in 1993 was 13%, gradually declining to 6% in the year
2007. The weighted average discount rate used in determining the accumulated
postretirement benefits obligation was 8.75%, 7.5% and 8.5% at December 31,
1994, 1993 and 1992, respectively.
If the health care cost trend rate assumptions were increased by 1%, the
accumulated postretirement benefits obligation as of December 31, 1994 would
be increased 6.6%. The effect of this change on the sum of the service cost
and interest cost would be an increase of 8.6%.
12) DERIVATIVES AND FAIR VALUE OF FINANCIAL INSTRUMENTS
Derivatives
The Insurance Group primarily uses derivatives for asset/liability risk
management and for hedging individual securities. Derivatives mainly are
utilized to reduce the Insurance Group's exposure to interest rate
fluctuations. Accounting for interest swap transactions are on an accrual
basis. Gains and losses related to hedge transactions are amortized as yield
adjustments for the remaining life of the underlying hedged item. Income and
expense resulting from derivative activities are reflected in net investment
income. The notional amount of matched interest rate swaps outstanding at
December 31, 1994 was $1,906.6 million. The average unexpired terms at
December 31, 1994 range from 2.2 to 2.9 years. At December 31, 1994, the cost
of terminating outstanding matched swaps in a loss position was $79.8 million
and the unrealized gain on outstanding matched swaps in a gain position was
$17.6 million. The Company has no intention of terminating these contracts
prior to maturity. During 1994, 1993 and 1992, net (losses) gains of $(.2)
million, $-0- million and $2.2 million, respectively, were recorded in
connection with interest rate swap activity.
38
<PAGE>
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Fair Value of Financial Instruments
The Company defines fair value as the quoted market prices for those
instruments that are actively traded in financial markets. In cases where
quoted market prices are not available, fair values are estimated using
present value or other valuation techniques. The fair value estimates are
made at a specific point in time, based on available market information and
judgments about the financial instrument, including estimates of timing,
amount of expected future cash flows and the credit standing of
counterparties. Such estimates do not reflect any premium or discount that
could result from offering for sale at one time the Company's entire holdings
of a particular financial instrument, nor do they consider the tax impact of
the realization of unrealized gains or losses. In many cases, the fair value
estimates cannot be substantiated by comparison to independent markets, nor
can the disclosed value be realized in immediate settlement of the
instrument.
Certain financial instruments are excluded, particularly insurance
liabilities other than financial guarantees and investment contracts. Fair
market value of off-balance-sheet financial instruments of the Insurance
Group was not material at December 31, 1994 and 1993.
Fair value for mortgage loans on real estate are estimated by discounting
future contractual cash flows using interest rates at which loans with
similar characteristics and credit quality would be made. Fair values for
foreclosed mortgage loans and problem mortgage loans are limited to the
estimated fair value of the underlying collateral if lower.
The estimated fair values for the Company's liabilities under GIC and
association plan contracts are estimated using contractual cash flows
discounted based on the T. Rowe Price GIC Index Rate for the appropriate
duration. For durations in excess of the published index rate, the
appropriate Treasury rate is used plus a spread equal to the longest duration
GIC rate spread published.
The estimated fair values for those group annuity contracts which are
classified as investment contracts are measured at the estimated fair value
of the underlying assets. Deposit administration contracts (included with
group annuity contracts) classified as insurance contracts are measured at
estimated fair value of the underlying assets. The estimated fair values for
single premium deferred annuities ("SPDA") are estimated using projected cash
flows discounted at current offering rates. The estimated fair values for
supplementary contracts not involving life contingencies ("SCNILC") and
annuities certain are derived using discounted cash flows based upon the
estimated current offering rate.
Fair value for long-term debt is determined using published market values,
where available, or contractual cash flows discounted at market interest
rates. The estimated fair values for non-recourse mortgage debt are
determined by discounting contractual cash flows at a rate which takes into
account the level of current market interest rates and collateral risk. The
estimated fair values for recourse mortgage debt are determined by
discounting contractual cash flows at a rate based upon current interest
rates of other companies with credit ratings similar to the Company. The
Company's fair value of short-term borrowings approximates their carrying
value.
