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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(Mark One) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
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x OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
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For the fiscal year ended December 31, 1995
OR
------ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
------ SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
Commission File Number 0-25280
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
(Exact name of registrant as specified in its charter)
New York 13-5570651
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
787 Seventh Avenue, New York, New York 10019
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 554-1234
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
- ------------------------------------------- ----------------------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock (Par Value $1.25 Per Share)
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
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. x
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No voting stock of the registrant is held by non-affiliates of the registrant as
of March 20, 1996.
As of March 20, 1996, 2,000,000 shares of the registrant's Common Stock were
outstanding.
REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION J(1)(a) AND (b)
OF FORM 10-K AND IS THEREFORE FILING THIS FORM WITH THE REDUCED DISCLOSURE
FORMAT.
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TABLE OF CONTENTS
Part I
Item 1. Business.............................................. 1-1
General............................................... 1-1
Segment Information................................... 1-1
Individual Insurance and Annuities.................... 1-1
Products.............................................. 1-2
Investment Services................................... 1-5
Group Pension......................................... 1-9
General Account Investment Portfolio.................. 1-10
Competition........................................... 1-16
Regulation............................................ 1-17
Principal Shareholder................................. 1-23
Item 2. Properties............................................ 2-1
Item 3. Legal Proceedings..................................... 3-1
Item 4. Submission of Matters to a Vote of Security Holders... 4-1
Part II
Item 5 Market for Registrant's Common Equity and Related
Stockholder Matters.................................. 5-1
Item 6. Selected Consolidated Financial Information........... 6-1
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations................. 7-1
Item 8. Financial Statements and Supplementary Data........... FS-1
Item 9. Changes In and Disagreements With Accountants
On Accounting and Financial Disclosure.............. 9-1
Part III
Item 10. Directors and Executive Officers of the Registrant.... 10-1
Item 11. Executive Compensation................................ 11-1
Item 12. Security Ownership of Certain Beneficial
Owners and Management................................ 12-1
Item 13. Certain Relationships and Related Transactions........ 13-1
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K.......................................... 14-1
Signatures ...................................................... S-1
Index to Exhibits ...................................................... E-1
Part I, Item 1.
BUSINESS1
General. Equitable Life, together with its insurance and investment
subsidiaries, constitutes a diversified financial services organization serving
a broad spectrum of insurance, investment management and, through its minority
interest in DLJ, investment banking customers. Equitable Life's insurance
business, which is comprised of an Individual Insurance and Annuities segment
and a Group Pension segment, is conducted by the Insurance Group. Equitable
Life's investment management and investment banking business, which comprises
the Investment Services segment, is conducted principally by Alliance, Equitable
Real Estate, and DLJ, in which Equitable Life owns a minority 36.1% interest.
For additional information on Equitable Life's business segments, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Combined Results of Continuing Operations by Segment" and Note 18
of Notes to Consolidated Financial Statements. Since Equitable Life's
demutualization in 1992, it has been a wholly owned subsidiary of the Holding
Company, shares of which are listed on the New York Stock Exchange ("NYSE").
AXA, a French holding company for an international group of insurance and
related financial services companies, has been the Holding Company's largest
shareholder. For more information on Equitable Life's demutualization, including
the establishment of the Closed Block, see Notes 2 and 6 of Notes to
Consolidated Financial Statements and "Principal Shareholder".
Segment Information
Individual Insurance and Annuities
General. The Individual Insurance and Annuities segment accounted for
approximately $3.25 billion or 72.0% of consolidated revenue for the year ended
December 31, 1995. It offers a variety of life insurance, annuity and disability
income products, and mutual funds and other investment products. These products
are marketed in all 50 states by a career agency force of over 7,200 agents. The
Insurance Group's Income Manager series of annuity products, which was
introduced in May, 1995, is also distributed through securities firms, financial
planners and banks. As of December 31, 1995, the Insurance Group had over two
million policy or contractholders. Equitable Life, which was established in the
State of New York in 1859, has been among the largest life insurance companies
in the United States for more than 100 years. Since Equitable Life's
demutualization in 1992, its ratio of capital (capital, surplus and asset
valuation reserve ("AVR")) to general account liabilities (excluding AVR) under
statutory accounting principles has more than doubled from 4.9% at December 31,
1991 to 11.9% at December 31, 1995, one of the highest such ratios among its
principal competitors. At December 31, 1995, Equitable Life's statutory assets
(excluding Separate Accounts) were $32.05 billion, statutory liabilities
(excluding AVR) were $28.67 billion, and capital (capital, surplus and AVR) was
$3.40 billion. For additional information on the Individual Insurance and
Annuities segment, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Combined Results of Continuing Operations
by Segment," Note 18 of Notes to Consolidated Financial Statements, as well as
"Employees and Agents," "Competition" and "Regulation".
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1 As used in this Form 10-K, "Equitable Life" refers to The Equitable Life
Assurance Society of the United States, a New York stock life insurance
company, "Holding Company" refers to The Equitable Companies Incorporated, a
Delaware corporation, and the "Company" or "The Equitable" refers to Equitable
Life and its consolidated subsidiaries. See Note 2 of Notes to Consolidated
Financial Statements (Item 8 of this report for information on the principles
of consolidation. The term "Insurance Group" refers collectively to Equitable
Life and its wholly owned subsidiaries, Equitable Variable Life Insurance
Company ("EVLICO") and Equitable of Colorado, Inc. ("EOC"). The term
"Investment Subsidiaries" refers collectively to Equitable Life's wholly owned
subsidiary, Equitable Real Estate Investment Management, Inc., together with
its affiliates Equitable Agri-Business, Inc., and EQ Services, Inc.
(collectively referred to herein as "Equitable Real Estate"), to Equitable
Life's publicly traded affiliates, Alliance Capital Management L.P.
("Alliance") and Donaldson, Lufkin & Jenrette, Inc. ("DLJ") and in each case
their respective subsidiaries. The term "General Account" refers to the assets
held in the respective general accounts of Equitable Life, EVLICO and EOC and
all of the investment assets held in certain of Equitable Life's separate
accounts on which the Insurance Group bears the investment risk. The term
"Separate Accounts" refers to the Separate Account investment assets of
Equitable Life and EVLICO, excluding those separate accounts on which the
Insurance Group bears the investment risk. The term "General Account
Investment Assets" refers to assets held in the General Account associated
with the Insurance Group's continuing operations and does not include assets
held in the General Account associated with the Insurance Group's discontinued
guaranteed interest contract ("GIC") Segment which are referred to herein as
"GIC Segment Investment Assets".
1-1
Products. The Insurance Group emphasizes the sale of individual variable life
insurance products and individual variable annuity products (both tax-qualified
and non-qualified). These products are designed to meet the life insurance,
asset accumulation and retirement funding needs of the Insurance Group's
targeted markets. They offer multiple Separate Account investment options,
including bond funds, domestic and global equity funds, a balanced fund, and a
series of asset allocation funds, as well as General Account guaranteed interest
options. The range of investment options creates flexibility in meeting
individual customer needs. The Insurance Group's Separate Accounts are managed
principally by Alliance.
In 1995, the Insurance Group introduced its Income Manager series of retirement
products which are annuities designed to provide for both the accumulation and
distribution of retirement assets. In addition to offering Separate Account
investment options, these products offer a market value adjusted fixed rate
option which provides a guaranteed interest rate to a fixed maturity date and a
market value adjustment for withdrawals or transfers prior to such date.
To fund the pension plans (both defined benefit and defined contribution) of
small to medium-sized employers, the Insurance Group offers annuity products
tailored to the small pension market. These products offer both Separate Account
and General Account investment options.
The overall growth of Separate Account assets is a strategic objective of
Equitable Life. To the extent that the investment funds associated with variable
life insurance and variable annuity products are placed in the Separate Accounts
rather than in the General Account, the investment risk (and reward) is
transferred to policyholders while Equitable Life earns fee income from the
management of assets held in the Separate Accounts. Management believes that
this fee income produces a more predictable income stream than the spread income
from traditional products. In addition, variable products, because they involve
less risk to the Insurance Group than traditional products, require less
capital. Separate Account options also permit policy owners to choose more
aggressive or conservative investment strategies without affecting the
composition of General Account assets. Over the past five years, Separate
Account balances for individual variable life and variable annuities have
increased by $9.77 billion to $13.16 billion at December 31, 1995.
The Insurance Group also sells traditional whole life insurance and term
insurance products, disability income products, and, through its wholly owned
broker-dealer subsidiary Equico Securities, Inc. ("Equico"), mutual funds.
During 1995, the Insurance Group's career agency force sold approximately $867.0
million in mutual funds through Equico. In cases where the Insurance Group does
not offer an insurance product suitable for the needs of a particular customer,
the Insurance Group provides its agents with access to a number of additional
insurance products through EquiSource, Inc., a wholly owned insurance brokerage
subsidiary.
In addition to the sale of insurance products, the Insurance Group acts as a
professional retrocessionaire by assuming life and annuity reinsurance from
professional reinsurers. The Insurance Group also assumes accident, health,
aviation and space risks by participating various reinsurance pools.
In early 1990, the Insurance Group discontinued its group life and health
insurance operations by selling its joint venture interest in EQUICOR, a joint
venture between Equitable Life and Hospital Corporation of America. Effective
September 15, 1992, the Insurance Group ceased to sell new individual major
medical policies. Since July 1, 1993, new disability income policies have been
80% reinsured through an arrangement with Paul Revere Life Insurance Company.
1-2
The following table summarizes premiums and deposits for the Individual
Insurance and Annuities segment's products combining amounts for the Closed
Block and amounts for operations outside the Closed Block.
Individual Insurance and Annuity Products
Premiums/Deposits
(In Millions)
Years Ended December 31,
----------------------------------
1995 1994 1993
----------- ---------- -----------
Individual annuities ........................... $ 2,847.4 $ 2,766.9 $ 2,302.0
Variable and interest-sensitive life insurance. 1,358.4 1,264.9 1,104.0
---------- -------- ----------
Total .......................................... 4,205.8 4,031.8 3,406.0
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Traditional life insurance ..................... 887.4 925.9 979.3
Other .......................................... 463.6 433.7 413.9
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Total .......................................... $ 5,556.8 $ 5,391.4 $ 4,799.2
========== ========== ==========
Markets. The Insurance Group's targeted customers include middle and upper
income individuals such as professionals, owners of small businesses, employees
of tax-exempt organizations and existing customers. For variable life, the
Insurance Group has targeted certain markets including the retirement savings
market, particularly non-qualified retirement planning, the estate planning
market, the market for business continuation needs (e.g. the use of variable
life insurance to fund buy/sell agreements and similar arrangements), as well as
the middle-to-upper income savings and life protection markets. The Insurance
Group's target markets for variable annuities include the tax exempt markets
(particularly retirement plans for educational and non-profit organizations),
corporate pension plans (particularly 401-K defined contribution plans covering
25 to 250 employees) and the IRA retirement planning market. The Insurance
Group's Income Manager series of annuity products is designed to address the
market of those at or near retirement who have a need to convert retirement
savings into retirement income.
Demographic studies suggest that, as the post-World War II "baby boom"
generation ages over the next decade, there will be growth in the number of
individuals who management believes are most likely to purchase the Insurance
Group's savings-oriented products. Those studies also suggest that over the next
15 years there will be significant growth in the number of new retirees.
Management believes this growth in the retiree population represents an
opportunity for the Insurance Group's Income Manager products. In addition,
management believes the trend among U.S. employers away from defined benefit
plans (under which the employer makes the investment decisions) toward
employee-directed, defined contribution retirement and savings plans (which
allow employees to choose from a variety of investment options) will continue.
Management believes the asset accumulation needs of customers in these target
markets for estate planning, the planning for and management of retirement and
education funds and other forms of long-term savings, as well as their
traditional insurance protection needs, can be satisfied by the range of
insurance and annuity products offered by the Insurance Group.
In 1995, the Insurance Group collected premiums and deposits from policy or
contractholders in all 50 states, the District of Columbia and Puerto Rico. For
the Individual Insurance and Annuities segment, the states of New York (18.4%),
New Jersey (7.0%), California (6.5%), Illinois (6.4%), Pennsylvania (6.1%) and
Michigan (5.5%) contributed the greatest amounts of premiums (accounted for on a
statutory basis), and no other state represented more than 5% of the Insurance
Group's statutory premiums. The Insurance Group also collected premiums in
Canada and certain other foreign countries, but premiums from all foreign
countries represented less than 1% of the Insurance Group's 1995 aggregate
statutory premiums.
Distribution. Products are distributed primarily through a career agency force
of over 7,200 professionals organized into approximately 80 agencies across the
United States which are owned and managed by the Insurance Group and which
provide agents with training, marketing and sales support. After an initial
training period, agents are compensated by commissions based on product sales
levels and key profitability factors, including persistency. The Insurance Group
sponsors pension and other benefit plans and sales incentive programs for its
agents which provide incentives to encourage agents to focus their sales efforts
on the Insurance Group's products. Most of the Insurance Group's career agents
1-3
are not prohibited from selling traditional insurance products offered by other
companies. Equitable Life's Law Department maintains a Compliance Group staffed
with compliance professionals who, working together with attorneys in the Law
Department, review and approve advertising and sales literature prior to use by
the Insurance Group's agency force and monitor customer complaints.
As of December 31, 1995, approximately 85% of the Insurance Group's agents were
licensed to sell variable insurance and annuity products as well as certain
investment products, including mutual funds. The Insurance Group leads the
insurance industry in the number of agents and employees who hold both the
Chartered Life Underwriter (CLU) and Chartered Financial Consultant (ChFC)
designations, which are awarded by the American College, a professional
organization for insurance and financial planning professionals. Management
believes that the professionalism of its agency force provides it with a
competitive advantage in the marketing of the Insurance Group's sophisticated
insurance products, including variable insurance and annuities.
In a continuing effort to enhance the quality of the Insurance Group's agency
force, during 1995 management focused its recruiting efforts on attracting
professionals from related fields such as accounting, banking and law.
Management believes that the knowledge and experience of these individuals
enables them to add significant value to client service and that recruiting more
experienced individuals has had a positive impact on the retention rate of first
year agents. In 1995, management also implemented a new needs-based selling
strategy with the introduction of its Financial Fitness Profile. Financial
Fitness Profile is designed to make the client's long-term financial needs the
key ingredient of the sales process and is used by the Insurance Group to
identify a client's risk exposure and financial goals in order to develop a
comprehensive financial strategy addressing the client's unique situation.
Management believes its Financial Fitness Profile adds significant value to
client service and provides an excellent foundation for building long-term
relationships with the Insurance Group's customers.
During 1995, management also undertook a number of initiatives to increase the
efficiency and lower the costs of the Insurance Group's distribution system.
These initiatives included the consolidation of new business processing, the
implementation of a new underwriting system, and the introduction of Equitable
Life Workstation which gives each agent on-line access to information about
clients, policy transactions and home office announcements.
In connection with the introduction of the Insurance Group's Income Manager
series of products in 1995, management began implementing new distribution
channels to complement the capabilities of its career agency force. These new
channels for distribution of the Income Manager products include brokerage
houses, banks and financial planners. During 1995, because state approvals in
major markets for the new Income Manager products were not received until late
in the year, management focused on regional securities firms and financial
planners. During 1996, management intends to expand these new distribution
channels to national securities firms.
Insurance Underwriting and Reinsurance. The risk selection process is carried
out in the Insurance Group by underwriters who evaluate policy applications on
the basis of information provided by the applicant and other sources. Specific
tests, such as blood analysis, are used to evaluate policy applications based on
the size of the policy, the age of the applicant and other factors. Underwriting
rules and procedures are established by the Insurance Group's underwriting area
and are designed to produce mortality results consistent with assumptions used
in product pricing while providing for competitive risk selection.
The Insurance Group limits risk retention on new policies to a maximum of $5.0
million and all in force business above $5.0 million has been reinsured. A
contingent liability exists with respect to reinsurance ceded should the
reinsurers be unable to meet their obligations. The Insurance Group evaluates
the financial condition of its reinsurers to minimize its exposure to
significant losses from reinsurer insolvencies. The Insurance Group is not party
to any risk reinsurance arrangement with any reinsurer pursuant to which the
amount of reserves on reinsurance ceded to such reinsurer equals more than 1% of
the total policy reserves of the Insurance Group (including Separate Accounts).
The Insurance Group also assumes mortality risk as a reinsurer. Mortality risk
on any single life (through reinsurance assumed and directly written coverage)
is limited to $5.0 million. For additional information on the Insurance Group's
reinsurance agreements, see Note 12 of Notes to Consolidated Financial
Statements.
1-4
Insurance Liabilities. The Insurance Group has established liabilities for
policyholders' account balances and future policy benefits to meet obligations
on various policies and contracts. Policyholders' account balances for universal
life and variable life and other investment-type policies are equal to
cumulative account balances, which are the sum of net premiums or considerations
plus credited interest or net investment results, less expense, mortality and
risk charges and withdrawals. Future policy benefits for traditional products
are computed on the basis of assumed investment yields, mortality, persistency,
morbidity and expenses (including a margin for adverse deviation), which are
established at the time of issuance of a policy and generally vary by product,
year of issue and policy duration.
The insurance liabilities reflected in the consolidated balance sheets included
herein are prepared in accordance with GAAP and differ from the reserves
prescribed by statutory accounting practices and carried on the Insurance
Group's statutory financial statements. The variances arise from differences in
the reserve calculation methods and from the use of different mortality,
morbidity, interest rate and persistency assumptions.
Investment Services
General. The Investment Services segment, which in 1995 accounted for
approximately $949.1 million or 21.0% of consolidated revenues, provides
investment management, investment banking, securities transaction and brokerage
services to both corporate and institutional clients, including the Insurance
Group, and to high net worth individuals. In recent years, rapid growth in sales
of mutual funds to individuals and retail clients has augmented the traditional
focus on institutional markets. This segment also includes the institutional
Separate Accounts, which provide various investment options for group clients
through pooled or single group accounts. The results of DLJ were included in
Equitable Life's consolidated statements of earnings until December 15, 1993,
the date on which Equitable Life sold a 61% interest in DLJ to the Holding
Company. Subsequent to that date, DLJ is accounted for on the equity basis. See
Note 20 of Notes to Consolidated Financial Statements. For additional
information on the Investment Subsidiaries, including their respective results
of operations, see "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Combined Results of Continuing Operations by Segment
- - Investment Services".
Equitable Life continues to pursue its strategy of increasing third party assets
under management. The Investment Subsidiaries have steadily added to third party
assets under management, while continuing to provide investment management
services to the Insurance Group. At December 31, 1995, Equitable Life and its
subsidiaries had $189.8 billion of assets under management and DLJ had $4.5
billion of assets under management for a total of $195.3 billion. Of this total,
$144.4 billion (or 73.9%) were managed by the Investment Subsidiaries for third
parties, including domestic and overseas investors, mutual funds, pension funds,
endowment funds and, through the Insurance Group's Separate Accounts, insurance
and annuity customers of the Insurance Group. Approximately $138.9 million
(14.6%) of the revenues of the Investment Services segment for the year ended
December 31, 1995 consisted of fees earned by the Investment Subsidiaries for
investment management and other services provided to the Insurance Group and to
unconsolidated real estate joint ventures. For additional information on fees
and assets under management, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Investment Services - Fees From
Assets Under Management".
Alliance
General - Alliance, one of the nation's largest investment advisors, provides
diversified investment management services to a variety of institutional
clients, including pension funds, endowments and foreign financial institutions,
as well as to individual investors principally through a broad line of mutual
funds. As of December 31, 1995, Alliance had approximately $146.5 billion in
assets under management (including $125.0 billion for third party clients).
Alliance's assets under management at December 31, 1995 consisted of
approximately $97.7 billion from institutional clients and approximately $48.8
billion from products for individual investors. Alliance's greatest growth in
recent years has been in products for individual investors, primarily mutual
funds, which generate relatively high management and servicing fees as compared
to fees charged to institutional accounts. As of December 31, 1995, The
Equitable owned a 1% general partnership interest in Alliance and approximately
58.7% of the units representing assignments of beneficial ownership of limited
partnership interests in Alliance ("Alliance Units").
1-5
Alliance is not currently subject to Federal income tax on its partnership
business; however, under the Revenue Act of 1987, Alliance, as a publicly traded
partnership, will become subject to Federal income tax commencing on January 1,
1998 and may become subject to Federal income tax prior to January 1, 1998 under
certain circumstances. See "Management's Discussion and Analysis of Financial
Conditions and Results of Operations Liquidity and Capital Resources - Insurance
Group - Sources of Insurance Group Liquidity".
During the fourth quarter of 1995, Alliance entered into an agreement to acquire
Cursitor-Eaton Asset Management Company and Cursitor Holdings Ltd. (collectively
"Cursitor") and, in January, 1996, Alliance agreed in principle to form a joint
venture with Albion Asset Advisors, a New York based investment specialist. The
Cursitor acquisition, which was completed on February 29, 1996, increased
Alliance's assets under management by approximately $10.5 billion. For
additional information on these transactions, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Combined Results of
Continuing Operations by Segment - Investment Services".
Alliance's business can be divided into two broad categories: Institutional
Account Management and Individual Investor Services. Alliance's institutional
account management business consists primarily of the active management of
equity and fixed income accounts. Alliance's individual investor services, which
developed as a diversification of its institutional investment management
business, consist of the management, distribution and servicing of mutual funds
and cash management products, including money market funds and deposit accounts.
Institutional Account Management - At December 31, 1995, institutional accounts
(other than investment companies and deposit accounts) represented approximately
67% of Alliance's total assets under management while the fees earned from the
management of those accounts represented approximately 36% of Alliance's
revenues for the year ended December 31, 1995. Alliance's institutional account
management business consists primarily of the active management of equity
accounts, balanced (equity and fixed income) accounts and fixed income accounts.
Alliance also provides active management for international (non U.S.) and global
(including U.S.) equity, balanced and fixed income portfolios, venture capital
portfolios, and hedge fund portfolios. In addition, Alliance provides "passive"
management services for equity, fixed income and international accounts.
As of December 31, 1995, Alliance acted as investment manager for approximately
1,000 institutional accounts (other than investment companies) which include
corporate employee benefit plans, public employee retirement systems, the
General and Separate Accounts of Equitable Life and its insurance company
subsidiaries, endowment funds, foundations, foreign governments and financial
and other institutions. The General and Separate Accounts of the Insurance Group
are Alliance's largest institutional clients. Alliance's institutional accounts
are managed pursuant to written investment management agreements between the
clients and Alliance, which are usually terminable at any time or upon
relatively short notice by either party.
Individual Investor Services - Alliance also (i) manages The Hudson River Trust
which is the funding vehicle for the individual variable life insurance and
annuity products offered by the Insurance Group; (ii) manages and sponsors a
broad range of open and closed-end mutual funds other than The Hudson River
Trust ("Alliance Mutual Funds"); and (iii) provides cash management services
(money market funds and Federally insured deposit accounts) that are marketed to
individual investors through broker-dealers, banks, insurance companies, and
other financial intermediaries. The assets comprising all Alliance Mutual Funds,
The Hudson River Trust and deposit accounts on December 31, 1995, amounted to
approximately $48.8 billion.
For additional information on Alliance, see Alliance's Annual Report on Form
10-K for the year ended December 31, 1995.
Donaldson, Lufkin & Jenrette, Inc.
DLJ, in which Equitable Life owns a minority 36.1% interest, is a leading
integrated investment and merchant bank that serves institutional, corporate,
governmental and individual clients both domestically and internationally. DLJ's
businesses include securities underwriting, sales and trading; merchant banking;
financial advisory services; investment research; correspondent brokerage
services; and asset management. On October 30, 1995, DLJ completed an initial
public offering ("IPO") of 10.58 million shares of its common stock and the sale
of $500.0 million aggregate principal amount of its senior notes due November 1,
2005. See Note 20 of Notes to Consolidated Financial Statements for additional
information. At December 31, 1995, Equitable Life owned approximately 36.1% and
the Holding Company owned approximately 44.1% of DLJ's issued and outstanding
common stock. Assuming full vesting of the forfeitable restricted stock units
and the exercise of stock options granted to certain employees in connection
1-6
with DLJ's IPO (but excluding any shares issued under employee stock options
which may be granted after the IPO), Equitable Life would own approximately 28%
and the Holding Company would own approximately 35% of DLJ's common stock. While
DLJ is now accounted for on the equity basis in Equitable Life's consolidated
financial statements, the financial data contained in the following description
reflects DLJ's business in total.
DLJ conducts its business through three principal operating groups, each of
which is an important contributor to revenues and earnings: the Banking Group,
which includes DLJ's Investment Banking, Merchant Banking and recently formed
Emerging Markets groups; the Capital Markets Group, consisting of DLJ's Fixed
Income, Institutional Equities and Equity Derivatives Divisions, as well as
Sprout, its venture capital affiliate; and the Financial Services Group,
comprised of Pershing, the Investment Services Group and Wood Struthers &
Winthrop; and Autranet, a distributor of investment research products.
DLJ's Banking Group is a major participant in the raising of capital and the
providing of financial advice to companies throughout the U.S. and has
significantly expanded its activities abroad. Through its Investment Banking
group, DLJ manages and underwrites public offerings of securities, arranges
private placements and provides advisory and other services in connection with
mergers, acquisitions, restructurings and other financial transactions. Its
Merchant Banking group pursues direct investments in a variety of areas through
a number of investment vehicles funded with capital provided primarily by
institutional investors, DLJ and its employees. The recently formed Emerging
Markets Group specializes in client advisory services for mergers, acquisitions
and financial restructurings, as well as merchant banking and the underwriting,
placement and trading of equity, debt derivative securities in Latin America and
Asia.
The Capital Markets Group encompasses a broad range of activities including
trading, research, origination and distribution of equity and fixed income
securities, private equity investments and venture capital. Its Fixed Income
Division provides institutional clients with research, trading and sales
services for a broad range of taxable fixed income products including high yield
corporate, investment grade corporate, U.S. government and mortgage-backed
securities. The Institutional Equities division provides institutional clients
with research, trading and sales services in U.S. listed and over the counter
equity securities. In addition, DLJ's Equity Derivatives Division provides a
broad range of equity and index options products, while Sprout is one of the
oldest and largest groups in the private equity investment and venture capital
industry.
The Financial Services Group provides a broad array of services to individual
investors and the financial intermediaries which represent them. Pershing is a
leading provider of correspondent brokerage services, clearing transactions for
over 500 U.S. brokerage firms which collectively maintain over 1.3 million
client accounts. DLJ's Investment Services Group provides high net worth
individuals and medium and smaller sized institutions with access to DLJ's
equity and fixed income research, trading services and underwriting. Through
Wood, Struthers & Winthrop Management Corporation ("Wood, Struthers &
Winthrop"), DLJ provides investment management and trust services primarily to
high net worth individual investors and institutions. During the first quarter
of 1996, DLJ created a new unit, DLJ Asset Management Corp., which will provide
asset management services to institutions and corporations.
