SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
=========
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1995
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 0-8590
Equitable of Iowa Companies
(Exact name of registrant as specified in its charter)
Iowa 42-1083593
(State or other jurisdiction of (IRS employer identification no.)
incorporation or organization)
604 Locust Street, Des Moines, Iowa 50306
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (515) 245-6911
__________________________________________________________________________
Former name, former address and formal fiscal year, if changed since last
report
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes /X/ No / /
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all
documents and reports required to be filed by Section 12, 13 or 15(d)
of the Securities Exchange Act of 1934 subsequent to the distribution
of securities under a plan confirmed by a court. Yes / / No / /
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date: 31,631,869
shares of Common Stock as of April 27, 1995.
FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Person for whom the Financial Information is given: EQUITABLE OF IOWA
COMPANIES AND ITS
SUBSIDIARIES
Consolidated Statements of Income (Unaudited):
FOR THE THREE MONTHS ENDED
March 31, 1995 March 31, 1994
_______________ ________________
(Current Year) (Preceding Year)
(Dollars in thousands)
REVENUES:
Universal life and annuity product
charges $12,510 $10,504
Traditional life insurance premiums 11,295 11,810
Net investment income 148,246 119,901
Realized gains on investments 113 6,009
Other income 6,534 4,395
_______________ ________________
178,698 152,619
BENEFITS AND EXPENSES:
Universal life and investment product benefits:
Interest credited to account balances 93,166 72,837
Benefit claims incurred in excess of
account balances 2,040 1,515
Traditional life insurance benefits:
Death benefits 7,109 6,622
Other benefits 8,133 7,635
Increase in future policy benefits:
Life and annuity 2,177 1,135
Other contracts 332 205
Distributions to participating
policyholders 6,242 6,074
Underwriting, acquisition and insurance expenses:
Commissions 41,799 30,568
General expenses 11,071 9,306
Insurance taxes 2,799 2,245
Policy acquisition costs deferred (51,455) (36,429)
Amortization of deferred policy
acquisition costs 14,471 11,020
_______________ ________________
137,884 112,733
Interest expense 2,021 2,190
Other expenses 2,119 2,830
_______________ ________________
142,024 117,753
_______________ ________________
36,674 34,866
Consolidated Statements of Income (Unaudited): (CONTINUATION)
FOR THE THREE MONTHS ENDED
March 31, 1995 March 31, 1994
_______________ ________________
(Current Year) (Preceding Year)
(Dollars in thousands,
except per share data)
Income taxes (credit):
Current $8,607 $10,959
Deferred 4,268 1,193
_______________ ________________
12,875 12,152
_______________ ________________
23,799 22,714
Equity loss, net of related tax benefit
of $3 in 1995 and $52 in 1994 (5) (112)
_______________ ________________
NET INCOME $23,794 $22,602
=============== ================
NET INCOME PER COMMON SHARE (average
shares used: 1995 - 31,663,427;
1994 - 31,529,538): $0.75 $0.72
=============== ================
CASH DIVIDENDS PAID PER COMMON SHARE $0.12 $0.105
Consolidated Balance Sheets (Unaudited):
March 31, 1995 December 31, 1994
_______________ _________________
(Dollars in thousands)
ASSETS
Investments:
Fixed maturities:
Held for investment, at amortized cost
(market: 1995 - $5,228,261;
1994 - $5,059,090) $5,351,332 $5,393,798
Available for sale, at market
(cost: 1995 - $1,208,017;
1994 - $819,083) 1,206,123 $778,486
Equity securities, at market
(cost: 1995 - $23,349; 1994 - $23,351) 23,664 22,978
Mortgage loans on real estate 691,080 613,208
Real estate, less allowances for
depreciation of $4,670 in 1995
and $4,659 in 1994 15,160 15,668
Policy loans 178,110 176,448
Short-term investments 25,286 50,975
_______________ _________________
TOTAL INVESTMENTS 7,490,755 7,051,561
Cash and cash equivalents 11,434 12,674
Securities and indebtedness of
related parties 11,126 11,034
Accrued investment income 110,634 105,959
Notes and other receivables 22,367 23,173
Deferred policy acquisition costs 631,678 607,626
Property and equipment, less
allowances for depreciation of
$7,481 in 1995 and $6,795 in 1994 7,733 7,843
Current income taxes recoverable 8,601 14,491
Intangible assets 3,717 2,605
Other assets 41,720 43,664
Separate account assets 100,128 84,963
_______________ _________________
TOTAL ASSETS $8,439,893 $7,965,593
=============== =================
Consolidated Balance Sheets (Unaudited):
March 31, 1995 December 31, 1994
_______________ _________________
(Dollars in thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY
Policy liabilities and accruals:
Future policy benefits:
Universal life and investment products $6,573,894 $6,237,107
Traditional life insurance products 779,172 777,100
Unearned revenue reserve 13,867 14,317
Other policy claims and benefits 8,063 7,785
_______________ _________________
7,374,996 7,036,309
Other policyholders' funds:
Supplementary contracts without
life contingencies 12,591 12,224
Advance premiums and other deposits 807 790
Accrued dividends 12,699 12,761
_______________ _________________
26,097 25,775
Deferred income taxes 5,909 1,442
Notes and loans payable:
Commercial paper notes 72,200 90,450
Long-term debt 100,000 --
_______________ _________________
172,200 90,450
Other liabilities 127,063 139,324
Separate account liabilities 100,128 84,963
_______________ _________________
TOTAL LIABILITIES 7,806,393 7,378,263
Stockholders' equity:
Serial preferred stock, without par value,
authorized 2,500,000 shares -- --
Common stock, without par value (stated
value $1.00 per share), authorized 70,000,000
shares, issued and outstanding 31,631,702
shares in 1995 and 31,677,891 in 1994 31,632 31,678
Additional paid-in capital 78,326 78,661
Unrealized depreciation on fixed
maturity securities (721) (26,493)
Unrealized appreciation (depreciation)
on marketable equity securities 315 (373)
Retained earnings 525,599 505,622
Unearned compensation (deduction) (1,651) (1,765)
_______________ _________________
TOTAL STOCKHOLDERS' EQUITY 633,500 587,330
_______________ _________________
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $8,439,893 $7,965,593
=============== =================
Consolidated Statement of Cash Flows (Unaudited):
FOR THE THREE MONTHS ENDED
March 31, 1995 March 31, 1994
_______________ ________________
(Current Year) (Preceding Year)
(Dollars in thousands)
OPERATING ACTIVITIES
Net income $23,794 $22,602
Adjustments to reconcile net income to
net cash provided by operations:
Adjustments related to universal life
and investment products:
Interest credited to account balances 93,166 72,837
Charges for mortality and
administration (13,034) (9,170)
Deferral of unearned revenues (145) 14
Amortization of unearned revenue reserve (339) (358)
Increase in traditional life policy
liabilities and accruals 2,387 1,406
Increase (decrease) in other policyholders'
funds 322 (433)
Increase in accrued investment income (4,675) (1,904)
Policy acquisition costs deferred (51,455) (36,429)
Amortization of deferred policy
acquisition costs 14,471 11,020
Change in other assets, other liabilities,
and accrued income taxes (2,425) 6,592
Provision for depreciation and
amortization (997) 1,077
Provision for deferred income taxes 4,281 1,026
Share of losses of related parties 7 148
Realized gains on investments (113) (6,009)
_______________ ________________
NET CASH PROVIDED BY OPERATING
ACTIVITIES 65,245 62,419
INVESTING ACTIVITIES
Sale, maturity, or repayment of investments:
Fixed maturities - held for investment 48,362 92,723
Fixed maturities - available for sale 9,898 80,405
Equity securities 225 --
Mortgage loans on real estate 8,739 8,316
Real estate 749 --
Policy loans 5,797 8,162
Short-term investments - net 25,689 57,559
_______________ ________________
99,459 247,165
Acquisition of investments:
Fixed maturities - held for investment (2,022) (483,930)
Fixed maturities - available for sale (400,436) (19,151)
Equity securities (226) --
Mortgage loans on real estate (86,331) (52,812)
Real estate (335) (249)
Policy loans (7,459) (7,161)
_______________ ________________
(496,809) (563,303)
Consolidated Statement of Cash Flows (Unaudited): (CONTINUATION)
FOR THE THREE MONTHS ENDED
March 31, 1995 March 31, 1994
_______________ ________________
(Current Year) (Preceding Year)
(Dollars in thousands)
INVESTING ACTIVITIES - continued
Disposal of investments accounted for
by the equity method $6 $2,790
Repayments of notes receivable 91 1
Issuance of notes receivable -- (1,287)
Sales of property and equipment 67 184
Purchases of property and equipment (679) (715)
_______________ ________________
NET CASH USED IN INVESTING ACTIVITIES (397,865) (315,165)
FINANCING ACTIVITIES
Issuance of long term debt 100,000 --
Repayment of long term debt -- (218)
Issuance (repayment) of commercial
paper - net (18,250) 33,500
Receipts from universal life policies
and investment contracts credited to
policyholder account balances 424,508 323,047
Return of policyholder account balances
on universal life policies and
investment contracts (167,853) (98,162)
Issuance of stock under employee stock
plans (3,208) 277
Cash dividends paid (3,817) (3,322)
_______________ ________________
NET CASH PROVIDED BY FINANCING
ACTIVITIES 331,380 255,122
_______________ ________________
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (1,240) 2,376
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 12,674 5,190
_______________ ________________
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $11,434 $7,566
=============== ================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest $1,044 $1,696
Income taxes 22 8,142
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for annual financial statements. In the opinion of management,
all adjustments considered necessary for a fair presentation have been
included. All adjustments were of a normal recurring nature, unless
otherwise noted in Management's Discussion and Analysis and the Notes to
Financial Statements. Operating results for the three months ended March
31, 1995 are not necessarily indicative of the results that may be expected
for the year ended December 31, 1995. For further information, refer to
the consolidated financial statements and footnotes thereto included in the
company's Annual Report on Form 10-K for the year ended December 31, 1994.