39
<PAGE>
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table discloses carrying value and estimated fair value for
financial instruments not otherwise disclosed in Notes 3 and 6:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------
1994 1993
------------------------ ------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
VALUE FAIR VALUE VALUE FAIR VALUE
---------- ------------ ---------- ------------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Consolidated Financial Instruments:
- -----------------------------------
Mortgage loans on real estate ..... $4,018.0 $3,919.4 $4,592.1 $4,889.6
Other joint ventures ............... 544.4 544.4 658.3 658.3
Policy loans ....................... 1,731.2 1,676.6 1,549.1 1,622.3
Risk based Separate Account assets 269.8 269.0 283.4 283.6
Policyholders' account balances:
Association plans ................. 141.0 141.0 242.0 247.0
Group annuity contracts ........... 2,450.0 2,469.0 2,902.0 2,995.0
SPDA .............................. 1,744.3 1,732.7 2,129.5 2,143.0
Annuity certain and SCNILC ....... 599.1 624.7 580.4 632.6
Long-term debt ..................... 1,317.4 1,249.2 1,458.8 1,299.1
Closed Block Financial Instruments:
- -----------------------------------
Mortgage loans on real estate ..... 1,543.7 1,477.8 1,692.3 1,796.1
Other equity investments ........... 179.5 179.5 210.5 210.5
Policy loans ....................... 1,827.9 1,721.9 1,877.1 1,961.5
SCNILC liability ................... 39.5 37.0 45.0 45.8
GIC Segment Financial Instruments:
- -----------------------------------
Mortgage loans on real estate ..... 1,730.5 1,743.7 2,076.0 2,259.6
Fixed maturities ................... 219.3 219.3 373.0 373.0
Other equity investments ........... 591.8 591.8 711.0 711.0
Guaranteed interest contracts ..... 835.0 855.0 1,601.8 1,717.2
Long-term debt ..................... 134.8 127.9 142.8 137.4
</TABLE>
13) COMMITMENTS AND CONTINGENT LIABILITIES
The Company has provided, from time to time, certain guarantees or
commitments to affiliates, investors and others. These arrangements include
commitments by the Company, under certain conditions: to make liquidity
advances to cover delinquent principal and interest and property protection
expenses with respect to loan servicing agreements for securitized mortgage
loans which at December 31, 1994 totaled $1.9 billion (as of December 31,
1994, $2.0 million has been advanced under these commitments); to make
capital contributions of up to $249.5 million to affiliated real estate joint
ventures; to advance payments of interest and outstanding balances with
respect to certain commercial mortgage loans sold by the Company with
outstanding balances at December 31, 1994 of $25.9 million; to guarantee
interest on non-recourse debt on investments in real estate; to guarantee
$54.4 million of loans at December 31, 1994 made directly to real estate
partnerships in which the Company has an
40
<PAGE>
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
ownership interest; to provide equity financing to certain limited
partnerships of $67.5 million at December 31, 1994, under existing loan or
loan commitment agreements; and to fund its participation in various
partnerships which at December 31, 1994 totaled $3.3 million. Management
believes the Company will not incur any material losses as a result of these
commitments.
Equitable Life is the obligor under certain structured settlement
agreements which it had entered into with unaffiliated insurance companies
and beneficiaries. To satisfy its obligations under these agreements,
Equitable Life owns single premium annuities issued by previously wholly
owned life insurance subsidiaries. Equitable Life has directed payment under
these annuities to be made directly to the beneficiaries under the structured
settlement agreements. A contingent liability exists with respect to these
agreements should the previously wholly owned subsidiaries be unable to meet
their obligations. Management believes the satisfaction of those obligations
by Equitable Life is remote.
At December 31, 1994, two money market fund portfolios ("Portfolios")
sponsored by Alliance owned $30.0 million principal amount of Tax and Revenue
Anticipation Notes Series A issued by Orange County, California due July 19,
1995 ("Orange County Obligations"). On December 6, 1994, Orange County filed
a petition in bankruptcy under Chapter 9 of the Federal Bankruptcy Code.