Autranet Inc., a registered broker-dealer and member firm of the NYSE, is active
in the distribution of investment research products purchased from approximately
450 sources known as "independent originators." Independent orginators are
research specialists, not primarily employed by securities firms, and range in
size and scope from large economic consulting firms to individual freelance
analysts. Autranet generates its revenues from a client base of over 400
domestic and international institutions.
1-7
The securities industry generally experienced favorable market conditions in
1995, as strong rallies in the stock and bond markets and strong trading volumes
on all major exchanges helped fuel merger and acquisition activity as well as
underwriting activity. DLJ's principal business activities are, by their nature,
highly competitive and subject to general market conditions, volatile trading
markets and fluctuations in the volume of market activity. Consequently, DLJ's
net income and revenues have been, and are likely to continue to be, subject to
wide fluctuations, reflecting the impact of many factors beyond DLJ's control,
including securities market conditions, the level and volatility of interest
rates, competitive conditions, and the size and timing of transactions.
For additional information on DLJ, see DLJ's Annual Report on Form 10-K for the
year ended December 31, 1995.
Equitable Real Estate
General - As of December 31, 1995, Equitable Real Estate had $25.7 billion of
assets under management (including $13.9 billion for third party clients). The
decline in assets under management from December 31, 1994 was primarily due to
Equitable Real Estate's sale, on October 27, 1995, of 30 commercial mortgage
servicing contracts. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Combined Results of Continuing Operations
by Segment - Investment Services". Equitable Real Estate is ranked as the
largest United States manager of tax-exempt assets invested in real estate and
provides real estate investment management services, property management
services (through its two COMPASS subsidiaries), mortgage servicing and loan
asset management, mortgage loan origination (through its affiliate Column
Financial, Inc.) and agricultural investment management (through its affiliate
Equitable Agri-Business, Inc.).
Equitable Real Estate has capabilities in a variety of major real estate
disciplines including acquisitions and financings, portfolio management, asset
management, appraisals, asset disposition and workouts and capital markets.
Equitable Real Estate offers a broad range of products and services to its
third-party client base, which includes more than 300 corporate, public and
multi-employer pension funds, insurance companies, foreign investors and
individual accounts.
As of December 31, 1995, Equitable Real Estate managed equity and joint venture
interests in approximately 1,000 investments covering over 238 million square
feet of real estate, and managed over 11,000 mortgage loans (approximately 874
of which were commercial loans) with a carrying value of approximately $8.9
billion. The equity real estate and mortgage portfolios managed by Equitable
Real Estate include investments in a range of commercial, agricultural and
industrial properties including regional and neighborhood shopping centers,
downtown and suburban office buildings, apartments, warehouse and distribution
facilities and hotels. As of December 31, 1995, Equitable Real Estate managed
one of the largest portfolios of regional shopping malls in the United States
and managed substantial holdings in major center city office properties.
Institutional Account Management - As of December 31, 1995, Equitable Real
Estate managed $11.2 billion in real estate assets on behalf of approximately
246 pension funds. Equitable Real Estate's largest real estate investment
account is Prime Property Fund which had net assets of $2.9 billion as of
December 31, 1995, making it the largest open-end real estate investment fund
for pension funds in the United States.
In addition, Equitable Real Estate offers a series of special focus, closed-end
pooled funds, certain single and multi-property pooled funds, single client
accounts tailored to achieve a specific set of investment goals and certain
other accounts tailored to meet the objectives of large public pension fund
clients.
Mortgage Operations - At December 31, 1995, Equitable Real Estate managed a
mortgage portfolio on behalf of the Insurance Group with an outstanding balance
of approximately $6.5 billion. Services provided by Equitable Real Estate to the
Insurance Group and other clients include mortgage and asset management services
including due diligence, portfolio valuation, loan custody, maintenance,
reporting and cash management, loan restructuring, foreclosures, equity real
estate management and disposition.
Property Management Operations - At December 31, 1995, COMPASS Management and
Leasing and COMPASS Retail managed over 140 million square feet of commercial
office and retail space for Equitable Life and third party clients. Services
provided by these two subsidiaries of Equitable Real Estate include property and
facilities management of commercial properties and management and development of
regional shopping centers.
1-8
Other Operations - At December 31, 1995, Equitable Real Estate's International
Group managed approximately $1.6 billion in U.S. real estate investments for 31
Pacific Rim and European investors. Equitable Real Estate's international
products include direct equity real estate investments and pooled equity real
estate funds. In addition, Equitable Agri-Business offers agricultural
investment management advisory services to the Insurance Group and third party
clients. Equitable Real Estate also has various joint venture relationships,
including Column Financial, Inc., a venture with DLJ, which originates, packages
and securitizes mortgage loans, and Equitable Real Estate Hyperion Capital
Advisors, LLP., a venture with Hyperion Capital Management, Inc., which provides
advice with respect to investments in commercial mortgage-backed securities.
Institutional Separate Accounts
The Investment Services segment includes the Insurance Group's Separate Accounts
for group clients. Pooled Separate Accounts offer pension fund clients
diversification and economies of scale in asset management. Investment options
range across the risk spectrum from short-term fixed income portfolios, to
equity oriented growth and small capitalization portfolios, to real estate
funds. At December 31, 1995, assets held in the institutional Separate Accounts
totaled $11.41 billion. Alliance and Equitable Real Estate derive fee income
from management of assets invested in these institutional Separate Accounts.
Group Pension
General. The Group Pension segment, which in 1995 accounted for approximately
$292.0 million, or 6.5%, of consolidated revenues includes traditional
participating group annuity contracts, conversion annuities and association
plans. Due to decreased demand for traditional defined benefit participating
group annuities, the Group Pension segment has made few new group annuity sales
in recent years.
Products. The following table summarizes premiums/deposits for the Insurance
Group's principal Group Pension products.
Group Pension
Premiums/Deposits
(In Millions)
Years Ended December 31,
----------------------------------
1995 1994 1993
-------- -------- ---------
Participating group annuities ........... $ 213.2 $ 144.9 $ 209.0
Association plans ....................... 139.6 88.2 60.9
Conversion annuities .................... 1.9 1.3 1.5
-------- -------- --------
Total Premiums/Deposits ................. $ 354.7 $ 234.4 $ 271.4
======== ======== ========
The Insurance Group's principal Group Pension products are traditional
participating group annuity contracts and conversion annuities for defined
benefit plans of larger employers, neither of which are currently offered to new
clients. Other products include association plans under group annuity contracts
which provide full service retirement programs for independent businesses
affiliated with large professional and trade associations. Future policy
benefits/account balances for these products are held in the General Account
and, in the case of association plan contracts, also in the institutional
Separate Accounts.
Discontinued Operations
In September 1991, Equitable Life discontinued the business operations of the
GIC Segment, reflecting management's strategic decision to focus its attention
and capital on its core individual insurance and investment services businesses.
See Note 7 of Notes to Consolidated Financial Statements and "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Discontinued Operations".
1-9
The discontinued GIC Segment consists of the GIC and Wind-Up annuity lines of
business. The GIC line of business includes several types of GIC products
pursuant to which Equitable Life is contractually obligated to credit an
interest rate which was set at the date of issue. These contracts have fixed
maturity dates on which funds are to be returned to the contractholder. Wind-Up
annuity products, the terms of which are fixed at issue, were sold to corporate
sponsors of terminating qualified defined benefit plans. At December 31, 1995,
$1.40 billion of GIC Segment liabilities to contractholders were outstanding, of
which $329.2 million were related to GIC products and the balance to Wind-Up
annuities.
Closed Block
In connection with the demutualization, Equitable Life established the Closed
Block, consisting of certain classes of individual participating policies in
respect of which Equitable Life had a dividend scale payable in 1991 and which
were in force on July 22, 1992. Since the Closed Block was funded to provide for
payment of guaranteed benefits under such policies and, in addition, for
continuation of dividends paid under 1991 dividend scales, it will not be
necessary to use general funds to pay guaranteed benefits unless the Closed
Block experiences very substantial adverse deviations in investment, mortality,
persistency or other experience factors. If the assets allocated to the Closed
Block, the cash flows therefrom and the revenues from the Closed Block prove to
be insufficient to pay the benefits guaranteed under the policies included in
the Closed Block, Equitable Life will be required to make such payments from its
general funds. In addition, if the investment, mortality, persistency or other
experience of the Closed Block was substantially worse than that of Equitable
Life's principal competitors, management might, for competitive reasons, use
Equitable Life's general funds to maintain competitive dividend levels. For more
information on the Closed Block, see Notes 2 and 6 of Notes to Consolidated
Financial Statements.
General Account Investment Portfolio
General. The Insurance Group's General Account consists of a diversified
portfolio of investments. The General Account liabilities can be divided into
two primary types, participating and non-participating. For participating
products, the investment results of the underlying assets determine, to a large
extent, the return to the policyholder, and the Insurance Group's profits are
earned from investment management, mortality and other charges. For
non-participating or interest-sensitive products, the Insurance Group's profits
are earned from a positive spread between the investment return and the
crediting or reserve interest rate.
Although all the assets of the General Account of each insurer in the Insurance
Group support all of that insurer's liabilities, the Insurance Group has
developed an asset/liability management approach with separate investment
segments within each insurer for specific classes of product liabilities, such
as insurance, annuity and group pension. As part of this approach, the Insurance
Group develops investment guidelines for each product line which form the basis
for investment strategies to manage each product's return and liquidity
requirements. Specific investments frequently meet the requirements of, and are
acquired by, more than one investment segment, with each such investment segment
holding a pro rata interest in such investments and the cash flows therefrom.
The Closed Block assets are a part of continuing operations and have been
combined on a line-by-line basis with assets outside of the Closed Block for
comparability purposes. In view of the similar asset quality characteristics of
the major asset categories in the two portfolios, management believes it is
appropriate to discuss the Closed Block assets and the assets outside of the
Closed Block on a combined basis. The General Account Investment Assets and the
Holding Company Group investment portfolio are discussed below. For further
information on these portfolios and on GIC Segment Investment Assets, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Continuing Operations Investment Portfolio and - Discontinued
Operations". Most individual investments in the portfolios of the GIC Segment
and the Holding Company Group are also included in General Account Investment
Assets (which include the Closed Block).
1-10
The following table summarizes General Account Investment Assets by asset
category for the periods shown.
General Account Investment Assets
Net Amortized Cost(1)
(Dollars In Millions)
At December 31, 1995 At December 31, 1994
------------------------ -----------------------
Amount % of Total Amount % of Total
------------ ---------- ----------- ----------
Fixed maturities ..................... $ 19,149.9 56.7% $ 16,871.6 52.2%
Mortgages ............................ 5,007.1 14.8 5,582.9 17.3
Equity real estate ................... 4,130.3 12.2 4,654.7 14.4
Other equity investments ............. 764.1 2.3 846.1 2.6
Policy loans ......................... 3,773.6 11.2 3,559.1 11.0
Cash and short-term investments ...... 952.1 2.8 824.2 2.5
----------- ------ ----------- ------
Total ................................ $ 33,777.1 100.0% $ 32,338.6 100.0%
=========== ====== =========== ======
<FN>
(1) Amortized cost net of valuation allowances.
</FN>
The present composition of the General Account reflects decisions made in 1990
to increase the credit quality of the investment portfolio to support the
Insurance Group's objectives of strengthening the balance sheet and improving
profitability. The Insurance Group has substantially reduced its exposure to
commercial mortgages since December 31, 1990 when they comprised $7.52 billion
or 22.4% of the net amortized cost of General Account Investment Assets to $3.33
billion or 9.9% at December 31, 1995. The equity real estate portfolio has
increased modestly from $3.87 billion or 11.6% of net amortized cost at the end
of 1990 to $4.13 billion or 12.2% at December 31, 1995, primarily due to
properties acquired through foreclosure. Other equity investments have declined
from $1.30 billion or 3.9% at December 31, 1990 to $764.1 million or 2.3% at
December 31, 1995. In addition, below investment grade fixed maturities were
reduced from a net amortized cost of $3.3 billion or 9.9% of General Account
Investment Assets at December 31, 1990 to $1.13 billion or 3.5% at December 31,
1993. In light of the Insurance Group's significantly reduced exposure to below
investment grade securities, management increased its portfolio of below
investment grade securities in 1994 and 1995 to a net amortized cost of $2.61
billion or 7.7% of General Account Investment Assets at December 31, 1995,
primarily through purchases of below investment grade public fixed maturities.
Investment Surveillance. As part of the Insurance Group's investment management
process, management, with the assistance of its asset managers, constantly
monitors General Account investment performance. This process culminates with a
quarterly review of troubled assets by the Insurance Group's Surveillance
Committee which decides whether values of any investments are other than
temporarily impaired, whether specific investments should be classified as
problems, potential problems or restructured, and whether specific investments
should be put on an interest non-accrual basis. For fixed maturities, other than
temporary declines in value result in writedowns of the investments to market or
estimated fair value. In determining whether valuation allowances are necessary
for mortgages or equity real estate, management considers, among other factors,
its ability and intent to hold the relevant investments. Any writedowns or
changes in valuation allowances are netted against the asset categories to which
they apply and are included in total investment results.
When establishing the valuation allowances for mortgages, management considers,
among other things, the current and expected future payment status of the loan
(i.e., whether the loan is a problem, potential problem or restructured) the
estimated fair value of the underlying collateral and expected debt service.
Fair values of the underlying collateral are determined based on an analysis of
cash flow projections for the properties. The cash flow projections reflect
specific conditions affecting each property and generally assume some gradual
improvement in occupancy levels and lease terms from current levels, determined
on a property specific basis. For equity real estate (other than real estate
identified as available for sale) valuation allowances are based on the
relationship between depreciated cost and forecasted cash flows discounted at a
rate equal to Equitable Life's cost of funds. The cash flow calculation involves
the preparation of cash flow projections for each property for the valuation
period (generally the next ten years) and includes an assumed sale of the
property at the end of the valuation period. The cash flow forecasts are based
on the specific conditions affecting each property, including local real estate
conditions, and generally assume a gradual improvement in occupancy levels and
1-11
lease terms from current levels. For equity real estate identified as available
for sale, valuation allowances are established and adjusted periodically so that
the Insurance Group's carrying value equals estimated fair value, net of
disposition costs, or depreciated cost. Management's estimates of fair value and
anticipated cash flows used in establishing valuation allowances for mortgages
and equity real estate are inherently subjective and involve numerous judgments.
For additional information on the valuation of assets held in the General
Account, including information on writedowns and valuation allowances for
specific classes of assets and the impact of the implementation of new
accounting standards, see Notes 2, 3 and 5 of Notes to Consolidated Financial
Statements and "Management's Discussion and Analysis of Financial Condition and
Results of Operations - General Account Investment Assets Portfolio".
Description of General Account Investment Assets. For portfolio management
purposes, General Account Investment Assets are divided into four asset
categories: fixed maturities, mortgages, equity real estate and other equity
investments.
Fixed Maturities. As of December 31, 1995, the fixed maturities category was the
largest asset class of General Account Investment Assets with $19.15 billion in
net amortized cost or 56.7% of total General Account Investment Assets. The
fixed maturities category consists of both investment grade and below investment
grade public and private debt securities, as well as small amounts of redeemable
preferred stock. As of December 31, 1995, publicly traded debt securities
represented 69.8% of the amortized cost of the asset category, and privately
placed debt securities and redeemable preferred stock represented 29.5% and
0.7%, respectively. As of December 31, 1995, 86.4% ($16.54 billion) of the
amortized cost of fixed maturities were rated investment grade (National
Association of Insurance Commissioners ("NAIC") bond rating 1 or 2). For a
discussion of the credit quality of fixed maturities see "Management's
Discussion and Analysis of Financial Condition and Results of Operations General
Account Investment Portfolio - Continuing Operations - Investment Results by
Asset Category - Fixed Maturities".
The following table summarizes fixed maturities by remaining average life as of
December 31, 1995.
Fixed Maturity Investments By Remaining Average Life
December 31, 1995
(Dollars In Millions)
Amortized Cost
---------------------------------------
Public Private % of Total
Fixed Fixed Fixed
Maturities Maturities Maturities
----------- ------------ -----------
Remaining Average Life:(1)
Less than one year ............................. $ 300.6 $ 222.9 2.7%
One or more and less than three years .......... 1,645.4 714.1 12.3
Three or more and less than five years ......... 1,212.8 1,190.0 12.6
Five or more and less than seven years ......... 1,283.2 840.4 11.1
Seven or more and less than ten years .......... 2,481.2 1,526.9 21.0
Ten or more and less than fifteen years ........ 941.2 551.1 7.8
Fifteen or more and less than twenty years ..... 426.5 135.8 2.9
More than twenty years ......................... 1,064.5 124.5 6.2
----------- ---------- -----
Subtotal ................................. 9,355.4 5,305.7 76.6
Collateralized mortgage obligations(2) ......... 2,003.9 335.3 12.2
Mortgage pass-through securities(2) ............ 2,019.1 0.0 10.5
Redeemable preferred stock and other ........... 87.5 43.0 0.7
----------- ---------- -----
Total .......................................... $ 13,465.9 $ 5,684.0 100.0%
=========== ========== ======
1-12
<FN>
(1) Assumes debt securities are not called for redemption prior to stated
maturity. Declines in prevailing interest rates may result in higher levels
of redemptions prior to maturity of fixed maturities that do not have
adequate call protection. At December 31, 1995, approximately 57.9%
(measured by amortized cost) of fixed maturities (excluding collateralized
mortgage obligations ("CMOs"), asset-backed securities, mortgage
pass-through securities and preferred stock and other) were non-callable.
An additional approximately 26.2% had call protection due to substantial
prepayment ("make-whole") premiums. Approximately 15.2% were callable bonds
with weighted average coupons of 7.50% or below.
(2) The average life of CMOs and mortgage pass-through securities is not
calculated due to the variability of timing of principal repayments.
Approximately 79.2% of the CMOs have underlying collateral which bears
interest at rates of 7.50% or less and 64.2% of the mortgage pass-through
securities bear interest at rates of 7.50% or less.
</FN>
Investment grade fixed maturities (which includes redeemable preferred stocks)
include the securities of 856 different issuers, with no individual issuer
representing more than 1.2% of investment grade fixed maturities as a whole. The
investment grade fixed maturities are also diversified by industry, with
investments in manufacturing (16.2%), finance (9.6%), banking (8.4%), utilities
(6.8%), and transportation (5.2%) representing the five largest allocations of
investment grade fixed maturities at December 31, 1995. No other industry
represented more than 5.0% of the investment grade fixed maturities portfolio at
that date.
Below investment grade fixed maturities (NAIC bond rating 3 through 6 and
redeemable preferred stocks) include the securities of over 248 different
issuers with no individual issuer representing more than 6.9% of below
investment grade fixed maturities as a whole. At December 31, 1995, the five
largest industries represented in these below investment grade fixed maturities
were manufacturing (38.2%), communications (12.5%), wholesale and retail
(11.9%), agricultural/mining/construction (8.0%) and finance (6.7%). No other
industry represented 5.0% or more of this portfolio. The General Account also
has interests in below investment grade fixed maturities through equity
interests in a number of high yield funds. See "Other Equity Investments".
For information regarding problem, potential problem and restructured
investments in the fixed maturities category, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Continuing
Operations Investment Portfolio - Investment Results of General Account
Investment Assets - Fixed Maturities".
Mortgages. As of December 31, 1995, measured by amortized cost, commercial
mortgages totaled $3.41 billion (67.1% of the amortized cost of the category),
agricultural loans were $1.62 billion (31.9%) and residential loans were $53.2
million (1.0%). As of December 31, 1995, over 97.6% of all commercial mortgage
loans, measured by amortized cost, bore a fixed interest rate.
Commercial Mortgages - Commercial mortgages, substantially all of which are made
on a non-recourse basis, consist primarily of fixed rate first mortgages on
completed properties. As of December 31, 1995, first mortgages (which include
all mortgages where no other lender holds a senior position to Equitable Life)
represented $3.40 billion (99.6%) of the amortized cost of the commercial
mortgage portfolio and there were no construction loans in the category. These
loans are diversified by property type. As of December 31, 1995, there were 518
individual commercial mortgage loans collateralized by office buildings, retail
properties, industrial properties, apartment buildings, hotels and land. By
dollar amount of amortized cost, loans collateralized by downtown office
buildings comprised 71.0% of the loans on office properties and regional malls
comprised 76.4% of the loans collateralized by retail properties as of such
date.
1-13
The following tables set forth the distribution, by property type and by state,
of the commercial mortgages as of December 31, 1995.
Commercial Mortgages By Property Type and By State
December 31, 1995
(In Millions)
Amortized Amortized
Cost Cost
----------- -----------
Property Type: State:
Office...................... $ 1,586.4 New York......................... $ 523.6
Retail...................... 936.4 California....................... 363.6
Hotel....................... 445.4 Pennsylvania..................... 265.6
Industrial.................. 305.1 Texas............................ 244.8
Apartment................... 122.4 Connecticut...................... 220.1
Land and other.............. 18.0 Ohio............................. 199.7
----------
Total....................... 3,413.7 Maryland......................... 174.9
Less valuation allowances... 79.9 Other (no state larger than 5%).. 1,421.4
---------- ---------
Carrying Value.............. $ 3,333.8 Total............................ 3,413.7
==========
Less valuation allowances........ 79.9
---------
Carrying Value................... $ 3,333.8
=========
Substantially all the mortgage loans in the General Account were originated by
Equitable Life and not purchased from third parties. Equitable Life's investment
policy with regard to the origination of new General Account mortgage loans
involves a review of the economics of the property being financed, the loan to
value ratio, adherence to guidelines that provide for diversification of
Equitable Life's mortgage portfolio by property type and location and a review
of prevailing industry lending practices. Equitable Life has substantially
slowed its volume of new mortgage loan originations. Equitable Life does not
calculate current loan-to-value ratios of its General Account commercial
mortgages following their dates of origination; however management believes that
the current aggregate loan-to-value ratio of commercial mortgage loans in the
problem, potential problem or the restructured categories is higher than the
current aggregate loan-to-value ratio of performing loans not in those
categories.
At December 31, 1995, loans in the commercial mortgage portfolio (including
those portions of the loans in the GIC Segment) to one borrowing group
represented 6.9% or more of The Equitable's consolidated shareholders' equity.
At that date, The Equitable total investments (including holdings of the Closed
Block and discontinued GIC Segment) related to that same borrowing group
exceeded 10% of The Equitable's consolidated shareholders' equity. For
additional information on these loans, see Note 3 of Notes to Consolidated
Financial Statements.
The commercial mortgage portfolio includes both amortizing and balloon loans.
Management defines balloon loans to be mortgages for which the final principal
payment is more than half of the original loan amount. As of December 31, 1995,
16.5% of the portfolio was comprised of loans that provided for majority or
complete amortization prior to final maturity. For information on maturity and
principal repayment schedule for the commercial mortgage portfolio as of
December 31, 1995, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations - General Account Investment Portfolio -
Investment Results of General Account Investment Assets".
For information regarding problem, potential problem and restructured commercial
mortgage loans, see "Management's Discussion and Analysis of Financial Condition
and Results of Operations - General Account Investment Portfolio - Continuing
Operations - Investment Returns by Asset Category - Mortgages".
Agricultural Mortgages - The agricultural mortgage loans add diversity to the
mortgage loan portfolio. As of December 31, 1995, there were approximately 4,533
outstanding agricultural mortgages with an aggregate amortized cost of $1.62
billion.
1-14
Equity Real Estate. While Equitable Life historically has been an active
investor in equity real estate, it has a policy of not investing substantial new
funds in equity real estate, except to safeguard values in existing investments
or to honor outstanding commitments. As of December 31, 1995, 15.9% of the total
amortized cost of equity real estate included in General Account Investment
Assets represented commercial properties acquired as investment real estate
after December 31, 1986. The remainder of the equity real estate portfolio was
acquired prior to 1987 or represents properties acquired through foreclosure.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations - General Account Investment Portfolio - Continuing Operations
Overview".
The equity real estate category consists of office, retail, hotel, industrial
and other properties. Office properties constitute the largest component of the
category and primarily are significant downtown buildings in major cities. The
retail properties are largely regional malls, and the hotels are generally
members of major chains with national reservation systems.
The following tables reflect the distribution by property type and state of the
equity real estate assets as of December 31, 1995.
Equity Real Estate By Property Type and By State
December 31, 1995
(In Millions)
Amortized Amortized
Cost Cost
---------- -----------
Property Type: State:
Office......................$ 2,981.1 Massachusetts.................... $ 761.8
Retail...................... 447.4 California....................... 560.1
Mixed Use................... 292.3 Illinois......................... 539.2
Industrial.................. 250.4 New York......................... 447.6
Agricultural................ 30.5 Georgia.......................... 401.1
Hotel/Motel................. 24.3 Texas............................ 363.9
Apartment................... 2.9 Pennsylvania..................... 216.0
Other....................... 365.5 Other (no state larger than 5%).. 1,104.7
--------- ----------
Total....................... 4,394.4 Total............................ 4,394.4
Less valuation allowances... 264.1 Less valuation allowances........ 264.1
--------- ----------
Carrying Value..............$ 4,130.3 Carrying Value................... $ 4,130.3
========= ==========
Other Equity Investments. The other equity investments category consists
primarily of limited partnership interests in high yield debt and equity funds
managed by outside investment managers, The Deal Flow Fund, L.P. which had an
amortized cost of $110.1 million at December 31, 1995 (the "Deal Flow Fund"),
common and preferred stock acquired in connection with private leveraged buyout
transactions and other below investment grade investments (including common
stock). See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - General Account Investment Portfolio - Continuing
Operations - Investment Results by Asset Category - Other Equity Investments".
Employees and Agents
As of December 31, 1995, The Equitable had approximately 13,300 employees. Of
these, approximately 4,200 were employed by the Insurance Group and
approximately 9,100 were employed by the Investment Subsidiaries. Fewer than 500
employees are covered by a collective bargaining agreement. In addition, the
Insurance Group's career sales force consists of over 7,200 agents, some of
whom, including agency and district managers and newer agents compensated on a
combined salary and commission basis, are employees of the Insurance Group.
Management believes relations with employees and agents are good.
1-15
Competition
Insurance and Annuities. There is strong competition among insurance companies
seeking clients for the types of insurance, annuity and group pension products
sold by the Insurance Group. Many other insurance companies offer one or more
products similar to those offered by the Insurance Group and in some cases
through similar marketing techniques. In addition, the Insurance Group competes
with banks and other financial institutions for sales of annuity and, to a
lesser extent, life insurance products and with mutual funds, investment
advisers and other financial entities for the investment of savings dollars.
The principal competitive factors affecting the Insurance Group's business are
price, financial and claims-paying ratings, size, strength and professionalism
of agency force, range of product lines, product quality, reputation and
visibility in the marketplace, quality of service and, with respect to variable
insurance and annuity products, investment management performance. Management
believes the dual licensing of a large majority of its agency force by the
National Association of Securities Dealers, Inc. ("NASD") and the training
provided to agents by the Insurance Group provide the Insurance Group with a
competitive advantage in effectively penetrating and communicating with its
target markets.
