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, 1996
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, P.O. Box 1635, 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: 31,884,496 shares of
Common Stock as of April 30, 1996.
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, 1996 March 31, 1995
________________ ________________
(Current Year) (Preceding Year)
(Dollars in thousands)
REVENUES:
Annuity and universal life product
charges $14,717 $12,510
Traditional life insurance premiums 10,151 11,295
Net investment income 171,212 148,246
Realized gains on investments 5,150 113
Other income 4,346 6,534
________________ ________________
205,576 178,698
INSURANCE BENEFITS AND EXPENSES:
Annuity and universal life benefits:
Interest credited to account balances 107,758 93,166
Benefit claims incurred in excess of
account balances 1,622 2,040
Traditional life insurance benefits 13,121 15,242
Increase (decrease) in future policy
benefits (1,884) 2,509
Distributions to participating
policyholders 6,299 6,242
Underwriting, acquisition and insurance expenses:
Commissions 32,679 41,799
General expenses 11,037 11,071
Insurance taxes 2,817 2,799
Policy acquisition costs deferred (39,681) (51,455)
Amortization of deferred policy
acquisition costs 18,123 14,471
________________ ________________
151,891 137,884
Interest expense 3,326 2,021
Other expenses 3,571 2,119
________________ ________________
158,788 142,024
________________ ________________
46,788 36,674
Consolidated Statements of Income (Unaudited): (CONTINUATION)
FOR THE THREE MONTHS ENDED
March 31, 1996 March 31, 1995
________________ ________________
(Current Year) (Preceding Year)
(Dollars in thousands,
except per share data)
Income taxes:
Current $14,482 $8,607
Deferred 1,986 4,268
________________ ________________
16,468 12,875
________________ ________________
30,320 23,799
Equity loss, net of related tax benefit
of $62 in 1996 and $3 in 1995 (115) (5)
________________ ________________
NET INCOME $30,205 $23,794
================ ================
NET INCOME PER COMMON SHARE (average
shares used: 1996 - 31,816,700;
1995 - 31,663,427): $0.95 $0.75
================ ================
CASH DIVIDENDS PAID PER COMMON SHARE $0.135 $0.12
Consolidated Balance Sheets (Unaudited):
March 31, 1996 December 31, 1995
________________ _________________
(Dollars in thousands,
except per share data)
ASSETS
Investments:
Fixed maturities available for sale, at
market (cost: 1996 - $7,123,074;
1995 - $6,884,837) $7,279,727 $7,352,211
Equity securities, at market
(cost: 1996 - $57,280; 1995 - $49,789) 58,088 50,595
Mortgage loans on real estate 1,344,824 1,169,456
Real estate, less allowances for
depreciation of $4,945 in 1996
and $4,804 in 1995 14,111 13,960
Policy loans 183,334 182,423
Short-term investments 15,674 39,234
________________ _________________
TOTAL INVESTMENTS 8,895,758 8,807,879
Cash and cash equivalents 10,592 10,730
Securities and indebtedness of
related parties 14,122 13,755
Accrued investment income 123,634 122,834
Notes and other receivables 29,238 32,410
Deferred policy acquisition costs 672,012 554,179
Property and equipment, less
allowances for depreciation of
$10,581 in 1996 and $9,761 in 1995 7,911 8,039
Current income taxes recoverable -- 6,968
Intangible assets, less accumulated
amortization of $740 in 1996 and
$683 in 1995 3,677 3,639
Other assets 52,819 48,102
Separate account assets 208,635 171,881
________________ _________________
TOTAL ASSETS $10,018,398 $9,780,416
================ =================
Consolidated Balance Sheets (Unaudited): (CONTINUATION)
March 31, 1996 December 31, 1995
________________ _________________
(Dollars in thousands,
except per share data)
LIABILITIES AND STOCKHOLDERS' EQUITY
Policy liabilities and accruals:
Future policy benefits:
Annuity and universal life products $7,742,867 $7,500,494
Traditional life insurance products 716,184 718,110
Unearned revenue reserve 16,730 14,326
Other policy claims and benefits 9,414 8,980
________________ _________________
8,485,195 8,241,910
Other policyholders' funds:
Advance premiums and other deposits 664 691
Accrued dividends 12,713 12,715
________________ _________________
13,377 13,406
Income taxes:
Current 5,742 --
Deferred 41,206 114,915
Notes and loans payable:
Commercial paper notes 158,000 58,100
Long-term debt 100,000 100,000
________________ _________________
258,000 158,100
Other liabilities 224,353 186,272
Separate account liabilities 208,635 171,881
________________ _________________
TOTAL LIABILITIES 9,236,508 8,886,484
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 31,873,441
shares in 1996 and 31,769,490 in 1995 31,873 31,769
Additional paid-in capital 83,364 80,100
Unrealized appreciation (depreciation) on
fixed maturity securities 70,192 208,932
Unrealized appreciation (depreciation) on
marketable equity securities 807 806
Retained earnings 599,688 573,799
Unearned compensation (deduction) (4,034) (1,474)
________________ _________________
TOTAL STOCKHOLDERS' EQUITY 781,890 893,932
________________ _________________
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $10,018,398 $9,780,416
================ =================
Consolidated Statements of Cash Flows (Unaudited):
FOR THE THREE MONTHS ENDED
March 31, 1996 March 31, 1995
________________ ________________
(Current Year) (Preceding Year)
(Dollars in thousands)
OPERATING ACTIVITIES
Net income $30,205 $23,794
Adjustments to reconcile net income to
net cash provided by operations:
Adjustments related to annuity and
universal life products:
Interest credited to account balances 107,758 93,166
Charges for mortality and
administration (15,031) (13,034)
Change in unearned revenues (95) (484)
Increase in traditional life policy
liabilities and accruals 6,746 2,387
Increase (decrease) in other
policyholders' funds (29) 322
Increase in accrued investment income (800) (4,675)
Policy acquisition costs deferred (39,681) (51,455)
Amortization of deferred policy
acquisition costs 18,123 14,471
Change in other assets, other liabilities,
and accrued income taxes 41,618 (2,425)
Provision for depreciation and
amortization (689) (997)
Provision for deferred income taxes 1,998 4,281
Share of losses of related parties 177 7
Realized gains on investments (5,150) (113)
________________ ________________
NET CASH PROVIDED BY OPERATING
ACTIVITIES 145,150 65,245
INVESTING ACTIVITIES
Sale, maturity or repayment of investments:
Fixed maturities - available for sale 112,554 9,898
Fixed maturities - held for investment -- 48,362
Equity securities 3,868 225
Mortgage loans on real estate 7,674 8,739
Real estate -- 749
Policy loans 8,083 5,797
Short-term investments - net 23,560 25,689
________________ ________________
155,739 99,459
Acquisition of investments:
Fixed maturities - available for sale (344,752) (400,436)
Fixed maturities - held for investment -- (2,022)
Equity securities (11,106) (226)
Mortgage loans on real estate (182,968) (86,331)
Real estate (292) (335)
Policy loans (8,994) (7,459)
________________ ________________
(548,112) (496,809)
Consolidated Statements of Cash Flows (Unaudited): (CONTINUATION)
FOR THE THREE MONTHS ENDED
March 31, 1996 March 31, 1995
________________ ________________
(Current Year) (Preceding Year)
(Dollars in thousands)
INVESTING ACTIVITIES - continued
Disposal of investments accounted for
by the equity method $6 $6
Repayments of notes receivable -- 91
Sales of property and equipment -- 67
Purchases of property and equipment (694) (679)
________________ ________________
NET CASH USED IN INVESTING ACTIVITIES (393,061) (397,865)
FINANCING ACTIVITIES
Issuance of long term debt -- 100,000
Issuance (repayment) of commercial
paper - net 99,900 (18,250)
Receipts from annuity and universal life
policies credited to policyholder
account balances 380,152 424,508
Return of policyholder account balances
on annuity and universal life policies (228,345) (167,853)
Issuance of stock under employee stock
plans 381 (3,208)
Cash dividends paid (4,315) (3,817)
________________ ________________
NET CASH PROVIDED BY FINANCING
ACTIVITIES 247,773 331,380
________________ ________________
DECREASE IN CASH AND CASH EQUIVALENTS (138) (1,240)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 10,730 12,674
________________ ________________
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $10,592 $11,434
================ ================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest $5,784 $1,044
Income taxes 1,517 22
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, 1996 are not necessarily indicative of the results that may be expected
for the year ending December 31, 1996. 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, 1995.