Alliance arranged for the issuance of letters of credit by a commercial bank
in favor of the Portfolios which allow the Portfolios to draw down an
aggregate of up to $31.4 million if Orange County fails to pay principal and
interest due at maturity. Alliance is required to pay the bank, on demand,
all amounts drawn down by the Portfolios under the letters of credit. The
letters of credit will be reduced to reflect any sales of Orange County
Obligations by the Portfolios. The Company believes that its loss, if any,
resulting from the Orange County Obligations will not be material.
14) LITIGATION
The Company is a defendant in connection with various legal actions and
proceedings of a character normally incident to its business. Some of the
actions and proceedings have been brought on behalf of various alleged
classes of claimants and certain of these claimants seek damages of
unspecified amounts. While the ultimate outcome of such litigation cannot be
predicted with certainty, management believes, after consultation with
counsel responsible for such litigation, that the resolution of these actions
and proceedings will not result in losses that would have a material effect
on the consolidated financial statements.
15) LEASES
The Company has entered into operating leases for office space and certain
other assets, principally data processing equipment and office furniture and
equipment. Future minimum payments under noncancelable leases for 1995 and
the succeeding four years are $125.6 million, $103.7 million, $77.8 million,
$64.5 million, $53.4 million and $372.6 million thereafter. Minimum future
sublease rental income on these noncancelable leases for 1995 and the
succeeding four years are $9.1 million, $6.8 million, $6.4 million, $5.9
million, $3.9 million and $3.6 million thereafter.
At December 31, 1994, the minimum future rental income on noncancelable
operating leases for wholly owned investments in real estate for 1995 and the
succeeding four years are $306.9 million, $283.9 million, $254.6 million,
$223.1 million and $192.8 million and $876.1 million thereafter.
41
<PAGE>
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
16) SUPPLEMENTAL CASH FLOW INFORMATION
For the years ended December 31, 1994, 1993 and 1992, respectively, real
estate of $189.8 million, $261.8 million and $208.5 million was acquired in
satisfaction of debt.
On January 1, 1992, net assets of $517.6 million were transferred to the
discontinued GIC Segment. The transfer included investment assets at
amortized cost of $611.3 million and valuation allowances of $17.7 million.
In connection with the demutualization, certain significant non-cash
transactions occurred as follows: assets aggregating $7,714.5 million and
liabilities aggregating $8,889.5 million were transferred to the Closed Block
(additional detail is provided in Note 6); secured and surplus notes
aggregating $1.0 billion issued to AXA were exchanged for 69.8 million shares
of the Holding Company's common stock, 2.5 million shares of convertible
preferred stock and 2.989 million shares of the Holding Company's redeemable
preferred stock; policyholders received 22.6 million shares of common stock
for policyholders' membership interest and retained earnings of $1,089.4
million were transferred to common stock and capital in excess of par; and
policy credits of $48.5 million were credited to certain policyholders and
$19.7 million were accrued or paid to certain policyholders with such policy
credits and cash payments being charged to retained earnings.
17) OTHER OPERATING COSTS AND EXPENSES
Other operating costs and expenses consisted of the following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------
1994 1993 1992
----------- ----------- -----------
(IN MILLIONS)
<S> <C> <C> <C>
Compensation costs ........................ $ 690.0 $1,452.3 $1,302.2
Commissions ............................... 313.0 551.1 491.5
Short-term debt interest expense .......... 19.0 317.1 176.1
Long-term debt interest expense ........... 98.3 86.0 166.0
Amortization of policy acquisition costs . 318.1 275.9 144.7
Capitalization of policy acquisition costs (410.9) (397.8) (409.0)
Rent expense, net of sub-lease income .... 128.9 159.5 213.7
Other ..................................... 786.7 1,140.1 1,010.5
----------- ----------- -----------
Total ..................................... $1,943.1 $3,584.2 $3,095.7
=========== =========== ===========
</TABLE>
During the years ended December 31, 1994, 1993 and 1992, the Company
restructured certain operations in connection with cost reduction programs
and recorded pre-tax provisions of $20.4 million, $96.4 million and $24.8
million, respectively. The amounts paid during 1994, associated with the 1994
cost reduction program, totaled $5.0 million. At December 31, 1994, the
liabilities associated with the 1994 cost reduction program amounted to $15.4
million. The 1994 cost reduction program included costs associated with the
termination of operating leases and employee severance benefits in connection
with the consolidation of 16 insurance agencies. The 1993 cost reduction
program primarily reflected severance benefits of terminated employees in
connection with the combination of a wholly owned subsidiary of the Company
with Alliance.