Ratings are an important factor in establishing the competitive position of
insurance companies. Since Equitable Life's demutualization, the financial
strength or claims-paying ratings of Equitable Life and EVLICO have been
upgraded by each of Moody's Investors Service ("Moody's"), Standard & Poor's
Corporation ("S&P"), A.M. Best Company, Inc. and Duff & Phelps Credit Rating Co.
As of December 31, 1995, the financial strength or claims-paying rating of
Equitable Life and EVLICO was AA- from S&P (4th highest of 18 ratings), A1 from
Moody's (5th highest of 19 ratings), A from A.M. Best Company, Inc. (3rd highest
of 15 ratings), AA from Fitch Investors Service, L.P. (3rd highest of 18
ratings) and AA- from Duff & Phelps Credit Rating Co. (4th highest of 18
ratings).
During 1996, management intends to explore selective acquisition opportunities
in Equitable Life's core insurance and asset management businesses.
Investment Fund Management. The investment management industry is highly
competitive and new entrants continually are attracted to it, due in part to
relatively few barriers to entry. Alliance and Equitable Real Estate are subject
to substantial competition in all aspects of their business. Pension fund,
institutional, and corporate assets are managed by investment management firms,
broker-dealers, banks and insurance companies. Alliance and Equitable Real
Estate compete with these investment managers primarily on the basis of the
range of investment products offered, the investment performance of such
products and the services provided to clients. Consultants also play a major
role in the selection of managers for pension funds.
Many of the firms competing with these Investment Subsidiaries for institutional
clients also offer mutual fund shares and cash management services to individual
investors. Competitiveness in this area is chiefly a function of the investment
performance and range of mutual funds and cash management services offered, the
quality in servicing customer accounts and the capacity to provide financial
incentives to intermediaries through distribution assistance and administrative
services payments funded by "Rule 12b-1" plans and the manager's own resources.
Equitable Life is subject to New York Insurance Law limitations on the amount it
may invest in its Investment Subsidiaries (including Alliance and Equitable Real
Estate); however, these limitations do not apply to the Holding Company.
The Insurance Group and the Investment Subsidiaries compete with and are
expected to continue to compete with each other by providing investment
management services, including sponsoring mutual funds and other investment
funds and accounts. For example, Alliance's partnership agreement specifically
allows Equitable Life and its subsidiaries (other than Alliance Capital
Management Corporation, a wholly owned Equitable Life subsidiary) to compete
with Alliance and to seek to develop opportunities that also may be available to
Alliance.
Securities and Investment Banking. DLJ encounters significant competition in all
aspects of the securities business and competes worldwide directly with other
securities firms, both domestic and foreign, a number of which have greater
capital, financial and other resources than DLJ currently has at its disposal.
In addition to competition from firms currently in the securities business,
there has been increasing competition from other sources, such as commercial
1-16
banks and investment boutiques. The principal competitive factors influencing
DLJ's business are its professional staff, the firm's reputation in the
marketplace, its existing client relationships, the ability to commit capital to
client transactions and its mix of market capabilities. DLJ's ability to compete
effectively in securities brokerage and investment banking activities will also
be influenced by the adequacy of its capital levels.
Regulation
State Supervision. The Insurance Group is licensed to transact its insurance
business in, and is subject to extensive regulation and supervision by, all 50
of the United States, the District of Columbia, Puerto Rico, the U.S. Virgin
Islands and Canada and nine of Canada's twelve provinces and territories.
Equitable Life and EVLICO are each domiciled in New York and are primarily
regulated by the New York Superintendent. The extent of state regulation varies,
but most jurisdictions have laws and regulations governing standards of
solvency, levels of reserves, permitted types and concentrations of investments,
and business conduct to be maintained by insurance companies as well as agent
licensing, approval of policy forms and, for certain lines of insurance,
approval or filing of rates. The New York Insurance Law limits sales commissions
and certain other marketing expenses that may be incurred. The Insurance Group
is required to file detailed annual financial statements, prepared on a
statutory accounting basis, with supervisory agencies in each of the
jurisdictions in which it does business, and its operations and accounts are
subject to examination by such agencies at regular intervals.
Holding Company Regulation. Several states, including New York, regulate
transactions between an insurer and its affiliates under insurance holding
company acts. These acts contain certain reporting requirements and restrictions
on transactions such as the transfer of assets, loans or the payment of
dividends between an insurer and its affiliates. Under such laws, transfers of
assets, loans or dividends to Equitable Life by its insurance subsidiaries, or
by Equitable Life to the Holding Company, may be subject to prior notice or
approval depending on the size of such transactions or payments. Equitable Life
has agreed in an undertaking to the New York Insurance Department ("NYID") that
similar approval requirements also apply to transactions between (i) material
subsidiaries of Equitable Life and (ii) the Holding Company (and certain
affiliates, including AXA). Changes in control (generally presumed at a
threshold of 10% or more of outstanding voting securities) are also regulated by
these laws.
Guaranty Funds. Under insurance guaranty fund laws existing in all states,
insurers doing business in those states can be assessed up to prescribed limits
to protect policyholders of companies which become impaired or insolvent.
Assessments levied against the Insurance Group during each of the past five
years have not been material. While the amount of any future assessments cannot
be predicted with certainty, management believes that assessments with respect
to pending insurance company impairments and insolvencies will not be material
to the financial position of Equitable Life.
Statutory Investment Valuation Reserves. Statutory accounting practices require
a life insurer to maintain two reserves, an AVR and an interest maintenance
reserve ("IMR") to absorb both realized and unrealized gains and losses on most
of an insurer's invested assets.
AVR requires life insurers to establish statutory reserves for substantially all
invested assets other than policy loans and life insurance subsidiaries. AVR
generally captures all realized and unrealized gains or losses on invested
assets, other than those resulting from changes in interest rates. Each year the
amount of an insurer's AVR will fluctuate as additional gains or losses are
absorbed by the reserve. To adjust for such changes over time, an annual
contribution must be made to AVR equal to 20% of the difference between the
maximum AVR (as determined annually according to the type and quality of an
insurer's assets) and the actual AVR. In addition, voluntary contributions to
the AVR are permitted, to the extent that AVR does not exceed its maximum level.
As of December 31, 1995, the maximum AVR for the assets of the Insurance Group
was $1.9 billion and the actual AVR was $1.3 billion. The $599.6 million
difference between the maximum and actual AVR has no statutory or regulatory
significance other than its effect on the required future contribution to AVR.
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IMR captures the net gains which are realized upon the sale of fixed income
investments and which result from changes in the overall level of interest
rates. These net realized gains or losses are then amortized into income over
the remaining life of each investment sold. IMR applies to all types of fixed
income securities (bonds, preferred stocks, mortgage-backed securities and
mortgage loans).
In 1995, the AVR and IMR decreased statutory surplus by $365.7 million and $80.3
million, respectively, as compared to increases of $285.2 million and $2.1
million, respectively, in 1994. The decrease in statutory surplus caused by the
AVR in 1995 primarily was a result of an increase in carrying value of the
common stock of investment affiliates held by the Insurance Group and the $118.0
million of voluntary contributions to the AVR. The decrease caused by the IMR
resulted from realized capital gains due to changes in interest rates.
Changes in statutory surplus resulting from increases or decreases in AVR and
IMR impact the funds available for shareholder dividends. See "Shareholder
Dividend Restrictions". AVR and IMR are not included in financial statements
prepared in conformity with GAAP. Asset valuation allowances reflected in
consolidated financial statements included herein are established under GAAP.
While the future effect of both AVR and IMR on the Insurance Group's statutory
surplus will depend on the actual composition (both as to type and quality) of
the Insurance Group's assets and gains/losses, management does not expect these
reserves will reduce its statutory surplus to levels that would constrain the
growth of the Insurance Group's operations. See "Regulation Insurance -
Statutory Surplus and Capital".
Surplus Relief Reinsurance. The Insurance Group uses surplus relief reinsurance,
which has no GAAP financial reporting effect other than from the associated
expense and risk charge and administrative costs. However, surplus relief
reinsurance does have the effect of increasing current statutory surplus while
reducing future statutory earnings. As of December 31, 1995, $278.9 million
(7.9%) of the Insurance Group's total statutory capital (capital surplus and
AVR) resulted from surplus relief reinsurance. Management reduced surplus relief
reinsurance by approximately $271.0 million in 1995 and by $385.1 million since
December 31, 1992. Management currently intends to eliminate all surplus relief
reinsurance by December 31, 2000. Such reductions will reduce the amount of the
Insurance Group's statutory surplus on a dollar-for-dollar basis. The ability of
Equitable Life to pay dividends to the Holding Company may be affected by the
reduction of statutory earnings caused by reductions in the levels of surplus
relief reinsurance.
During 1993, New York and certain other states adopted new and more stringent
regulations governing the recognition of surplus relief reinsurance. In
accordance with a commitment to the NYID, Equitable Life and EVLICO submit each
new reinsurance agreement and amendment to the NYID. Management believes the
Insurance Group's surplus relief reinsurance agreements are in substantial
compliance with all applicable regulations.
NAIC Ratios. On the basis of statutory financial statements filed with state
insurance regulators, the NAIC calculates annually a number of financial ratios
to assist state regulators in monitoring the financial condition of insurance
companies. Eleven ratios were calculated based on the 1995 statutory financial
statements. A "usual range" of results for each ratio is used as a benchmark.
Departure from the "usual range" on four or more of the ratios can lead to
inquiries from individual state insurance departments.
For Equitable Life's 1995 statutory financial statements, four ratios fell
outside of the "usual range." These ratios include (i) the ratio of net gain to
total income, (ii) the ratio of mortgage loans and real estate to total invested
assets, (iii) the ratio of investments in affiliates to capital and surplus, and
(iv) the reserving ratio for individual life insurance products. This result
reflects (i) Equitable Life's investment performance in 1995, including realized
and unrealized capital gains and losses, (ii) the relatively high level of
equity real estate and mortgage loan assets held in Equitable Life's General
Account (see "General Account Investment Portfolio"), (iii) the fact that
Equitable Life conducts a substantial portion of its business through
subsidiaries, and (iv) the effects of Equitable Life's reinsurance contracts,
(see "Surplus Relief Reinsurance"). Based on Equitable Life's statutory
financial statements for 1994, three of the twelve ratios fell outside of the
"usual range" established by the NAIC. After review, an NAIC examiner team
designated Equitable Life as requiring second priority regulatory attention
based on low surplus, affiliated company transactions, and poor investment
1-18
quality, in each case as reflected in its 1994 statutory financial statements.
This designation advised state regulators to accord high priority to Equitable
Life in the surveillance process. No regulatory action by the NYID or any other
state insurance regulator occurred as a result of this designation.
Based on EVLICO's statutory financial statements for 1995, three ratios fell
outside of the "usual range." These include (i) the net change in capital and
surplus, (ii) the ratio of net gain to total income, and (iii) the reserving
ratio for individual life insurance products. This result reflects (i) EVLICO's
investment performance in 1995, including realized and unrealized capital gains
and losses, and (ii) the effects of EVLICO's reinsurance contracts. On the basis
of its statutory financial statements for 1994, EVLICO had two of twelve ratios
outside the "usual range" and received third priority designation by an NAIC
examiner team. This designation advised state regulators to accord high priority
to EVLICO in the surveillance process. No regulatory actions by the NYID or any
other state insurance regulator occurred as a result of this designation.
Management does not expect any 1995 designations accorded to Equitable Life or
EVLICO based on their respective 1995 statutory financial statements to have a
material adverse effect on the business or operations of Equitable Life or
EVLICO or to adversely affect their respective ratings.
Statutory Surplus and Capital. As a licensed insurer in each of the 50 states of
the United States, the Insurance Group is subject to the supervision of the
regulators of each such state. Such regulators have the discretionary authority,
in connection with the continual licensing of any member of the Insurance Group,
to limit or prohibit new issuances of business to policyholders within their
jurisdiction when, in their judgment, such regulators determine that such member
is not maintaining adequate statutory surplus or capital. Equitable Life does
not believe the current or anticipated levels of statutory surplus of the
Insurance Group present a material risk that any such regulator would limit the
amount of new insurance business the Insurance Group may issue.
The NAIC has undertaken a comprehensive codification of statutory accounting
practices for insurers. The resulting changes, once the codification project has
been completed and the new principles adopted and implemented, could have a
significant adverse impact on the Insurance Group's statutory results and
financial position. The codification project is not expected to be completed
prior to 1997.
Risk-Based Capital. Since 1993, life insurers, including Equitable Life and
EVLICO, have been subject to certain risk-based capital ("RBC") guidelines. The
RBC guidelines provide a method to measure the adjusted capital (statutory
capital and surplus plus AVR and other adjustments) that a life insurance
company should have for regulatory purposes taking into account the risk
characteristics of the company's investments and products. The RBC requirements
establish capital requirements for four categories of risk: asset risk,
insurance risk, interest rate risk and business risk. For each category, the
capital requirement is determined by applying factors to various asset, premium
and reserve items, with the factor being higher for those items with greater
underlying risk and lower for less risky items. The New York Insurance Law gives
the insurance commissioner explicit regulatory authority to require various
actions by, or take various actions against, insurance companies whose adjusted
capital does not meet the minimum acceptable level. Equitable Life and EVLICO
were above their target RBC ratios at year-end 1995. Proposed changes in the RBC
formula that may become effective for year end 1996 statutory financial
statements are expected to adversely effect Equitable Life's RBC ratio. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources - Risk-Based Capital".
Shareholder Dividend Restrictions. Dividends from Equitable Life are not
expected to be a source of liquidity for the Holding Company for several years.
Since the demutualization, the Holding Company has not received any dividends
from Equitable Life. In addition, under the New York Insurance Law, Equitable
Life would be permitted to pay shareholder dividends to the Holding Company only
if it files notice of its intention to declare such a dividend and the amount
thereof with the New York Superintendent and the New York Superintendent does
not disapprove the distribution. The applicable statute gives the New York
Superintendent broad discretion in determining whether the financial condition
of a stock life insurance company supports the payment of dividends to its
shareholders. There can be no assurance that the New York Superintendent would
not prevent the payment of dividends to the Holding Company for several years.
See Note 17 of Notes to Consolidated Financial Statements.
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In December 1995, Equitable Life issued $600.0 million aggregate principal
amount of surplus notes (the "Surplus Notes"). See Note 8 of Notes to
Consolidated Financial Statements. Under the New York Insurance Law, interest
and principal payments on the Surplus Notes may be made only out of "free and
divisible surplus ...with approval of the Superintendent whenever, in his
judgement, the financial condition of such insurer warrants." Accordingly, the
New York Superintendent has broad discretion in determining whether to allow
Equitable Life to make payments on the Surplus Notes. Any interest or principal
payments on the Surplus Notes by Equitable Life will reduce amounts, if any,
available for future payment of dividends to Equitable Life's shareholder.
Regulation of Investments. The Insurance Group is subject to state laws and
regulations that require diversification of its investment portfolio and limit
the amount of investments in certain investment categories such as below
investment grade fixed maturities, equity real estate and other equity
investments. Failure to comply with these laws and regulations would cause
investments exceeding regulatory limitations to be treated as non-admitted
assets for purposes of measuring statutory surplus, and, in some instances,
require divestiture. As of December 31, 1995, the Insurance Group's investments
complied with all such regulations.
Federal Initiatives. Although the Federal government generally does not directly
regulate the insurance business, many Federal laws do affect the business in a
variety of ways. There are a number of existing or recently proposed Federal
laws which may significantly affect the Insurance Group, including employee
benefits regulation, removal of barriers preventing banks from engaging in the
insurance and mutual fund businesses, the taxation of insurance companies and
the taxation of insurance products. In addition, there has been some interest
among certain members of Congress concerning possible Federal roles in the
regulation of the insurance industry. These initiatives are generally in a
preliminary stage and, consequently management cannot assess their potential
impact on the Insurance Group at this time.
ERISA Considerations. The Insurance Group and the Investment Subsidiaries act as
fiduciaries and are subject to regulation by the Department of Labor ("DOL")
when providing a variety of products and services to employee benefit plans
governed by the Employee Retirement Income Security Act of 1974 ("ERISA").
Severe penalties are imposed by ERISA on fiduciaries which violate ERISA's
prohibited transaction provisions by breaching their duties to ERISA covered
plans. In a case decided by the United States Supreme Court in December, 1993
(John Hancock Mutual Life Insurance Company v. Harris Trust and Savings Bank)
the Court concluded that an insurance company general account contract that had
been issued to a pension plan should be divided into its guaranteed and
nonguaranteed components and that certain ERISA fiduciary obligations applied
with respect to the assets underlying the nonguaranteed components. Although
Equitable Life has not issued contracts identical to the one involved in Harris
Trust, some of its policies relating to ERISA-covered plans may be deemed to
have nonguaranteed components subject to the principles announced by the Court.
During 1994, Equitable Life added additional guarantees to certain of these
contracts.
In the absence of court decisions clarifying the Supreme Courts ruling, the full
extent to which Harris Trust makes the fiduciary standards and prohibited
transaction provisions of ERISA applicable to all or part of insurance company
general account assets, however, cannot accurately be determined at this time.
The Supreme Court's opinion did not resolve whether the assets at issue in the
case may be subject to ERISA for some purposes and not others. The life
insurance industry is currently discussing with the DOL the possibility of
exemptions from the prohibited transaction provisions of ERISA in view of Harris
Trust. Prohibited Transaction Exemption 95-60, granted by the DOL on July 7,
1995, exempted from the prohibited transaction rules, prospectively and
retroactively to January 1, 1975, certain transactions engaged in by insurance
company general accounts in which employee benefit plans have an interest. The
exemption does not cover all such transactions, and the insurance industry
continues to seek further relief, including legislative relief from Congress.
Pending further development of these and other matters, Equitable Life is unable
to determine whether the Harris Trust decision will result in any liability and,
if so, its nature and scope.
Environmental Considerations. As owners and operators of real property,
Equitable Life and certain Investment Subsidiaries are subject to extensive
Federal, state and local environmental laws and regulations. Inherent in such
ownership and operation is the risk there may be potential environmental
liabilities and costs in connection with any required remediation of such
properties. Equitable Life routinely conducts environmental assessments for real
estate being acquired for investment and before taking title through foreclosure
to real property collateralizing mortgages held by Equitable Life. Based on
these environmental assessments and compliance with Equitable Life's internal
environmental procedures, management believes that any costs associated with
compliance with environmental laws and regulations regarding such properties
1-20
would not be material to the consolidated financial position of Equitable Life.
Furthermore, although Equitable Life and certain of its subsidiaries hold equity
positions in companies that could potentially be subject to environmental
liabilities, management believes, based on its assessment of the businesses and
properties of these companies and the level of involvement of Equitable Life and
the subsidiaries in the operation and management of such companies, any
environmental liabilities with respect to these investments would not be
material to the consolidated financial position of Equitable Life.
Securities Laws. Equitable Life, certain of its insurance subsidiaries and
certain policies and contracts offered by them are subject to regulation under
the Federal securities laws administered by the Securities and Exchange
Commission (the "Commission") and under certain state securities laws. Certain
Separate Accounts of Equitable Life and EVLICO are registered as investment
companies under the Investment Company Act of 1940, as amended (the "Investment
Company Act"). Separate Account interests under certain annuity contracts and
insurance policies issued by Equitable Life and EVLICO are also registered under
the Securities Act of 1933, as amended (the "Securities Act"). Equitable Life,
EVLICO, Equico, Donaldson, Lufkin & Jenrette Securities Corporation ("DLJSC")
and certain other subsidiaries of Equitable Life are registered as
broker-dealers (collectively the "Broker-Dealers") under the Securities Exchange
Act of 1934 (the "Exchange Act"). The Broker-Dealers are subject to extensive
regulation (as discussed below in "Investment Banking" with reference to DLJSC),
and are members of, and subject to regulation by, the NASD and various other
self regulatory organizations ("SROs"). As a result of registration under the
Exchange Act and SRO memberships, the Broker-Dealers are subject to overlapping
schemes of regulation which cover all aspects of their securities business. Such
regulations cover matters including capital requirements, the use and
safekeeping of customers' funds and securities, recordkeeping and reporting
requirements, supervisory and organizational procedures intended to assure
compliance with securities laws and rules of the SROs and to prevent improper
trading on "material nonpublic" information, employee-related matters,
limitations on extensions of credit in securities transactions, and clearance
and settlement procedures. A particular focus of the applicable regulations
concerns the relationship between broker-dealers and their customers. As a
result, the Broker-Dealers in some instances may be required to make
"suitability" determinations as to certain customer transactions, are limited in
the amounts that they may charge customers, cannot trade ahead of their
customers and must make certain required disclosures to their customers.
Equitable Life and certain of the Investment Subsidiaries also are registered as
investment advisors under the Investment Advisers Act of 1940, as amended (the
"Investment Advisers Act"). Many of the investment companies managed by the
Investment Subsidiaries, including a variety of mutual funds and other pooled
investment vehicles, are registered with the Commission under the Investment
Company Act. All aspects of Equitable Life's and the Investment Subsidiaries'
investment advisory activities are subject to various Federal and state laws and
regulations and to the law in those foreign countries in which they conduct
business. Such laws and regulations relate to, among other things, limitations
on the ability of investment advisers to charge performance-based or
non-refundable fees to clients, recordkeeping and reporting requirements,
disclosure requirements, limitations on principal transactions between an
adviser or its affiliates and advisory clients, as well as general anti-fraud
provisions. The failure to comply with such laws may result in possible
sanctions including the suspension of individual employees, limitations on the
activities in which the investment advisor may engage, suspension or revocation
of the investment advisor's registration as an advisor, censure and/or fines.
Investment Banking. DLJ's business is, and the securities industry generally is,
subject to extensive regulation in the United States at both the Federal and
state level. Various regulatory bodies are charged with safeguarding the
integrity of the securities and other financial markets and with protecting the
interests of customers participating in those markets. DLJSC is registered as a
broker-dealer with the Commission and in all 50 states and the District of
Columbia, as a futures commission merchant with the Commodities Futures Trading
Commission (the "CFTC"), as an investment advisor in certain states and with the
Commission and is also designated a primary dealer in U.S. Government securities
by the Federal Reserve Bank of New York. It is also a member of, and subject to
regulation by, the NASD, the NYSE, the Chicago Board of Trade ("CBOT"), the CFTC
and various other self-regulatory organizations. Broker-dealers are subject to
regulation by state securities administrators in those states in which they
conduct business. Broker-dealers are also subject to regulations that cover all
aspects of the securities business, including sales and trading practices, use
and safekeeping of customers' funds and securities, capital structure,
record-keeping and the conduct of directors, officers and employees. The
Commission, other governmental regulatory authorities, including state
securities commissions, and self-regulatory organizations may institute
1-21
administrative or judicial proceedings, which may result in censure, fine, the
issuance of cease-and-desist orders, the suspension or expulsion of a
broker-dealer or member, its officers or employees or other similar
consequences.
DLJ's business may be materially affected not only by regulations applicable to
it as a financial market intermediary, but also by regulations of general
application. For example, the volume of DLJ's underwriting, merger and
acquisition and merchant banking businesses in any year could be affected by,
among other things, existing and proposed tax legislation, antitrust policy and
other governmental regulations and policies (including the interest rate
policies of the Federal Reserve Board) and changes in interpretation or
enforcement of existing laws and rules that affect the business and financial
communities. From time to time, various forms of anti-takeover legislation and
legislation that could affect the benefits associated with financing leveraged
transactions with high yield securities have been proposed that, if enacted,
could adversely affect the volume of merger and acquisition and merchant banking
business, which in turn could adversely affect DLJ's underwriting, advisory and
trading revenues related thereto.
As a broker-dealer registered with the Commission and a member firm of the NYSE,
DLJSC is subject to the capital requirements of the Commission and of the NYSE.
These capital requirements specify minimum levels of capital, computed in
accordance with regulatory requirements ("net capital"), that DLJSC is required
to maintain and also limit the amount of leverage that DLJSC is able to obtain
in its businesses. As a futures commission merchant, DLJSC is also subject to
the capital requirements of the CFTC and the CBOT. A failure by DLJSC to
maintain its minimum required capital would require it to cease executing
customer transactions until it came back into capital compliance, and could
cause it to lose its membership on the NYSE or other exchanges, its right to
registration with the Commission or CFTC, or require its liquidation. In
addition, the decline in DLJSC's net capital below certain "early warning
levels," even though above minimum capital requirements, could have material
adverse consequences including the imposition of a prohibition on DLJSC's
ability to pay dividends, redeem stock, prepay subordinated indebtedness or,
under certain circumstances, make principal payments in respect of subordinated
indebtedness. Compliance with the net capital requirements could limit those
operations of DLJSC that require the intensive use of capital, such as
underwriting, merchant banking and trading activities, and also could restrict
the Holding Company's ability to withdraw capital from DLJSC. Rule 15c3-1 under
the Exchange Act limits the ability of stockholders of a registered
broker-dealer to withdraw excess capital from that broker-dealer, if such
withdrawal would impair the broker-dealer's net capital. This rule could limit
the payment of dividends and the making of loans and advances to Equitable Life
by the Broker-Dealers and by Equitable Life to the Holding Company.
DLJSC is a member of the Securities Investor Protection Corporation, which
provides, in the event of the liquidation of a broker-dealer, protection for
customers' accounts held by the firm of up to $500,000 for each customer,
subject to a limitation of $100,000 for claims for cash balances. In addition,
DLJSC has excess coverage insurance purchased from Equitable Casualty Insurance
Company, an indirect wholly owned subsidiary of the Holding Company. DLJ is
currently in the process of replacing this excess coverage with coverage written
by an unaffiliated third party insurer. Margin lending by certain subsidiaries
of DLJ is subject to the margin rules of the Board of Governors of the Federal
Reserve System and the NYSE.
DLJSC is also subject to the SEC's Temporary Risk Assessment Rules which
require, among other things, that a broker-dealer maintain and preserve certain
information, describe risk management policies and procedures and report on the
financial condition of certain affiliates whose financial and securities
activities are reasonably likely to have a material impact on the financial and
operational condition of the broker-dealer.
DLJSC is designated a primary dealer in U.S. Government securities. Under the
Government Securities Act, which established an integrated system of regulation
of government securities brokers and dealers, the Department of the Treasury has
promulgated regulations concerning, among other things, capital adequacy,
custody and use of government securities and transfers and control of government
securities subject to repurchase transactions.
1-22
In addition to being regulated in the U.S., DLJ's business is subject to
regulation by various foreign governments and regulatory bodies. DLJ has
broker-dealer subsidiaries that are subject to regulation by the Securities and
Futures Authority of the United Kingdom, the Securities and Futures Commission
of Hong Kong and the Ontario Securities Commission.
Additional legislation and regulations, including those relating to the
activities of affiliates of broker-dealers, changes in rules promulgated by the
Commission, the CFTC or other U.S. or foreign governmental regulatory
authorities and SROs or changes in the interpretations or enforcement of
existing laws and rules may adversely affect the manner of operation and
profitability of DLJ.