NOTE 2 -- INVESTMENT OPERATIONS
Fixed maturity securities that the company has the positive intent and
ability to hold to maturity are designated as "held for investment". Held
for investment securities are reported at cost adjusted for amortization of
premiums and discounts. Changes in the market value of these securities,
except for declines that are other than temporary, are not reflected in the
company's financial statements. Fixed maturity securities which may be
sold are designated as "available for sale". Available for sale securities
are reported at market value and unrealized gains and losses on these
securities are included directly in stockholders' equity, after adjustment
for changes in deferred policy acquisition costs, policy reserves and
deferred income taxes. Transfers of securities between categories are
restricted and are recorded at fair value at the time of transfer.
Securities that are determined to have a decline in value that is other
than temporary are written down to fair value which becomes the security's
new cost basis by a charge to realized losses in the company's Statement of
Income. Premiums and discounts are amortized/accrued utilizing the
scientific interest method which results in a constant yield over the
securities' expected life. Amortization/accrual of premiums and discounts
on mortgage-backed securities incorporates a prepayment assumption to
estimate the securities' expected life.
Equity securities (common and nonredeemable preferred stocks) are reported
at market if readily marketable, or at cost if not readily marketable. The
change in unrealized appreciation and depreciation of marketable equity
securities (net of related deferred income taxes, if any) is included
directly in stockholders' equity. Equity securities that are determined to
have a decline in value that is other than temporary are written down to
estimated fair value which becomes the security's new cost basis by a
charge to realized losses in the company's Statement of Income.
Mortgage loans on real estate are reported at cost adjusted for
amortization of premiums and accrual of discounts. If the value of any
mortgage loan is determined to be impaired (i.e. when it is probable that
the company will be unable to collect all amounts due according to the
contractual terms of the loan agreement), the carrying value of the
mortgage loan is reduced to the present value of expected future cash flows
from the loan, discounted at the loan's effective interest rate, or to the
loan's observable market price, or the fair value of the underlying
collateral. The carrying value of impaired loans is reduced by the
establishment of a valuation allowance which is adjusted at each reporting
date for significant changes in the calculated value of the loan. Changes
in this valuation allowance are charged or credited to income.
Real estate, which includes real estate acquired through foreclosure, is
reported at cost less allowances for depreciation. Real estate acquired
through foreclosure, or in-substance foreclosure, is recorded at the lower
of cost (which includes the balance of the mortgage loan, any accrued
interest and any costs incurred to obtain title to the property) or fair
value as determined at or before the foreclosure date. After foreclosure,
foreclosed real estate is carried at the lower of fair value less estimated
sale costs, or cost.
Policy loans are reported at unpaid principal. Short-term investments are
reported at cost adjusted for amortization of premiums and accrual of
discounts (which approximates estimated market value for these securities).
Estimated market values, as reported herein, of publicly traded fixed
maturity securities are as reported by an independent pricing service.
Market values of conventional mortgage-backed securities not actively
traded in a liquid market are estimated using a third party pricing system
which uses a matrix calculation assuming a spread over U.S. Treasury bonds
based upon the expected average lives of the securities. Market values of
private placement bonds are estimated using a matrix that assumes a spread
over U.S. Treasury bonds based upon interest rates and a risk assessment of
the bonds. Market values of redeemable preferred stocks are as reported by
the National Association of Insurance Commissioners ("NAIC"). Market
values of equity securities are based on the latest quoted market prices,
or where not readily marketable, at values which are representative of the
market values of issues of comparable yield and quality. Realized gains
and losses are determined on the basis of specific identification of
investments.
The company analyzes projected cash flows from investments and policy
liabilities under a variety of economic scenarios to determine what portion
of its investment portfolio might need to be sold under these scenarios.
Based upon this analysis and other factors, the company designates a
portion of its fixed maturity securities portfolio as "available for sale".
On March 31, 1995, fixed income securities with an amortized cost of
$1,208,017,000 and an estimated market value of $1,206,123,000 were
designated as available for sale. Unrealized losses on these securities,
net of adjustments to deferred policy acquisition costs, decreased
stockholders' equity by $721,000, or $0.02 per share, at March 31, 1995.