Certain amounts in the 1995 financial statements have been reclassified to
conform to the 1996 financial statement presentation.
NOTE 2 -- INVESTMENT OPERATIONS
All of the company's fixed maturity securities are designated as available for
sale although the company is not precluded from designating fixed maturity
securities as held for investment or trading at some future date. Investments
classified as 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 related changes in deferred policy
acquisition costs, policy reserves and deferred income taxes. 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.
Sales of securities designated as held for investment are severely restricted
by Statement of Financial Accounting Standards (SFAS) No. 115. Securities
that are bought and held principally for the purpose of selling them in the
near term are designated as trading securities. Unrealized gains and losses
on trading securities are included in current earnings. Transfers of
securities between categories are restricted and are recorded at fair value
at the time of the transfer. 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. 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. The carrying value
of these assets is subject to regular review. If the fair value, less
estimated sale cost, of real estate owned decreases to an amount lower than
its carrying value, a valuation allowance is established for the difference.
This valuation allowance can be restored should the fair value of the property
increase. Changes in this valuation allowance are charged or credited to
income.
Policy loans are reported at unpaid principal. Short-term investments are
reported at cost adjusted for amortization of premiums and accrual of
discounts. Investments accounted for by the equity method include
investments in, and advances to, various joint ventures and partnerships.
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 (based
on interest rates and a risk assessment of the bonds) over U.S. Treasury
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 and average
cost methods for manager initiated and issuer initiated disposals,
respectively.
At March 31, 1996 and December 31, 1995, 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, 1996 Cost Gains Losses Value
______________________________________________________________________________
(Dollars in thousands)
U.S. government and
governmental agencies
and authorities:
Mortgage-backed securities $284,207 $10,863 ($1,096) $293,974
Other 87,589 2,406 (1,448) 88,547
States, municipalities and
political subdivisions 15,402 1,090 (3) 16,489
Foreign governments 10,572 2,350 -- 12,922
Public utilities 1,236,363 37,213 (24,247) 1,249,329
Investment grade corporate 2,466,436 156,955 (25,732) 2,597,659
Below investment grade
corporate 657,605 13,011 (17,600) 653,016
Mortgage-backed securities 2,364,265 45,508 (42,382) 2,367,391
Redeemable preferred stocks 635 -- (235) 400
_______________________________________________
TOTAL AVAILABLE FOR
SALE $7,123,074 $269,396 ($112,743) $7,279,727
===============================================
Gross Gross Estimated
Amortized Unrealized Unrealized Market
December 31, 1995 Cost Gains Losses Value
______________________________________________________________________________
(Dollars in thousands)
U.S. government and
governmental agencies
and authorities:
Mortgage-backed securities $289,422 $16,738 $306,160
Other 60,567 4,163 ($2) 64,728
States, municipalities and
political subdivisions 15,485 1,639 -- 17,124
Foreign governments 10,573 3,426 -- 13,999
Public utilities 1,271,641 92,546 (2,077) 1,362,110
Investment grade corporate 2,322,036 277,981 (1,303) 2,598,714
Below investment grade
corporate 574,284 19,428 (12,492) 581,220
Mortgage-backed securities 2,340,194 75,704 (8,142) 2,407,756
Redeemable preferred stocks 635 -- (235) 400
_______________________________________________
TOTAL AVAILABLE FOR
SALE $6,884,837 $491,625 ($24,251) $7,352,211
===============================================
No fixed maturity securities were designated as held for investment at March
31, 1996 or December 31, 1995. Short-term investments with maturities of 30
days or less have been excluded from the above schedules. Amortized cost
approximates market value for these securities.
Amortized cost and estimated market value of debt securities at March 31,
1996, 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
AVAILABLE FOR SALE Cost Value
____________________________________________________________________________
(Dollars in thousands)
Due within one year $7,497 $7,723
Due after one year through five years 177,292 180,072
Due after five years through ten years 1,619,663 1,666,007
Due after ten years 2,670,150 2,764,560
_____________________________
4,474,602 4,618,362
Mortgage-backed securities 2,648,472 2,661,365
_____________________________
TOTAL AVAILABLE FOR SALE $7,123,074 $7,279,727
=============================
The amortized cost and estimated market value of mortgage-backed securities,
which comprise 37% of the company's investment in fixed maturity securities
as of March 31, 1996, are as follows:
Estimated
Amortized Market
Cost Value
_____________________________
(Dollars in thousands)
Mortgage-backed securities:
Government and agency guaranteed pools:
Very accurately defined maturities $17,250 $17,969
Planned amortization class 84,800 88,377
Targeted amortization class 29,301 28,905
Sequential pay 67,508 67,800
Pass through 85,349 90,923
Private Label CMOs and REMICs:
Very accurately defined maturities 30,585 31,549
Planned amortization class 25,482 26,497
Targeted amortization class 443,173 434,131
Sequential pay 1,802,265 1,810,770
Mezzanines 37,952 38,298
Private placements and subordinate issues 24,807 26,146
_____________________________
TOTAL MORTGAGE-BACKED SECURITIES $2,648,472 $2,661,365
=============================
During periods of significant interest rate volatility, the mortgages under-
lying 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 a pro-rata share of principal return in the
pass-through structure. The company owns no "interest only" or "principal
only" mortgage-backed securities. Further, the company has not purchased
obligations at significant premiums, thereby limiting exposure to loss during
periods of accelerated prepayments. At March 31, 1996, unamortized premiums
on mortgage-backed securities totaled $5,456,000 and unaccrued discounts on
mortgage-backed securities totaled $59,189,000.
An analysis of sales, maturities and principal repayments of the company's
fixed maturities portfolio for the three months ended March 31, 1996 and 1995
is as follows:
Gross Gross Proceeds
Amortized Realized Realized from
Cost Gains Losses Sale
_______________________________________________
Three months ended March 31, 1996
- ---------------------------------
Available for sale:
Scheduled principal repayments,
calls and tenders $90,240 $4,340 ($226) $94,354
Sales 17,969 231 -- 18,200
_______________________________________________
TOTAL $108,209 $4,571 ($226) $112,554
===============================================
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):
Available for sale $9,904 $1 ($7) $9,898
Held for investment 45,916 2,481 (35) 48,362
_______________________________________________
TOTAL $55,820 $2,482 ($42) $58,260
===============================================
At March 31, 1996, the company owned equity securities with a combined book
value of $57,280,000 and an estimated market value of $58,088,000, resulting
in gross unrealized appreciation of $1,020,000 and gross unrealized
depreciation of $212,000.
At March 31, 1996, the company had established valuation allowances of
$189,000 on two mortgage loans (one of which was delinquent by 90 days or
more) to reduce the carrying value of these investments to their estimated
fair value, less costs to sell. At March 31, 1996, two mortgage loans with
a combined carrying value of $719,000, net of a valuation allowance on one
of the loans totaling $180,000, were delinquent by 90 days or more.