Principal Shareholder
Equitable Life is a wholly owned subsidiary of the Holding Company. AXA is the
largest shareholder of the Holding Company, beneficially owning (together with
certain of its affiliates) at December 31, 1995 (i) $392.2 million stated value
of Series E convertible preferred stock of the Holding Company, and (ii) 60.6%
of the outstanding shares of Common Stock of the Holding Company (without giving
effect to conversion of the Series E convertible preferred stock beneficially
owned by AXA). All shares of the Holding Company's Common Stock and preferred
stock beneficially owned by AXA have been deposited in the voting trust referred
to below. AXA, a French company, is the holding company for an international
group of insurance and related financial services companies. AXA's insurance
operations include activities in life insurance, property and casualty insurance
and reinsurance. The insurance operations are diverse geographically, with
activities in more than 20 countries, including France, the United States,
Australia, the United Kingdom, Canada and other countries, principally in Europe
and the Asia Pacific area. AXA is also engaged in asset management, investment
banking, securities trading, brokerage, real estate and other financial services
activities in the United States, Europe and the Asia Pacific area.
AXA acquired its interest in the Holding Company in 1992 upon Equitable Life's
demutualization. As a result of the demutualization and related transactions,
Equitable Life is likely to be treated as having undergone an "ownership change"
for purposes of Sections 382 and 383 of the Internal Revenue Code of 1986 (the
"Code"). These sections generally limit the utilization for Federal income tax
purposes of any loss carryforwards and other tax benefits from before the change
to offset the Federal income tax liabilities of Equitable Life for years
following the change. Although no assurance can be given because of the
uncertainties involved in applying Sections 382 and 383 to these transactions
and in determining the amount of the loss carryforwards and other tax benefits
that might be available at the time of the ownership change, management believes
it is unlikely these limitations will have a material adverse effect on the
consolidated financial position of Equitable Life.
Neither AXA nor any affiliate of AXA has any obligation to provide additional
capital or credit support to Equitable Life.
1-23
Part I, Item 2.
PROPERTIES
The Equitable's present headquarters are located at 787 Seventh Avenue, New
York, New York and consist of 1.38 million square feet of office space owned in
fee. Of this amount The Equitable currently occupies approximately 370,000
square feet. In addition, The Equitable leases property both domestically and
abroad, the majority of which houses insurance operations. In 1995, The
Equitable executed a long-term lease for approximately 500,000 square feet of
office space located in 1290 Avenue of the Americas, New York, New York, which
will serve as the Company's new headquarters. The Equitable will begin moving
staff from its present headquarters and the other Manhattan office locations it
currently occupies into the new headquarters during the summer of 1996. The
relocation is scheduled for completion in 1999. Management believes its
facilities are adequate for its present needs in all material respects. For
additional information, see Notes 15 and 16 of Notes to Consolidated Financial
Statements.
2-1
Part I, Item 3.
LEGAL PROCEEDINGS
The matters set forth in Note 14 of Notes to Equitable Life's Consolidated
Financial Statements for the year ended December 31, 1995 (Item 8 of this
report) are incorporated herein by reference.
3-1
Part I, Item 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
4-1
Part II, Item 5.
MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
All of Equitable Life's common equity is owned by the Holding Company.
Consequently, there is no established public trading market for Equitable Life's
common equity. No dividends have been declared on Equitable Life's common equity
since it was issued on July 22, 1992. For information on Equitable Life's
present and future ability to pay dividends, see Note 17 of Notes to
Consolidated Financial Statements (Item 8) of this report.
5-1
Part II, Item 6.
SELECTED CONSOLIDATED FINANCIAL INFORMATION
At or For the Years Ended December 31,
---------------------------------------------------------------
1995 1994 1993 1992 1991
---------- ---------- ---------- ---------- ----------
(In Millions)
Consolidated Statements of Earnings Data
Total revenues (1)(2)...................... $ 4,522.0 $ 4,459.7 $ 6,221.8 $ 6,285.0 $ 6,116.8
Total benefits and other deductions........ 4,112.0 4,065.0 5,918.1 6,292.2 6,623.1
----------- ----------- ---------- ---------- ----------
Earnings (loss) from continuing operations
before Federal income taxes.............. 410.0 394.7 303.7 (7.2) (506.3)
Federal income tax expense (benefit)....... 112.4 101.2 91.3 19.2 (198.5)
----------- ----------- ---------- ---------- ----------
Earnings (loss) from continuing operations 297.6 293.5 212.4 (26.4) (307.8)
Discontinued operations, net of Federal
income taxes............................. - - - - (561.9)
Extraordinary charge for demutualization
expenses................................. - - - (93.8) (28.3)
Cumulative effect of accounting changes,
net of Federal income taxes.............. - (27.1) - 4.9 -
----------- ----------- ---------- ---------- ----------
Net Earnings (Loss)........................ $ 297.6 $ 266.4 $ 212.4 $ (115.3) $ (898.0)
=========== =========== ========== ========== ==========
Consolidated Balance Sheets Data
Total assets(2)............................ $ 69,242.2 $ 61,409.5 $ 61,087.7 $ 80,580.6 $ 76,272.3
Long-term debt............................. 1,899.3 1,317.4 1,458.8 1,897.9 2,693.0
Total liabilities(2)....................... 65,241.4 58,215.1 58,137.1 78,220.7 74,916.8
Shareholder's equity....................... 4,000.8 3,194.4 2,950.6 2,359.9 1,355.5
<FN>
(1) Total revenues for the year ended December 31, 1994 included a $52.4 million
gain resulting from Alliance's sales of newly issued units. The year ended
December 31, 1993 included a $49.3 million gain (before variable
compensation and related expenses) related to the sale of shares of one
investment in the DLJ long-term corporate development portfolio. The year
ended December 31, 1992 included a gain on that same investment of $166.2
million, which consisted of a $82.4 million investment gain on shares sold
and an $83.8 million investment gain from the recognition of an increase in
fair value of the investment. The year ended December 31, 1991 included a
pre-tax gain of $51.9 million from the sale of an equity interest in
Equitable Life's Japanese life insurance subsidiary, Equitable Seimei Hoken.
(2) The results of the Closed Block for the periods subsequent to July 22, 1992
are reported on one line in the consolidated statements of earnings.
Accordingly, total revenues and total benefits and other deductions are not
comparable for all periods presented. Total assets and total liabilities
include the assets and liabilities of the Closed Block, respectively, and
therefore amounts are comparable for all periods presented. See Note 6 of
Notes to Consolidated Financial Statements. Assets and liabilities relating
to the discontinued GIC Segment are not reflected on the consolidated
balance sheets of the Company, except that as of December 31, 1995, 1994,
1993 and 1992 the net amount due to continuing operations for intersegment
loans made to the discontinued GIC Segment in excess of continuing
operations' obligations' to fund the discontinued GIC Segment's accumulated
deficit is reflected as "Amounts due from discontinued GIC Segment". At
prior balance sheet dates there was a net amount due from continuing
operations to the GIC Segment reflected as "Amounts due to discontinued GIC
Segment". See Note 7 of Notes to Consolidated Financial Statements.
</FN>
6-1
Part II, Item 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following analysis of the consolidated results of operations and financial
condition of the Company should be read in conjunction with the Consolidated
Financial Statements and the related Notes to Consolidated Financial Statements
included elsewhere herein.
Closed Block
On completion of its demutualization in 1992, Equitable Life established a
Closed Block for the payment of future benefits, policyholders' dividends and
certain expenses and taxes relating to certain classes of individual policies.
Equitable Life allocated to the Closed Block an amount of assets expected to
produce cash flows which, together with anticipated revenues from the Closed
Block business, are reasonably expected to be sufficient to support the Closed
Block business. The Closed Block includes only those revenues, benefit payments,
dividends and premium taxes considered in funding the Closed Block and excludes
many costs and expenses associated with operating the Closed Block and
administering the policies included therein. Since many expenses related to the
Closed Block were excluded from the calculation of the Closed Block
contribution, the contribution from the Closed Block does not represent the
actual profitability of the Closed Block. As a result of such exclusion,
operating costs and expenses outside of the Closed Block are disproportionate to
the business outside of the Closed Block.
COMBINED RESULTS OF OPERATIONS
The contribution from the Closed Block is reported on one line in the
consolidated statements of earnings. The following table presents the results of
operations of the Closed Block for the years ended December 31, 1995, 1994 and
1993 combined with the results of operations outside of the Closed Block. See
Closed Block results as combined herein on page 7-4. Management's discussion and
analysis addresses the combined results of operations unless noted otherwise.
The results of DLJ through December 15, 1993, the date of sale of a 61% interest
to the Holding Company, are included in the consolidated statements of earnings
for the year ended December 31, 1993 on a consolidated basis. Subsequent to that
date of sale, DLJ is accounted for on the equity basis. See Note 20 of Notes to
Consolidated Financial Statements.
Combined Results of Operations
Years Ended December 31,
----------------------------------
1995 1994 1993
---------- ----------- ----------
(In Millions)
Policy fee income and premiums ....................... $ 2,129.0 $ 2,137.8 $ 2,102.0
Net investment income ................................ 2,666.6 2,553.9 3,125.8
Investment (losses) gains, net ....................... (14.9) 67.8 518.4
Commissions, fees and other income ................... 889.0 846.3 1,719.0
---------- ---------- ----------
Total revenues ................................. 5,669.7 5,605.8 7,465.2
---------- ---------- ----------
Interest credited to policyholders' account balances . 1,259.9 1,217.1 1,347.6
Policyholders' benefits and dividends ................ 2,080.7 1,980.4 2,127.7
Other operating costs and expenses ................... 1,919.1 2,013.6 3,686.2
---------- ---------- ----------
Total benefits and other deductions ............ 5,259.7 5,211.1 7,161.5
---------- ---------- ----------
Earnings before Federal income taxes and cumulative
effect of accounting change ........................ 410.0 394.7 303.7
Federal income taxes ................................. 112.4 101.2 91.3
---------- ---------- ----------
Earnings before cumulative effect of accounting
change ............................................. 297.6 293.5 212.4
Cumulative effect of accounting change, net of Federal
income taxes ....................................... -- (27.1) --
========== ========== ==========
Net Earnings ......................................... $ 297.6 $ 266.4 $ 212.4
========== ========== ==========
7-1
Continuing Operations
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994 - Compared
to 1994, higher pre-tax results of operations for the year ended December 31,
1995 reflected increased earnings in the Individual Insurance and Annuities
segment and lower losses in the Corporate and Other segment, partially offset by
lower earnings in Attributed Insurance Capital and the Investment Services
segment and losses as compared to earnings in the Group Pension segment.
The $63.9 million increase in revenues for the year ended December 31, 1995
compared to 1994 was primarily attributed to a $42.7 million increase in
commissions, fees and other income principally due to increased business
activity within the Investment Services segment and a $30.0 million increase in
investment results.
Net investment income increased $112.7 million for the year ended December 31,
1995 with an increase of $138.1 million for the Individual Insurance and
Annuities segment, offset by decreases of $12.5 million for the Group Pension
segment and $12.5 million for Attributed Insurance Capital. The Individual
Insurance and Annuities increase was due to higher overall yields on a larger
investment asset base. The decrease in investment income in Attributed Insurance
Capital principally resulted from a reduced investment asset base due to the
$1.22 billion payment of the obligation to fund the accumulated deficit of the
discontinued GIC Segment in January 1995, partially offset by the $300.0 million
capital contribution received from the Holding Company in December 1994.
There were investment losses of $14.9 million for the year ended December 31,
1995 as compared to gains of $67.8 million for the same period in 1994.
Investment losses on General Account Investment Assets of $21.5 million as
compared to $15.4 million of investment gains in 1994 were due to $87.9 million
of losses on equity real estate as compared to gains of $19.9 million in 1994
and a $73.9 million decrease in gains on other equity investments offset by
$102.0 million in gains on fixed maturities compared with $20.5 million in
losses in 1994 and a $22.2 million decrease in losses on mortgages. Investment
losses for the year ended December 31, 1995 were net of a $9.4 million gain
recognized on the sale by EQ Services, Inc. ("EQ Services") of mortgage
servicing contracts. Investment gains for the year ended December 31, 1994
included the $43.9 million gain (net of $8.5 million of related state income
tax) recognized in the third quarter of 1994 on Alliance's sales of newly issued
Units to third parties.
During 1995, total benefits and other deductions increased by $48.6 million from
1994, primarily reflecting a $100.3 million increase in policyholders' benefits
and a $42.8 million increase in interest credited to policyholders' benefits,
offset by a decrease in other operating costs and expenses of $94.5 million. The
increase in policyholders' benefits primarily resulted from the larger in force
book of business for variable and interest-sensitive life policies and higher
morbidity experience on the disability income business, offset by improved
mortality experience on term life insurance policies and policies within the
Closed Block. Improved mortality experience and better persistency resulted in
an increase to the provision for policyholder dividends on policies within the
Closed Block. The $90.3 million increase in interest credited to policyholders
for the Individual Insurance and Annuities segment was primarily due to higher
crediting rates applied to a larger in force book of business and was offset by
the Group Pension segment's $47.5 million decrease in interest credited to
policyholders due to the impact of pass-throughs of investment losses to
participating pension contractholders and smaller policyholders' account
balances. The decrease in other operating costs and expenses was attributable to
decreased operating costs in the Individual Insurance and Annuities segment and
lower Corporate interest expense. Corporate interest expense declined primarily
as a result of the previously described cash settlement in January 1995 with the
discontinued GIC Segment.
Year Ended December 31, 1994 Compared to Year Ended December 31, 1993 - The
Company's pre-tax results of operations for the year ended December 31, 1994
reflected an increase in earnings in the Individual Insurance and Annuities and
Group Pension segments and lower losses in the Corporate and Other segment
compared to 1993, offset principally by lower earnings in the Investment
Services segment.
7-2
The $1.86 billion decrease in revenues for the year ended December 31, 1994
compared to 1993 was primarily attributed to the effect of DLJ's deconsolidation
as well as lower earnings at DLJ due to decreased business activity. The Group
Pension segment's revenues declined 15.8% to $359.1 million in 1994 primarily
due to lower investment results while Individual Insurance and Annuities
basically was basically unchanged from the prior year, as increases in policy
fee income and premiums were offset by decreases in investment results.
The $571.9 million decrease in investment income for 1994 principally reflected
DLJ's absence from 1994 consolidated results and the $51.4 million decrease for
the Group Pension segment, offset by a $23.7 million increase in the Individual
Insurance and Annuities segment.
Investment gains decreased to $67.8 million during 1994 from $518.4 million in
1993 with DLJ's deconsolidation again the principal cause for the change and
lower investment gains on General Account Investment Assets of $15.4 million in
1994 as compared to $60.3 million in 1993 also contributing to the decline.
These decreases were partially offset by the $52.4 million gain recognized in
the third quarter of 1994 on Alliance's sales of newly issued Units to third
parties. The decline in investment gains on General Account Investment Assets
was due to losses on fixed maturities of $20.5 million as compared to gains of
$127.3 million in 1993 offset by a $39.9 million improvement for the equity real
estate category, a $33.3 million increase in gains on other equity investments
and a $29.9 million decrease in losses on mortgages.
Total benefits and other deductions decreased in 1994 by $1.95 billion to $5.21
billion. In addition to the significant impact of the DLJ deconsolidation, the
decrease was due to a $147.3 million reduction in policyholders' benefits and
dividends and a decrease in interest credited to policyholders' account balances
of $130.5 million. Increases in other operating costs and expenses in the
Individual Insurance and Annuities segment resulting from increases in employee
compensation and benefits were offset by the absence of restructuring costs
associated with the 1993 Alliance/Equitable Capital Management Corporation
("Equitable Capital") combination. The reduction in policyholders' benefits
primarily resulted from improved morbidity experience on the disability income
business, reductions of reserves related to renegotiation and resolution of
contractual issues pertaining to certain reinsurance contracts and favorable
individual life insurance mortality.
Federal Income Taxes
Federal income taxes resulted in an expense of $112.4 million for 1995, as
compared to $101.2 million in 1994 and $91.3 million in 1993, reflecting the
Company's improved earnings over the period. See Note 9 of Notes to Consolidated
Financial Statements. At December 31, 1995, the Company's deferred income tax
account reflected a net liability in the amount of $369.4 million as compared to
a net asset of $62.5 million at December 31, 1994. Management believes the gross
deferred tax asset at December 31, 1995 of $293.0 million is more likely than
not to be fully realizable and, consequently, no valuation allowance is
necessary.
Equitable Life is no longer subject to the add-on tax imposed on mutual life
insurance companies under Section 809 of the Internal Revenue Code. This tax
results from the disallowance of a portion of a mutual life insurance company's
policyholders' dividends as a deduction from taxable income. The add-on tax was
estimated each year and adjusted in subsequent years. The add-on tax provision
was a benefit of $16.8 million for the year ended December 31, 1994 as compared
to $23.2 million for the year ended December 31, 1993. The benefits in these two
years resulted from revised estimates of prior years' add-on tax.
Accounting Changes and New Accounting Pronouncements
In 1995, Equitable Life adopted SFAS No. 114, "Accounting by Creditors for
Impairment of a Loan". For information on this and prior years' accounting
changes, as well as new accounting pronouncements, see Note 2 of Notes to
Consolidated Financial Statements.
7-3
Combined Results of Continuing Operations by Segment
Individual Insurance and Annuities. The following table presents the results of
combined operations for the Individual Insurance and Annuities segment:
Individual Insurance and Annuities
(In Millions)
Years Ended December 31,
--------------------------------------------------------
1995
----------------------------------
As Closed 1994 1993
Reported Block Combined Combined Combined
----------- ---------- ---------- ---------- ----------
Policy fees, premiums and other
income .......................... $ 1,392.9 $ 753.4 $ 2,146.3 $ 2,160.0 $ 2,112.5
Net investment income ............. 1,702.3 538.9 2,241.2 2,103.1 2,079.4
Investment gains (losses), net .... 35.0 (20.2) 14.8 (6.3) 33.0
Contribution from the Closed Block 124.4 (124.4) -- -- --
---------- ---------- ---------- ---------- ----------
Total revenues .............. 3,254.6 1,147.7 4,402.3 4,256.8 4,224.9
Total benefits and other
deductions ................ 2,980.2 1,147.7 4,127.9 4,011.3 4,148.7
---------- ---------- ---------- ---------- ----------
Earnings before Federal Income
Income Taxes and Cumulative
Effect of Accounting Change ..... $ 274.4 $ -- $ 274.4 $ 245.5 $ 76.2
========== ========== ========== ========== ==========
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994 - The
pre-tax results from operations in the Individual Insurance and Annuities
segment for the year ended December 31, 1995 reflected an increase of $28.9
million from the year-earlier period. Higher investment gains primarily on sales
of fixed maturities, lower operating costs and higher policy fees on variable
and interest-sensitive life and individual annuities contracts were offset by an
accrual for future dividend payments to the Closed Block policyholders and
unfavorable morbidity results on disability income policies. The effect of
increased crediting rates on interest-sensitive life and annuity contracts more
than offset the increase in investment income.
Total revenues increased by $145.5 million primarily due to a $159.2 million
increase in investment results and a $49.7 million increase in policy fees,
offset by a $61.5 million decline in premiums. The decrease in premiums
principally was due to lower traditional life and individual health premiums.
From the date the Closed Block was established through December 31, 1994, the
cumulative contribution from the Closed Block was approximately equal to the
actuarially determined expected contribution as estimated at inception. The
actuarially determined expected contribution from the Closed Block declined in
1995 and, generally, is expected to continue to decline in future years. As a
result of cumulative performance in excess of the actuarially determined
expected contribution, the liability for future dividend payments to be paid to
the Closed Block policyholders was $11.0 million at December 31, 1995.
Total benefits and other deductions for the year ended December 31, 1995 rose
$116.6 million from 1994. The increase principally was due to higher interest
credited on policyholders' account balances, a $9.0 million increase in the
accrual for future Closed Block policyholder dividends, increased death claims
due to the larger in force book of business for variable and interest-sensitive
life policies (offset by lower death claims on policies within the Closed Block)
and the morbidity experience mentioned above, offset by a decrease in other
operating costs and expenses principally due to decreases in employee related
compensation and benefits. Interest credited on policyholders' account balances
in the segment increased by $90.3 million reflecting higher crediting rates
applied to a larger in force book of business.
7-4
Losses on the disability income business were $42.3 million for the year ended
December 31, 1995, a $12.1 million increase from the prior year's loss. The
$32.1 million increase in 1995 incurred benefits for disability income products
primarily reflected a slowdown in claims terminations and was partially offset
by lower expenses of $10.3 million and a $9.0 million increase in investment
income. Management is taking additional administrative actions to mitigate
losses in this business.
Year Ended December 31, 1994 Compared to Year Ended December 31, 1993 - The
pre-tax results from operations in the Individual Insurance and Annuities
segment for the year ended December 31, 1994 reflected an improvement of $169.3
million over the prior year primarily due to improved spreads between investment
results and crediting rates on interest-sensitive products and policyholders'
dividends on traditional life products, improved morbidity experience on
disability income products, increased policy charges assessed on growing
policyholders' account balances and favorable mortality.
Net investment losses in 1994 were $6.3 million compared with net investment
gains in 1993 of $33.0 million. Losses of $22.2 million on fixed maturities as
compared to $116.5 million of gains on fixed maturities in 1993 were due to
lower gains on sales and prepayments. Offsetting this change were an increase of
$46.2 million in gains on other equity investments, a $29.5 million decrease in
losses on mortgage loans and a $23.3 million improvement for equity real estate.
Total benefits and other deductions in 1994 fell $137.4 million from the 1993
level. The decrease was principally due to lower interest credited on
policyholders' account balances, lower dividends to policyholders on traditional
life products, favorable mortality experience on life insurance, improved
morbidity experience on disability income products and the renegotiation of
certain reinsurance contracts offset by higher employee compensation and benefit
related costs. Interest credited on policyholders' account balances in the
segment decreased by $60.9 million reflecting substantially reduced crediting
rates applied to a higher in force book of business.
Losses on the disability income business were $30.2 million for the year ended
December 31, 1994, a $70.3 million improvement from the prior year. Incurred
benefits for disability income products decreased $64.8 million in 1994 from the
comparable 1993 levels reflecting the reduction in the growth of the number of
outstanding claims and their expected durations.
In a further effort to minimize the earnings volatility from mortality results,
effective January 1, 1994, all in force business above $5.0 million was
reinsured. Previously, in February 1993, management had established a practice
limiting the risk retention on new policies issued by the Insurance Group to a
maximum of $5.0 million, a reduction from its previously established maximum of
$10.0 million.
7-5
Premiums and Deposits - The following table lists premiums and deposits,
including universal life and investment-type contract deposits, for the
segment's major product lines.
Premiums and Deposits
(In Millions)
Years Ended December 31,
----------------------------------
1995 1994 1993
--------- --------- -----------
Product Line:
Individual annuities
First year ............................... $ 1,756.7 $ 1,721.9 $ 1,354.3
Renewal .................................. 1,090.7 1,045.0 947.7
---------- ---------- ----------
2,847.4 2,766.9 2,302.0
Variable and interest-sensitive life
First year recurring ..................... 178.3 186.4 151.9
First year optional ...................... 149.0 148.8 104.8
Renewal .................................. 1,031.1 929.7 847.3
---------- ---------- ----------
1,358.4 1,264.9 1,104.0
Traditional life
First year recurring ..................... 23.4 31.3 50.6
First year optional ...................... 5.5 7.6 12.9
Renewal .................................. 858.5 887.0 915.8
---------- ---------- ----------
887.4 925.9 979.3
Other(1)
First year ............................... 75.7 27.7 30.8
Renewal .................................. 387.9 406.0 383.1
---------- ---------- ----------
463.6 433.7 413.9
Total First Year ........................... 2,188.6 2,123.7 1,705.3
Total Renewal .............................. 3,368.2 3,267.7 3,093.9
---------- ---------- ----------
Grand Total ................................ $ 5,556.8 $ 5,391.4 $ 4,799.2
========== ========== ==========
<FN>
(1) Includes reinsurance assumed and health insurance.
</FN>
First year premiums and deposits for the year ended December 31, 1995 increased
from prior year levels by $64.9 million primarily due to higher sales of
individual annuities and reinsurance assumed on individual annuity contracts.
Renewal premiums and deposits increased by $100.5 million during the year ended
December 31, 1995 over the prior year as increases in the growing block of
variable and interest-sensitive life and individual annuities policies were
offset by decreases in traditional life policies and other product lines.
Traditional life premiums and deposits for 1995 decreased from the prior year by
$38.5 million due to the marketing focus on variable and interest-sensitive
products and the decline in the traditional life book of business. The increase
in first year individual annuities premiums and deposits included $244.4 million
for 1995 as compared to $126.0 million in 1994 resulting from an exchange
program that offered contractholders of existing SPDA contracts with no
remaining surrender charges an opportunity to exchange their contract for a new
flexible premium variable contract which retains assets in the Company and
establishes new surrender charge scales. Management believes total first year
premiums and deposits continue to be impacted by the transition to a new
generation of variable life insurance products, the assimilation of a new sales
support system and the reduction of district managers and new hires as a result
of the implementation of new performance standards beginning in 1994.
First year premiums and deposits for the year ended December 31, 1994 increased
from prior year levels by $418.4 million primarily due to higher individual
annuities and variable and interest-sensitive life sales. The 27.1% increase in
first year individual annuity premiums and deposits primarily resulted from
higher sales in the targeted recurring premium small pension and tax sheltered
annuities markets, as well as higher single premiums and deposits received in
the IRA/non-qualified market. Management believes the increases in individual
annuity premiums and deposits in 1994 resulted from strong industry wide
variable annuity sales, the availability of additional Separate Account options,
the introduction of new small pension products and the contract
7-6
exchange program described above. First year individual annuities premiums and
deposits included $126.0 million resulting from that exchange program.
Traditional life premiums and deposits for 1994 decreased from the prior year by
$53.4 million due to the marketing focus on variable and interest-sensitive
products and the decline in the traditional life book of business. Renewal
premiums and deposits increased during the year ended December 31, 1994 over the
prior year by 5.6% primarily due to the growing variable and interest-sensitive
life and individual annuity books of business.
Surrenders and Withdrawals; Policy Loans - The following table summarizes
surrenders and withdrawals, including universal life and investment-type
contract withdrawals, for the segment's major product lines.
Surrenders and Withdrawals(1)
(In Millions)
Years Ended December 31,
----------------------------------
1995 1994 1993
---------- ---------- ----------
Product Line:
Individual annuities ....................... $ 2,186.8 $ 1,879.9 $ 1,282.3
Variable and interest-sensitive life ....... 405.0 419.2 410.5
Traditional life ........................... 340.6 350.7 376.9
---------- ---------- ----------
Total ...................................... $ 2,932.4 $ 2,649.8 $ 2,069.7
========== ========== ==========
<FN>
(1) Surrendered traditional, variable and interest-sensitive life insurance
policies represented 4.1%, 4.5% and 4.9% of average surrenderable future
policy benefits and policyholders' account balances for such life insurance
contracts in force during each of the years 1995, 1994 and 1993,
respectively. Surrendered individual annuity contracts represented 11.5%,
10.9% and 8.3% of average surrenderable policyholders' account balances for
individual annuity contracts in force during the same years.