At March 31, 1995 and December 31, 1994, amortized cost, gross unrealized
gains and losses and estimated market values of fixed maturity securities
held for investment are as follows:
HELD FOR INVESTMENT
Gross Gross Estimated
Amortized Unrealized Unrealized Market
March 31, 1995 Cost Gains Losses Value
______________________________________________________________________________
(Dollars in thousands)
U.S. government and
governmental agencies
and authorities:
Mortgage-backed securities $285,496 $5,918 ($6,731) $284,683
Other 4,936 125 (42) 5,019
States, municipalities and
political subdivisions 15,479 339 (103) 15,715
Foreign governments 10,573 1,137 -- 11,710
Public utilities 1,223,082 14,624 (58,218) 1,179,488
Investment grade corporate 1,594,814 55,641 (40,612) 1,609,843
Below investment grade
corporate 196,864 1,721 (9,182) 189,403
Mortgage-backed securities 2,019,397 14,138 (101,569) 1,931,966
Redeemable preferred stocks 691 -- (257) 434
___________ ___________ ___________ ___________
TOTAL HELD FOR
INVESTMENT $5,351,332 $93,643 ($216,714) $5,228,261
=========== =========== =========== ===========
Gross Gross Estimated
Amortized Unrealized Unrealized Market
December 31, 1994 Cost Gains Losses Value
______________________________________________________________________________
(Dollars in thousands)
U.S. government and
governmental agencies
and authorities:
Mortgage-backed securities $288,914 $2,971 ($13,949) $277,936
Other 3,980 66 (104) 3,942
States, municipalities and
political subdivisions 15,557 -- (1,128) 14,429
Foreign governments 10,573 719 -- 11,292
Public utilities 1,231,799 7,148 (99,517) 1,139,430
Investment grade corporate 1,594,095 33,750 (80,108) 1,547,737
Below investment grade
corporate 223,908 477 (19,074) 205,311
Mortgage-backed securities 2,024,281 4,389 (170,091) 1,858,579
Redeemable preferred stocks 691 -- (257) 434
___________ ___________ ___________ ___________
TOTAL HELD FOR
INVESTMENT $5,393,798 $49,520 ($384,228) $5,059,090
=========== =========== =========== ===========
At March 31, 1995 and December 31, 1994, amortized cost, gross unrealized
gains and losses and estimated market values of fixed maturity securities
designated as available for sale are as follows:
AVAILABLE FOR SALE
Gross Gross Estimated
Amortized Unrealized Unrealized Market
March 31, 1995 Cost Gains Losses Value
______________________________________________________________________________
(Dollars in thousands)
U.S. government and
governmental agencies
and authorities:
Mortgage-backed securities $17,321 ($147) $17,174
Other 55,627 $989 (78) 56,538
Public utilities 105,101 1,795 (4,906) 101,990
Investment grade corporate 593,653 19,985 (11,161) 602,477
Below investment grade
corporate 231,137 3,271 (16,473) 217,935
Mortgage-backed securities 205,178 4,990 (159) 210,009
___________ ___________ ___________ ___________
TOTAL AVAILABLE FOR SALE $1,208,017 $31,030 ($32,924) $1,206,123
=========== =========== =========== ===========
Gross Gross Estimated
Amortized Unrealized Unrealized Market
December 31, 1994 Cost Gains Losses Value
______________________________________________________________________________
(Dollars in thousands)
U.S. government and
governmental agencies
and authorities:
Mortgage-backed securities $17,817 ($730) $17,087
Other 30,624 (1,178) 29,446
Public utilities 70,184 $704 (7,173) 63,715
Investment grade corporate 365,162 9,288 (19,574) 354,876
Below investment grade
corporate 199,597 589 (23,417) 176,769
Mortgage-backed securities 135,699 1,926 (1,032) 136,593
___________ ___________ ___________ ___________
TOTAL AVAILABLE FOR SALE $819,083 $12,507 ($53,104) $778,486
=========== =========== =========== ===========
Short-term investments with maturities of 30 days or less have been
excluded from the above schedules, since amortized cost approximates market
value for those securities.
Amortized cost and estimated market value of debt securities at March 31,
1995, by contractual maturity, are shown below. Expected maturities will
differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties.
Estimated
Amortized Market
HELD FOR INVESTMENT Cost Value
____________________________________________________________________________
(Dollars in thousands)
Due in one year or less $639 $636
Due after one year through five years 58,402 59,807
Due after five years through ten years 566,146 560,443
Due after ten years 2,421,252 2,390,726
_____________ _____________
3,046,439 3,011,612
Mortgage-backed securities 2,304,893 2,216,649
_____________ _____________
TOTAL HELD FOR INVESTMENT $5,351,332 $5,228,261
============= =============
Estimated
Amortized Market
AVAILABLE FOR SALE Cost Value
____________________________________________________________________________
(Dollars in thousands)
Due after one year through five years $79,007 $79,415
Due after five years through ten years 435,338 437,606
Due after ten years 471,173 461,919
_____________ _____________
985,518 978,940
Mortgage-backed securities 222,499 227,183
_____________ _____________
TOTAL AVAILABLE FOR SALE $1,208,017 $1,206,123
============= =============
Carrying value and estimated market value of mortgage-backed securities,
which comprise 38.6% of the company's investment in fixed maturity
securities as of March 31, 1995, are as follows:
Estimated
Carrying Market
Value Value
_____________________________
(Dollars in thousands)
Mortgage-backed securities:
Government and agency guaranteed pools:
Very accurately defined maturities $17,242 $17,193
Planned amortization class 79,561 79,282
Targeted amortization class 29,271 27,384
Sequential pay 73,099 70,717
Pass through 103,497 107,281
Private Label CMOs and REMICs:
Very accurately defined maturities 30,406 30,527
Planned amortization class 25,629 25,737
Targeted amortization class 458,895 429,860
Sequential pay 1,647,019 1,592,311
Mezzanines 38,247 36,352
Private placements and subordinate issues 29,210 27,188
_____________ _____________
TOTAL MORTGAGE-BACKED SECURITIES $2,532,076 $2,443,832
============= =============
During periods of significant interest rate volatility, the mortgages
underlying mortgage-backed securities may prepay more quickly or more
slowly than anticipated. If the principal amount of such mortgages are
prepaid earlier than anticipated during periods of declining interest
rates, investment income may decline due to reinvestment of these funds at
lower current market rates. If principal repayments are slower than
anticipated during periods of rising interest rates, increases in
investment yield may lag behind increases in interest rates because funds
will remain invested at lower historical rates rather than reinvested at
higher current rates. To mitigate this prepayment volatility, the company
invests primarily in intermediate tranche collateralized mortgage
obligations ("CMOs"). CMOs are pools of mortgages that are segregated into
sections, or tranches, which provide sequential retirement of bonds rather
than pro-rata share of principal return in the pass-through structure. The
company does not hold any "interest only" or "principal only" mortgage-
backed securities. Further, the company has not purchased obligations at
significant premiums, thereby limiting exposure to capital loss during
periods of accelerated prepayments. At March 31, 1995, unamortized
premiums on mortgage-backed securities totaled $4,588,000 and unaccrued
discounts on mortgage-backed securities totaled $71,459,000.
An analysis of sales, maturities and principal repayments of the company's
fixed maturities portfolio for the three months ended March 31, 1995 and
1994 is as follows:
Gross Gross Proceeds
Amortized Realized Realized from
Cost Gains Losses Sale
_______________________________________________
Three months ended March 31, 1995
- -------------------------------
Scheduled principal repayments
calls and tenders (available
for sale only):
Held for investment $45,916 $2,481 ($35) $48,362
Available for sale 9,904 1 (7) 9,898
___________ ___________ ___________ ___________
TOTAL $55,820 $2,482 ($42) $58,260
=========== =========== =========== ===========
Gross Gross Proceeds
Amortized Realized Realized from
Cost Gains Losses Sale
_______________________________________________
Three months ended March 31, 1994
- -------------------------------
Scheduled principal repayments
calls and tenders (available
for sale only):
Held for investment $89,497 $3,226 $ -- $92,723
Available for sale 51,293 1,097 -- 52,390
Sales - available for sale 24,913 3,102 -- 28,015
___________ ___________ ___________ ___________
TOTAL $165,703 $7,425 $ -- $173,128
=========== =========== =========== ===========
There were no transfers between the held for investment and available for
sale portfolios during the three months ended March 31, 1995. During the
three months ended March 31, 1995, the change in the net unrealized gain or
loss on available for sale securities included in stockholders' equity, net
of adjustments, amounted to $25,772,000 of net appreciation.
At March 31, 1995, the company identified one below investment grade
security as having an impairment in value that was other than temporary.
As a result of this determination, the company recognized a pre-tax loss of
$2,103,000 to reduce the carrying value of this security to its estimated
fair value of $900,000. This security was sold in April 1995 at no gain or
loss. The carrying value of fixed maturity investments considered to have
other than temporary impairments represent a negligible portion of total
investments, total assets, or total stockholders' equity at March 31, 1995.
At March 31, 1995, the company owned equity securities with a combined book
value of $23,349,000 and an estimated market value of $23,664,000,
resulting in gross unrealized appreciation of $490,000 and gross unrealized
depreciation of $175,000.
At March 31, 1995, the company had established valuation allowances of $54,000
on one mortgage loan and $944,000 on one real estate property to reduce the
carrying value of these investments to their estimated fair value, less costs
to sell.
The carrying value of investments which have been non-income producing for
the twelve months preceding March 31, 1995 totaled $239,000 related to one
real estate property.