42
<PAGE>
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
18) INSURANCE GROUP STATUTORY FINANCIAL INFORMATION
Equitable Life is restricted as to the amounts it may pay as dividends to
the Holding Company. Under the New York Insurance Law, the New York
Superintendent has broad discretion to determine whether the financial
condition of a stock life insurance company would support the payment of
dividends to its shareholders. The New York Insurance Department has
established informal guidelines for the Superintendent's determinations which
focus upon, among other things, the overall financial condition and
profitability of the insurer under statutory accounting practices. For the
years ended December 31, 1994, 1993 and 1992, statutory earnings (loss)
totaled $67.5 million, $324.0 million and $(288.6) million, respectively. No
amounts are expected to be available for dividends from Equitable Life to the
Holding Company in 1995.
At December 31, 1994, the Insurance Group, in accordance with various
government and state regulations, had $17.5 million of securities deposited
with such government or state agencies.
Accounting practices used to prepare statutory financial statements for
regulatory filings of stock life insurance companies differ in certain
instances from GAAP. The following reconciles the Company's net change in
statutory surplus and capital stock and statutory surplus and capital stock
determined in accordance with accounting practices prescribed by the New York
Insurance Department with net earnings (loss) and equity on a GAAP basis.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------
1994 1993 1992
--------- --------- -----------
(IN MILLIONS)
<S> <C> <C> <C>
Net change in statutory surplus and capital stock ..... $ 292.4 $ 190.8 $ 534.2
Change in asset valuation reserves ..................... (285.2) 639.1 81.2
--------- --------- -----------
Net change in statutory surplus, capital stock and
asset valuation reserves .............................. 7.2 829.9 615.4
Adjustments:
Future policy benefits and policyholders' account
balances ........................................... (11.0) (171.0) (72.1)
Deferred policy acquisition costs .................... 92.8 121.8 264.3
Deferred Federal income taxes ........................ (59.7) (57.5) 394.2
Valuation of investments ............................. 45.2 202.3 (37.0)
Valuation of investment subsidiary ................... 396.6 (464.9) (37.8)
Limited risk reinsurance ............................. 74.9 85.2 (20.7)
Sale of subsidiary and joint venture ................. -- (366.5) --
Surplus note ......................................... -- -- 250.0
Contribution from the Holding Company ................ (300.0) -- --
Demutualization transaction .......................... -- -- (1,129.3)
Postretirement benefits .............................. 17.1 23.8 (357.5)
Other, net ........................................... (44.0) 60.3 (30.9)
GAAP adjustments of Closed Block ..................... 4.5 (16.0) (7.4)
GAAP adjustments of discontinued GIC Segment ......... 42.8 (35.0) 53.5
--------- --------- -----------
Net Earnings (Loss) .................................. $ 266.4 $ 212.4 $ (115.3)
========= ========= ===========
</TABLE>
43
<PAGE>
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------
1994 1993 1992
---------- ---------- -----------
(IN MILLIONS)
<S> <C> <C> <C>
Statutory surplus and capital stock ................. $2,124.8 $1,832.4 $ 1,641.6
Asset valuation reserves ............................ 980.2 1,265.4 626.3
---------- ---------- -----------
Statutory surplus, capital stock and asset valuation
reserves ........................................... 3,105.0 3,097.8 2,267.9
Adjustments:
Future policy benefits and policyholders' account
balances ........................................ (949.5) (938.5) (747.0)
Deferred policy acquisition costs ................. 3,221.1 2,858.8 2,887.5
Deferred Federal income taxes ..................... (26.8) (137.8) (52.9)
Valuation of investments .......................... (794.1) (29.8) (507.5)
Valuation of investment subsidiary ................ (476.5) (873.1) (408.2)
Limited risk reinsurance .......................... (845.9) (920.8) (1,006.0)
Postretirement benefits ........................... (316.6) (333.7) (357.5)
Other, net ........................................ (79.2) (81.9) (67.4)
GAAP adjustments of Closed Block .................. 578.8 574.2 577.0
GAAP adjustments of discontinued GIC Segment ...... (221.9) (264.6) (226.0)
---------- ---------- -----------
Total Shareholder's Equity ........................ $3,194.4 $2,950.6 $ 2,359.9
========== ========== ===========
</TABLE>
19) BUSINESS SEGMENT INFORMATION
The Company has three major business segments: Individual Insurance and
Annuities; Investment Services and Group Pension. Consolidation/elimination,
principally includes debt not specific to any business segment. Net assets of
$1,924.6 million at December 31, 1993 held within the Insurance Group and
previously presented in Consolidation/elimination are now presented as
Attributed Insurance Capital within insurance operations. Attributed
Insurance Capital represents net assets and related revenues and earnings of
the Insurance Group not assigned to the insurance segments. Interest expense
related to debt not specific to any business segment is presented within
Corporate interest expense. Information for all periods is presented on a
comparable basis.
Effective January 1, 1993, management changed the methodology for
determining the capital requirements of the Company's insurance business
segments. This new methodology requires the annual transfer of cash and cash
equivalents to and from Attributed Insurance Capital and the Individual
Insurance and Annuities and Group Pension segments to result in the insurance
business segments having assets equal to adjusted liabilities plus equity
maintained at Equitable Life and its life insurance subsidiaries determined
in accordance with statutory accounting practices. Had this methodology been
in place at January 1, 1992, investment income for the Individual Insurance
and Annuities and Group Pension segments would have been reduced by $80.4
million and $4.5 million, respectively, and other operating costs and
expenses for Attributed Insurance Capital would have been decreased by $84.9
million for the year ended December 31, 1992.
44
<PAGE>
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Individual Insurance and Annuities segment offers a variety of
traditional, variable and interest-sensitive life insurance products,
disability income, annuity products and mutual fund and other investment
products to individuals and small groups. This segment includes Separate
Accounts for certain individual insurance and annuity products.
The Investment Services segment provides investment fund management,
primarily to institutional clients. This segment includes Separate Accounts
which provide various investment options for group clients through pooled or
single group accounts.
Intersegment investment advisory and other fees of approximately $135.3
million, $128.6 million and $131.2 million for 1994, 1993 and 1992,
respectively, are included in total revenues of the Investment Services
segment. These fees, excluding amounts related to the discontinued GIC
Segment of $27.4 million, $17.0 million and $19.0 million for 1994, 1993 and
1992, respectively, are eliminated in consolidation.