</FN>
Policy and contract surrenders and withdrawals increased $282.6 million during
the year ended December 31, 1995 compared to 1994 due to the $306.9 million
increase in individual annuities surrenders and withdrawals. This increase
occurred during the first six months of 1995 and primarily was due to increased
surrenders of Equi-Vest and SPDA contracts due to the aging book of business,
the effect of the aforementioned exchange program which was designed to retain
assets in the Company and the maintenance of crediting rates throughout 1994
despite an increasing interest rate environment. Management expects the
moderation in SPDA exchange program volume experienced during the second half of
1995 to continue. Surrenders and withdrawals in the first quarter of 1996 will
include $88.0 million paid in early January 1996 for two small pension clients
who terminated their contracts. The 1994 amount for variable and
interest-sensitive life products included a scheduled withdrawal of
approximately $52.9 million of policy cash value from a large corporate owned
life insurance plan issued by Equitable of Colorado, Inc. Excluding the effect
of the 1994 scheduled withdrawal, surrenders and withdrawals of variable and
interest-sensitive life contracts for the year ended December 31, 1995 increased
by $38.7 million from the prior year's comparable period due to the larger book
of business.
As compared to 1993, surrenders and withdrawals increased $580.1 million in
1994. Increased surrenders of small pension and SPDA contracts contributed to
the increase in individual annuity contract surrender rates from 8.3% in 1993 to
10.9% in 1994. The increase in small pension and SPDA surrenders was due to the
aging book of business and the resulting reduced surrender charges as well as to
the SPDA exchange program described earlier. In addition, crediting rates were
maintained during 1994 despite increases in market interest rates, which
contributed to increased surrenders and withdrawals. The surrender rate on
Equi-Vest contracts, the principal individual annuity product, remained
unchanged at 5.7% in both 1994 and 1993.
7-7
The persistency of life insurance and annuity products is a critical element of
their profitability. As of December 31, 1995, all in force individual life
insurance policies (other than individual life term policies without cash values
which comprise 8.2% of in force policies) and more than 90% of individual
annuity contracts (as measured by reserves) were surrenderable. However, a
surrender charge often applies in the early contract years and declines to zero
over time. Contracts without surrender provisions cannot be terminated prior to
maturity.
Policy loan balances increased to $3.77 billion at December 31, 1995, as
compared to $3.56 billion at December 31, 1994. However, since policy cash
values increased at a similar rate during these years, the ratio of outstanding
policy loans to aggregate policy cash values has been generally stable since
1990.
Margins on Individual Insurance and Annuity Products - Individual Insurance and
Annuities segment results depend significantly on profit margins between
investment results from General Account Investment Assets and interest credited
on insurance and annuity products. During 1995, such margins narrowed as
increases in crediting rates more than offset the effect of the higher
investment yields. During 1995, the crediting rate ranges were: 4.50% to 6.75%
for variable and interest-sensitive life insurance; 5.00% to 6.65% for variable
deferred annuities; 4.60% to 9.00% for SPDA contracts and 5.70% to 6.45% for
retirement investment accounts.
Margins on Individual Insurance and Annuity products are affected by interest
rate fluctuations. Rising interest rates result in a decline in the market value
of assets. However, the positive cash flows from renewal premiums, investment
income and maturities of existing assets would make an early disposition of
investment assets to meet operating cash flow requirements unlikely. Rising
interest rates also would result in available cash flows from maturities being
invested at higher interest rates, which would help support a gradual increase
in new business and renewal interest rates on interest-sensitive products. A
sharp, sudden rise in the interest rate environment without a concurrent
increase in crediting rates could result in higher surrenders, particularly for
annuities. The effect of such surrenders would be to reduce earnings modestly
over the long term while increasing earnings in the period of the surrenders to
the extent surrender charges were applicable. In 1995, Equitable Life initiated
an interest rate cap program designed to hedge crediting rate increases on
interest-sensitive individual annuity contracts. At February 29, 1996, the
outstanding notional amounts of contracts purchased and sold totaled $5.05
billion and $600.0 million, respectively, up from $2.6 billion and $300.0
million, respectively, at December 31, 1995.
If interest rates fall, crediting interest rates and dividends would be adjusted
subject to competitive pressures. Only a minority of this segment's policies and
contracts have fixed interest rates locked in at issue. The majority of
contracts are adjustable, having guaranteed minimum rates ranging from
approximately 2.5% to 5.5%. More than 88% of the policies have a minimum rate of
4.5% or lower. Should interest rates fall below such policy minimums,
adjustments to life policies' mortality and expense charges could cover the
shortfall in most situations. Lower crediting interest rates and dividends could
result in higher surrenders.
Investment Services. The following table summarizes the results of
operations for the Investment Services segment.
Investment Services
(In Millions)
Years Ended December 31,
----------------------------
1995 1994 1993
-------- -------- ----------
Third party commissions and fees ................... $ 720.8 $ 675.1 $ 1,571.7
Affiliate fees(1) .................................. 138.9 149.9 146.4
Other income(2) .................................... 89.4 110.2 1,074.5
-------- -------- ----------
Total revenues ..................................... 949.1 935.2 2,792.6
Total costs and expenses ........................... 787.9 757.7 2,490.5
-------- -------- ----------
Earnings before Federal Income Taxes and Cumulative
Effect of Accounting Change ...................... $ 161.2 $ 177.5 $ 302.1
======== ======== ==========
7-8
<FN>
(1) These fees are earned by the Investment Subsidiaries principally for
investment management and other services provided to the Insurance Group and
unconsolidated real estate joint ventures. These fees (except those related
to the discontinued GIC Segment and unconsolidated real estate joint
ventures of $28.1 million, $42.0 million and $34.8 million in 1995, 1994 and
1993, respectively) are eliminated as intercompany transactions in the
consolidated statements of earnings included elsewhere herein.
(2) Includes net dealer and trading gains, investment results and other items.
</FN>
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994 - For the
year ended December 31, 1995, pre-tax earnings for the Investment Services
segment declined by $16.3 million from 1994. In 1994, revenues included the
$43.9 million gain on Alliance's sales of new Units to third parties.
Revenues for 1995 increased by $13.9 million to $949.1 million and included a
$9.4 million gain on the sale by EQ Services of mortgage servicing contracts.
Third party commission and fees increased by $45.7 million during 1995 while
affiliate fees decreased by 7.3% to $138.9 million at December 31, 1995. DLJ's
revenue contribution on the equity basis increased $21.7 million to $60.3
million for 1995, as a result of higher earnings at DLJ.
Total costs and expenses increased $30.2 million during 1995 to $787.9 million
due to increases at Alliance and Equitable Real Estate of $14.2 million and $3.6
million, respectively and to a $12.4 million increase in Alliance's minority
interest.
On October 30, 1995, DLJ completed an IPO of 10.58 million shares of its common
stock, which included 7.28 million of the Holding Company's shares in DLJ,
priced at $27 per share. The remaining 3.3 million common shares sold in the DLJ
IPO were shares newly issued by DLJ. Upon completion of the IPO, the Holding
Company's ownership percentage was reduced to 44.1%. Since Equitable Life
continues to own an additional 36.1% interest, The Equitable's total ownership
interest was reduced from 100% to 80.2%. In connection with the IPO,
approximately 500 DLJ employees acquired forfeitable restricted stock units and
stock options covering common stock of DLJ. Such restricted stock units and
options will vest and become exercisable over a four-year period beginning in
February 1997. Assuming full vesting of the forfeitable restricted stock units
and the exercise of the stock options (but excluding any shares issued under
employee stock options granted in the future), these employees would own
approximately 21% of the outstanding common stock of DLJ and The Equitable would
own approximately 63% of such common stock, 35% held by the Holding Company and
28% by Equitable Life. Concurrently, DLJ completed the offering of $500.0
million aggregate principal amount of 6.875% senior notes due November 1, 2005.
DLJ's proceeds from this senior debt offering totaled $493.5 million before
deducting certain expenses related to the transaction. DLJ used the net proceeds
from the common stock and debt offerings to repay certain outstanding
indebtedness, effectively lengthening the average maturity of DLJ's borrowings.
DLJ did not receive any part of the proceeds from the sale of shares by the
Holding Company. Prior to these offerings, The Equitable made a capital
contribution to DLJ of equity securities with a market value of $55.0 million,
$33.8 million from the Holding Company and $21.2 million from Equitable Life.
On October 27, 1995, Equitable Real Estate sold 30 securitized commercial
mortgage servicing contracts on assets under management of $7.5 billion to a
third party, recognizing a $9.4 million gain on the transaction. The contracts,
mostly RTC related, were managed by EQ Services, Equitable Real Estate's
mortgage servicing affiliate. Equitable Real Estate will continue to manage and
service the remaining $7.5 billion mortgage portfolios of the General and
Separate Accounts.
Year Ended December 31, 1994 Compared to Year Ended December 31, 1993 - For
1994, pre-tax earnings for the Investment Services segment decreased by $124.6
million from the preceding year, primarily due to the deconsolidation of DLJ and
to lower earnings at DLJ, offset by increased earnings at Alliance and Equitable
Real Estate and a net gain on the issuance of Alliance Units of $43.9 million.
Pre-tax earnings for the year ended December 31, 1993 included $27.7 million in
restructuring costs incurred in connection with the Alliance and Equitable
Capital combination and $10.0 million in restructuring costs incurred at
Equitable Real Estate. Total revenues decreased in 1994 as the impact of DLJ's
deconsolidation and decreased earnings at DLJ more than offset the increased
fees earned at Alliance. Underwritings at DLJ in 1994 slowed compared to 1993
due to less favorable conditions in the capital markets.
7-9
Total costs and expenses decreased to $757.7 million in 1994 as compared to
$2.49 billion in 1993 principally reflecting the effect of DLJ's
deconsolidation. Compensation expense increased at Alliance due to higher
activity in 1994 as compared to 1993.
On March 7, 1994, Alliance completed the acquisition of the business and
substantially all of the assets of Shields Asset Management, Inc. ("Shields"),
formerly an indirect wholly owned unit of Xerox Financial Services, Inc., and
Shields' wholly owned subsidiary, Regent Investor Services, Inc. ("Regent"), for
a purchase price of approximately $74.0 million in cash. In addition, Alliance
issued new Units to key employees of Shields and Regent having an aggregate
value of $15.0 million in connection with their entering into long-term
employment agreements.
Results By Business Unit - Though now accounted for on the equity basis since
December 1993, DLJ's business results in total are addressed in this section and
in "Fees From Assets Under Management". The following table summarizes results
of operations by business unit; the elimination of DLJ majority interest is
included in Consolidation/elimination:
Investment Services
Results of Operations by Business Unit
(In Millions)
Years Ended December 31,
----------------------------
1995 1994 1993
--------- --------- --------
Earnings before Federal income taxes and
cumulative effect of accounting change:
DLJ(1) .......................................... $ 271.6 $ 192.7 $ 288.8
Alliance(2) ..................................... 159.3 134.8 73.2
Equitable Real Estate ........................... 43.6 40.7 28.3
Consolidation/elimination(3) .................... (313.3) (190.7) (88.2)
-------- -------- --------
Earnings before Federal Income Taxes and Cumulative
Effect of Accounting Change ..................... $ 161.2 $ 177.5 $ 302.1
======== ========= ========
<FN>
(1) Excludes amortization expense of $5.5 million, $5.9 million and $7.9 million
for the years ended December 31, 1995, 1994 and 1993, respectively, on
goodwill and intangible assets related to Equitable Life's acquisition of
DLJ in 1985 and minority interest accruals for dividends on DLJ preferred
stock of $19.9 million, $19.6 million and $3.6 million for the years ended
December 31, 1995, 1994 and 1993, respectively, as well as $10.4 million
related to minority interest in DLJ for the year ended December 31, 1995,
all of which are included in consolidation/elimination.
(2) Excludes $62.8 million, $50.4 million and $28.6 million related to minority
interest in Alliance for the years ended December 31, 1995, 1994 and 1993,
respectively, which are included in consolidation/elimination.
(3) Includes interest expense of $18.6 million, $14.1 million and $16.7 million
related to intercompany debt issued by intermediate holding companies
payable to Equitable Life for the years ended December 31, 1995, 1994 and
1993, respectively. Also includes $43.9 million net gain recognized in
connection with the sales of newly issued Alliance Units to third parties in
the third quarter of 1994.
</FN>
DLJ - DLJ's earnings from operations for the year ended December 31, 1995 were
$271.6 million, up $78.9 million from the prior year. Revenues increased $748.6
million to $2.76 billion primarily due to higher dealer and trading gains of
$199.2 million, increased underwriting revenues of $180.4 million, fee increases
of $87.8 million, higher commissions of $84.1 million and $66.1 million higher
gains on the corporate development portfolio. Corporate development revenue for
the third quarter of 1995 included a $25.0 million reserve for a potential loss
with respect to a bridge loan to a company experiencing financial difficulties.
DLJ's expenses were $2.49 billion for the year ended December 31, 1995, up
$669.7 million from the prior year due to a $369.8 million increase in
compensation and commissions, higher interest expense
7-10
of $176.8 million, a $35.2 million increase in rent related expenditures, $32.5
million higher brokerage and exchange fees and a $7.2 million restructuring
charge related to the wind down of its public finance underwriting operations.
During 1995, DLJ repurchased an additional $2.2 million of certain
mortgage-related securities previously underwritten by DLJ and made advances of
$25.1 million for certain expenses, bringing the total carrying value of these
securities to $278.5 million at December 31, 1995.
DLJ's earnings from operations for the year ended December 31, 1994 were $192.7
million, down $96.1 million from the prior year. Revenues decreased by $276.6
million in 1994 to $2.01 billion primarily due to decreased underwriting revenue
of $313.5 million and decreased dealer and trading gains of $215.8 million
offset by increased gains of $17.7 million on the corporate development
portfolio, an increase in fees of $70.0 million and an increase in net
investment income of $143.4 million. Increases in short-term interest rates
during the last ten months of 1994 significantly disrupted the flow of new
underwritings and greatly reduced the level of dealer and trading gains. DLJ's
expenses were $1.82 billion for the year ended December 31, 1994, down $180.5
million compared to the prior year due to a decrease in compensation and
commissions of $302.6 million offset by higher interest expense of $127.2
million due to higher interest rates combined with higher average inventory
positions. During the fourth quarter of 1994, DLJ repurchased $263.2 million of
certain mortgage-related securities previously underwritten by DLJ. The changes
in the value of these securities repurchased did not have a material effect on
DLJ's results of operations for the year ended December 31, 1994.
DLJ is engaged in various securities trading activities which resulted in net
dealer and trading gains of $364.9 million, $165.7 million and $381.5 million
for the years ended December 31, 1995, 1994 and 1993, respectively. A
substantial portion of DLJ's transactions are executed with and on behalf of
DLJ's customers. DLJ's exposure to credit risk associated with the
nonperformance of these customers in fulfilling their contractual obligations
can be directly impacted by volatile securities and credit markets and
regulatory changes. DLJ manages this credit risk by requiring customers to
maintain margin collateral in compliance with regulatory and internal
guidelines. DLJ monitors compliance with these guidelines on a daily basis.
DLJ's derivatives activities consist primarily of writing OTC options to
accommodate its customers needs, trading in forward contracts in U.S. government
and agency issued or guaranteed securities and in futures contracts on equity
based indices and currencies, and issuing structured notes. DLJ's involvement in
swap contracts, which generally involve greater risk and volatility, is not
significant.
DLJ's principal business activities, investment and merchant banking, securities
sales and trading and correspondent brokerage services are, by their nature,
highly competitive and subject to various risks, volatile trading markets and
fluctuations in the volume of market activity. Consequently, DLJ's net income
and revenues have been, and may continue to be, subject to wide fluctuations,
reflecting the impact of many factors beyond DLJ's control, including securities
market conditions, the level and volatility of interest rates, competitive
conditions and the size and timing of transactions.
During the first quarter of 1996, DLJ created a new unit, DLJ Asset Management
Corp., which will provide asset management services to institutions and
corporations, complementing its existing investment management services to high
net worth individuals.
Alliance - Alliance's earnings from operations for the year ended December 31,
1995 were $159.3 million, an increase of $24.5 million from the prior year.
Revenues totaled $639.7 million for 1995, an increase of $38.7 million from
1994, due to increased investment advisory fees, offset by lower distribution
plan fees from lower average load mutual fund assets. Alliance's costs and
expenses increased $14.2 million to $480.4 million for the year ended December
31, 1995 primarily due to increases in rent and related costs, offset by
decreases in employee compensation and benefits, interest expense and other
promotional expenditures.
Alliance's earnings from operations for the year ended December 31, 1994 were
$134.8 million, an increase of $61.6 million from the prior year which included
$40.8 million of restructuring costs associated with the combination of Alliance
and Equitable Capital. Revenues totaled $601.0 million for 1994, a 20.3%
increase over 1993, due to higher average assets under management primarily
resulting from additions to institutional accounts, the impact of the
Shields/Regent acquisition and the launching of The Alliance Global
Privatization Fund.
7-11
Alliance's costs and expenses increased $39.9 million to $466.2 million for the
year ended December 31, 1994 primarily due to increases in employee compensation
and benefits, distribution plan payments to financial intermediaries and other
promotional expenditures. Employee compensation and benefits increased due to a
significant increase in personnel, including the addition of Shields/Regent
staff, and higher incentive compensation resulting from increased operating
earnings. Distribution plan payments to financial intermediaries that distribute
Alliance Mutual Funds increased as a result of higher average load mutual fund
assets attributable to Class B (back end load) and Class C (no load) shares.
Other promotional expenditures increased in support of a new mutual fund
advertising campaign and the launching of The Alliance Global Privatization
Fund. See Note 14 of Notes to Consolidated Financial Statements concerning
certain lawsuits filed in 1995 by the shareholders of one of the Alliance mutual
funds.
In January 1996, Alliance agreed in principle to form a joint venture with
Albion Asset Advisors ("Albion") to manage private investments in emerging
markets. Albion is a New York based independent investment specialist formed in
1995 to provide investment services to institutional and high net worth
individual investors in the emerging debt markets. The newly formed entity will
have a global focus and expand Alliance's existing corporate finance and private
placement debt and equity investing business in developing markets.
On February 29, 1996, Alliance completed the acquisition of the business of
Cursitor for approximately $149.6 million consisting of $84.9 million in cash,
approximately 1.76 million Alliance Units and 6% notes totaling $21.5 million
payable ratably over four years, as well as substantial additional consideration
which will be determined at a later date. At December 31, 1995, Cursitor, an
international investment management firm, managed approximately $10.5 billion in
assets for both U.S. and non-U.S. institutions, mainly pension plans. Upon
completion of the acquisition, the Company's ownership percentage of Alliance
has been reduced to 57.6%.
Equitable Real Estate - Equitable Real Estate's earnings from operations were
$43.6 million for 1995, up $2.9 million from 1994. The increase primarily was
due to a $9.4 million gain on the sale by EQ Services of mortgage servicing
contracts offset by lower management fees from the General Account and $2.9
million of restructuring charges. The results for the year ended December 31,
1994 included a $4.8 million disposition fee received on a property sold in the
first quarter of that year.
Equitable Real Estate's pre-tax earnings from operations were $40.7 million for
1994, up $12.4 million from the preceding year. This increase was attributable
to increased fees from management and leasing activity offset by higher
personnel costs. The 1993 results included a $10.0 million restructuring charge.
Fees From Assets Under Management - As the following table illustrates, third
party clients continued to constitute an important source of revenues and
earnings.
Fees and Assets Under Management
(In Millions)
At or for the Years Ended December 31,
--------------------------------------
1995 1994 1993
---------- ----------- ----------
Fees:
Third Party .............................. $ 613.0 $ 544.7 $ 472.2
Equitable Life and the Holding Company ... 128.2 138.6 137.6
---------- ---------- ---------
Total .................................... $ 741.2 $ 683.3 $ 609.8
========== ========== =========
Assets Under Management:
Third Party(1)(2) ........................ $ 144,441 $ 125,145 $ 121,643
Equitable Life and the Holding Company(3). 50,900 47,376 51,003
---------- ---------- ---------
Total .................................... $ 195,341 $ 172,521 $ 172,646
========== ========== =========
7-12
<FN>
(1) Includes Separate Account assets under management of $24.72 billion, $20.67
billion and $19.74 billion at December 31, 1995, 1994 and 1993,
respectively. Third party assets under management include 100% of the
estimated fair value of real estate owned by joint ventures in which third
party clients own an interest.
(2) Includes $2.4 billion, and $2.2 billion of performing mortgages at December
31, 1994 and 1993, respectively, under a special stand-by services contract
with the RTC. Stand-by fees are received on the entire portfolio under the
contract; servicing fees are earned only on those mortgages that are
delinquent.
(3) Includes invested assets of Equitable Life and the Holding Company not
managed by the Investment Subsidiaries, principally invested assets of
subsidiaries and policy loans totaling approximately $17.59 billion, $14.26
billion and $16.78 billion at December 31, 1995, 1994 and 1993,
respectively.
</FN>
Fees for assets under management increased 8.5% during 1995 as compared to 1994
as a result of the growth in assets under management for third parties. During
1995, Alliance's third party assets under management increased by $25.64 billion
primarily due to market appreciation and net sales of money market funds. Third
party assets under management at Equitable Real Estate decreased by $8.15
billion primarily due to the sale by EQ Services of mortgage servicing
contracts. The growth in fees for assets under management for 1994 primarily was
due to asset growth in 1993, as 1994 included a full year of fees generated from
1993 asset increases. During 1994, the increase in third party assets under
management primarily was attributable to the $7.8 billion increase due to
Alliance's Shields/Regent acquisition offset by a decrease of $2.2 billion at
Equitable Real Estate primarily due to loan repayments.
Group Pension. The following table summarizes the results of operations for the
Group Pension segment.
Group Pension
(In Millions)
Years Ended December 31,
------------------------------
1995 1994 1993
--------- --------- ---------
Policy fees, premiums and other income, net .... $ 56.1 $ 53.7 $ 64.2
Net investment income .......................... 273.3 285.8 337.2
Investment (losses) gains, net ................. (37.4) 19.6 25.2
--------- -------- --------
Total revenues ................................. 292.0 359.1 426.6
Total benefits and other deductions ............ 305.3 343.3 424.6
--------- -------- --------
(Loss) Earnings before Federal Income Taxes and
Cumulative Accounting Change ................. $ (13.3) $ 15.8 $ 2.0
========= ======== ========
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994 - The
results for the Group Pension segment reflected a decline of $29.1 million for
the year ended December 31, 1995 compared to the prior year. This decrease was
attributed to investment losses in 1995 as compared to investment gains in 1994
offset by lower operating costs and expenses, higher market value adjustments to
participating policyholders' accounts that transferred to Separate Account
annuity contracts and improved net risk experience. The $57.0 million decrease
from $19.6 million of investment gains in 1994 to $37.4 million of losses in
1995 produced an earnings decline of approximately $37.0 million after
reflecting the effect of pass-throughs to participating pension contractholders.
The investment losses principally resulted from additions to asset valuation
allowances on mortgage loans and equity real estate. Investment income for the
year ended December 31, 1995 decreased from the comparable period of the prior
year due to a smaller asset base.
Year Ended December 31, 1994 Compared to Year Ended December 31, 1993 - The
results for the Group Pension segment were $13.8 million higher for the year
ended December 31, 1994 compared to 1993. This increase in pre-tax earnings was
attributable to: lower operating costs and expenses; the improvement in spread
between investment results and interest credited to Association Plans contracts
due to the maturity of high fixed rate contracts; and improved investment
7-13
results relative to amounts passed through to participating pension
contractholders. The decrease in investment gains of $5.6 million was more than
offset by the effect of pass-throughs to participating pension contractholders.
Investment income for the year ended December 31, 1994 decreased from the prior
year due to a smaller asset base and lower yields on investments.
GENERAL ACCOUNT INVESTMENT PORTFOLIO
At December 31, 1995, the Insurance Group, including the Closed Block, had
$34.64 billion of General Account Investment Assets to support the insurance and
annuity liabilities of its continuing operations. The following discussion
analyzes the results of the major categories of General Account Investment
Assets, including the Closed Block investment assets. These categories are:
fixed maturities, which include both investment grade and below investment grade
public and private debt securities and redeemable preferred stock; mortgages,
principally on commercial properties; equity real estate, which includes
significant investments in office and mixed use properties; and other equity
investments, which consists principally of limited partnership investments in
funds which invest in below investment grade debt and equity securities, and
other equity securities received in connection with private below investment
grade debt investments. Policy loans and cash and short-term investments make up
the remainder of General Account Investment Assets.
The Insurance Group investment segments often hold pro rata interests in the
same investment assets and share on a pro rata basis the cash flows therefrom.
Most individual investment assets held in the discontinued GIC Segment portfolio
are also held in the General Account investment portfolio. At demutualization,
General Account Investment Assets were allocated between the Closed Block and
operations outside of the Closed Block. The Closed Block assets are a part of
continuing operations and have been combined on a line-by-line basis with assets
outside of the Closed Block for comparability purposes. In view of the similar
asset quality characteristics of the major asset categories in the two
portfolios, management believes it is appropriate to discuss the Closed Block
assets and the assets outside of the Closed Block on a combined basis. The
investment results of General Account Investment Assets reflected in the
Company's results from continuing operations; investment results of GIC Segment
Investment Assets are reflected in discontinued operations.
The following table reconciles the consolidated balance sheet asset amounts to
General Account Investment Assets.
General Account Investment Asset Carrying Values
December 31, 1995
(In Millions)
General
Balance Account
Sheet Closed Investment
Balance Sheet Captions: Total Block Other (1) Assets
- ----------------------- ------------ ---------- ----------- -----------
Fixed maturities:
Available for sale(2) ....... $ 15,899.9 $ 3,896.2 $ (211.7) $ 20,007.8
Mortgage loans on real estate.. 3,638.3 1,368.8 -- 5,007.1
Equity real estate ............ 3,916.2 192.6 (21.5) 4,130.3
Policy loans .................. 1,976.4 1,797.2 -- 3,773.6
Other equity investments ...... 621.1 151.6 8.6 764.1
Other invested assets ......... 1,342.7 15.3 1,042.7 315.3
----------- -------- -------- ---------
Total investments ........... 27,394.6 7,421.7 818.1 33,998.2
Cash and cash equivalents ..... 774.7 70.6 208.5 636.8
----------- -------- -------- ---------
Total ......................... $ 28,169.3 $ 7,492.3 $ 1,026.6 $ 34,635.0
=========== ======== ======== =========
7-14
<FN>
(1) Assets listed in the "Other" category consist principally of assets held in
portfolios other than the General Account and certain reclassifications and
intercompany adjustments. The "Other" category is deducted in arriving at
General Account Investment Assets.