No investment in any person or its affiliates (other than bonds issued by
agencies of the United States government) exceeded ten percent of
stockholders' equity at March 31, 1995.
NOTE 3 -- CREDIT ARRANGEMENTS
In February 1995, the company issued $100 million of 8.5% notes, maturing
on February 15, 2005, receiving net proceeds totaling approximately
$98,826,000, after expenses. The company contributed $50 million of the
proceeds to its insurance subsidiaries and applied the remaining net
proceeds to the repayment of outstanding commercial paper notes.
The company maintains line of credit arrangements with several banks to
support its commercial paper notes payable and to provide short-term
liquidity. On March 30, 1995, the company entered into a new agreement
which provides for a line of credit totaling $225,000,000, expiring on
March 30, 2000.
NOTE 4 -- COMMITMENTS AND CONTINGENCIES
In the normal course of business, the company seeks to limit its exposure
to loss on any single insured and to recover a portion of benefits paid by
ceding reinsurance to other insurance enterprises or reinsurers.
Reinsurance coverages for life insurance vary according to the age and risk
classification of the insured with retention limits ranging up to $500,000
of coverage per individual life. The company does not use surplus relief
reinsurance.
Reinsurance contracts do not relieve the company from its obligations to
its policyholders. To the extent that reinsuring companies are later
unable to meet obligations under reinsurance agreements, the company's life
insurance subsidiaries would be liable for these obligations and could
result in losses to the company. To limit the possibility of such losses
the company evaluates the financial condition of its reinsurers, monitors
concentrations of credit risk arising from factors such as similar
geographic regions, and limits its exposure to any one reinsurer. At March
31, 1995, the company had reinsurance treaties with 18 reinsurers, all of
which are deemed to be long-duration, retroactive contracts, and has
established a receivable totaling $10,885,000 for reserve credits,
reinsurance claims and other receivables from these reinsurers. No
allowance for uncollectible amounts has been established since none of the
receivables are deemed to be uncollectible, and because such receivables,
either individually or in the aggregate, are not material to the company's
operations. The company's liability for future policy benefits and notes
and other receivables has been increased by $9,860,000 at March 31, 1995
for reserve credits on reinsured policies. Insurance premiums and product
charges have been reduced $1,834,000 in the first quarter of 1995 compared
to $1,733,000 in the same period of 1994, as a result of the cession
agreements. Insurance benefits and expenses have been reduced by
$1,105,000 in the first quarter of 1995 compared to $513,000 in the same
period of 1994. The amount of reinsurance assumed is not significant.
The company's insurance subsidiaries are assessed contributions by life and
health guaranty associations in almost all states to indemnify
policyholders of failed companies. In some states, such assessments are
offset by reductions in future premium taxes. The company cannot predict
whether and to what extent legislative initiatives may affect the right to
offset. The amount of these assessments prior to 1991 was not material.
Failures of substantially larger companies since 1990 could result in
future assessments in material amounts. The company has established a
reserve to cover such assessments and regularly reviews information
regarding known failures and revises its estimate of future guaranty fund
assessments accordingly. During the first quarter of 1995, the company
accrued and charged to expense an additional $492,000, and at March 31,
1995, the remaining reserve for insurance guaranty fund assessments, net of
expected future premium tax credits, totaled $14,333,000. The company
believes this reserve is sufficient to cover expected future insurance
guaranty fund assessments related to known insolvencies at this time.
At March 31, 1995, outstanding commitments to fund mortgage loans on real
estate totaled $110,367,000. In addition, outstanding commitments to
purchase mortgage-backed securities totaled $6,258,000 at March 31, 1995.
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The purpose of this section is to discuss and analyze the company's
consolidated financial condition, liquidity and capital resources and
results of operations. This analysis should be read in conjunction with
the consolidated financial statements and related notes which appear
elsewhere in this report. The company reports financial results on a
consolidated basis. The consolidated financial statements include the
accounts of the company and its subsidiaries. All of the company's
significant subsidiaries are wholly-owned. The company's primary
subsidiaries are Equitable Life Insurance Company of Iowa ("Equitable
Life") and USG Annuity & Life Company ("USG").
FINANCIAL CONDITION
Investments
The company's total investment portfolio grew $456,853,000, or 6.7%, in the
first three months of 1995 from $6.858 billion to $7.315 billion, as
$431,872,000 of annuity and life insurance premiums were received during
the period. The company manages the growth of its insurance operations in
order to maintain adequate capital ratios and has established a goal of
growing assets at least 20% in 1995.
To support the company's annuities and life insurance products, cash flow
was invested primarily in fixed income investments. At March 31, 1995, the
company's investment portfolio was comprised of the following:
Estimated Yield at
Carrying % of Market % of Amortized
Value Total Value Total Cost
_______________________________________________
Investment cash and short-term
investments $27,601 0.4% $27,601 0.4% 6.2%
Governments and agency mortgage-
backed securities 390,196 5.3% 390,839 5.4% 8.4%
Conventional mortgage-backed
securities 2,229,406 30.5% 2,141,975 29.8% 8.0%
Investment grade corporate
securities 3,523,054 48.2% 3,494,232 48.7% 8.4%
Below-investment grade corporate
securities 414,799 5.7% 407,338 5.7% 9.4%
Mortgage loans 691,080 9.4% 684,907 9.5% 8.8%
_______________________________________________
Total cash and fixed income
investments 7,276,136 99.5% 7,146,892 99.5% 8.4%
Equity securities 23,664 0.3% 23,664 0.3% 3.9%
Real estate 15,160 0.2% 15,160 0.2% 2.6%
_______________________________________________
Total investments $7,314,960 100.0% $7,185,716 100.0% 8.4%
===============================================
<FN>
Note: Estimated market values of publicly traded securities are as reported
by an independent pricing service. Market values of conventional
mortgage-backed securities not actively traded in a liquid market are
estimated using a third party pricing system, which uses a matrix
calculation assuming a spread over U.S. Treasury bonds based upon the
expected average lives of the securities. Market values of private
placement bonds are estimated using a matrix that assumes a spread
(based on interest rates and a risk assessment of the bonds) over U.S.
Treasury bonds. Estimated market values of redeemable preferred
stocks are as reported by the National Association of Insurance
Commissioners ("NAIC"). Market values of mortgage loans on real
estate are estimated by discounting expected cash flows, using
interest rates currently being offered for similar loans. Market value
of owned real estate is estimated to be equal to, or in excess of,
carrying value based upon appraised values.