The Group Pension segment administers traditional participating group
annuity contracts with conversion features, generally for corporate qualified
pension plans, and association plans which provide full service retirement
programs for individuals affiliated with professional and trade associations.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1994 1993 1992
---------- ---------- ----------
(IN MILLIONS)
<S> <C> <C> <C>
Revenues
Individual insurance and annuities .................... $3,110.7 $2,981.5 $3,479.6
Group pension ......................................... 359.1 426.6 512.0
Attributed insurance capital .......................... 79.4 61.6 85.2
---------- ---------- ----------
Insurance operations ................................. 3,549.2 3,469.7 4,076.8
Investment services ................................... 935.2 2,792.6 2,314.4
Consolidation/elimination ............................. (24.7) (40.5) (106.2)
---------- ---------- ----------
Total ................................................. $4,459.7 $6,221.8 $6,285.0
========== ========== ==========
Earnings (loss) before Federal income taxes,
extraordinary item and cumulative effect of
accounting changes
Individual insurance and annuities .................... $ 245.5 $ 76.2 $ (148.0)
Group pension ......................................... 15.8 2.0 16.2
Attributed insurance capital .......................... 69.8 49.0 (17.2)
---------- ---------- ----------
Insurance operations ................................. 331.1 127.2 (149.0)
Investment services ................................... 177.5 302.1 289.8
Consolidation/elimination ............................. .3 .5 4.6
---------- ---------- ----------
Subtotal ............................................ 508.9 429.8 145.4
Corporate interest expense ............................ (114.2) (126.1) (152.6)
---------- ---------- ----------
Total ................................................. $ 394.7 $ 303.7 $ (7.2)
========== ========== ==========
</TABLE>
45
<PAGE>
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1994 1993
----------- -----------
(IN MILLIONS)
<S> <C> <C>
Assets
Individual insurance and annuities $44,063.4 $42,667.1
Group pension ..................... 4,222.8 4,928.4
Attributed insurance capital ..... 2,609.8 2,852.4
----------- -----------
Insurance operations ............. 50,896.0 50,447.9
Investment services ............... 12,127.9 12,229.1
Consolidation/elimination ......... (1,614.4) (1,589.3)
----------- -----------
Total ............................. $61,409.5 $61,087.7
=========== ===========
</TABLE>
20) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The quarterly results of operations for the years ended December 31, 1994,
1993 and 1992, are summarized below:
<TABLE>
<CAPTION>
THREE MONTHS ENDED,
-----------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
---------- ---------- -------------- -------------
(IN MILLIONS)
<S> <C> <C> <C> <C>
1994
- ----------------------------
Total Revenues .............. $1,107.4 $1,075.0 $1,153.8 $1,123.5
Earnings before Cumulative
Effect of Accounting Change $ 64.0 $ 68.4 $ 89.1 $ 72.0
Net Earnings ................ $ 36.9 $ 68.4 $ 89.1 $ 72.0
1993
- ----------------------------
Total Revenues .............. $1,502.2 $1,539.7 $1,679.4 $1,500.5
========== ========== ============== =============
Net Earnings ................ $ 32.3 $ 47.1 $ 68.8 $ 64.2
========== ========== ============== =============
1992
- ----------------------------
Total Revenues .............. $1,781.7 $1,647.7 $1,484.4 $1,371.2
========== ========== ============== =============
(Loss) Earnings before
Extraordinary Item and
Cumulative Effect of
Accounting Changes ......... $ (3.6) $ (18.9) $ 25.0 $ (28.9)
========== ========== ============== =============
Net Loss .................... $ (18.6) $ (44.7) $ (23.1) $ (28.9)
========== ========== ============== =============
Net Earnings (Loss) After
Demutualization ............ $ 34.1 $ (28.9)
============== =============
</TABLE>
46
<PAGE>
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
21) INVESTMENT IN DLJ
On December 15, 1993, the Company sold a 61% interest in DLJ to the
Holding Company for $800.0 million in cash and securities. The excess of the
proceeds over the book value in DLJ at the date of sale of $340.2 million has
been reflected as a capital contribution. The results of operations and cash
flows of DLJ through the date of sale are included in the consolidated
statements of earnings and cash flows for the years ended December 31, 1993
and 1992. For the period subsequent to the date of sale, the results of
operations of DLJ are accounted for on the equity basis and are included in
commissions, fees and other income in the consolidated statements of
earnings. The Company's carrying value of DLJ is included in investment in
and loans to affiliates in the consolidated balance sheets.