(2) Fixed maturities available for sale are reported at estimated fair value. At
December 31, 1995, the amortized cost of the General Account's fixed
maturity portfolio was $19.15 billion compared with an estimated market
value of $20.00 billion.
</FN>
Asset Valuation Allowances;
Writedowns of Fixed Maturity Securities
Impairments in the value of fixed maturities that are other than temporary are
treated as direct writedowns to the asset value and are accounted for as
realized losses. The Company provides for other than temporary declines in the
values of mortgages and equity real estate through asset valuation allowances.
Additions or deductions to these allowances are recognized in investment gains
(losses) for the period in which they are recorded. The carrying values of
assets on the consolidated balance sheets are presented net of the applicable
valuation allowance at the relevant date.
Management, with the assistance of its asset managers, regularly monitors the
performance of General Account Investment Assets. Based on recommendations from
these asset managers, as well as other factors, Equitable Life's Investments
Under Surveillance Committee (the "Surveillance Committee") decides on a
quarterly basis whether any investments are other than temporarily impaired. The
Surveillance Committee reviews proposed writedowns and the adequacy of the
valuation allowance for each asset category and adjusts such amounts, as
management deems appropriate, in accordance with the Company's valuation
policies for investments (see Note 2 of Notes to Consolidated Financial
Statements).
Fixed maturities identified as available for sale are carried at estimated fair
value while those identified as held to maturity are carried at amortized cost.
On December 1, 1995, as the result of a one-time reassessment of the
classification of fixed maturities permitted by the FASB's implementation guide
on SFAS No. 115, all General Account and discontinued GIC Segment fixed
maturities then classified as "held to maturity" were reclassified as "available
for sale." Equity real estate identified as available for sale is carried at the
lower of cost or estimated fair value less disposition costs. During the first
quarter of 1996, the Company will implement SFAS No. 121, which prescribes the
accounting for the impairment of long-lived assets, including equity real
estate. See Note 2 of Notes to Consolidated Financial Statements for discussion
of the impact of this accounting change. Equity securities are carried at
estimated fair value, with other than temporary decreases in value reflected as
realized losses in the consolidated statements of earnings. The carrying value
of equity in other limited partnership interests is based on the net assets of
the partnership, which generally are determined by the relevant partnership
using estimated fair value of the underlying assets, with changes reflected by
the Company in investment income in the consolidated statements of earnings.
7-15
The following table shows asset valuation allowances and additions to and
deductions from such allowances for the periods indicated.
General Account Investment Assets
Valuation Allowances
(In Millions)
Private
Fixed Equity Real
Maturities Mortgages Estate Total
----------- --------- ----------- --------
December 31, 1995
Assets Outside of the Closed Block:
Beginning balances .............. $ 64.2 $ 220.7 $ 284.9
Additions ....................... 45.8 90.2 136.0
Deductions(1) ................... (44.5) (51.1) (95.6)
-------- --------- ---------
Ending Balances ................... $ 65.5 $ 259.8 $ 325.3
======== ========= =========
Closed Block:
Beginning balances .............. $ 46.2 $ 2.6 $ 48.8
Additions ....................... 7.8 2.7 10.5
Deductions(1) ................... (35.6) (1.0) (36.6)
-------- --------- ---------
Ending Balances ................... $ 18.4 $ 4.3 $ 22.7
======== ========= =========
Total:
Beginning balances .............. $ 110.4 $ 223.3 $ 333.7
Additions ....................... 53.6 92.9 146.5
Deductions(1) ................... (80.1) (52.1) (132.2)
-------- --------- ---------
Ending Balances ................... $ 83.9 $ 264.1 $ 348.0
======== ========= =========
December 31, 1994
Total:
Beginning balances .............. $ 216.6 $ 211.8 $ 428.4
Additions ....................... 47.9 24.2 72.1
Deductions(1) ................... (154.1) (12.7) (166.8)
-------- --------- --------
Ending Balances ................... $ 110.4 $ 223.3 $ 333.7
======== ======== ========
December 31, 1993
Total:
Beginning balances .............. $ 128.3 $ 249.0 $ 195.5 $ 572.8
Additions ....................... 12.1 86.0 31.6 129.7
Deductions(1) ................... (106.4) (118.4) (15.3) (240.1)
Transfers(2) .................... (34.0) -- -- (34.0)
-------- -------- -------- --------
Ending Balances ................... $ -- $ 216.6 $ 211.8 $ 428.4
======== ======== ======== ========
<FN>
(1) Reflect asset sales, writedowns and improvements in asset value. For 1993,
as a result of the implementation of SFAS No. 115 at December 31, 1993,
$53.5 million of asset valuation allowances for private fixed maturities
were recharacterized as adjustments to amortized cost.
(2) Represents the transfer of asset valuation allowances to the Trust when the
assets were sold by the Insurance Group.
</FN>
Writedowns (primarily related to below investment grade securities) aggregated
$63.5 million, $46.7 million and $7.1 million in 1995, 1994 and 1993,
respectively.
7-16
General Account Investment Assets
The following table shows the major categories of General Account Investment
Assets by amortized cost, valuation allowance and net amortized cost as of
December 31, 1995 and by net amortized cost as of December 31, 1994.
General Account Investment Assets
(Dollars In Millions)
At December 31, 1995 At December 31, 1994
----------------------------------------------- ----------------------
% of % of
Net Total Net Net Total Net
Amortized Valuation Amortized Amortized Amortized Amortized
Cost Allowances Cost Cost Cost Cost
---------- ---------- ---------- ---------- ----------- ----------
Fixed maturities(1) .. $19,149.9 $ -- $19,149.9 56.7% $16,871.6 52.2%
Mortgages ............ 5,091.0 83.9 5,007.1 14.8 5,582.9 17.3
Equity real estate ... 4,394.4 264.1 4,130.3 12.2 4,654.7 14.4
Other equity
investments ........ 764.1 -- 764.1 2.3 846.1 2.6
Policy loans ......... 3,773.6 -- 3,773.6 11.2 3,559.1 11.0
Cash and short-term
investments(2) ..... 952.1 -- 952.1 2.8 824.2 2.5
--------- ------- --------- ------ --------- ------
Total ................ $34,125.1 $ 348.0 $33,777.1 100.0% $32,338.6 100.0%
========= ======= ========= ====== ========= ======
<FN>
(1) Excludes $857.9 million of unrealized gains and $542.5 million of unrealized
losses in fixed maturities available for sale which were reflected in the
carrying values at December 31, 1995 and 1994, respectively. As of December
31, 1995, all fixed maturities were classified as available for sale.
(2) Comprised of "Cash and cash equivalents" and short-term investments included
within the "Other invested assets" caption on the consolidated balance
sheet.
</FN>
Management has a policy of not investing substantial new funds in equity real
estate except to safeguard values in existing investments or to honor
outstanding commitments. It is management's continuing objective to reduce the
size of the equity real estate portfolio relative to total assets over the next
several years. Management anticipates that reductions will depend on real estate
market conditions, the level of mortgage foreclosures and expenditures required
to fund necessary or desired improvements to properties.
In accordance with Equitable Life's plan of demutualization, new investments for
the Closed Block must consist of cash and short-term investments, fixed income
securities having an NAIC category 1 or category 2 rating and commercial and
agricultural mortgages having an "A" rating or better pursuant to an internal
rating system acceptable to the Superintendent of the New York Insurance
Department. No new investments may be made in equity real estate, mortgages
(except as described in the preceding sentence) or obligations rated below NAIC
category 2, except to safeguard the value of existing investments allocated to
the Closed Block or to honor outstanding commitments. The Closed Block
reinvestment policies may be changed with the Superintendent's prior approval.
Investment Results of General Account Investment Assets
For the year ended December 31, 1995, investment results from General Account
Investment Assets totaled $2.40 billion, as compared to $2.30 billion in 1994,
an increase of 4.1%. Investment yields, including investment gains and losses,
increased to 7.46% in 1995 from 7.41% in 1994. Net investment income on General
Account Investment Assets was $2.42 billion in 1995, as compared to $2.29
billion in 1994. The increase principally was due to higher income from fixed
maturities and other equity investments offset by lower income from mortgages
and equity real estate. There were investment losses of $21.5 million as
compared to gains of $15.4 million in 1994.
7-17
Investment gains on fixed maturities in 1995 totaling $102.0 million as compared
to losses of $20.5 million in 1994 and a $22.2 million decrease in losses on
mortgage loans were more than offset by losses of $87.9 million in 1995 as
compared to gains of $19.9 million in 1994 for the equity real estate category
and a $73.9 million decrease in gains on other equity investments.
For the year ended December 31, 1994, investment results from General Account
Investment Assets totaled $2.30 billion, as compared to $2.40 billion in 1993, a
decrease of 4.2%. Investment yields, including investment gains and losses,
decreased to 7.41% in 1994 from 7.83% in 1993. Net investment income on General
Account Investment Assets was $2.29 billion in 1994, as compared to $2.34
billion in 1993. The decline principally was due to lower income from mortgage
loans and other equity investments offset by higher income from fixed maturities
and equity real estate. There were investment gains of $15.4 million as compared
to $60.3 million in 1993.
7-18
The following table summarizes investment results by General Account Investment
Asset category for the periods indicated.
Investment Results By Asset Category
(Dollars In Millions)
Years Ended December 31,
--------------------------------------------------------------------------
1995 1994 1993
----------------------- ---------------------- ------------------------
(1) (1) (1)
Yield Amount Yield Amount Yield Amount
--------- ------------ -------- ----------- -------- -----------
Fixed Maturities:
Income...................... 8.05% $ 1,447.7 8.02% $ 1,313.9 8.09% $ 1,222.0
Investment Gains/(Losses)... 0.57% 102.0 (0.13)% (20.5) 0.84% 127.3
--------- ------------ --------- ------------ --------- ------------
Total....................... 8.62% $ 1,549.7 7.89% $ 1,293.4 8.93% $ 1,349.3
Ending Assets............... $ 19,149.9 $ 16,871.6 $ 16,479.5
Mortgages:
Income...................... 8.82% $ 460.1 8.91% $ 532.0 9.17% $ 625.9
Investment Gains/(Losses)... (0.83)% (43.2) (1.09)% (65.4) (1.39)% (95.3)
--------- ------------ --------- ------------ --------- ------------
Total....................... 7.99% $ 416.9 7.82% $ 466.6 7.78% $ 530.6
Ending Assets............... $ 5,007.1 $ 5,582.9 $ 6,305.7
Equity Real Estate(2):
Income...................... 2.59% $ 92.5 2.96% $ 107.8 2.56% $ 90.8
Investment Gains/(Losses)... (2.46)% (87.9) 0.55% 19.9 (0.56)% (20.0)
--------- ------------ --------- ------------ --------- ------------
Total....................... 0.13% $ 4.6 3.51% $ 127.7 2.00% $ 70.8
Ending Assets............... $ 3,210.5 $ 3,717.0 $ 3,580.2
Other Equity Investments:
Income...................... 11.20% $ 90.0 5.69% $ 56.3 11.24% $ 136.5
Investment Gains/(Losses)... 0.93% 7.5 8.24% 81.4 3.96% 48.1
--------- ------------ --------- ------------ --------- ------------
Total....................... 12.13% $ 97.5 13.93% $ 137.7 15.20% $ 184.6
Ending Assets............... $ 764.1 $ 846.1 $ 1,059.0
Policy Loans:
Income...................... 6.95% $ 256.1 6.70% $ 233.3 6.81% $ 232.8
Ending Assets............... $ 3,773.6 $ 3,559.1 $ 3,426.2
Cash and Short-term
Investments:
Income...................... 8.18% $ 72.6 6.74% $ 43.4 6.13% $ 34.5
Investment Gains/(Losses)... 0.01% 0.1 0.00% 0.0 0.04% 0.2
--------- ------------ --------- ------------ --------- ------------
Total....................... 8.19% $ 72.7 6.74% $ 43.4 6.17% $ 34.7
Ending Assets............... $ 952.1 $ 824.2 $ 546.6
Total:
Income(3)................... 7.52% $ 2,419.0 7.36% $ 2,286.7 7.64% $ 2,342.5
Investment Gains/(Losses)... (0.06)% (21.5) 0.05% 15.4 0.19% 60.3
--------- ------------ --------- ------------ --------- ------------
Total(4).................... 7.46% $ 2,397.5 7.41% $ 2,302.1 7.83% $ 2,402.8
Ending Assets............... $ 32,857.3 $ 31,400.9 $ 31,397.2
<FN>
(1) Yields are based on the quarterly average asset carrying values, excluding
unrealized gains and (losses) in the fixed maturity asset category.
(2) Equity real estate carrying values are shown, and equity real estate yields
are calculated, net of third party debt and minority interests of $919.8
million, $937.7 million and $967.8 million as of December 31, 1995, 1994 and
1993, respectively. Equity real estate income is shown net of operating
expenses, depreciation, third party interest expense and minority interests.
Third party interest expense and minority interests totaled $59.3 million,
$48.1 million and $31.0 million for the years ended December 31, 1995, 1994
and 1993, respectively.
7-19
(3) Total investment income includes non-cash income from amortization,
payment-in-kind distributions and undistributed equity earnings of $72.2
million, $51.2 million and $50.4 million for the years ended December 31,
1995, 1994 and 1993, respectively. Investment income is shown net of
depreciation of $126.3 million, $119.7 million and $116.8 million for the
years ended December 31, 1995, 1994 and 1993, respectively.
(4) Total yields are shown before deducting investment fees paid to the
Investment Subsidiaries (which include asset management, acquisition,
disposition, accounting and legal fees). If such fees had been deducted,
total yields would have been 7.15%, 7.09% and 7.48% for the years ended
December 31, 1995, 1994 and 1993, respectively.
</FN>
Fixed Maturities. Fixed maturities consist of publicly traded debt securities,
privately placed debt securities and small amounts of redeemable preferred
stock, which represented 69.8%, 29.5% and 0.7%, respectively, of the amortized
cost of this asset category at December 31, 1995.
Total investment results on fixed maturity investments during 1995 increased by
$256.3 million (19.8%) from results in 1994. Investment income increased $133.8
million reflecting a higher asset base and higher investment returns available
on below investment grade securities. There were investment gains of $102.0
million on fixed maturity investments in 1995 as compared to losses of $20.5
million in 1994 primarily due to $165.5 million of gains on sales and
prepayments in 1995, offset by $63.5 million in writedowns.
The fixed maturities portfolio, which represented 56.7% of the net amortized
cost of General Account Investment Assets at December 31, 1995 (compared to
52.2% at December 31, 1994), consists largely of investment grade corporate debt
securities, including significant amounts of U.S. government and agency
obligations. As of December 31, 1995, 86.4% ($16.54 billion) of amortized cost
of fixed maturities were rated investment grade (NAIC bond rating of 1 or 2)
including $5.74 billion of publicly traded securities rated Aaa by Moody's
(42.6% of publicly traded fixed maturities). At December 31, 1994, 87.9% of
fixed maturities were investment grade and 36.1% of publicly traded fixed
maturities were rated Aaa. Using external rating agencies or an internal rating
system when a public rating does not exist, the weighted average quality of the
General Account public and private fixed maturity portfolios at December 31,
1995 was A2 and Baa1, respectively.
At December 31, 1995, the Company held collateralized mortgage obligations
("CMOs") with an amortized cost of $2.34 billion, including $2.00 billion in
publicly traded CMOs. About 76.6% of the public CMO holdings were collateralized
by GNMA, FNMA and FHLMC securities. Approximately 48.3% of the public CMO
holdings were in planned amortization class ("PAC") bonds. At December 31, 1995,
interest only ("IO") strips amounted to $13.8 million of amortized cost. There
were no principal only strips. In addition, at December 31, 1995, the Company
held $2.02 billion of mortgage pass-through securities (GNMA, FNMA, or FHLMC
securities) and also held $686.9 million of public and private asset-backed
securities, primarily backed by home equity and credit card receivables.
The Company reduced the net amortized cost of its below investment grade (NAIC
bond ratings 3 through 6) fixed maturity portfolio from $3.33 billion at
December 31, 1990 to $1.13 billion at December 31, 1993. In light of the
Insurance Group's significantly reduced exposure to below investment grade
securities at December 31, 1993, management increased its portfolio of below
investment grade securities in 1994 and 1995, primarily through purchases of
below investment grade public fixed maturities.
The below investment grade securities in the fixed maturity portfolio (including
redeemable preferred stock), which had an amortized cost of $2.61 billion, or
13.6% of fixed maturities, as of December 31, 1995 as compared to $2.04 billion
(12.1%) at December 31, 1994, primarily consisted of $1.94 billion of public
below investment grade securities and $672.4 million of privately placed debt
investments. At December 31, 1995, $801.9 million (30.7%) of the below
investment grade fixed maturities were rated NAIC 3, the highest below
investment grade rating. Of these "medium" grade assets, 56.8% were publicly
rated and the remainder were privately placed.
The amortized cost of General Account Investment Asset public and private fixed
maturities which were investment grade when acquired and were subsequently
downgraded to below investment grade was $51.8 million and $249.5 million,
respectively, at December 31, 1995.
7-20
Summaries of all fixed maturities, public fixed maturities and private fixed
maturities are shown by NAIC rating in the following tables.
Fixed Maturities
By Credit Quality
(Dollars In Millions)
At December 31, 1995 At December 31, 1994
Rating Agency ---------------------------------- --------------------------------
NAIC Equivalent Amortized % of Estimated Amortized % of Estimated
Rating Designation Cost Total Fair Value Cost Total Fair Value
- ---------- ------------------------ ------------ -------- ---------- ------------ ------- -----------
1 Aaa/Aa/A............... $11,713.7 61.2% $12,307.2 $ 9,893.2 58.6% $ 9,439.9
2 Baa.................... 4,822.3 (1) 25.2 5,116.7 4,942.7(1) 29.3 4,689.2
3 Ba..................... 801.9 (2) 4.2 802.1 654.1(2) 3.9 605.1
4 B...................... 1,488.9 (2) 7.8 1,461.6 1,043.6(2) 6.2 956.3
5 Caa and lower.......... 133.3 0.7 126.8 166.7 1.0 146.2
6 In or near default..... 59.3 0.3 57.8 34.4 0.2 34.7
--------- ------ --------- --------- ------ ---------
Subtotal.......................... 19,019.4 99.4 19,872.2 16,734.7 99.2 15,871.4
Redeemable preferred stock
and other....................... 130.5 0.6 126.5 136.9 0.8 120.2
--------- ------ --------- --------- ------ ---------
Total............................. $19,149.9 100.0% $19,998.7 $16,871.6 100.0% $15,991.6
========= ====== ========= ========= ====== =========
<FN>
(1) Includes Class B Notes issued by the Trust ("Class B Notes") having an
amortized cost of $100.0 million, eliminated in consolidation.
(2) Includes Class B Notes having an amortized cost of $50.0 million,
eliminated in consolidation.
</FN>
Public Fixed Maturities
By Credit Quality
(Dollars In Millions)
At December 31, 1995 At December 31, 1994
Rating Agency --------------------------------- ----------- -------------------
NAIC Equivalent Amortized % of Estimated Amortized % of Estimated
Rating Designation Cost Total Fair Value Cost Total Fair Value
- ---------- ------------------------ ------------ ------ ----------- ----------- ------ ----------
1 Aaa/Aa/A............... $ 9,205.6(1) 68.4% $ 9,642.2 $ 7,498.5(2) 66.0% $ 7,131.7
2 Baa.................... 2,318.8 17.2 2,472.3 2,440.6 21.5 2,320.1
3 Ba..................... 455.8 3.4 464.6 394.3 3.5 358.6
4 B...................... 1,275.9 9.5 1,236.6 857.5 7.5 777.5
5 Caa and lower.......... 108.3 0.8 101.1 76.8 0.7 57.1
6 In or near default..... 14.0 0.1 12.6 11.8 0.1 11.2
---------- ------ ---------- ---------- ------ ---------
Subtotal.......................... 13,378.4 99.4 13,929.4 11,279.5 99.3 10,656.2
Redeemable preferred stock
and other....................... 87.5 0.6 89.9 86.4 0.7 78.7
---------- ------ ---------- ---------- ------ ---------
Total............................. $13,465.9 100.0% $14,019.3 $11,365.9 100.0% $10,734.9
========== ====== ========== ========== ====== =========
<FN>
(1) Includes $5.74 billion amortized cost of Aaa rated securities (62.4% of the
NAIC 1 public fixed maturities) with an estimated market value of $5.95
billion, $643.2 million amortized cost of Aa rated securities (7.0%) with an
estimated market value of $680.5 million, and $2.79 billion amortized cost
of A rated securities (30.3%) with an estimated market value of $2.99
billion.
(2) Includes $4.10 billion amortized cost of Aaa rated securities (54.7% of the
NAIC 1 public fixed maturities) with an estimated market value of $3.92
billion, $508.0 million amortized cost of Aa rated securities (6.8%) with an
estimated market value of $473.9 million, and $2.81 billion amortized cost
of A rated securities (37.5%) with an estimated market value of $2.66
billion.
</FN>
7-21
Private Fixed Maturities
By Credit Quality
(Dollars In Millions)
At December 31, 1995 At December 31, 1994
Rating Agency --------------------------------- -------------------------------
NAIC Equivalent Amortized % of Estimated Amortized % of Estimated
Rating Designation Cost Total Fair Value Cost Total Fair Value
- ---------- ------------------------ ------------ ------ ---------- ----------- ------ ----------
1 Aaa/Aa/A............... $ 2,508.1 44.1% $2,665.0 $2,394.7 43.5% $2,308.2
2 Baa.................... 2,503.5 (1) 44.1 2,644.4 2,502.1(1) 45.5 2,369.1
3 Ba..................... 346.1 (2) 6.1 337.5 259.8(2) 4.7 246.5
4 B...................... 213.0 (2) 3.7 225.0 186.1(2) 3.4 178.8
5 Caa and lower.......... 25.0 0.4 25.7 89.9 1.6 89.1
6 In or near default..... 45.3 0.8 45.2 22.6 0.4 23.5
---------- ------ --------- ---------- ------ --------
Subtotal.......................... 5,641.0 99.2 5,942.8 5,455.2 99.1 5,215.2
Redeemable preferred stock
and other....................... 43.0 0.8 36.6 50.5 0.9 41.5
--------- ------ -------- --------- ------ --------
Total............................. $ 5,684.0 100.0% $5,979.4 $ 5,505.7 100.0% $5,256.7
========= ====== ======== ========= ====== ========
<FN>
(1) Includes Class B Notes having an amortized cost of $100.0 million,
eliminated in consolidation.
(2) Includes Class B Notes having an amortized cost of $50.0 million,
eliminated in consolidation.
</FN>
Management defines problem securities in the fixed maturity category as
securities (i) as to which principal and/or interest payments are in default or
are to be restructured pursuant to commenced negotiations or (ii) issued by a
company that went into bankruptcy subsequent to the acquisition of such
securities. The amortized cost of problem fixed maturities decreased to $70.8
million at December 31, 1995 (0.4% of the amortized cost of this category) from
$94.9 million (0.6%) at December 31, 1994. The amount of problem fixed
maturities decreased in 1995 as assets were written down, removed from the
problem category, sold or restructured.
The Company does not accrue interest income on problem fixed maturities unless
management believes the full collection of principal and interest is probable.
For the years ended December 31, 1995, 1994 and 1993, investment income included
$0.0 million, $1.3 million and $0.2 million, respectively, of interest accrued
on problem fixed maturities. Interest not accrued on problem fixed maturity
investments totaled $11.2 million, $10.7 million and $11.3 million for the years
ended December 31, 1995, 1994 and 1993, respectively. The amortized cost of
wholly or partially non-accruing problem fixed maturities was $70.8 million,
$44.8 million and $36.2 million at December 31, 1995, 1994 and 1993,
respectively.
Fixed Maturities
Problems, Potential Problems and Restructureds
Amortized Cost
(In Millions)
At December 31,
---------------------------------
1995 1994 1993 (2)
---------- --------- ----------
FIXED MATURITIES (Public and Private) ...... $19,149.9 $16,871.6 $16,479.5
Problem fixed maturities ................... 70.8 94.9 67.6
Potential problem fixed maturities ......... 43.4 96.2 13.8
Restructured fixed maturities(1) ........... 7.6 38.2 34.3
<FN>
(1) Excludes restructured fixed maturities of $3.5 million, $24.0 million and
$43.1 million that are shown as problems at December 31, 1995, 1994 and
1993, respectively, and excludes $9.2 million and $4.8 million of
restructured fixed maturities that are shown as potential problems at
December 31, 1995 and 1993.
7-22
(2) As a result of the adoption of SFAS No. 115 at December 31, 1993, $53.5
million of asset valuation allowances for private fixed maturities were
recharacterized as adjustments to amortized cost. These adjustments to
amortized cost amounted to $43.0 million, $2.7 million and $7.8 million for
problem, potential problem and restructured private fixed maturities,
respectively.
</FN>
The Company reviews all fixed maturities at least once each quarter and
identifies investments that management concludes require additional monitoring.
Among the criteria that may cause a fixed maturity security to be so identified
are (i) debt service coverage or cash flow falling below certain thresholds
which vary according to the issuer's industry and other relevant factors, (ii)
significant declines in revenues and/or margins, (iii) violation of financial
covenants, (iv) public securities trading at a substantial discount as a result
of specific credit concerns and (v) other subjective factors relating to the
issuer.
Based on its monitoring of fixed maturities, management identifies a class of
potential problem fixed maturities, which consists of fixed maturities not
currently classified as problems but for which management has serious doubts as
to the ability of the issuer to comply with the present debt payment terms and
which may result in the security becoming a problem or being restructured. The
decision whether to classify a performing fixed maturity security as a potential
problem involves significant subjective judgments by management as to likely
future industry conditions and developments with respect to the issuer. The
amortized cost of potential problem fixed maturities decreased to $43.4 million
at December 31, 1995 from $96.2 million at December 31, 1994 as new potential
problems were more than offset by assets that were repaid, were classified as
problems or were removed from the potential problem category.
In certain situations, the terms of some fixed maturity assets are restructured
or modified. Management defines restructured investments in accordance with SFAS
No. 15, "Accounting by Debtors and Creditors for Troubled Debt Restructurings".
Restructured fixed maturities amounted to $7.6 million, $38.2 million and $34.3
million at December 31, 1995, 1994 and 1993, respectively. These amounts exclude
problem restructured and potential problem restructured fixed maturities. The
decrease in total restructured fixed maturities principally resulted from asset
sales.
The foregone interest on restructured fixed maturities (including restructured
fixed maturities presented as problem or potential problem fixed maturities) for
the years ended December 31, 1994 and 1993 was $0.6 million and $2.0 million,
respectively. There was no foregone interest on restructured fixed maturities in
1995. The amortized cost of wholly or partially non-accruing restructured fixed
maturities (including restructured fixed maturities presented as problem or
potential problem fixed maturities) was $2.8 million, $17.1 million and $37.1
million at December 31, 1995, 1994 and 1993, respectively.
Mortgages. Mortgages consist of commercial, agricultural and residential loans.