At March 31, 1995, the ratings assigned by Standard & Poor's Corporation
("Standard & Poor's") and Moody's Investors Service ("Moody's") to the
individual securities in the company's fixed maturities portfolio are
summarized as follows:
Carrying % of Estimated % of
Value Total Market Value Total
____________ _______ ____________ _______
(Dollars in thousands)
Ratings assigned by
Standard & Poor's:
U.S. governments, agencies
& AAA Corporates $2,561,522 39.1% $2,477,131 38.5%
AA+ to AA- 302,746 4.6% 296,877 4.6%
A+ to A- 2,030,828 31.0% 2,021,274 31.4%
BBB+ to BBB- 1,130,305 17.3% 1,116,725 17.4%
BB+ to BB- 355,232 5.4% 351,121 5.5%
B+ to B- 66,764 1.0% 63,982 1.0%
C+ to C- 900 0.0% 900 0.0%
D 4,200 0.1% 4,200 0.1%
Issues not rated by S & P
(by NAIC rating):
Rated 1 (AAA to A-) 22,122 0.3% 21,309 0.3%
Rated 2 (BBB+ to BBB-) 26,651 0.4% 26,316 0.4%
Rated 3 (BB+ to BB-) 53,371 0.8% 52,147 0.8%
Rated 4 (B+ to B-) 2,123 0.0% 1,968 0.0%
Redeemable preferred stock 691 0.0% 434 0.0%
____________ _______ ____________ _______
TOTAL FIXED MATURITIES $6,557,455 100.0% $6,434,384 100.0%
============ ======= ============ =======
Carrying % of Estimated % of
Value Total Market Value Total
____________ _______ ____________ _______
(Dollars in thousands)
Ratings assigned by Moody's:
U.S. governments, agencies
& Aaa Corporates $2,431,651 37.1% $2,356,425 36.6%
Aa1 to Aa3 394,177 6.0% 378,885 5.9%
A1 to A3 2,125,665 32.4% 2,110,206 32.8%
Baa1 to Baa3 1,045,443 16.0% 1,036,522 16.1%
Ba1 to Ba3 379,911 5.8% 377,789 5.9%
B1 to B3 71,819 1.1% 68,582 1.1%
Caa1 to Caa3 900 0.0% 900 0.0%
Ca 4,200 0.1% 4,200 0.1%
Issues not rated by Moody's
(by NAIC rating):
Rated 1 (Aaa to A3) 22,122 0.3% 21,309 0.3%
Rated 2 (Baa1 to Baa3) 26,651 0.4% 26,316 0.4%
Rated 3 (Ba1 to Ba3) 52,102 0.8% 50,848 0.8%
Rated 4 (B1 to B3) 2,123 0.0% 1,968 0.0%
Redeemable preferred stock 691 0.0% 434 0.0%
____________ _______ ____________ _______
TOTAL FIXED MATURITIES $6,557,455 100.0% $6,434,384 100.0%
============ ======= ============ =======
The company analyzes projected cash flows from investments and policy
liabilities under a variety of economic scenarios to determine what portion
of its investment portfolio might need to be sold under these scenarios.
Based upon this analysis and other factors, the company designates a
portion of its fixed maturity securities portfolio as "available for sale".
On March 31, 1995, fixed income securities with an amortized cost of
$1,208,017,000 and an estimated market value of $1,206,123,000 were
designated as available for sale. Unrealized holding losses on these
securities, net of adjustments to deferred policy acquisition costs,
decreased stockholders' equity by $721,000, or $0.02 per share, at
March 31, 1995.
Net unrealized depreciation of fixed maturity investments of $124,965,000
was comprised of gross appreciation of $124,673,000 and gross depreciation
of $249,638,000.
The percentage of the company's portfolio invested in below investment
grade securities has decreased slightly during the first three months of
1995. At March 31, 1995 the carrying value of the company's total
investment in below investment grade securities consisted of investments in
86 issuers totaling $414,799,000, or 5.7% of the company's investment
portfolio compared to 80 issuers totaling $400,677,000, or 5.9%, at
December 31, 1994. The company intends to purchase additional below
investment grade securities but it does not expect the percentage of its
portfolio invested in below investment grade securities to increase
significantly. At March 31, 1995, the yield on the company's below
investment grade portfolio was 9.4% compared to 8.4% for the company's
investment grade corporate bond portfolio. The company estimates that the
market value of its below investment grade portfolio was $407,338,000, or
98.2% of carrying value, at March 31, 1995.
Below investment grade securities have different characteristics than
investment grade corporate debt securities. Risk of loss upon default by
the borrower is significantly greater with respect to below investment
grade securities than with other corporate debt securities. Below
investment grade securities are generally unsecured and are often
subordinated to other creditors of the issuer. Also, issuers of below
investment grade securities usually have higher levels of debt and are more
sensitive to adverse economic conditions, such as recession or increasing
interest rates, than are investment grade issuers. The company attempts to
reduce the overall risk in its below investment grade portfolio, as in all
of its investments, through careful credit analysis, strict investment
policy guidelines, and diversification by company and by industry.
The company analyzes its investment portfolio, including below investment
grade securities, at least quarterly in order to determine if its ability
to realize its carrying value on any investment has been impaired. For
debt and equity securities, if impairment in value is determined to be
other than temporary (i.e. if it is probable that the company will be
unable to collect all amounts due according to the contractual terms of the
security), the cost basis of the impaired security is written down to fair
value, which becomes the security's new cost basis. The amount of the
writedown is included in earnings as a realized loss. Future events may
occur, or additional or updated information may be received, which may
necessitate future write-downs of securities in the company's portfolio.
Significant write-downs in the carrying value of investments could
materially adversely affect the company's net income in future periods.
At March 31, 1995, the Company identified one below investment grade
security as having an impairment in value that was other than temporary.
As a result of this determination, the Company recognized a pre-tax loss of
$2,103,000 to reduce the carrying value of this security to its fair value
of $900,000. This security was sold in April 1995 at no gain or loss. The
carrying value of fixed maturity investments considered to have other than
temporary impairments represent a negligible portion of total investments,
total assets, or total stockholders' equity at March 31, 1995.
During the first three months of 1995, fixed maturity securities designated
as held for investment with a combined amortized cost value of $45,916,000
were called or repaid by their issuers generating net realized gains
totaling $2,446,000. Also during the first three months of 1995, fixed
maturity securities designated as available for sale with a combined
amortized cost value of $9,904,000 were called, repaid or tendered
generating net realized losses totaling $6,000. In total, pre-tax gains
from sales, calls, repayments, tenders and writedowns of fixed maturity
investments amounted to $337,000 in the first three months of 1995.
The company's fixed maturity investment portfolio had a combined amortized
cost yield of 8.4% at March 31, 1995 and December 31, 1994 as current
market interest rates are similar to the company's portfolio rate.
Mortgage loans make up approximately 9.4% of the company's investment
portfolio, as compared to an industry average of 16.7%, based on information
reported in the 1994 ACLI Fact Book. The company resumed active mortgage
lending in 1990 to broaden its investment alternatives, and continues to
increase its investment allocation in this area, due to the availability of
attractive yields and loan to value ratios. As a result of this increase in
lending activity, mortgages outstanding increased to $691,080,000 from
$613,208,000 during the first three months of 1995. The company expects the
carrying value of this asset category to continue to grow over the next
several years. The company's mortgage loan portfolio includes 305 loans
with an average size of $2,266,000. Average seasoning of the company's
mortgage loan portfolio is 7.2 years if weighted by the number of loans,
or 2.4 years if weighted by mortgage loan carrying values. The company's
mortgage loans are typically secured by occupied buildings in major
metropolitan locations and not speculative developments, and are diversified
by type of property and geographic location. At March 31, 1995, the yield on
the company's mortgage loan portfolio was 8.8%.
Distribution of these loans by type of collateral and geographic location
is as follows:
% of
# of Carrying Mortgage
Loans Value Portfolio
_______________________________
(Dollars in thousands)
Collateral Breakdown
- ------------------------------
Farm 4 $160 0.0%
Multi-family residential 51 161,893 23.4%
Industrial 120 171,183 24.8%
Office buildings 43 114,326 16.6%
Retail 84 230,825 33.4%
Other 3 12,693 1.8%
______ ____________ _________
TOTAL 305 $691,080 100.0%
====== ============ =========
% of
# of Carrying Mortgage
Loans Value Portfolio
_______________________________
(Dollars in thousands)
Geographic Breakdown
- ------------------------------
New England 1 $240 0.0%
Middle Atlantic 32 98,237 14.2%
South Atlantic 38 82,719 12.0%
East North Central 75 187,650 27.1%
West North Central 38 94,023 13.6%
East South Central 9 21,182 3.1%
West South Central 15 28,812 4.2%
Mountain 21 49,812 7.2%
Pacific 76 128,405 18.6%
______ ____________ _________
TOTAL 305 $691,080 100.0%
====== ============ =========
At March 31, 1995, no mortgage loans were delinquent by 90 days or more.
The company does not expect to incur material losses from its mortgage loan
portfolio since mortgage loans represent less than 10% of the company's
investment portfolio and the company has been able to recover 98% of the
principal amount of problem mortgages that have been resolved in the last
three years.
At March 31, 1995, the company owned real estate totaling $15,160,000,
including properties acquired through foreclosure valued at $11,274,000.
The valuation allowance, established in 1994, or one of the company's real
estate properties totaled $944,000 at March 31, 1995.