The carrying value of investments which have been non-income producing for
the twelve months preceding March 31, 1996 totaled $239,000 related to one
real estate property.
The company's investment policies related to its investment portfolio
require diversification by asset type, company and industry and set limits
on the amount which can be invested in an individual issuer. Such policies
are at least as restrictive as those set forth by regulatory authorities.
The percentages quoted in the following sentences relates to the holdings
at March 31, 1996 and December 31, 1995, respectively. Fixed maturity
investments included investments in various non-governmental mortgage-
backed securities (32% in 1996, 33% in 1995), public utilities (18% in
1996, 19% in 1995), basic industrials (22% in 1996, 21% in 1995) and
consumer products (12% in 1996 and 1995). Mortgage loans on real estate
have been analyzed by geographical location and there are no concentrations
of mortgage loans in any state exceeding ten percent in 1996 and 1995.
Mortgage loans on real estate have also been analyzed by collateral type
with significant concentrations identified in retail facilities (29% in
1996 and 32% in 1995), industrial buildings (29% in 1996 and 26% in 1995),
multi-family residential buildings (21% in 1996 and 24% in 1995) and office
buildings (19% in 1996 and 17% in 1995). Equity securities are comprised
of investments in the company's registered separate account and other
equity securities and do not contain any concentrations of risk by issuer
or industry. Real estate and investments accounted for by the equity
method are not significant to the company's overall investment portfolio.
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, 1996.
NOTE 3 -- COMMITMENTS AND CONTINGENCIES
Reinsurance: 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
financial or 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 payment
of these obligations 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, 1996, the company had reinsurance treaties with 16
reinsurers, all of which are deemed to be long-duration, retroactive
contracts, and has established a receivable totaling $18,991,000 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 $18,427,000
at March 31, 1996 for reserve credits on reinsured policies. This "gross-
up" of assets and liabilities for reserve credits on reinsurance had no
impact on the company's net income. Insurance premiums and product charges
have been reduced by $1,917,000 in the first three months of 1996 compared
to $1,834,000 in the first quarter of 1995. Insurance benefits and expenses
have been reduced by $1,195,000 in the first three months of 1996 compared
to $1,105,000 in the same period of 1995. The amount of reinsurance assumed
is not significant.
Investment Commitments: At March 31, 1996, outstanding commitments to fund
mortgage loans on real estate totaled $161,503,000.
Guaranty Fund Assessments: Assessments are levied on the company's life
insurance subsidiaries by life and health guaranty associations in most
states in which these subsidiaries are licensed to cover losses of
policyholders of insolvent or rehabilitated insurers. In some states,
these assessments can be partially recovered through a reduction in future
premium taxes. The company cannot predict whether and to what extent
legislative initiatives may affect the right to offset. The company has
established a reserve to cover such assessments and regularly reviews
information regarding known failures and revises it estimates of future
guaranty fund assessments accordingly. At March 31, 1996, the company has
a reserve of $47,646,000 to cover estimated future assessments (net of
related anticipated premium tax credits) and has established an asset
totaling $13,026,000 for items expected to be recoverable through future
premium tax offsets. The company believes this reserve is sufficient to
cover expected future insurance guaranty fund assessments related to known
insolvencies at this time.
Litigation: As previously reported, the company and certain of its
subsidiaries are defendants in class action lawsuits filed in the Iowa
District Court for Polk County in May 1995 and the United States District
Court for the Middle District of Florida, Tampa Division in February 1996.
The Florida suit is similar to the Iowa suit and was filed by some of the
same law firms as in the earlier Iowa suit. The company believes the new
action was filed in response to jurisdictional and procedural problems
faced by the plaintiffs in the Iowa suit. The suits claim unspecified
damages as a result of the sale of life insurance policies with so-called
"vanishing premiums" wherein cash values are used to pay insurance premiums
under certain interest rate scenarios. The complaints allege that the
policyholders were misled by optimistic policy illustrations. The company
believes the allegations are without merit because full and appropriate
disclosure was made as a matter of practice. The suits are in the early
discovery and procedural stages and have not yet been certified as class
actions. The company intends to defend the suits vigorously. The amount
of any liability which may arise as a result of these suits, if any, cannot
be reasonably estimated and no provision for loss has been made in the
accompanying financial statements.
As previously reported, on December 15, 1995, USG received a Notice of
Intention to Arbitrate a dispute with one of its insurance brokerage
agencies before the American Arbitration Association. The agency alleges
that USG has failed to pay an unspecified amount of commissions for the
sale of insurance products, including alleged future commissions on future
policy values if the policies stay in force. USG believes the claims are
without merit based upon its interpretation of the agreements between the
parties, the business relations between the parties and custom and practice
in the industry. Therefore, USG has denied the allegations and intends to
defend the proceeding vigorously. The amount of any liability which may
arise as a result of this arbitration, if any, cannot be reasonably
estimated and no provision for loss has been made in the accompanying
financial statements.
In the ordinary course of business, the company and its subsidiaries are
also engaged in certain other litigation, none of which management believes
is material.
Vulnerability from Concentrations: The company has various concentrations
in its investment portfolio (see Note 2 for further information). The
company's asset growth, net investment income and cash flow are primarily
generated from the sale of individual fixed annuity policies and associated
future policy benefits. Substantial changes in tax laws that would make
these products less attractive to consumers or extreme fluctuations in
interest rates which may result in higher withdrawal experience than
assumed, could cause a severe impact to the company's financial condition.
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 results of operations, financial condition, and liquidity and
capital resources. 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").
RESULTS OF OPERATIONS
Sales
Percentage Dollar
Quarter ended March 31 1996 Change Change 1995
______________________________________________________________________________
(Dollars in thousands)
First year and single premiums:
Fixed annuities $301,257 (22.3)% ($86,270) $387,527
Variable annuities 34,083 306.7 25,690 8,393
Life insurance 8,288 (16.4) (1,629) 9,917
_____________________________________________
343,628 (15.3) (62,209) 405,837
Renewal premiums:
Fixed annuities 15,892 36.1 4,218 11,674
Variable annuities 299 NA 299 --
Life insurance 23,074 1.4 320 22,754
_____________________________________________
39,265 14.1 4,837 34,428
_____________________________________________
Total premiums $382,893 (13.0)% ($57,372) $440,265
=============================================
Total annuity and life insurance sales, as measured by first year and single
premiums, decreased 15.3% to $343,628,000 in the first three months of 1996.
Fixed annuity sales decreased 22.3%, to $301,257,000 in the first three months
of 1996. Variable annuity sales are up 42.1% compared to the fourth quarter
of 1995 due, in part, to the recent strong stock market returns and marketing
efforts. The variable annuity product was introduced in the fourth quarter of
1994. Total fixed annuity premiums (including renewal premiums) decreased
20.6% to $317,148,000 in the first three months of 1996. The decrease in
fixed annuity sales reflects the impact of the current challenging sales
environment wherein high short-term interest rates have allowed bank
certificates of deposit and other shorter duration investments to be more
competitive than usual, while declining long-term rates have caused returns
on annuity and life products to be comparatively lower than usual. Interest
rates declined throughout 1995 and have risen slightly in the first quarter
of 1996 contributing to a 2.6% increase in the first quarter fixed annuity
sales compared to the 1995 fourth quarter sales of $293,683,000. The company
believes that the growth in the number of its agents, its commitment to
customer service, the quality of its investment portfolio, competitive pricing
and its overall financial strength will 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 several
factors, including the company's diversified product portfolio, competitive
commissions, prompt policy issuance and weekly commission payments. First
year and single life insurance premiums decreased 16.4% to $8,288,000 in the
first three months of 1996 due to decreases in sales of the company's single
premium life insurance products. As with the annuity sales, the current
interest rate environment has made sales of single premium life insurance
products more challenging.