As of December 31, 1995, commercial mortgages totaled $3.41 billion (67.1% of
the amortized cost of the category), agricultural loans were $1.62 billion
(31.9%) and residential loans were $53.2 million (1.0%).
In 1995, total investment results on mortgages decreased by $49.7 million
(10.7%) from 1994 levels. The investment income decrease resulted from a
declining asset base, in large part resulting from loan repayments. There were
investment losses on mortgages of $43.2 million and $65.4 million in 1995 and
1994, respectively, which reflected additions to asset valuation allowances of
$53.6 million in 1995 as compared to $47.9 million in 1994.
The Company adopted SFAS No. 114 effective January 1, 1995. At December 31,
1995, management identified impaired mortgage loans with a carrying value of
$507.2 million. The provision for losses for these impaired loans was $80.8
million at December 31, 1995. Income accrued on these loans in 1995 was $33.8
million, including cash received of $29.7 million.
7-23
Mortgages
Problems, Potential Problems and Restructureds
Amortized Cost
(Dollars In Millions)
At December 31,
----------------------------
1995 1994 1993
--------- -------- ---------
COMMERCIAL MORTGAGES ............................. $3,413.7 $4,007.4 $4,804.2
Problem commercial mortgages(1) .................. 41.3 107.0 365.0
Potential problem commercial mortgages ........... 194.7 349.4 470.0
Restructured commercial mortgages(2) ............. 522.2 459.4 560.9
VALUATION ALLOWANCES ............................. $ 79.9 $ 106.4 $ 214.9
As a percent of commercial mortgages ........... 2.3% 2.7% 4.5%
As a percent of problem commercial mortgages ... 193.5% 99.4% 58.9%
As a percent of problem and potential problem
commercial mortgages ......................... 33.9% 23.3% 25.7%
As a percent of problem, potential problem and
restructured commercial mortgages ............ 10.5% 11.6% 15.4%
AGRICULTURAL MORTGAGES ........................... $1,624.1 $1,618.5 $1,628.7
Problem agricultural mortgages(3) ................ 82.9 17.5 57.1
Potential problem agricultural mortgages ......... 0.0 68.2 0.0
Restructured agricultural mortgages .............. 2.0 1.4 2.4
VALUATION ALLOWANCES ............................. $ 4.0 $ 4.0 $ 1.7
<FN>
(1) Includes delinquent mortgage loans of $41.3 million, $100.6 million and
$308.8 million at December 31, 1995, 1994 and 1993, respectively, and
mortgage loans in process of foreclosure of $0.0 million, $6.4 million and
$56.2 million, respectively, at the same dates.
(2) Excludes restructured commercial mortgages of $12.6 million, $1.7 million
and $37.8 million that are shown as problems at December 31, 1995, 1994 and
1993, respectively, and excludes $148.3 million, $180.9 million and $123.8
million of restructured commercial mortgages that are shown as potential
problems at December 31, 1995, 1994 and 1993, respectively.
(3) Includes delinquent mortgage loans of $77.2 million, $8.8 million and $23.3
million at December 31, 1995, 1994 and 1993, respectively, and mortgage
loans in process of foreclosure of $5.7 million, $8.7 million and $33.8
million, respectively, at the same dates.
</FN>
Management has a monitoring process to stay close to the performance of the
mortgage loans in its portfolio and local market dynamics. When management
believes that a specific loan will experience payment problems, The Equitable
will discuss various restructuring alternatives with the borrower, as well as
consider foreclosure. Because the mortgage portfolio is managed by Equitable
Real Estate which has expertise in a variety of real estate disciplines, the
Company is able to deal directly and aggressively with its problem mortgages.
The volume of problem commercial mortgage loans decreased significantly during
1995. A large loan package which was previously delinquent was resolved in 1995,
with part of the package reclassified as restructured and the remainder
reclassified as equity real estate. At December 31, 1995, 1994 and 1993, problem
commercial mortgage loans (defined as mortgages 60 days or more past due or
mortgages in process of foreclosure) totaled $41.3 million, $107.0 million and
$365.0 million, respectively, or 1.2%, 2.7% and 7.6%, respectively, of the total
amortized cost of commercial mortgages at such dates.
7-24
The amortized cost of wholly or partially non-accruing problem commercial
mortgages was $38.7 million, $107.0 million and $309.5 million at December 31,
1995, 1994 and 1993, respectively. For the years ended December 31, 1995 and
1993, investment income included $0.1 million and $1.3 million, respectively, of
interest accrued on problem loans. Interest not accrued on problem commercial
mortgages totaled $3.3 million, $9.4 million and $20.7 million for the years
ended December 31, 1995, 1994 and 1993, respectively.
The Company reviews its commercial mortgage loan portfolio and identifies
monthly all commercial mortgage loans that management concludes require
additional monitoring. Among the criteria that may cause a loan to be so
identified are (i) borrower bankruptcies, (ii) bankruptcies of major tenants of
mortgaged properties, (iii) requests from borrowers for loan restructuring or
other relief, (iv) known or suspected cash flow deficiencies, (v) lateness of
payments, (vi) noncompliance with covenants, (vii) known or suspected loan to
value imbalances, (viii) lease rollovers affecting debt service coverage or
property value, (ix) property vacancy rates, (x) maturing loans identified as
potential refinancing risks, and (xi) other subjective factors relating to the
borrower or the mortgaged property.
Based on its monthly monitoring of commercial mortgages, management identifies a
class of potential problem mortgages, which consists of mortgage loans that are
not currently classified as problems but for which management has serious doubts
as to the ability of the borrower to comply with the present loan payment terms
and which may result in the loan becoming a problem or being restructured. The
decision whether to classify a performing mortgage loan as a potential problem
involves significant subjective judgments by management as to likely future
market conditions and developments with respect to the borrower or the
individual mortgaged property. Potential problem commercial mortgages decreased
during 1995 as new potential problems were more than offset by foreclosures,
removals due to improvements, and repayments.
7-25
The following table shows the distribution of problem and potential problem
commercial mortgages by property type and by state.
December 31, 1995
--------------------------------
(Dollars In Millions)
Number of Amortized % of
Loans Cost Total
--------- --------- -------
Problem Commercial Mortgages
Property Type:
Retail ....................................... 5 $ 17.6 42.6%
Hotel ........................................ 2 11.0 26.6
Office ....................................... 1 10.2 24.7
Apartment .................................... 2 2.5 6.1
---- -------- ------
Total ........................................ 10 $ 41.3 100.0%
==== ======== ======
State:
Pennsylvania ................................. $ 13.1 31.7%
Virginia ..................................... 10.2 24.7
California ................................... 9.5 23.0
Indiana ...................................... 3.9 9.4
Other (no state larger than 5.0%) ............ 4.6 11.2
-------- ------
Total ........................................ $ 41.3 100.0%
======== ======
Potential Problem Commercial Mortgages
Property Type:
Office ....................................... 7 $ 128.5 66.0%
Retail ....................................... 4 42.4 21.8
Hotel ........................................ 3 22.9 11.8
Land ......................................... 1 0.9 0.4
--- -------- ------
Total ........................................ 15 $ 194.7 100.0%
=== ======== ======
State:
California ................................... $ 66.8 34.3%
Virginia ..................................... 57.6 29.6
South Carolina ............................... 31.3 16.1
Other (no state larger than 5.0%) ............ 39.0 20.0
-------- ------
Total ........................................ $ 194.7 100.0%
======== ======
In certain situations, mortgages may be restructured or modified within the
meaning of SFAS Nos. 114 and 15, as amended. The amount of restructured
commercial mortgages increased during 1995, as new restructureds were partially
offset by reclassification to potential problems as well as payoffs. The
original weighted coupon rate of the $522.2 million of restructured commercial
mortgages was 10.0%. As a result of these restructurings, the restructured
weighted coupon rate is 8.9% and the restructured cash payment rate is 6.3%. The
foregone interest on restructured commercial mortgages (including restructured
mortgages presented as problem or potential problem mortgages) for the years
ended December 31, 1995, 1994 and 1993 was $7.6 million, $5.7 million and $7.8
million, respectively.
7-26
The following table sets out the distribution, by property type and by state, of
restructured commercial mortgages.
Restructured Commercial Mortgages
By Property Type and By State
December 31, 1995
(Dollars In Millions)
Number of Amortized % of
Loans Cost Total
---------- ---------- -----
Property Type:
Office .................................... 15 $ 206.1 39.5%
Hotel ..................................... 5 168.6 32.3
Industrial ................................ 3 99.5 19.0
Retail .................................... 3 48.0 9.2
---- -------- ------
Total ..................................... 26 $ 522.2 100.0%
==== ======== ======
State:
Texas ..................................... $ 114.4 21.9%
Illinois .................................. 110.8 21.2
California ................................ 69.9 13.4
New York .................................. 60.2 11.5
Louisiana ................................. 56.9 10.9
New Jersey ................................ 40.0 7.7
Other (no state larger than 5.0%) ......... 70.0 13.4
-------- ------
Total ..................................... $ 522.2 100.0%
======== ======
For the year ended December 31, 1995, scheduled amortization payments and
prepayments received on commercial mortgage loans aggregated $393.1 million. For
the year ended December 31, 1995, $528.0 million of commercial mortgage loan
maturity payments were scheduled, of which $261.5 million (49.5%) was paid as
due. Of the amount not paid, $210.9 million (40.0%) was extended for a weighted
average of 3.9 years at a weighted average interest rate of 8.7%, $15.5 million
(2.9%) was delinquent or in default for non-payment of principal, $39.8 million
(7.5%) was granted short-term extensions of up to six months and the balance of
$0.3 million (0.1%) was foreclosed upon.
During 1996, approximately $496.5 million of commercial mortgage principal
payments are scheduled, including $417.0 million of payments at maturity on
commercial mortgage balloon loans. An additional $1.10 billion of commercial
mortgage principal payments, including $889.0 million of payments at maturity on
commercial mortgage balloon loans, are scheduled for 1997 and 1998. Depending on
market conditions and lending practices in future years, many maturing loans may
have to be refinanced, restructured or foreclosed upon.
During the years ended December 31, 1995, 1994 and 1993, the amortized cost of
foreclosed commercial mortgages totaled $103.1 million, $469.1 million and
$352.1 million, respectively. At the time of foreclosure, reductions in
amortized cost reflecting the writing down of these properties to estimated fair
value totaled $54.4 million, $152.3 million and $119.1 million in 1995, 1994 and
1993, respectively.
As of December 31, 1995, problem agricultural mortgages (defined as mortgages
with payments 90 days or more past due or in foreclosure) totaled $82.9 million,
or 5.1% of the amortized cost of the agricultural mortgage portfolio, as
compared with $17.5 million (1.1%) and $57.1 million (3.5%) at December 31, 1994
and 1993, respectively. The 1995 increase in problem agricultural mortgages is
largely due to several loans in Florida that became delinquent. There were no
potential problem agricultural mortgages at December 31, 1995 and 1993 as
compared to $68.2 million (4.2%) at December 31, 1994.
For the years ended December 31, 1995, 1994 and 1993, the amortized cost of
foreclosed agricultural mortgages totaled $5.5 million, $19.8 million and $2.6
million, respectively.
7-27
Equity Real Estate. The equity real estate category consists primarily of a
diversified group of office, retail, hotel, industrial and other properties.
Office properties constituted the largest component (67.8% of amortized cost) of
this portfolio at December 31, 1995.
Total investment results on equity real estate assets declined in 1995 to $4.6
million from $127.7 million in 1994. Investment income was $92.5 million in
1995, as compared to $107.8 million in 1994. Investment losses of $87.9 million
in 1995 included $30.2 million of losses recognized in 1995 on equity real
estate properties with amortized cost of $635.4 million which were sold as
compared to $44.7 million of gains recognized during 1994 on equity real estate
properties with amortized cost of $234.9 million which were sold. Additions to
asset valuation allowances were $92.9 million and $24.2 million in 1995 and
1994, respectively.
At December 31, 1995, the overall vacancy rate for the Company's real estate
office properties was 15.6%, with a vacancy rate of 11.2% for properties
acquired as investment real estate and 26.4% for properties acquired through
foreclosure. The national commercial office vacancy rate was 14.3% (as of
September 30, 1995) as measured by CB Commercial. Lease rollover rates for such
properties for 1996, 1997 and 1998 range from 7.8% to 9.1%.
At December 31, 1995, the equity real estate category included $3.21 billion
amortized cost of properties acquired as investment real estate (or 73.1% of
amortized cost of equity real estate held) and $1.18 billion (26.9%) amortized
cost of properties acquired through foreclosure (including in-substance
foreclosure). Asset valuation allowances related to the equity real estate
category at December 31, 1995 totaled $264.1 million (6.0% of amortized cost).
Cumulative writedowns recognized on foreclosed properties were $425.9 million
through December 31, 1995. As of December 31, 1995, the carrying value of the
equity real estate portfolio was 75.6% of its original cost. The amortized cost
of foreclosed equity real estate totaled $1.36 billion (28.0% of amortized cost)
and $1.12 billion (23.6%) at year end 1994 and 1993, respectively. Depending on
future real estate market conditions, there may be further acquisitions of
equity real estate through foreclosure.
The following table summarizes the distribution by property type and by state of
foreclosed equity real estate properties.
Foreclosed Equity Real Estate Properties
By Property Type and By State
December 31, 1995
(Dollars In Millions)
Number of Amortized % of
Properties Cost Total
------------ ---------- ------
Property Type:
Office .......................... 26 $ 480.7 40.6%
Mixed Use ....................... 2 292.3 24.7
Retail .......................... 18 216.2 18.3
Industrial ...................... 9 22.2 1.9
Apartment ....................... 2 0.1 **
Hotel ........................... 1 * **
Other ........................... 47 172.0 14.5
--- -------- -----
Total ........................... 105 $1,183.5 100.0%
=== ======== =====
State:
California ...................... $ 265.2 22.4%
Texas ........................... 229.3 19.4
Georgia ......................... 110.8 9.4
Illinois ........................ 104.5 8.8
Pennsylvania .................... 86.1 7.3
Ohio ............................ 79.1 6.7
Other (no state larger
than 5.0%) ..................... 308.5 26.0
-------- -----
Total ........................... $1,183.5 100.0%
======== =====
* Less than $0.05 million.
** Less than 0.05%.
7-28
Total equity real estate with an aggregate carrying value of $276.4 million was
classified as available for sale at December 31, 1995, including $237.1 million
of foreclosed real estate. At foreclosure, the Company assesses each property
(except those properties acquired through in-substance foreclosure which are
always classified as available for sale) and makes a determination as to whether
the property should be classified as being available for sale or held for
investment. Because of Equitable Real Estate's expertise in a variety of real
estate management disciplines, The Company believes it has the capability to
manage certain foreclosed assets for the production of income in the same way as
properties originally purchased as investments. This treatment of foreclosed
assets is consistent with The Company's periodic review of all of its equity
real estate assets, including properties that were originally purchased as
investments, to determine whether the assets should be classified as available
for sale or held for investment.
Other Equity Investments. Other equity investments consist of limited
partnership interests in high yield funds managed by third parties ($521.4
million or 68.2% of amortized cost of this portfolio at December 31, 1995),
common and non-redeemable preferred stocks most of which were acquired in
connection with below investment grade fixed maturity investments ($132.6
million or 17.4%) and Equitable Deal Flow Fund, L.P., a high yield limited
partnership sponsored by the Insurance Group ($110.1 million or 14.4%). The high
yield funds in which the Insurance Group holds equity interests principally
invest in below investment grade fixed maturities and associated equity
securities. These funds can create significant volatility in investment income
since they are accounted for in accordance with the equity method that treats
increases and decreases in the Company's allocable portion of the estimated fair
value of the underlying partnership assets, whether realized or unrealized, as
investment income or loss to the Company.
Returns on other equity investments have been very volatile year-to-year. Total
investment results on other equity investments decreased by $40.2 million and
$46.9 million during 1995 and 1994, respectively. The decrease in investment
results in 1995 was due to lower investment gains. Investment income in 1995
increased by $33.7 million. There were investment gains of $7.5 million in 1995,
as compared to $81.4 million in 1994 and $48.1 million in 1993. Investment gains
have primarily resulted from the gain on sale of certain common stock
investments held in the portfolio.
Policy Loans. As of December 31, 1995, General Account Investment Assets
included $3.77 billion in outstanding policy loans which are collateralized by
the cash value of the underlying insurance policies. The policy loan interest
rates charged to policyholders are specified in the policies and ranged from
5.0% to 8.0% for policies with fixed rate provisions during 1995. For policies
with variable rate provisions, the loan interest rates were tied to external
indices. Interest rates charged on policy loans generally exceed interest rates
credited on the underlying policies.
7-29
DISCONTINUED OPERATIONS
GIC Segment
Results of Operations. As of December 31, 1995, $1.40 billion of GIC Segment
liabilities to contractholders were outstanding, of which $329.2 million were
related to GIC products. GIC Segment liabilities to contractholders are expected
to decline by the end of 1997 to $1.04 billion, of which $34.2 million will be
represented by GICs and the balance by Wind-Up Annuities. The loss allowance and
premium deficiency reserve for GIC contracts and Wind-Up Annuities totaled
$164.2 million at December 31, 1995. As of December 31, 1995, the range of
credited interest rates on GIC contracts was 7.20% to 17.35%. The weighted
average rates credited during 1995 and 1994 were 9.2% and 9.5%, respectively.
Payments on maturing GIC contracts and voluntary client withdrawals totaled
$562.6 million and $867.8 million during 1995 and 1994, respectively. In 1995,
$25.1 million of pre-tax losses were incurred compared to $21.7 million in 1994
and $24.7 million in 1993. All pre-tax losses incurred were charged to the GIC
Segment's loss allowance.
In January 1995, continuing operations transferred $1.22 billion in cash to the
GIC Segment in settlement of its obligation to fund the accumulated deficit of
the GIC Segment. Subsequently, the GIC Segment remitted $1.16 billion in cash to
continuing operations in partial repayment of borrowings by the GIC Segment. No
gains or losses were recognized on these transactions. As a result of these
transactions, the discontinued GIC Segment's total investment income and
benefits and other deductions for 1995 were both reduced. Total investment
income within continuing operation's Attributed Insurance Capital and Corporate
interest expense were also reduced in 1995.
The higher losses in 1995, compared to the year-earlier period, primarily were
due to a $69.9 million decline in investment income and investment losses of
$22.9 million as compared with gains of $26.8 million in 1994, offset by a $65.1
million decrease in interest expense on the GIC Segment's intersegment loans
from continuing operations as a result of the $1.16 billion repayment noted
above and lower interest credited of $52.5 million on a reduced GIC contract
base. The interest expense on intersegment loans totaled $154.6 million, $219.7
million and $197.1 million in 1995, 1994 and 1993, respectively.
Amounts due from the discontinued GIC Segment of $2.10 billion on the Company's
consolidated balance sheet at December 31, 1995 consisted of intersegment
borrowings by the GIC Segment from continuing operations. At December 31, 1994
and 1993, such intersegment borrowings were offset by the obligation of
continuing operations to provide assets to fund the GIC Segment accumulated
deficit which equaled $1.22 billion and $1.16 billion, respectively.
The Company's procedure for analyzing the adequacy of the loss allowance and
premium deficiency reserve for the discontinued GIC Segment rests on its annual
planning process and the resultant forecast of future years' investment income.
This process produced the following estimates of annual net cash flow:
Projections at December 31,
----------------------------
1994 1995
---------- ------------
(In Billions)
1995 $ (0.00) -
1996 0.13 $ 0.65
1997 - (0.11)
Cash requirements are funded by cash flows from assets held by the discontinued
GIC Segment and new intersegment loans from continuing operations. The
intersegment loan balance at December 31, 1995 of $2.10 billion is expected to
be reduced by approximately $650.1 million during 1996 and increased by
approximately $107.4 million in 1997. The net cash flow for the GIC Segment is
projected to be approximately $239.3 million for the years 1998 through 2000
resulting in a projected balance of intersegment loans at December 31, 2000 of
$1.32 billion. The remaining intersegment loan balance is expected to be repaid
by the GIC Segment from cash flows after the year 2000. The weighted average
interest rate on intersegment loans in 1995 was 7.13% as compared to 6.65% in
1994 (the weighted average interest rate on the borrowings repaid in January
1995 was 5.74%). The projection at December 31, 1995 assumes new intersegment
loans are made for a term of three years.
7-30
Other material assumptions for the determination of the adequacy of the loss
allowance and premium deficiency reserve are estimates of:
(i) Future annual investment portfolio returns through maturity or assumed
disposition for GIC Segment Investment Assets which ranged in the 1994
projection from 6.9% to 7.8% and ranged in the 1995 projection from 5.8%
to 7.3%. Investment return assumptions have declined somewhat between the
1994 and 1995 projections, primarily due to higher assumed repayments on
other equity investments and lower assumed returns on mortgage loans
partially offset by higher assumed investment returns on other equity
investments.
(ii) Planned sales of equity real estate assets and sales of other equity
investments over time as market conditions improve, with the proceeds
therefrom and from other maturing GIC Segment Investment Assets being used
to pay maturing GIC liabilities or to repay outstanding intersegment
borrowings.
(iii)Interest to be credited to policyholders' accounts under the fixed terms
of the underlying agreements, which terms, in the case of the GIC
contracts, establish well defined liability payment schedules.
(iv) Mortality experience for Wind-Up Annuities based on the 1983 GAM (Group
Mortality Table) with projections for future mortality improvements.
Wind-Up Annuities' cash flows beyond the year 2000 were discounted at
8.95% in 1994 and 7.43% in 1995.
The Company's quarterly process for evaluating the adequacy of the loss
allowance is to apply the current period's results of operations against the
allowance, re-estimate future losses and adjust the allowance as appropriate.
Management believes the loss allowance and premium deficiency reserve for GIC
contracts and Wind-Up Annuities at December 31, 1995 are adequate to provide for
all future losses; however, the determination of loss provisions involves
numerous estimates and subjective judgments regarding the expected performance
of GIC Segment Investment Assets, and there is no assurance the losses provided
for will not differ from the losses ultimately realized. To the extent actual
results of the discontinued GIC Segment differ from management's best estimates
underlying the loss allowance and premium deficiency reserve, the difference
will be reflected in the consolidated statements of earnings in discontinued
operations.
Investment Results. Total investment results declined by $119.6 million to
$302.3 million for the year ended December 31, 1995 as compared to 1994.
Investment income declined by $69.9 million principally due to the January 1995
cash settlement with continuing operations described above and lower investment
income of $44.9 million on GIC Segment Investment Assets, partially offset by an
increase of $48.1 million due to interest on the settlement of outstanding tax
items and lower investment management expenses of $13.9 million. Interest income
in 1994 included $88.2 million in interest on the obligation of continuing
operations to fund the GIC Segment's accumulated deficit. The decline in
investment income on GIC Segment Investment Assets resulted from a shrinkage in
the portfolio (due to payments on maturing GIC contracts). There were investment
losses of $22.9 million principally related to fixed maturities, mortgages and
equity real estate as compared to investment gains of $26.8 million for 1994
primarily from sales of equity real estate and other equity investments. Total
investment income included non-cash amounts from amortization, payment-in-kind
distributions and undistributed equity earnings of $8.0 million, $7.2 million
and $14.3 million for the years ended December 31, 1995, 1994 and 1993,
respectively. Investment income is shown net of depreciation of $32.7 million,
$37.7 million and $36.0 million, respectively, for such periods.
The following table shows the major categories of GIC Segment Investment Assets
by amortized cost, valuation allowances and net amortized cost as of December
31, 1995 and by net amortized cost as of December 31, 1994. See Note 7 of Notes
to Consolidated Financial Statements.
7-31
GIC Segment Investment Assets(1)
(Dollars In Millions)
At December 31, 1995 At December 31, 1994
------------------------------------------------- ------------------------
% of % of
Net Total Net Net Total Net
Amortized Valuation Amortized Amortized Amortized Amortized
Cost Allowances Cost Cost Cost Cost
----------- ---------- ----------- ----------- ---------- -----------
Fixed maturities...... $ 108.4 $ -- $ 108.4 3.3% $ 231.4 5.9%
Mortgages............. 1,505.0 19.2 1,485.8 45.7 1,730.5 44.4
Equity real estate.... 1,209.1 77.9 1,131.2 34.8 1,203.2 30.8
Other equity
investments......... 455.9 -- 455.9 14.0 591.8 15.2
Cash and short-term
investments......... 72.4 -- 72.4 2.2 142.6 3.7
---------- -------- ---------- ------ ----------- ------
Total................. $ 3,350.8 $ 97.1 $ 3,253.7 100.0% $ 3,899.5 100.0%
========== ======== ========== ====== =========== ======
<FN>
(1) Includes the assets of Separate Account No. 9.
</FN>
Asset Valuation Allowances; Writedowns of Fixed Maturity Securities
The following table shows asset valuation allowances at the dates indicated.
GIC Segment Investment Assets
Valuation Allowances
(In Millions)
Private
Fixed Equity Real
Maturities Mortgages Estate Total
------------ ----------- ----------- ---------
December 31, 1995
Beginning balances............... $ 50.2 $ 74.7 $ 124.9
Additions........................ 10.8 19.3 30.1
Deductions....................... (41.8) (16.1) (57.9)
---------- -------- ---------
Ending Balances.................... $ 19.2 $ 77.9 $ 97.1
========== ======== =========
December 31, 1994
Beginning balances............... $ 61.4 $ 61.5 $ 122.9
Additions........................ 8.0 25.0 33.0
Deductions....................... (19.2) (11.8) (31.0)
---------- -------- ---------
Ending Balances.................... $ 50.2 $ 74.7 $ 124.9
========== ======== =========
December 31, 1993
Beginning balances............... $ 92.6 $ 63.0 $ 79.3 $ 234.9
Additions........................ 2.3 28.2 21.4 51.9
Deductions(1).................... (94.9) (29.8) (39.2) 163.9)
--------- ---------- -------- ---------
Ending Balances.................... $ - $ 61.4 $ 61.5 $ 122.9
========= ========== ======== =========
<FN>
(1) As a result of the implementation of SFAS No. 115 at December 31, 1993,
$40.8 million of asset valuation allowances for private fixed maturities
were recharacterized as adjustments to amortized cost.
</FN>
7-32
Writedowns (primarily related to below investment grade securities) aggregated
$8.1 million, $17.8 million and $1.1 million in 1995, 1994 and 1993,
respectively.
Investment Results by Asset Category
Fixed Maturities - At December 31, 1995, the amortized cost of the discontinued
GIC Segment's fixed maturity portfolio was $108.4 million compared with an
estimated fair value of $109.7 million. GIC Segment fixed maturities consist of
publicly traded debt securities, privately placed debt securities and small
amounts of redeemable preferred stock, which represented 16.0%, 77.2% and 6.8%,
respectively, of amortized cost of this asset category at December 31, 1995. At
December 31, 1995, approximately 45.6% ($49.4 million) of the GIC Segment's
fixed maturities were scheduled to mature within five years (with 14.9%, or
$16.2 million, scheduled to mature in 1996).