In total, the company has experienced a relatively small number of problems
with its total investment portfolio, with only 0.01% of the company's
investments in default at March 31, 1995. The company estimates its total
investment portfolio, excluding policy loans, had a market value equal to
98.2% of carrying value at March 31, 1995.
Other assets
Accrued investment income increased $4,675,000 primarily due to an increase
in new fixed income investments and in the overall size of the portfolio.
Deferred policy acquisition costs increased $24,052,000 over year-end 1994
levels as the deferral of current period costs (primarily commissions)
incurred to generate insurance and annuity sales totaled $51,455,000.
Amortization of costs deferred totaled $14,471,000. In addition, the change
in the adjustment to deferred acquisition costs related to the valuation of
fixed maturity securities designated as available for sale under SFAS No. 115
reduced deferred acquisition costs by $12,932,000 during the first quarter of
1995. At March 31, 1995, the company had total assets of $8,439,893,000, an
increase of 6.0% over total assets at December 31, 1994.
Liabilities
In conjunction with the volume of insurance and annuity sales, and the
resulting increase in business in force, the company's liability for policy
liabilities and accruals increased $338,687,000, or 4.8%, during the first
three months of 1995 and totaled $7,374,996,000 at March 31, 1995.
Reserves for the company's annuity policies increased $320,619,000, or
5.5%, during this period and totaled $6,147,583,000 at March 31, 1995. Life
insurance reserves increased $18,240,000, or 1.5%, during the first three
months of 1995 and totaled $1,205,483,000 at March 31, 1995.
The company incorporates a number of features in its annuity products
designed to reduce the early withdrawal or surrender of the policies and to
partially compensate the company for its costs if policies are withdrawn
early. Surrender charge periods on annuity policies currently range from
five years to the term of the policy, with 99.6% of such policies being
issued with a surrender charge period of seven years or more during the
first three months of 1995. The initial surrender charge on annuity
policies ranges from 5% to 20% of the premium and decreases over the
surrender charge period. The following table summarizes the company's
deferred annuity liabilities and sales at and for the three months ended
March 31, 1995 by surrender charge range category. Notwithstanding policy
features, the withdrawal rates of policyholder funds may be affected to
some degree by changes in interest rates.
Deferred Deferred
Annuity % of Annuity % of
Surrender Charge % Sales Total Liabilities Total
___________________________________________________________________
(Dollars in thousands)
No surrender charge $484,569 8.3%
1 to 4 percent 809,544 13.9%
5 to 6 percent $1,433 0.4% 682,925 11.7%
7 to 9 percent 319,307 85.5% 2,762,410 47.6%
10 percent and greater 52,547 14.1% 1,075,514 18.5%
_________________________________________
$373,286 100.0% $5,814,962 100.0%
=========================================
Total consolidated debt increased $81,750,000 during the first three months
of 1995 as the company issued $100 million of 8.5% notes in February 1995.
Commercial paper, issued to offset timing differences in investment related
cash receipts and disbursements and to provide for short-term operating needs,
amounted to $72,200,000 at March 31, 1995. Other liabilities decreased
$12,261,000 from year-end 1994 levels as a result of a decrease in the
liability for securities purchased but not yet paid for, partially offset
by increases in liabilities for outstanding checks and liabilities for
premiums received but not yet applied.
At March 31, 1995, the company had total liabilities of $7,806,393,000
compared to $7,378,263,000 at December 31, 1994, a 5.8% increase.
Equity
At March 31, 1995, stockholders' equity was $633,500,000, or $20.03 per
share, compared to $587,333,000 or $18.54 per common share at year end
1994. Unrealized depreciation of available for sale fixed maturity
securities reduced stockholders' equity by $721,000, or $0.02 per share,
after adjustments to deferred acquisition costs. The ratio of consolidated
debt to total capital was 21.4% at March 31, 1995, up from 13.3% at year-end
1994 as a result of the increase in long-term borrowings. At March 31, 1995,
there were 31,631,702 common shares outstanding compared to 31,677,891 shares
at December 31, 1994.
The effects of inflation and changing prices on the company are not
material since insurance assets and liabilities are both primarily monetary
and remain in balance. An effect of inflation, which has been low in
recent years, is a decline in purchasing power when monetary assets exceed
monetary liabilities.
LIQUIDITY AND CAPITAL RESOURCES
The liquidity requirements of the company's subsidiaries are met by cash
flow from insurance and annuity premiums, investment income, and maturities
of fixed maturity investments and mortgage loans. The company primarily
uses funds for the payment of insurance and annuity benefits, operating
expenses and commissions, and the purchase of new investments. No material
capital expenditures are planned.
The company issues short-term debt, including commercial paper notes, for
working capital needs and to provide short term liquidity. At March 31,
1995 the company had $72,200,000 in commercial paper notes outstanding, a
decrease of $18,250,000 from December 31, 1994. The company issues
commercial paper to fund short-term advances to the company's insurance
subsidiaries to smooth timing differences between investment related cash
receipts and disbursements and to provide for short-term operating needs.
The company's commercial paper is rated A1 by Standard and Poor's, P2 by
Moody's and D1 by Duff & Phelps Credit Rating Co.
To enhance short term liquidity and back up its outstanding commercial
paper notes, the company maintains a line of credit agreement with several
banks. On March 30, 1995, the company entered into a new agreement which
provides for a line of credit totaling $225,000,000, expiring on March 30,
2000.
Since Equitable of Iowa Companies is a holding company, funds required to
meet its debt service requirements, dividend payments and other expenses
are primarily provided by its subsidiaries. The ability of the company's
insurance subsidiaries to pay dividends and other distributions to the
company is regulated by state law. Iowa law provides that an insurance
company may pay dividends, without prior approval of the Commissioner of
Insurance if, together with all dividends or distributions made during the
preceding twelve month period, the dividends would not exceed the greater
of (a) 10% of the insurer's statutory surplus as of the December 31st next
preceding; or (b) the statutory net gain from operations for the twelve
month period ending as of the next preceding December 31st. In addition,
the law provides that the insurer may only make dividend payments to its
shareholders from its earned surplus (i.e., its surplus as regards
policyholders less paid-in and contributed surplus). Equitable Life could
pay dividends to the company without prior approval of the Iowa
Commissioner of Insurance of approximately $63,906,000 during the remainder
of 1995. The company's insurance subsidiaries have maintained adequate
statutory capital and surplus and have not used surplus relief or financial
reinsurance, which have come under scrutiny by many state insurance
departments.
The NAIC's risk-based capital requirements require insurance companies to
calculate and report information under a risk-based capital formula. These
requirements are intended to allow insurance regulators to identify
inadequately capitalized insurance companies based upon the type and
mixture of risks inherent in the company's operations. The formula
includes components for asset risk, liability risk, interest rate exposure
and other factors. The company's insurance subsidiaries have complied with
the NAIC's risk-based capital reporting requirements. Amounts reported
indicate that the company's insurance subsidiaries have total adjusted
capital (as defined in the requirements) which is well above all required
capital levels.
The terms of the line of credit agreement totaling $225,000,000 require the
company to maintain certain adjusted consolidated tangible net worth
levels. "Adjusted consolidated tangible net worth" is defined as
consolidated stockholders' equity, adjusted to exclude the effects of
Statement of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities", less intangible assets.
The most restrictive of these covenants requires the company to maintain
adjusted consolidated tangible net worth equal to or in excess of the sum
of (i) $490,000,000, plus (ii) 50% of consolidated net income from January
1, 1995 to the end of the most recent quarter, plus (iii) net proceeds from
the issuance of stock from January 1, 1995 to the end of the most recent
quarter. At March 31, 1995, $128,607,000 of retained earnings were free of
restrictions and could be distributed to the company's public stockholders.