Revenues
Percentage Dollar
Quarter ended March 31 1996 Change Change 1995
______________________________________________________________________________
(Dollars in thousands)
Annuity and universal life
product charges $14,717 17.6% $2,207 $12,510
Traditional life insurance
premiums 10,151 (10.1) (1,144) 11,295
Net investment income 171,212 15.5 22,966 148,246
Realized gains on investments 5,150 4467.0 5,037 113
Other income 4,346 (33.5) (2,188) 6,534
_____________________________________________
$205,576 15.0% $26,878 $178,698
=============================================
Total revenues increased 15.0% to $205,576,000 in the first three months of
1996. Annuity and universal life insurance product charges increased 17.6%
to $14,717,000 in the first three months of 1996, in conjunction with the
growth in the company's policyholder liabilities. Premiums from traditional
life insurance products decreased $1,144,000, or 10.1%, to $10,151,000 in
the first three months of 1996. Premiums from traditional life insurance
products have decreased as a result of the company's decision to emphasize
the more popular universal life and current interest products (for which
premiums are not included in revenues).
Net investment income increased 15.5% to $171,212,000 in the first three
months of 1996 due to the increase in invested assets. During the first
three months of 1996, the company had realized gains on the sale of
investments of $5,150,000, compared to gains of $113,000 in the same period
of 1995.
Expenses
Total insurance benefits and expenses increased $14,007,000, or 10.2%, to
$151,891,000 in the first three months of 1996. Interest credited to
annuity and universal life account balances increased $14,592,000, or
15.7%, to $107,758,000 in the first three months of 1996 as a result of
higher account balances associated with those products.
The company's policy is to change rates credited to 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 for the three months ended March 31,
1996 and 1995. Yield on assets and costs of funds are estimated by
calculating the weighted average of the three month end values for those
items.
Yield on Credited Interest
Three months ended March 31 Assets Rate Rate Spread
________ ________ ___________
Average base rate (excluding
first year bonus):
1996 8.53% 5.60% 2.93%
1995 8.63% 5.76% 2.87%
Average total (including
first year bonus):
1996 8.53% 5.90% 2.63%
1995 8.63% 6.21% 2.42%
At March 31, 1996 and 1995, the effective annual yield on assets, credited
rate and interest rate spread were as follows:
Yield on Credited Interest
Assets Rate Rate Spread
________ ________ ___________
Base rate (excluding first
year bonus):
1996 8.49% 5.58% 2.91%
1995 8.64% 5.79% 2.85%
Total (including first year
bonus):
1996 8.49% 5.87% 2.62%
1995 8.64% 6.23% 2.41%
The base interest credited rate represents the average interest rate credited
to policy accounts for interest sensitive products, including annuities,
universal life-type policies and participating life policies. Total interest
credited rate includes first year bonus interest credited to certain annuity
policies.
Death benefits on traditional life products and benefit claims incurred in
excess of account balances decreased $358,000, or 3.9%, to $8,791,000 in
the first three months of 1996. After adjustment for charges for mortality
risk, reserves released on death claims and taxes, the overall impact of
mortality on net income was more favorable in 1996 by approximately $960,000.
Other benefits decreased $2,181,000, or 26.8%, to $5,952,000 in the first
three months of 1996. These changes were offset by a corresponding change
in the reserve for future policy benefits and, therefore, had a smaller
impact on net income.
Commissions decreased $9,120,000, or 21.8%, to $32,679,000 in the first
three months of 1996. General expenses decreased $34,000, or 0.3%, to
$11,037,000 in the first three months of 1996. Insurance taxes increased
$18,000, or 0.7%, to $2,817,000 in the first three months of 1996.
Decreases in commissions during the first quarter are directly related to
lower annuity sales during this period. Most costs incurred as the result
of new sales have been deferred, and thus have very little impact on total
insurance expenses.
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 expected and has experienced an increase in
withdrawals as its annuity liabilities age. (2) Withdrawals tend to
increase in periods of rising interest rates as policyholders seek higher
returns on their savings. (3) 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 experienced, higher surrenders related to this block of business.
The impact of the higher withdrawal levels on this block of business was
reflected primarily in the 1994 financial statements and to a smaller
degree in 1995. At March 31, 1996, all policies originally issued from
1988 through March 1991, with a 5 year interest guarantee represent
approximately 1.4% ($91.8 million) of the company's annuity liabilities.
The company currently has two fixed annuity products available for sale through
stockbrokers. The pricing assumptions have been modified on these products to
reflect higher withdrawal expectations. Prior to the second quarter of 1995,
the company had not actively solicited fixed annuity sales through stockbrokers
since 1989. The company plans to continue to expand its distribution channels
to include stockbrokers, banks, and other financial institutions in addition
to its current brokerage and career agency distribution.
The following table summarizes the annualized annuity withdrawal rates and
the life insurance lapse ratios for the three months ended March 31, 1996
and 1995:
Three months ended March 31 1996 1995
--------------------------- ---- ----
Annuity withdrawals 8.3% 9.3%
Annuity withdrawals, excluding 8.2 7.4
withdrawals of policies for
which the five year interest
guarantee and five year surrender
charge have expired
Life insurance lapse rates 6.7 7.8
The withdrawal ratio for the company's annuity products is calculated by
dividing aggregate surrenders and withdrawals by beginning of period
account balances. The company's annualized lapse ratio for life insurance
is measured in terms of face amount and uses A.M. Best's formula.
The amortization of deferred policy acquisition costs increased by $3,652,000,
or 25.2%, in the first three months of 1996. Amortization of deferred
acquisition costs related to operating earnings increased $1,851,000, or
12.8%, in the first three months of 1996. Increases in amortization of
deferred acquisition costs related to operating earnings are the result of
increases in the deferred policy acquisition cost asset (before adjustment to
reflect the impact of SFAS No. 115) as costs of generating sales of the
company's products are deferred and amortized in later periods. Also,
withdrawals and surrenders 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 the earnings
impact of this accelerated amortization. Amortization related to realized
gains increased $1,801,000, in the first three months of 1996 due to the
increase in total realized gains. A breakdown of the amortization of deferred
policy acquisition costs for the three months ended March 31, 1996 and 1995
is as follows:
Percentage Dollar
Three months ended March 31 1996 Change Change 1995
_________________________________________________________________________
(Dollars in thousands)
Amortization related to:
Operating income $16,322 12.8% $1,851 $14,471
Realized gains 1,801 NA 1,801 --
______________________________________
Total income $18,123 25.2% $3,652 $14,471
======================================
Income
Operating income (income excluding realized gains and losses, commercial
mortgage and mortgage-backed securities prepayment gains and related
amortization of deferred policy acquisition costs, net of related income
taxes) increased $4,288,000, or 18.3%, in the first three months of 1996.
Net income increased $6,411,000, or 26.9%, in the first three months of
1996. A breakdown of income is as follows:
1996 1995
-------------------- --------------------
$ Per Share $ Per Share
--------- --------- --------- ---------
(Dollars in thousands,except per share data)
Three months ended March 31:
Operating income $27,675 $0.87 $23,387 $0.74
Realized gains (net of tax):
Gains realized on disposal
of investments 3,347 0.11 73 --
Commercial mortgage and
mortgage-backed securities
prepayment gains 353 0.01 334 0.01
Realized gains related
amortization of DPAC (1,170) (0.04) -- --
--------- --------- --------- ---------
2,530 0.08 407 0.01
--------- --------- --------- ---------
Net income $30,205 $0.95 $23,794 $0.75
========= ========= ========= =========
Average shares outstanding totaled 31,816,700 in the first three months of
1996 up from 31,663,427 in the same period of 1995.