Summarized balance sheets information for DLJ, reconciled to the Company's
carrying value of DLJ, are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1994 1993
----------- -----------
(IN MILLIONS)
<S> <C> <C>
Assets:
Trading account securities, at market value ............... $ 8,970.0 $11,589.8
Securities purchased under resale agreements .............. 10,476.4 11,547.7
Broker-dealer related receivables ......................... 11,784.8 13,745.2
Other assets .............................................. 1,884.9 1,884.0
----------- -----------
Total Assets .............................................. $33,116.1 $38,766.7
=========== ===========
Liabilities:
Securities sold under repurchase agreements ............... $18,356.7 $20,923.5
Broker-dealer related payables ............................ 10,618.0 13,450.3
Short-term and long-term debt ............................. 1,956.5 2,321.7
Other liabilities ......................................... 1,139.6 1,095.9
----------- -----------
Total liabilities ......................................... 32,070.8 37,791.4
Total shareholders' equity ................................ 1,045.3 975.3
----------- -----------
Total Liabilities, Cumulative Exchangeable Preferred Stock
and Shareholders' Equity ................................. $33,116.1 $38,766.7
=========== ===========
DLJ's equity as reported .................................. $ 1,045.3 $ 975.3
Unamortized cost in excess of net assets acquired in 1985 50.8 53.9
Reclassification of Cumulative Exchangeable Preferred
Stock .................................................... (225.0) (225.0)
The Holding Company's equity ownership in DLJ ............. (532.1) (490.6)
----------- -----------
The Company's Carrying Value of DLJ ....................... $ 339.0 $ 313.6
=========== ===========
</TABLE>
47
<PAGE>
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
Summarized statements of earnings information for DLJ reconciled to the
Company's equity earnings of DLJ is as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1994
--------------
(IN MILLIONS)
<S> <C>
Commission, fees and other income .............................. $ 953.5
Net investment income .......................................... 791.9
Dealer, trading and investment gains, net ...................... 263.3
--------------
Total Revenues ................................................. 2,008.7
Total Expenses ................................................. 1,885.7
--------------
Net Earnings ................................................... $ 123.0
DLJ's net earnings as reported ................................. $ 123.0
Amortization of cost in excess of net assets acquired in 1985 . (3.1)
Reclassification of Cumulative Exchange Preferred Stock
Dividend ...................................................... (20.9)
The Holding Company's equity in DLJ's earnings ................. (60.9)
--------------
The Company's Equity in DLJ's Earnings ......................... $ 38.1
==============
</TABLE>
22) RELATED PARTY TRANSACTIONS
On August 31, 1993, the Company sold $661.0 million of primarily privately
placed below investment grade fixed maturities to EQ Asset Trust 1993, a
limited purpose business trust, wholly owned by the Holding Company. The
Company recognized a $4.1 million gain net of related deferred policy
acquisition costs, deferred Federal income tax and amounts attributable to
participating group annuity contracts. In conjunction with this transaction,
the Company received $200.0 million of Class B Notes issued by EQ Asset Trust
1993. These notes have interest rates ranging from 6.85% to 9.45%. The Class
B Notes are reflected in investments in and loans to affiliates on the
consolidated balance sheets.
23) SUBSEQUENT EVENTS
In early 1995, seven complaints were filed by various groups of
shareholders of the Alliance North American Government Income Trust, Inc.
(the "Fund") alleging violations of Federal securities laws, fraud,
negligence, negligent misrepresentations and omissions, breach of fiduciary
duty and breach of contract in connection with the Fund's investments in
Mexican and Argentine securities. Each of the actions is brought against the
Fund, Alliance, which is the investment advisor to the Fund, and Alliance
Capital Management Corporation, a wholly owned subsidiary of the Company
which owns the 1% general partnership interest in Alliance. Other entities
and persons are named as defendants in certain of the complaints. Each of the
actions seeks to have a plaintiff class certified consisting of all
shareholders of the Fund who purchased or owned shares in the Fund at varying
times between February 1992 and December 1994. It is possible that one or
more additional actions making similar allegations may be filed against
Alliance and certain of the other entities and persons noted above. The
actions seek an unspecified amount of damages, costs and attorneys' fees.
Alliance believes that the allegations in each of the actions are without
merit and intends to vigorously defend against the claims in the actions.
While the ultimate results of these actions cannot be determined, management
of Alliance does not expect that these actions will have a material adverse
effect on Alliance's business.
48