Developing and writing increased volumes of insurance and annuity business
require increased amounts of capital and surplus for the company's
insurance operations including amounts in excess of those which may be
realized from operating results. The company may also expand its insurance
operations through acquisition of blocks of business from other insurance
companies, or through the acquisition of an insurance company, although no
such acquisitions are currently planned. In October 1993 the company
completed a primary stock offering of 2,300,000 shares to the public and
received net proceeds of approximately $76,264,000. The company
contributed $70,000,000 of the proceeds to its insurance subsidiaries. In
February 1995, the company issued $100 million of 8.5% notes, maturing on
February 15, 2005, receiving net proceeds totaling approximately
$98,826,000, after expenses. The company contributed $50 million of the
proceeds to its insurance subsidiaries and applied the remaining net
proceeds to the repayment of outstanding commercial paper notes. Over
time, further growth in the company's insurance operations may require
additional equity capital although the company believes it now has
sufficient resources to support growth in its operations for the next few
years. The company's primary sources of capital are retained earnings and
the issuance of additional common stock or debt.
The company's insurance subsidiaries operate under the regulatory scrutiny
of each of the state insurance departments supervising business activities
in the states where each company is licensed. The company is not aware of
any current recommendations by these regulatory authorities which, if they
were to be implemented, would have a material effect on the company's
liquidity, capital resources or operations.
RESULTS OF OPERATIONS
Sales
Total annuity and life insurance sales, as measured by first year and
single premiums, increased $92,040,000, or 30.1%, to $397,444,000 in the
first three months of 1995. Annuity sales remained strong and increased
$86,573,000, or 28.8%, to $386,915,000 in the first three months of 1995.
The company believes that the growth in its agents, its commitment to
customer service, the quality of its investment portfolio, competitive
pricing and its overall financial strength continue to attract consumers to
its annuity products as consumers seek a secure return on their retirement
savings. Insurance agents are attracted to sell the company's products by
the same factors, as well as a diversified product portfolio, competitive
commissions, rapid policy issuance and weekly commission payments. First
year and single life insurance premiums increased $5,467,000, or 108.0%, to
$10,529,000 in the first three months of 1995 due to increases in sales of
the company's universal life and current interest products.
Revenues
Total revenues increased $26,079,000, or 17.1%, to $178,698,000 in the
first three months of 1995. Universal life insurance and annuity product
charges increased $2,006,000, or 19.1%, to $12,510,000 in the first three
months of 1995, as increased withdrawals from the company's annuity
products generated higher surrender charge revenues. In addition to
increased withdrawal levels, withdrawals and surrenders of the company's
annuity products which contain a "market value adjustment" feature generate
greater surrender charge income as interest rates increase. Surrender
charge income, which allows the company to recover a portion of the
expenses incurred to generate policy sales, was offset by greater
amortization of deferred policy acquisition costs. Premiums from
traditional life insurance products decreased $515,000, or 4.4%, to
$11,295,000 in the first three months of 1995. These traditional life
insurance product premium decreases resulted from lower renewal premiums
although premiums from new sales increased slightly.
Net investment income increased $28,345,000, or 23.6%, to $148,246,000 in
the first three months of 1995 due to the increase in invested assets.
During the first three months of 1995, the company had realized gains on
the sale of investments of $113,000, compared to gains of $6,009,000 in the
same period of 1994. The level of realized gains has decreased as calls
and repayments of fixed maturity securities have slowed as current market
interest rates are similar to the company's portfolio rate.
Expenses
Total insurance benefits and expenses increased $25,151,000, or 22.3%, to
$137,884,000 in the first three months of 1995. Interest credited to
universal life and investment product account balances increased
$20,329,000, or 27.9%, to $93,166,000 in the first three months of 1995 as
a result of higher account balances associated with those products.
The company's policy is to change rates credited to inforce policy accounts
as the company's investment portfolio yield changes. Most of the company's
interest sensitive products, including annuities, universal life-type
policies and participating policies, allow for interest rate adjustments at
least annually. The following tables summarize the effective average
annual yield on assets invested to support policy accounts for interest-
sensitive products, the average annual interest rate credited to those
products and the interest rate spread at and for the three months ended
March 31, 1994 and 1995.
Three months ended March 31
Yield on Credited Interest
Assets Rate Rate Spread
________ _________ ___________
1995 8.6% 5.8% 2.8%
1994 8.7% 6.0% 2.7%
At March 31
Yield on Credited Interest
Assets Rate Rate Spread
________ _________ ___________
1995 8.6% 5.8% 2.8%
1994 8.6% 5.9% 2.7%
Death benefits on traditional life products and benefit claims incurred in
excess of account balances increased $1,012,000, or 12.4%, to $9,149,000 in
the first three months of 1995. Other benefits increased $498,000, or
6.5%, to $8,133,000 in the first three months of 1995. These changes were
offset by a corresponding change in the reserve for future policy benefits
and, therefore, had a smaller impact on net income.
The withdrawal ratio for the company's annuity products, as calculated by
dividing aggregate surrenders and withdrawals by beginning of period account
balances, was 9.3%, on an annualized basis, for the three months ended
March 31, 1995 compared to 6.3% in the first three months of 1994. Most of
the company's annuity products have surrender charges which are designed to
discourage early withdrawals and to allow the company to recover a portion
of the expenses incurred to generate annuity sales in the event of early
withdrawal. Withdrawal rates have been impacted by several factors. (1)
The company had anticipated an increase in withdrawals as its annuity
liabilities age. (2) A block of annuity policies sold in 1988 and 1989
primarily by stockbrokers contained a five-year surrender charge and a
portion also contained a five-year interest guarantee. The company planned
for, and has experienced, higher surrenders related to this block of
business. Excluding surrenders of the five-year guarantee business, the
company's annuity withdrawal ratio would have been 8.8% in the first three
months of 1995 compared to 7.6% during all of 1994. Excluding the total block
of business, the company's annuity withdrawal ratio would have been 7.4% in
the first three months of 1995 compared to 6.1% during all of 1994. The
company has not actively solicited fixed annuity sales through stockbrokers
since 1989, although it may in the future. At March 31, 1995, policies
issued with a 5 year interest guarantee represent approximately 2.5% ($144
million) of the company's annuity liabilities. (3) Withdrawals tend to
increase in periods of rising interest rates as policyholders seek higher
returns on their savings. The company's annualized lapse ratio for life
insurance measured in terms of face amount and using A.M. Best's formula,
was 7.8% in the first three months of 1995 compared to 7.1% in the first
three months of 1994.
Commissions increased $11,231,000, or 36.7%, to $41,799,000 in the first
three months of 1995. General expenses increased $1,765,000, or 19.0%, to
$11,071,000 in the first three months of 1995. Insurance taxes also
increased $554,000, or 24.7%, to $2,799,000 in the first three months of
1995. Increases in commissions and insurance taxes are directly related to
life insurance and annuity sales during these periods. General expenses
grew more slowly as they relate more directly to policyholder base and
total assets. Most costs incurred as the result of new sales and have been
deferred, thus having very little impact on total insurance expenses.
The amortization of deferred policy acquisition costs increased by
$3,451,000, or 31.3%, to $14,471,000 in the first three months of 1995.
Amortization of deferred acquisition costs related to operating earnings
increased $5,677,000 or 64.6%, to $14,471,000 in the first three months of
1995 as the result of a 33.5% increase in the deferred policy acquisition
cost asset since March 31, 1994 as costs of generating sales of the company's
products are deferred and amortized in later periods. Also, higher
withdrawals and surrenders of certain of the company's products have
accelerated the amortization of deferred acquisition costs related to those
products although surrender charges assessed on certain withdrawals offset
some of this accelerated amortization. There was no amortization related to
realized gains in the first three months of 1995 compared to $2,226,000 in
the first three months of 1994 due to the decrease in total realized gains.