FINANCIAL CONDITION
Investments
The financial statement carrying value of the company's total investments
grew 0.7% in the first three months of 1996. The amortized cost basis of
the company's total investment portfolio grew 4.6% during the same period.
Effective December 1, 1995, all of the company's investments, other than
mortgage loans and real estate, are carried at market value in the company's
financial statements. As such, growth in the carrying value of the company's
investment portfolio included unrealized appreciation and depreciation of
fixed maturity and equity securities as well as growth in the cost basis of
these securities. Growth in the cost basis of the company's investment
portfolio resulted from the investment of premiums from the sale of the
company's annuity and insurance products. The company manages the growth of
its insurance operations in order to maintain adequate capital ratios.
To support the company's annuities and life insurance products, cash flow
was invested primarily in fixed income investments. At March 31, 1996, the
company's investment portfolio was comprised of the following:
Estimated Yield at
Amortized % of Market % of Amortized
Cost Total Value Total Cost
_______________________________________________
(Dollars in thousands)
Investment cash and short-term
investments ($6,036) 0.0% ($6,036) 0.0% (4.5)%
Governments and agency mortgage-
backed securities 397,771 4.7 411,932 4.7 8.1
Conventional mortgage-backed
securities 2,364,264 27.7 2,367,391 27.2 7.9
Investment grade corporate
securities 3,703,434 43.4 3,847,388 44.1 8.3
Below-investment grade corporate
securities 657,605 7.7 653,016 7.5 9.2
Mortgage loans 1,344,824 15.7 1,370,717 15.7 8.4
_______________________________________________
Total cash and fixed income
investments 8,461,862 99.2 8,644,408 99.2 8.3
Equity securities 57,280 0.7 58,088 0.7 7.2
Real estate 14,111 0.1 14,111 0.1 2.5
_______________________________________________
Total investments $8,533,253 100.0% $8,716,607 100.0% 8.3%
===============================================
<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
values of publicly traded equity securities are based upon the most
recently available quoted price for those securities. Market values
of the company's investment in its registered separate account are
based upon the quoted market value of the securities comprising the
individual portfolios underlying the separate account. 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, 1996, 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:
Amortized % of Estimated % of
Cost Total Market Value Total
____________________________________________
(Dollars in thousands)
RATINGS ASSIGNED BY
STANDARD & POOR'S:
U.S. governments, agencies
& AAA Corporates $2,720,865 38.2% $2,736,765 37.6%
AA+ to AA- 388,881 5.5 397,828 5.5
A+ to A- 1,938,736 27.2 2,032,898 27.9
BBB+ to BBB- 1,290,483 18.1 1,329,266 18.3
BB+ to BB- 594,471 8.4 596,674 8.2
B+ to B- 92,247 1.3 89,487 1.2
Issues not rated by S & P
(by NAIC rating):
Rated 1 (AAA to A-) 36,059 0.5 37,103 0.5
Rated 2 (BBB+ to BBB-) 22,758 0.3 23,558 0.3
Rated 3 (BB+ to BB-) 30,808 0.4 31,028 0.5
Rated 5 (CCC+ to C) 1,976 0.0 1,800 0.0
Rated 6 (C1, D) 5,155 0.1 2,920 0.0
Redeemable preferred stock 635 0.0 400 0.0
____________________________________________
TOTAL FIXED MATURITIES $7,123,074 100.0% $7,279,727 100.0%
============================================
Amortized % of Estimated % of
Cost Total Market Value Total
____________________________________________
(Dollars in thousands)
RATINGS ASSIGNED BY MOODY'S:
U.S. governments, agencies
& Aaa Corporates $2,556,781 35.7% $2,574,911 35.5%
Aa1 to Aa3 452,424 6.4 454,028 6.2
A1 to A3 2,252,147 31.5 2,362,252 32.4
Baa1 to Baa3 1,065,011 15.0 1,095,338 15.0
Ba1 to Ba3 620,663 8.7 621,579 8.5
B1 to B3 86,861 1.3 83,395 1.1
Caa1 to Caa3 1,976 0.0 1,800 0.0
Issues not rated by Moody's
(by NAIC rating):
Rated 1 (Aaa to A3) 26,073 0.4 26,678 0.4
Rated 2 (Baa1 to Baa3) 22,758 0.3 23,558 0.3
Rated 3 (Ba1 to Ba3) 32,590 0.6 32,868 0.6
Rated 6 (C1 to Ca) 5,155 0.1 2,920 0.0
Redeemable preferred stock 635 0.0 400 0.0
____________________________________________
TOTAL FIXED MATURITIES $7,123,074 100.0% $7,279,727 100.0%
============================================
On November 15, 1995, the Financial Accounting Standards Board ("FASB")
issued a special report "A Guide to Implementation of Statement 115 on
Accounting for Certain Investments in Debt and Equity Securities." This
report allowed companies a one-time opportunity to reassess the
classification of their securities holdings pursuant to Statement of
Financial Accounting Standards ("SFAS") No. 115. SFAS No. 115 requires
companies to classify their securities as "held to maturity", "available
for sale" or "trading". SFAS No. 115 significantly restricts a company's
ability to sell securities in the held to maturity category without raising
questions about the appropriateness of its accounting policy for such
securities. Classification of securities as held to maturity, therefore,
limits a company's ability to manage its investment portfolio in many
circumstances. For example, a company would be prohibited from accepting a
tender offer or responding to an anticipated decline in the credit quality
of assets in a particular industry when the security is categorized as held
to maturity. Additionally, a company is unable to adjust its portfolio to
take advantage of tax planning opportunities or economic changes that would
assist in asset liability management. Thus a company's ability to maintain
the appropriate flexibility to make optimal investment decisions is
significantly restricted if it classifies securities as held to maturity.
In response to this opportunity, the company reclassified 100% of the
securities in its "held to maturity" category to "available for sale" on
December 1, 1995 to maximize investment flexibility. As a result of this
reclassification, the net unrealized investment gain component of
stockholders' equity increased by $138,795,000 on December 1, 1995 (net of
deferred taxes of $74,735,000 and an adjustment of $96,068,000 to deferred
policy acquisition costs) to reflect the net unrealized investment gains on
securities classified as available for sale that were previously classified
as held to maturity. The company is not, however, precluded from
classifying securities as held to maturity in the future. While it is not
the company's current practice to engage in active management of the fixed
maturities securities portfolio such that significant sales would occur,
the inability to respond to prudent financial management decisions
necessitated this change.
SFAS No. 115 requires the carrying value of fixed maturity securities
classified as available for sale to be adjusted for changes in the market
value, primarily caused by interest rates. While other related accounts
are adjusted as discussed above, the insurance liabilities supported by
these securities are not adjusted under SFAS No. 115, thereby creating
volatility in stockholders' equity as interest rates change. As a result,
the company expects that its stockholders' equity will be exposed to
incremental volatility due to changes in market interest rates and the
accompanying changes in the reported value of securities classified as
available for sale, with equity increasing as market interest rates decline
and, conversely, decreasing as market interest rates rise.
On March 31, 1996, fixed income securities with an amortized cost of
$7,123,074,000 and an estimated market value of $7,279,727,000 were
designated as available for sale. Unrealized holding gains on these
securities, net of adjustments to deferred policy acquisition costs and
deferred income taxes, increased stockholders' equity by $70,192,000, or
$2.20 per share at March 31, 1996 compared to an increase of $208,932,000,
or $6.58 per share at December 31, 1995.
Net unrealized appreciation of fixed maturity investments of $156,653,000
was comprised of gross appreciation of $269,396,000 and gross depreciation
of $112,743,000.
The percentage of the company's portfolio invested in below investment
grade securities has increased slightly during the first three months of
1996. At March 31, 1996 the amortized cost value of the company's total
investment in below investment grade securities consisted of investments in
94 issuers totaling $657,605,000, or 7.7% of the company's investment
portfolio compared to 92 issuers totaling $574,284,000, or 7.0%, at
December 31, 1995. 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 exceed 10% of
the investment portfolio. At March 31, 1996, the yield at amortized cost
on the company's below investment grade portfolio was 9.2% compared to 8.3%
for the company's investment grade corporate bond portfolio. The company
estimates that the market value of its below investment grade portfolio was
$653,016,000, or 99.3% of amortized cost value, at March 31, 1996.
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.
During the first quarter of 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 in the first quarter of 1995 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. No securities were
deemed to have an impairment in value that was other than temporary in the
first quarter of 1996.
During the first three months of 1996, fixed maturity securities designated
as available for sale with a combined amortized cost value of $90,240,000
were called, repaid or tendered generating net realized gains totaling
$4,114,000. In total, pre-tax gains from sales, calls, repayments, tenders
and writedowns of fixed maturity investments amounted to $4,345,000 in the
first three months of 1996.
The company's fixed maturity investment portfolio had a combined amortized
cost yield of 8.3% at March 31, 1996 and December 31, 1995.
Mortgage loans make up approximately 15.5% of the company's investment
portfolio carrying value, as compared to an industry average of 15.1%,
based on information reported in the 1995 ACLI Fact Book. The company
resumed active mortgage lending in 1994 to broaden its investment
alternatives and, as a result of this increase in lending activity,
mortgages outstanding increased to $1,344,824,000 from $1,169,456,000 at
December 31, 1995. The company expects this asset category to continue to
grow over the next several years. The company's mortgage loan portfolio
includes 473 loans with an average size of $2,843,000 and average seasoning
of 4.8 years if weighted by the number of loans, and 1.8 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, 1996, the yield on the company's
mortgage loan portfolio was 8.4%.
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 $125 0.0%
Multi-family residential 80 280,355 20.8
Industrial 185 396,601 29.5
Office buildings 80 257,657 19.2
Retail 119 393,694 29.3
Other 5 16,392 1.2
_______________________________
TOTAL 473 $1,344,824 100.0%
===============================
% of
# of Carrying Mortgage
Loans Value Portfolio
_______________________________
(Dollars in thousands)
Geographic Breakdown
- ----------------------
New England 1 $3,150 0.2%
Middle Atlantic 59 201,227 15.0
South Atlantic 65 188,334 14.0
East North Central 104 324,112 24.1
West North Central 59 175,124 13.0
East South Central 16 53,175 4.0
West South Central 29 80,050 5.9
Mountain 29 82,346 6.1
Pacific 111 237,306 17.7
_______________________________
TOTAL 473 $1,344,824 100.0%
===============================
At March 31, 1996, the company had valuation allowances of $189,000
remaining on two mortgage loans (one of which was delinquent by 90 days or
more) to reduce the carrying value of these investments to their estimated
fair values less costs to sell. At March 31, 1996, two mortgage loans with
combined carrying value of $719,000, net of a valuation allowance on one of
the loans totaling $180,000, 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 only 15.5% of the company's
investment portfolio and the company has been able to recover 80% of the
principal amount of problem mortgages that have been resolved in the last
three years.
At March 31, 1996, the company owned real estate totaling $14,111,000,
including properties acquired through foreclosure valued at $10,458,000.
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, 1996. The company estimates its total
investment portfolio, excluding policy loans, had a market value equal to
102.2% of amortized cost value at March 31, 1996.
Other assets
Accrued investment income increased $800,000 primarily due to an increase
in new fixed income investments and in the overall size of the portfolio.
Deferred policy acquisition costs increased $117,833,000 over year-end 1995
levels. Excluding the adjustment to reflect the impact of SFAS No. 115,
deferred policy acquisition costs increased $21,558,000 as the deferral of
current period costs (primarily commissions) totaled $39,681,000.
Amortization of costs deferred totaled $18,123,000. At March 31, 1996, the
company had $208,635,000 of separate account assets compared to
$171,881,000 at December 31, 1995. The increase in separate account assets
is primarily due to growth in the company's variable annuity product. At
March 31, 1996, the company had total assets of $10,018,398,000, an
increase of 2.4% over total assets at December 31, 1995.
Liabilities
In conjunction with the volume of annuity and insurance sales, and the
resulting increase in business in force, the company's liability for policy
liabilities and accruals increased $243,285,000, or 3.0%, during the first
three months of 1996 and totaled $8,485,195,000 at March 31, 1996.
Reserves for the company's annuity policies increased $231,638,000, or
3.3%, during this period and totaled $7,261,552,000 at March 31, 1996.
Life insurance reserves increased $8,808,000, or 0.7%, during the first
three months of 1996 and totaled $1,197,498,000 at March 31, 1996.
The company incorporates a number of features in its annuity products
designed to reduce 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 typically
range from five years to the term of the policy, with 89% of such policies
being issued with a surrender charge period of seven years or more during
the first three months of 1996. 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 non-par deferred annuity
liabilities and sales at and for the three months ended March 31, 1996 by
surrender charge range category. Notwithstanding policy features, the
withdrawal rates of policyholder funds may be affected by changes in
interest rates.
Deferred Deferred
Annuity % of Annuity % of
Surrender Charge % Sales Total Liabilities Total
___________________________________________________________________
(Dollars in thousands)
No surrender charge $622,793 9.3%
1 to 4 percent 780,729 11.6
5 to 6 percent $592 0.2% 975,957 14.5
7 to 9 percent 244,749 88.0 3,124,218 46.6
10 percent and greater 32,941 11.8 1,207,545 18.0
_________________________________________
$278,282 100.0% $6,711,242 100.0%
=========================================
Deferred income taxes decreased $73,709,000 to $41,206,000 from December
31, 1995 of which $75,708,000 of the decrease relates to the decrease in
the level unrealized gains on fixed maturity securities. Total
consolidated debt increased $99,900,000 during the first three months of
1996 as the company issued additional commercial paper. Commercial paper,
issued to offset short-term timing differences in investment related cash
receipts and disbursements (investment smoothing) and to provide for short-
term operating needs, amounted to $158,000,000 at March 31, 1996. Of this
amount, approximately $96,354,000 was issued for investment smoothing
purposes. The company's commercial paper levels will fluctuate throughout
the year as the amount outstanding for investment smoothing purposes
changes. Other liabilities increased $38,081,000 from year-end 1995 levels
primarily as a result of a $27,118,000 increase in the liability for
securities purchased but not yet paid for, a $7,735,000 increase in draft
accounts payable, a $8,889,000 increase in transfer and suspense accounts,
partially offset by a $8,145,000 decrease in reinsurance payables.
Separate account liabilities increased $36,754,000 to $208,635,000 from
December 31, 1995 primarily due to growth in the company's variable annuity
product. At March 31, 1996, the company had total liabilities of
$9,236,507,000 compared to $8,886,484,000 at December 31, 1995, a 3.9%
increase.