Income
Operating income (income excluding realized gains and losses, mortgage
backed securities prepayment gains and related amortization of deferred
policy acquisition costs, net of related income taxes) increased
$3,341,000, or 16.7%, in the first three months of 1995. Net income
increased $1,192,000 or 5.3%, in the first three months of 1995. A breakdown
of income is as follows:
1995 1994
-------------------- --------------------
$ Per Share $ Per Share
--------- --------- --------- ---------
(Dollars in thousands,
except per share data)
Three months ended March 31:
Operating income $23,387 $0.74 $20,046 $0.64
Realized gains (net of tax)
Gains realized on disposal
of investments 73 -- 4,003 0.13
Mortgage backed securities
prepayment gains 334 0.01 -- --
Realized gains related
amortization of DPAC -- -- (1,447) (0.05)
--------- --------- --------- ---------
407 0.01 2,556 0.08
--------- --------- --------- ---------
Net income $23,794 $0.75 $22,602 $0.72
========= ========= ========= =========
Average shares outstanding totaled 31,663,427 in the first three months of
1995 up from 31,529,538 in the same period of 1994.
Insurance Regulation
Currently, the company's insurance subsidiaries are subject to regulation
and supervision by the states in which they are admitted to transact
business. State insurance laws generally establish supervisory agencies
with broad administrative and supervisory powers related to granting and
revoking licenses to transact business, establishing guaranty fund
associations, licensing agents, market conduct, approving policy forms,
regulating premium rates for some lines of business, establishing reserve
requirements, prescribing the form and content of required financial
statements and reports, determining the reasonableness and adequacy of
statutory capital and surplus and regulating the type and amount of
investments permitted.
The insurance regulatory framework continues to be placed under increased
scrutiny by various states, the federal government and the NAIC. Various
states have considered or enacted legislation which changes, and in many
cases increases, the states' authority to regulate insurance companies.
The NAIC, in conjunction with state regulators, has been reviewing existing
insurance laws and regulations. A committee of the NAIC is developing
proposals to govern insurance company investments and holding company
investments in subsidiaries and affiliates presently anticipated to be
considered for adoption as model laws in 1995. While the specific
provisions of such model laws are not known at this time, and current
proposals are still being debated, the company is monitoring developments
in this area and the effects any change would have on the company. A task
force of the NAIC is currently undertaking a project to codify a
comprehensive set of statutory insurance accounting rules and regulations.
This project is not expected to be completed until at least 1996 and
specific recommendations have not been published. The company is
monitoring and, through an industry trade association, actively
participating in this process, but the potential impact of any changes in
insurance accounting standards is not yet known.
In addition, the NAIC has adopted Guideline XXXIII (formerly known as
Guideline GGG) effective December 31, 1995 which will require the company to
increase annuity reserves in its statutory financial statements by
approximately $25 to $50 million. The guideline allows this increase to be
phased in over a three year period if approved by the insurance department in
the state of domicile. The guideline would have no effect on financial
statements prepared in accordance with GAAP.
Recent concerns regarding the market conduct in the insurance industry have
resulted in increased scrutiny by insurance regulators and the insurance
industry itself of sales and marketing activities. The company has
conducted a thorough review of its sales and marketing process and has re-
emphasized its compliance efforts.
Legislative and regulatory initiatives under discussion in Congress
regarding changes in the regulation of banks and other financial services
businesses and restructuring of the federal income tax system could, if
adopted and depending on the form they take, have an adverse impact on the
company by altering the competitive environment for its products. The
outcome and timing of any such changes cannot be anticipated at this time,
but the company will continue to monitor developments in order to respond
to any opportunities or increased competition that may occur.
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
In the ordinary course of business, the company and its
subsidiaries are engaged in litigation. Management believes it is
unlikely that the outcome of any pending litigation will have a
material adverse effect on the company's financial condition.
Item 5. OTHER INFORMATION
None
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
4(a) Letter agreement to furnish Commission upon request
copies of other long-term debt instruments
11 Statement re: Computation of per share earnings
21 Subsidiary list
27 Financial Data Schedule (electronic filing only)
(b) The following reports on Form 8-K were filed during the
quarter ended March 31, 1995:
(i) Form 8-K filed February 15, 1995 with respect to the
Underwriting Agreement, Form of Global Security and
Computation of Earnings to Fixed Charges filed as
exhibits to Registrant's Registration Statement on
Form S-3, Registration No. 33-57343 filed January 18,
1995, as amended.
(ii) Form 8-K filed February 9, 1995 with respect to the
Press Release of the Registrant announcing the
financial results of the Registrant for year ended
December 31, 1994.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DATE: May 1, 1995 EQUITABLE OF IOWA COMPANIES
By /s/ P. E. Larson
______________________________________
Executive Vice President and CFO
(Principal Financial Officer)
By /s/ D. A. Terwilliger
______________________________________
Vice President and Controller
(Principal Accounting Officer)
INDEX
Exhibits to Form 10-Q
Three Months ended March 31, 1995
EQUITABLE OF IOWA COMPANIES
Page Number
3 Articles of Incorporation and By-Laws
(a) Restated Articles of Incorporation as amended through
April 29, 1993, filed as Exhibit 3(a) to Form 10-Q for
the period ended June 30, 1993, is incorporated by
reference --
(b) Amended and restated By-Laws filed as Exhibit 2 to
Form 8-K dated November 11, 1991, is incorporated by
reference --
4 Instruments Defining the Rights of Security Holders, Including
Indentures
(a) Letter Agreement to furnish Commission upon request copies
of other long-term debt instruments --
(b)(i) Rights Agreement filed as Exhibit 1 to Form 8-K dated
April 30, 1992, is incorporated by reference --
(ii) First amendment to Rights Agreement changing Rights Agent
filed as Exhibit 4(b)(ii) to Form 10-Q for the period
ended September 30, 1992, is incorporated by reference --
(iii) Second amendment to Rights Agreement dated April 29, 1993,
adjusting Purchase Price filed as Exhibit 2.2 to Form
8-A/A dated May 13, 1993, is incorporated by reference --
10 Material Contracts
(a) Executive compensation plans and arrangements *
(i) Restated Executive Severance Pay Plan filed as Exhibit
10(a) to Form 10-K for the year ended December 31, 1992,
is incorporated by reference --
(ii) Directors' Deferred Compensation Plan filed as Exhibit
10(b) to Form 10-K for the year ended December 31, 1989,
is incorporated by reference --
(iii) 1982 Stock Incentive Plan filed as Exhibit 10(c) to Form
10-K for the year ended December 31, 1989, is incorporated
by reference --
(iv) Excess Benefit Plan filed as Exhibit 10(d) to Form 10-K
for the year ended December 31, 1989, is incorporated by
reference --
(v) Supplemental Employee Retirement Plan filed as Exhibit
10(e) to Form 10-K for the year ended December 31, 1989,
is incorporated by reference --
(vi) Executive Flexible Perquisite Program filed as Exhibit
10(f) to Form 10-K for the year ended December 31, 1992,
is incorporated by reference --
INDEX
Exhibits to Form 10-Q
Three Months ended March 31, 1995
EQUITABLE OF IOWA COMPANIES
Page Number
(vii) Key Employee Incentive Plan filed as Exhibit 10(g) to Form
10-K for the year ended December 31, 1992, is incorporated
by reference --
(viii) 1992 Stock Incentive Plan, as amended, Registration
Statement No. 33-57492 filed as Exhibit 10(i) to Form
10-Q for the period ended March 31, 1993, is incorporated
by reference --
(ix) James E. Luhrs Consulting Agreement filed as Exhibit
10(j) to Form 10-Q for the period ended June 30, 1992,
is incorporated by reference --
* Management contracts or compensation plans required to
be filed as an Exhibit pursuant to Item 14(c) of Form
10(K).
11 Statement re: Computation of Per Share Earnings --
21 Subsidiaries List --
23 Consent of Experts and Counsel
(a) Consent of independent auditors (not required) --
(b) Consent of counsel (not required) --
27 Financial Data Schedule (electronic filing only) --
99 Additional Exhibits
Independence Policy filed as an Exhibit to Form 8-K dated November
11, 1991, is incorporated by reference --