Equity
At March 31, 1996, stockholders' equity was $781,890,000, or $24.53 per
share, compared to $893,932,000 or $28.14 per common share at year end
1995. Unrealized appreciation of available for sale fixed maturity
securities increased stockholders' equity by $70,192,000, or $2.20 per
share, after adjustments to deferred acquisition costs and deferred income
taxes, at March 31, 1996 compared to an increase of $208,932,000 or $6.58
per share at December 31, 1995. The ratio of consolidated debt to total
capital was 24.8% (26.6% excluding SFAS No. 115) at March 31, 1996, up from
15.0% (18.8% excluding SFAS No. 115) at year-end 1995 as a result of the
increase in commercial paper issued for investment smoothing. Excluding
commercial paper issued for investment smoothing purposes, the ratio of
debt to total capital was 17.1% (18.5% excluding SFAS No. 115) at March 31,
1996. At March 31, 1996, there were 31,873,441 common shares outstanding
compared to 31,769,490 shares at December 31, 1995.
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 annuity and insurance premiums, investment income, and maturities
of fixed maturity investments and mortgage loans. The company primarily
uses funds for the payment of annuity and insurance benefits, operating
expenses and commissions, and the purchase of new investments.
The company's home office operations are currently housed in four leased
locations in downtown Des Moines, Iowa. The company has entered into
agreements with a developer to develop and lease a 200,000 square foot
office building in downtown Des Moines, Iowa to house all of the company's
home office operations. The company anticipates an additional $5,000,000
for computer technology will be spent in 1997 for the new location. In
addition, the company intends to increase its commitment to improve
customer service and operating efficiencies by spending approximately
$7,000,000 per year through 1998 on capital needs, primarily for
information technology, as compared to the approximately $3,400,000 spent
in 1995. No other material capital expenditures are planned.
The company issues short-term debt, including commercial paper notes, for
working capital needs, investment smoothing purposes, and to provide short-
term liquidity. At March 31, 1996 the company had $158,000,000 in
commercial paper notes outstanding, an increase of $99,900,000 from
December 31, 1995 due primarily to investment smoothing discussed above.
The company's commercial paper is rated A1 by Standard and Poor's, D1 by
Duff & Phelps Credit Rating Co and P2 by Moody's.
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. The terms of the agreement 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 SFAS No. 115, less intangible assets.
The most restrictive covenant requires the company maintain adjusted
consolidated tangible net worth equal to or in excess of the sum of (1)
$490,000,000, plus (2) 50% of consolidated net income from January 1, 1995
to the end of the most recent quarter, plus (3) net proceeds from the
issuance of capital stock from January 1, 1995 to the end of the most
recent quarter. At March 31, 1996, $160,474,000 of retained earnings were
free of restrictions and could be distributed to the companies public
stockholders. The company is currently renegotiating the terms of its line
of credit to increase the line to $300,000,000 and extend its term to March
30, 2001.
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 $85,758,000 during the remainder
of 1996. 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.
Writing and supporting increased volumes of annuity and insurance business
requires increased amounts of capital and surplus for the company's
insurance operations. Historically, the company has funded growth in its
insurance operations internally through the retention of earnings.
Increased levels of growth in recent years have required capital
contributions in excess of amounts generated by operating activities. In
1993 the company completed a primary stock offering to the public and
contributed $70,000,000 of the proceeds from the offering to its insurance
operations. In February 1995, the company issued $100,000,000 of 8.5%
notes, maturing on February 15, 2005, receiving net proceeds of
$98,812,000, after expenses. The company contributed $50,000,000 of the
proceeds to its insurance subsidiaries and has applied the remaining net
proceeds to the repayment of outstanding commercial paper notes. Future
growth in the company's insurance operations, internally or through
acquisitions, may require additional capital although the company believes
it has sufficient resources to support internal growth in operations for
the next few years. The company's primary sources of capital are the
retention of earnings and the issuance of additional securities.
In order to provide the flexibility to respond promptly to capital needs as
opportunities or needs arise, the company filed a universal shelf
registration on Form S-3 on March 22, 1996 with the Securities and Exchange
Commission with respect to $300,000,000 of securities, including any
combination of debt securities, common stock and preferred stock. These
securities may be issued and sold upon such terms and conditions and at
such time or times as may be later determined. Any such offering will be
made only by means of a prospectus. These securities may not be sold nor
may offers to buy be accepted prior to the time a registration statement
relating to the securities has been filed and becomes effective. This
communication shall not constitute an offer to sell or the solicitation of
an offer to buy nor shall there by any sale of these securities in any
state in which such offer, solicitation or sale would be unlawful prior to
registration or qualification under the securities laws of any such state.
In April 1996, the company began a hedging program under which certain
derivative financial instruments, interest rate caps and cash settled put
swaptions ("instruments"), are being purchased to reduce the negative effect
of increased withdrawal activity related to the company's annuity liabilities
which may result from extreme increases in interest rates. The current
agreements for these instruments, which expire in April 2001 through April
2002, entitle the company to receive payments from the instrument's counter-
parties on future reset dates if interest rates, as specified in the agree-
ments, rise above a specified fixed rate (9% for instruments entered into as
of April 30, 1996). The amount of such payments for the interest rate caps,
if any, will be calculated by multiplying the percentage by which the
applicable rate exceeds the fixed rate times the notional amount of the caps
($200,000,000 at April 30, 1996) and will be recorded as an adjustment to
income. Payments on cash settled put swaptions are also calculated based upon
the percentage by which the specified rate exceeds the fixed rate times the
notional amount. The product of this rate differential times the notional
amount is assumed to continue for a series of ten future semi-annual payment
dates and the resulting hypothetical payments are discounted to the current
payment date using the rate defined in the agreement as the discount rate. At
April 30, 1996, the company had entered into agreements for a series of twelve
put swaptions with notional amounts of $25,000,000 each, or $300,000,000 in
total. For both interest rate caps and put swaptions, payments are required
only if in the company's favor. The company expects to have in place
instruments with notional amounts totaling approximately $600 million in
interest rate caps and approximately $1.3 billion in cash settled put swaptions
by June 30, 1996. Through April 30, 1996, the company has paid approximately
$5 million in premiums. The company expects to pay premiums totaling approxi-
mately $20 million for this program by June 30, 1996. The cost of this program
has been incorporated into the company's product pricing.
Premiums paid to enter these instruments will be deferred and included in
other assets. Premiums will be amortized into income over the term of the
instruments on a straight-line basis. Unrealized gains and losses on these
instruments and related assets or liabilities will not be recorded in income
until realized. The FASB and the SEC are evaluating the accounting and
disclosure requirements for these instruments and this accounting treatment
may change in the future. The company is actively monitoring the proposals
which are in the preliminary discussion phase and the impact of the final
standards, therefore, cannot be clearly projected at this time. At March 31,
1996, the company had not entered into any derivative financial instrument
transactions.
The company is exposed to the risk of losses in the event of non-performance
by the counterparties of these instruments. Losses recorded in the company's
financial statements in the event of non-performance will be limited to the
unamortized premium paid to enter into the instrument because no additional
payments are required by the company on these instruments after the initial
premium. Economic losses would be measured by the net replacement cost, or
market value, for such instruments if the net market value is in the company's
favor. The company limits its exposure to such losses by: diversification
among counterparties, limiting exposure to any individual counterparty based
upon that counterparty's credit rating, limiting the overall size of the
hedging program, and by limiting its exposure by instrument type. For purposes
of determining risk exposure to any individual counterparty, the company
evaluates the combined exposure to that counterparty from derivative financial
instruments and investment portfolio credit risk exposures and reports its
exposure to senior management at least monthly.
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.
INSURANCE INDUSTRY ISSUES
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 several states the company may
reduce premium taxes paid to recover a portion of assessments paid to the
states' guaranty fund association. This right of "offset" may come under
review by the various states, and the company cannot predict whether and to
what extent legislative initiatives may affect this right to offset. Also,
some state guaranty associations have adjusted the basis by which they
assess the cost of insolvencies to individual companies. The company
believes that its reserve for future guaranty fund assessments is
sufficient to provide for assessments related to known insolvencies. This
reserve is based upon management's current expectation of the availability
of this right of offset and state guaranty fund assessment bases. However,
changes in the basis whereby assessments are charged to individual
companies and changes in the availability of the right to offset
assessments against premium tax payments could materially affect the
company's results.
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 scrutinized by various
states, the federal government and the NAIC. The NAIC, in conjunction with
state regulators, has been reviewing existing insurance laws and
regulations. A committee of the NAIC has completed development of
proposals to govern insurance company investments and holding company
investments in subsidiaries and affiliates. These final proposals will be
considered for adoption by the NAIC as model laws in 1996. The company
does not presently anticipate any material adverse change in its business
if the proposals as currently drafted are adopted.
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 earlier than the end of 1996.
Specific recommendations have been set forth in papers issued by the NAIC
for industry review. 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.
The NAIC adopted Guideline XXXIII in 1995 which requires the company to
increase annuity reserves in its statutory financial statements by
approximately $24,000,000. The company has received approval from the Iowa
and Oklahoma insurance departments for a three year phasein. The 1995
statutory statements included an increase in annuity reserves of
approximately $8,100,000 pursuant to the requirements of the guideline.
The 1996 quarterly statutory financial statements include an increase in
annuity reserves of approximately $900,000 pursuant to the requirements of
the guideline. The guideline has no effect on financial statements
prepared in accordance with GAAP.
There has been increased scrutiny by insurance regulators and the insurance
industry itself of insurance sales and marketing activities. New rules for
life insurance illustrations have been proposed for adoption in 1996 and an
NAIC committee has begun to work on the issue of annuity illustrations.
The company has conducted a thorough review of its sales and marketing
process and continues to re-emphasize its compliance efforts.
Legislative and regulatory initiatives 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.
RECENT DEVELOPMENTS
As previously reported, the company and certain of its subsidiaries are
defendants in class action lawsuits filed in the Iowa District Court for
Polk County in May 1995 and the United States District Court for the Middle
District of Florida, Tampa Division in February 1996. The Florida suit is
similar to the Iowa suit and was filed by some of the same law firms as in
the earlier Iowa suit. The company believes the new action was filed in
response to jurisdictional and procedural problems faced by the plaintiffs
in the Iowa suit. The suits claim unspecified damages as a result of the
sale of life insurance policies with so-called "vanishing premiums" wherein
cash values are used to pay insurance premiums under certain interest rate
scenarios. The complaints allege that the policyholders were misled by
optimistic policy illustrations. The company believes the allegations are
without merit because full and appropriate disclosure was made as a matter
of practice. The suits are in the early discovery and procedural stages
and have not yet been certified as class actions. The company intends to
defend the suits vigorously. The amount of any liability which may arise as
a result of these suits, if any, cannot be reasonably estimated and no
provision for loss has been made in the accompanying financial statements.
As previously reported, on December 15, 1995, USG received a Notice of
Intention to Arbitrate a dispute with one of its insurance brokerage agencies
before the American Arbitration Association. The agency alleges that USG has
failed to pay an unspecified amount of commissions for the sale of insurance
products, including alleged future commissions on future policy values if the
policies stay in force. USG believes the claims are without merit based upon
its interpretation of the agreements between the parties, the business
relations between the parties and custom and practice in the industry. There-
fore, USG has denied the allegations and intends to defend the proceeding
vigorously. The amount of any liability which may arise as a result of this
arbitration, if any, cannot be reasonably estimated and no provision for loss
has been made in the accompanying financial statements.
In the ordinary course of business, the company and its subsidiaries are
also engaged in certain other litigation, none of which management believes
is material.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
The 1995 Private Securities Litigation Reform Act provides issuers the
opportunity to make cautionary statements regarding forward-looking
statements. Accordingly, any forward-looking statement contained herein or
in any other oral or written statement by the company or any of its
officers, directors or employees is qualified by the fact that actual
results of the company may differ materially from such statement due to the
following important factors, among other risks and uncertainties inherent
in the company's business:
1. Prevailing interest rate levels, including any continuation of the
current relatively flat yield curve for short-term investments in
comparison to long-term investments, which may affect the ability of
the company to sell its products, the market value of the company's
investments and the lapse rate of the company's policies, notwithstanding
product design features intended to enhance persistency of the company's
products.
2. Changes in the federal income tax laws and regulations which may affect
the relative tax advantages of the company's products.
3. Changes in the regulation of financial services, including bank sales
and underwriting of insurance products, which may affect the competitive
environment for the company's products.
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
As previously reported, the company and certain of its subsidiaries
are defendants in class action lawsuits filed in the Iowa District
Court for Polk County in May 1995 and the United States District
Court for the Middle District of Florida, Tampa Division in February
1996. The Florida suit is similar to the Iowa suit and was filed by
some of the same law firms as in the earlier Iowa suit. The company
believes the new action was filed in response to jurisdictional and
procedural problems faced by the plaintiffs in the Iowa suit. The
suits claim unspecified damages as a result of the sale of life
insurance policies with so-called "vanishing premiums" wherein cash
values are used to pay insurance premiums under certain interest
rate scenarios. The complaints allege that the policyholders were
misled by optimistic policy illustrations. The company believes the
allegations are without merit because full and appropriate disclosure
was made as a matter of practice. The suits are in the early
discovery and procedural stages and have not yet been certified as
class actions. The company intends to defend the suits vigorously.
The amount of any liability which may arise as a result of these
suits, if any, cannot be reasonably estimated and no provision for
loss has been made in the accompanying financial statements.
As previously reported, on December 15, 1995, USG received a Notice
of Intention to Arbitrate a dispute with one of its insurance
brokerage agencies before the American Arbitration Association. The
agency alleges that USG has failed to pay an unspecified amount of
commissions for the sale of insurance products, including alleged
future commissions on future policy values if the policies stay in
force. USG believes the claims are without merit based upon its
interpretation of the agreements between the parties, the business
relations between the parties and custom and practice in the
industry. Therefore, USG has denied the allegations and intends to
defend the proceeding vigorously. The amount of any liability which
may arise as a result of this arbitration, if any, cannot be reason-
ably estimated and no provision for loss has been made in the
accompanying financial statements.
In the ordinary course of business, the company and its subsidiaries
are also engaged in certain other litigation, none of which
management believes is material.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
A list of exhibits included as part of this report is set forth
in the Exhibit Index which immediately precedes such exhibits
and is hereby incorporated by reference herein.
(b) The following report on Form 8-K was filed during the quarter
ended March 31, 1996:
(i) None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 2, 1996 EQUITABLE OF IOWA COMPANIES
By /s/ Paul E. Larson
______________________________________
Executive Vice President and CFO
(Principal Financial Officer)
By /s/ David A. Terwilliger
______________________________________
Vice President and Controller
(Principal Accounting Officer)
INDEX
Exhibits to Form 10-Q
Three Months ended March 31, 1996
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, 1996
EQUITABLE OF IOWA COMPANIES
Page Number
(vii) Restated and Amended Key Employee Incentive Plan filed
as Exhibit A of Registrant's Proxy Statement dated
March 14, 1995, is incorporated by reference --
(viii) Restated and Amended 1992 Stock Incentive Plan
Registration Statement No. 33-57492, filed as Exhibit
B of Registrant's Proxy Statement dated March 14, 1995,
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 --