Total investment results on fixed maturity investments fell to $11.2 million in
1995 from $25.8 million in 1994 and $75.5 million in 1993. The decrease in
investment results during this period was largely due to a decline in investment
income to $23.0 million in 1995, down from $31.7 million and $64.0 million in
1994 and 1993, respectively, principally as a result of a significantly smaller
asset base. Total yields were 6.51%, 8.37% and 12.91% in 1995, 1994 and 1993,
respectively. There were investment losses of $11.8 million on fixed maturity
investments during 1995, as compared to losses of $5.9 million in 1994 and gains
of $11.5 million in 1993. The losses were primarily due to asset writedowns of
$8.1 million in 1995 compared to additions to asset valuation allowances and
writedowns of $17.8 million and $3.4 million in 1994 and 1993, respectively.
As of December 31, 1995, the GIC Segment fixed maturities with an amortized cost
of $108.4 million (compared to $231.4 million as of December 31, 1994) consisted
of $33.6 million of investment grade securities (NAIC 1 and 2), largely public
and private corporate debt, $67.4 million of below investment grade (NAIC 3-6)
securities, largely directly negotiated debt investments, and $7.4 million of
redeemable preferred stock.
The amount of problem fixed maturities decreased during 1995 as assets were
written down or were removed from the problem category through restructuring and
sales.
GIC Segment Fixed Maturities
Problems, Potential Problems and Restructureds
Amortized Cost
(In Millions)
At December 31,
----------------------------------
1995 1994 1993 (2)
--------- ---------- ----------
FIXED MATURITIES (Public and Private) ...... $ 108.4 $ 231.4 $ 391.4
Problem fixed maturities ................... 6.2 20.3 64.4
Potential problem fixed maturities ......... 7.2 25.0 2.3
Restructured fixed maturities(1) ........... 9.0 33.7 38.6
<FN>
(1) Excludes restructured fixed maturities of $6.1 million, $15.0 million and
$21.3 million that are shown as problems at December 31, 1995, 1994 and
1993, respectively. There were no restructured fixed maturities shown as
potential problems.
(2) As a result of the adoption of SFAS No. 115 at December 31, 1993, $40.8
million of valuation allowances for private fixed maturities have been
recharacterized as adjustments to amortized cost. These adjustments to
amortized cost amounted to $37.7 million and $3.1 million for problem and
restructured private fixed maturities, respectively.
</FN>
7-33
Mortgages - As of December 31, 1995, GIC Segment commercial mortgages totaled
$1.38 billion (91.7% of amortized cost of the category), agricultural loans were
$109.2 million (7.2%) and residential loans were $16.3 million (1.1%). Office,
retail and hotel properties accounted for 49.8%, 18.5% and 18.4%, respectively,
of amortized cost of GIC Segment commercial mortgages as of December 31, 1995.
Properties in New York (15.8% as measured by amortized cost), Texas (10.5%), New
Jersey (9.5%), the District of Columbia (8.4%), California (7.4%) and Louisiana
(5.6%) represented the largest amounts of GIC Segment commercial mortgages. Not
more than 5.0% (as measured by amortized cost) of GIC Segment commercial
mortgages was located in any other single state.
For the year ended December 31, 1995, total investment results on GIC Segment
mortgages were $137.8 million, as compared to $179.7 million and $174.7 million
in 1994 and 1993, respectively. Total investment yields were 8.59%, 9.44% and
7.62% in 1995, 1994 and 1993, respectively. The drop in investment income to
$146.2 million in 1995, as compared to $181.7 million in 1994 and $216.5 million
in 1993, reflected the shrinking asset base. There were investment losses of
$8.4 million in 1995, $2.0 million in 1994 and $41.8 million in 1993. Losses in
1995 relative to 1994 reflected higher additions to asset valuation allowances.
GIC Segment Mortgages
Problems, Potential Problems and Restructureds
Amortized Cost
(Dollars In Millions)
At December 31,
------------------------------
1995 1994 1993
--------- --------- ----------
COMMERCIAL MORTGAGES ............................. $1,379.5 $1,630.5 $1,944.7
Problem commercial mortgages(1) .................. 33.4 13.0 60.9
Potential problem commercial mortgages ........... 42.0 182.3 233.7
Restructured commercial mortgages(2) ............. 252.6 223.6 264.7
VALUATION ALLOWANCES ............................. $ 19.2 $ 50.2 $ 61.4
As a percent of commercial mortgages ........... 1.4% 3.1% 3.2%
As a percent of problem commercial mortgages ... 57.5% 386.2% 100.8%
As a percent of problem and potential problem
commercial mortgages ......................... 25.5% 25.7% 20.8%
As a percent of problem, potential problem and
restructured commercial mortgages ............ 5.9% 12.0% 11.0%
AGRICULTURAL MORTGAGES ........................... $ 109.2 $ 131.3 $ 169.8
Problem agricultural mortgages(3) ................ 2.0 1.9 3.9
<FN>
(1) Includes delinquent mortgage loans of $33.4 million, $12.5 million and $58.0
million at December 31, 1995, 1994 and 1993, respectively, and mortgage
loans in process of foreclosure of $0.0 million, $0.5 million and $2.9
million at the same respective dates.
(2) Excludes restructured commercial mortgages of $31.6 million and $0.2 million
that are shown as problems at December 31, 1995 and 1993, respectively, and
excludes $5.1 million, $147.5 million and $108.4 million of restructured
commercial mortgages that are shown as potential problems at December 31,
1995, 1994 and 1993, respectively.
(3) Includes delinquent mortgage loans of $0.5 million, $0.1 million and $1.6
million at December 31, 1995, 1994 and 1993, respectively, and mortgage
loans in process of foreclosure of $1.5 million, $1.8 million and $2.3
million, respectively, at the same dates.
</FN>
7-34
As of December 31, 1995, problem commercial mortgages totaled $33.4 million. Of
this amount, $31.5 million or 94.3% were collateralized by hotel properties and
$1.9 million or 5.7% by retail properties. Properties with problem mortgages
were principally located in California (91.6% of amortized cost of such
mortgages). The amortized cost of wholly or partially non-accruing problem
commercial mortgages was $31.7 million, $13.0 million and $21.4 million at
December 31, 1995, 1994 and 1993, respectively.
At December 31, 1995, $19.0 million of potential problem mortgages (45.2% of
amortized cost of such mortgages) were collateralized by hotel properties, $12.6
million (30.0%) by retail properties and $9.3 million (22.1%) by office
properties. Properties with potential problem mortgages were principally located
in Texas (45.2% of amortized cost) and New York (29.0%). Potential problem
commercial mortgages decreased in 1995 as new potential problems were more than
offset by reclassification to restructured loans or foreclosed real estate.
The 1995 increase in restructured mortgages was largely due to loans
reclassified from potential problems. At December 31, 1995, 52.7% of
restructured commercial mortgages, as measured by amortized cost, were
collateralized by office properties, 27.2% by industrial properties and 18.3% by
hotels. These restructured mortgages were on properties principally located in
Texas (37.3% of amortized cost), Louisiana (20.2%) and New Jersey (18.6%).
Interest income foregone on restructured commercial mortgages (including problem
and potential problem restructured commercial mortgages) totaled $2.5 million,
$0.8 million and $0.9 million for the years ended December 31, 1995, 1994 and
1993, respectively.
For the year ended December 31, 1995, scheduled amortization payments and
prepayments on commercial mortgage loans aggregated $173.0 million. For the year
ended December 31, 1995, $99.9 million of mortgage loan maturity payments were
scheduled, of which $26.2 million (26.2%) was paid as due. Of the amount not
paid, $60.9 million (61.0% of the amount scheduled) was extended for a weighted
average of 3.8 years at a weighted average interest rate of 9.1%, $12.5 million
(12.5%) was granted short-term extensions of up to six months, and $0.3 million
(0.3%) were delinquent or in default for non-payment of principal. No loans were
foreclosed upon.
During 1996, approximately $295.3 million of commercial mortgage principal
payments are scheduled, including $270.8 million of payments at maturity on
commercial mortgage balloon loans. An additional $353.3 million of principal
payments, including $299.4 million of payments at maturity on commercial
mortgage balloon loans, are scheduled from 1997 through 1998. Depending on the
condition of the real estate market and lending practices in future years, many
maturing loans may have to be refinanced, restructured or foreclosed upon.
During the years ended December 31, 1995, 1994 and 1993, the amortized cost of
foreclosed commercial mortgages totaled $72.6 million, $68.1 million and $33.7
million, respectively. At the time of foreclosure, reductions in amortized cost
reflecting the writing down of these properties to estimated fair value totaled
$40.1 million, $6.3 million and $9.5 million in 1995, 1994 and 1993,
respectively. Foreclosed agricultural mortgages totaled $0.0 million, $0.9
million and $1.7 million, for the years ended December 31, 1995, 1994 and 1993,
respectively.
Equity Real Estate - At December 31, 1995, the $1.21 billion amortized cost of
equity real estate in the GIC Segment was comprised principally of office
(65.5%), retail (13.6%), industrial (6.9%), mixed use (3.4%) and hotel (1.1%)
properties. GIC Segment equity real estate was principally located in New York
(18.7%), Illinois (15.1%), California (15.0%) Texas (10.2%), Florida (7.4%) and
Pennsylvania (5.3%).
For the year ended December 31, 1995, total investment results on equity real
estate assets were $14.7 million, as compared to $35.2 million in 1994 and $37.6
million in 1993, reflecting yields of 1.38%, 2.81% and 2.77% in 1995, 1994 and
1993, respectively. Investment income was $20.3 million in 1995, as compared to
$29.8 million in 1994 and $41.1 million in 1993. There were investment losses of
$5.6 million in 1995, as compared to gains of $5.4 million in 1994 and losses of
$27.7 million in 1993. Additions to the asset valuation allowance were $19.3
million, $25.0 million and $21.4 million for the years ended December 31, 1995,
1994 and 1993, respectively. In 1995, there were equity real estate sales with
amortized cost of $144.8 million.
7-35
At December 31, 1995, the equity real estate category included properties
acquired through foreclosure, including in-substance foreclosure, with an
amortized cost of $317.20 million (constituting 26.2% of amortized cost of
equity real estate held at that date). Cumulative writedowns recognized on
foreclosed properties were $109.4 million through December 31, 1995. At year end
1994 and 1993, the amortized cost of foreclosed equity real estate totaled
$317.3 million and $329.4 million, respectively (24.8% and 21.4% of total
amortized cost, respectively). At December 31, 1995, office, retail, mixed use,
industrial and other properties made up 57.1%, 21.7%, 13.1%, 5.5% and 2.6%,
respectively, of amortized cost of foreclosed equity real estate. Foreclosed
equity real estate is located in New York (24.3% of amortized cost of such
property), Illinois (20.7%), California (15.3%) and Texas (14.1%), with no other
single state accounting for more than 5.0% of such amortized cost.
Other Equity Investments - At December 31, 1995, GIC Segment other equity
investments of $455.9 million consisted primarily of limited partnership
interests in high yield funds managed by third parties ($380.4 million or 83.5%
of amortized cost of this portfolio at that date). GIC Segment other equity
investments also included common and preferred stocks acquired in connection
with the below investment grade fixed maturity investments, as well as other
equity investments ($38.4 million or 8.4%) and an investment in the Deal Flow
Fund ($37.1 million or 8.1%).
Total investment results on other equity investments were $56.1 million, $80.8
million and $119.2 million in 1995, 1994 and 1993, respectively. These
investment results reflected yields of 10.54%, 11.95% and 13.54%, for the years
1995, 1994 and 1993, respectively. Investment income amounted to $53.2 million,
$51.5 million and $108.1 million in 1995, 1994 and 1993, respectively.
Investment gains were $2.9 million, $29.3 million and $11.1 million in 1995,
1994 and 1993, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Insurance Group
The Insurance Group's principal cash flow sources are premiums, deposits and
charges on policies and contracts, investment income, repayments of principal
and proceeds from maturities and sales of General Account Investment Assets and
dividends and distributions from subsidiaries.
The liquidity requirements of the Insurance Group principally relate to the
liabilities associated with its various life insurance, annuity and group
pension products in its continuing operations, the liabilities of the
discontinued GIC Segment and operating expenses, including debt service on its
Surplus Notes. These liabilities include the payment of benefits under such life
insurance, annuity and group pension products, as well as the need to make cash
payments in connection with policy surrenders, withdrawals and loans.
In December 1995, Equitable Life completed the sale of $600.0 million of Surplus
Notes in a private placement to institutional investors. Interest on the $400.0
million 6.95% Surplus Notes and the $200.0 million 7.70% Surplus Notes is
scheduled to be paid on June 1 and December 1 of each year, beginning June 1,
1996. The 6.95% Surplus Notes are scheduled to mature on December 1, 2005 while
the 7.70% Surplus Notes are scheduled to mature on December 1, 2015. Under the
New York Insurance Law, payments of interest on or principal of the Surplus
Notes may only be made out of "free and divisible surplus . . .with the approval
of the Superintendent whenever, in his judgment, the financial condition of the
insurer warrants." Interest expense on the Surplus Notes was approximately $1.5
million in 1995 and is expected to total $43.2 million in 1996. For further
information, see Note 8 of Notes to Consolidated Financial Statements.
7-36
The liquidity requirements of the Insurance Group are monitored regularly to
match cash inflows with cash requirements. The Insurance Group forecasts its
daily cash needs and periodically reviews its projected sources and uses of
funds, as well as the asset, liability, investment and cash flow assumptions
underlying these projections. Adjustments are periodically made to the Insurance
Group's investment policies with respect to, among other things, the maturity
and risk characteristics of General Account Investment Assets to reflect changes
in the Insurance Group's cash needs and also to reflect changing business and
economic conditions.
Sources of Insurance Group Liquidity
The primary source of short-term liquidity to support continuing and
discontinued operations is a pool of highly liquid, high quality, short-term
instruments structured to provide liquidity in excess of the Insurance Group's
expected cash requirements. At December 31, 1995, this asset pool provided the
Insurance Group an aggregate of $1.02 billion in highly liquid short-term
investments, as compared to $966.8 million at December 31, 1994 and $706.0
million at December 31, 1993.
The Insurance Group has as a source of secondary liquidity a portfolio of
medium-term U.S. Treasury securities (consisting mostly of U.S. Treasury Notes
with 1 to 10 year maturities) of $1.14 billion at December 31, 1995, as compared
to $788.4 million at December 31, 1994 and $854.6 million at December 31, 1993.
Other sources of liquidity include dividends from Equitable Life's Investment
Subsidiaries, particularly Alliance. In 1995, Alliance reported cash
distributions of $1.73 per Unit as compared to $1.64 per Unit in 1994 and $1.42
per Unit in 1993. Alliance generally is not subject to a corporate level tax for
Federal income tax purposes. Current law provides that as a consequence of
public trading in Alliance Units, Alliance will be treated as a corporation for
Federal income tax purposes beginning in 1998. Accordingly, were Alliance to
make no change in its tax status prior to 1998, it would be taxed as a
corporation for Federal income tax purposes with respect to periods beginning in
1998. The Federal tax would significantly reduce the post-tax earnings reported
by Alliance and available for distribution to Unit holders. Additionally, The
Equitable and Equitable Life's consolidated earnings will be reduced by taxation
on Alliance cash distributions which will generally be treated as corporate
dividends for Federal income tax purposes.
In the normal course of business, Equitable Life provides, from time to time,
certain guarantees and commitments and faces certain contingencies. These
commitments and contingencies are discussed more fully in Notes 12, 13, 14 and
15 of Notes to Consolidated Financial Statements.
Management believes it has sufficient liquidity in its short-term asset pool,
together with its cash flow from operations and scheduled maturities of fixed
maturities, to satisfy its liquidity needs. Equitable Life also has a commercial
paper program with an issue limit of $500.0 million. This program is available
for general corporate purposes to support Equitable Life's liquidity needs and
is supported by Equitable Life's existing $350.0 million five-year bank credit
facility. At December 31, 1995, no amounts were outstanding under the commercial
paper program or the back-up credit facility.
Factors Affecting Insurance Group Liquidity
GIC contract maturities will amount to approximately $65 million, $271 million
and $5 million in 1996, 1997 and 1998, respectively. These contracts issued by
the GIC Segment may not be surrendered prior to maturity, which permits the
Insurance Group to anticipate its cash needs to repay these contracts. The
Insurance Group is managing its General Account and GIC Segment Investment
Assets to provide sufficient liquidity to satisfy its obligations as they become
due. However, because of the illiquid nature of certain GIC Segment Investment
Assets, at December 31, 1995, the GIC Segment had amounts due to continuing
operations of $2.10 billion outstanding. Management expects the GIC Segment will
repay approximately $650.1 million of maturing intersegment loans from Equitable
Life's continuing operations in 1996 and will borrow approximately $107.4
million during 1997. The remaining intersegment loans will be repaid upon the
ultimate sale or maturity of GIC Segment Investment Assets.
7-37
The Insurance Group's liquidity needs are also affected by fluctuations in the
level of surrenders and withdrawals previously discussed in "Combined Results of
Operations - Continuing Operations - Combined Results of Continuing Operations
by Segment - Individual Insurance and Annuities - Surrenders and Withdrawals;
Policy Loans". Management believes the Insurance Group has adequate internal
sources of funds for its presently anticipated needs.
Risk-Based Capital
Since 1993, life insurers, including Equitable Life and EVLICO, have been
subject to certain RBC guidelines. The RBC guidelines provide a method to
measure the adjusted capital (statutory capital and surplus plus AVR and other
adjustments) that a life insurance company should have for regulatory purposes,
taking into account the risk characteristics of the company's investments and
products. A life insurance company's RBC ratio will vary over time depending
upon many factors, including its earnings, the mix of assets in its investment
portfolio, the nature of the products it sells and its rate of sales growth, as
well as to changes in the RBC formulas required by regulators.
While the RBC guidelines are intended to be a regulatory tool only, and are not
intended as a means to rank insurers generally, comparisons of RBC ratios of
life insurers have become generally available. Equitable Life and EVLICO were
above their target RBC ratios at years end 1994 and 1995. Principally because of
the RBC formula's treatment of Equitable Life's large holdings of subsidiary
common stock (including its interest in Alliance, its 36.1% interest in DLJ, and
its wholly owned subsidiary Equitable Real Estate), equity real estate and
mortgages, Equitable Life's year end 1995 RBC ratio is expected to continue to
be lower than those of its competitors in the life insurance industry. Equitable
Life's holdings of Alliance Units are valued for statutory purposes at a 17%
discount from their market value. At December 31, 1995, this valuation formula
had increased the carrying value of Equitable Life's investment in Alliance to
$914.3 million from $736.4 million at December 31, 1994. In addition, under the
RBC formula, the resulting statutory value after such discount is subject to a
30% capital requirement.
Developments relating to certain elements of the RBC calculation may affect
Equitable Life's RBC ratio at year end 1996. Under the RBC formula, Equitable
Life's year end RBC ratio depends in part on the closing price of Alliance Units
on the last trading day of the year. In addition, proposed changes in the RBC
formula that may become effective for year end 1996 statutory financial
statements are expected to adversely effect Equitable Life's RBC ratio.
The NAIC has undertaken a comprehensive codification of statutory accounting
practices for insurers. The resulting changes, once the codification project has
been completed and the new principles adopted and implemented, could have a
significant adverse impact on the Insurance Group's statutory results and
financial position. The codification project is not expected to be completed
prior to 1997.
At December 31, 1995, $278.9 million (or 12.7%) of the Insurance Group's
aggregate statutory capital and surplus (representing 7.9% of statutory capital
and surplus and AVR) resulted from surplus relief reinsurance. The level of
surplus relief reinsurance was reduced by approximately $271.0 million in 1995.
Investment Subsidiaries
Alliance's principal sources of liquidity are cash flows from operations,
proceeds from sales of newly issued Alliance Units and borrowings from lending
institutions. Upon completion of the Alliance/Equitable Capital transaction in
July 1993, the Company purchased an additional $50.0 million of Alliance Units.
In the fourth quarter of 1994, the Class B Limited Partnership Interest
Equitable Life purchased earlier in the year for $50.0 million was converted
into approximately 2.27 million newly issued Alliance Units. During the third
quarter of 1994, Alliance issued $100.0 million of new Units to two third-party
investors. The proceeds from the 1994 transactions were used to repay in full
Alliance's $105.0 million senior notes and the outstanding balance under its
revolving credit facility. In 1995, Alliance has not issued any commercial paper
under its $100.0 million commercial paper program; there are no amounts
outstanding under its revolving credit facilities at December 31, 1995. As a
result of the continued growth in Alliance's business and the use of the
deferred sales charge options on various Alliance mutual funds, Alliance may
require additional sources of capital from time to time.
7-38
DLJ reported total assets as of December 31, 1995 of approximately $44.58
billion. Most of these assets are highly liquid marketable securities and
short-term receivables arising from securities transactions. These assets
include collateralized resale and securities borrowing agreements, both of which
are secured by U.S. Government and agency securities and corporate debt and
equity securities. A relatively small portion of total assets is fixed or held
for a period longer than one year. A significant portion of DLJ's borrowings is
matched to the interest rate and expected holding period of the corresponding
assets. DLJ monitors overall liquidity by tracking the extent to which
unencumbered marketable assets exceed short-term unsecured borrowing.
DLJ continually reviews its overall capital needs to ensure that its capital
base can support the needs of its businesses. As a result of these ongoing
reviews, DLJ has been active in raising additional capital through its October
1995 IPO and senior debt offering as well as extending the maturity and
increasing the credit available under its revolving credit agreement to $325.0
million in 1995, of which $250.0 million was outstanding at year end.
DLJ historically has satisfied its needs for funds primarily from capital
(including long-term debt), internally generated funds, uncommitted lines of
credit, free credit balances in customers' accounts, master notes and
collateralized borrowings primarily consisting of bank loans, repurchase
agreements and securities loaned. Short-term funding generally is obtained at
rates related to Federal funds, LIBOR and money market rates. Other borrowing
costs are negotiated depending upon prevailing market conditions. DLJ maintains
borrowing relationships with a broad range of banks, financial institutions,
counterparties and others including $6.1 billion, at December 31, 1995, in
uncommitted bank credit lines with more than 50 domestic and international
banks. In 1993, DLJ issued $225.0 million of its $8.83 Cumulative Exchangeable
Preferred Stock to a group of institutional investors, including $20.0 million
to Equitable Life.
On December 22, 1995, DLJ filed a shelf registration statement with the SEC
relating to the proposed offerings, either together or separately, of up to
$500.0 million of senior debt securities and/or shares of preferred stock. In
February 1996, DLJ completed a public offering of $250.0 million aggregate
principal amount of 5 5/8% Medium Term Notes due 2016. The net proceeds of
approximately $247.8 million will be used for general corporate purposes. Debt
service on these notes will total $14.1 million annually, payable in two
installments on February 15 and August 15 of each year, beginning August 15,
1996.
The primary source of cash flows for Equitable Real Estate is investment
management fee income derived from various kinds of financial and real estate
investments and from transaction fees related to acquiring, servicing and
disposing of such investments. Since Equitable Real Estate is primarily an
investment manager, its primary cash needs are to pay operating expenses such as
employee compensation and benefits, office rentals and information systems. In
December 1994, Equitable Real Estate paid a cash dividend of $50.0 million to
Equitable Life and established two bank lines of credit totaling $30.0 million.
At December 31, 1994, $20.0 million was outstanding under this credit facility.
Consolidated Cash Flows
Net cash provided by operating activities was $1.32 billion for the year ended
December 31, 1995 as compared to $634.0 million in 1994.
Net cash used by financing activities was $998.8 million in 1995 as compared to
$725.7million in 1994. The 1995 net cash used by financing activities
principally resulted from the $1.22 billion payment by continuing operations to
the GIC Segment in early 1995 offset by the proceeds from the $600.0 million
Surplus Note offering late in the year. Net cash withdrawals from General
Account policyholders' account balances were $277.8 million, $804.7 million and
$22.8 million in 1995, 1994 and 1993, respectively (Separate Account activity
for the Individual Insurance and Annuities segment are excluded). In 1994,
Alliance issued $100.0 million of new Units to third parties. Alliance used the
proceeds of these third party Unit sales to repay $105.0 million of long-term
debt. In 1993, the increase in DLJ's business activity was the principal reason
for the increase in short-term financing ($4.72 billion in 1993).
7-39
Net cash used by investing activities amounted to $244.4 million for the year
ended December 31, 1995 as compared to the $191.9 million net cash provided by
investing activities in 1994. In 1995, purchases exceeded sales, maturities and
repayments and return of capital by $845.8 million, as available funds were
invested principally in the fixed maturities category. Decreases in loans to the
discontinued GIC Segment totaled $1.23 billion in 1995 principally due to the
January 1995 repayment of $1.16 billion in loans by the GIC Segment. Sales,
maturities and repayments of investment assets in 1994 exceeded purchases by
$564.0 million, principally in the mortgage loan and other equity investment
categories. Net increases in loans to the discontinued GIC Segment were $40.0
million in 1994. In 1993, the net cash used by investing activities amounted to
$1.04 billion. These investment cash outlays principally resulted from new
investments in fixed maturities which exceeded sales and maturities by
approximately $1.73 billion and additional loans to the discontinued GIC Segment
of $880.0 million. Offsetting these increases were mortgage loan maturities and
repayments in excess of originations and advances of $721.7 million.
The operating, investing and financing activities described above resulted in an
increase in cash and cash equivalents of $81.1 million in 1995 as compared to
$100.2 million in 1994 and decreases of $169.7 million in 1993.
7-40
Part II, Item 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
Report of Independent Accountants................................................... F-1
Consolidated Financial Statements:
Consolidated Balance Sheets, December 31, 1995 and 1994 F-2
Consolidated Statements of Earnings, Years Ended December 31, 1995,
1994 and 1993................................................................... F-3
Consolidated Statements of Shareholder's Equity, Years Ended December 31,
1995, 1994 and 1993............................................................. F-4
Consolidated Statements of Cash Flows, Years Ended December 31, 1995,
1994 and 1993................................................................... F-5
Notes to Consolidated Financial Statements........................................ F-6
Report of Independent Accountants on Financial Statement Schedules.................. F-41
Consolidated Financial Statement Schedules:
Schedule I - Summary of Investments - Other than Investments in
Related Parties, December 31, 1995................................................ F-42
Schedule III - Balance Sheets (Parent Company), December 31, 1995 and 1994.......... F-43
Schedule III - Statements of Earnings (Parent Company), Years Ended December 31,
1995, 1994 and 1993............................................................... F-44
Schedule III - Statements of Cash Flows (Parent Company), Years Ended December 31,
1995, 1994 and 1993............................................................... F-45
Schedule V - Supplementary Insurance Information, Years Ended December 31, 1995,
1994 and 1993..................................................................... F-46
Schedule VI - Reinsurance, Years Ended December 31, 1995, 1994 and 1993............. F-49
FS-1
February 7, 1996
Report of Independent Accountants
To the Board of Directors and Shareholders of
The Equitable Life Assurance Society of the United States
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of earnings, of shareholder's equity and of cash flows
present fairly, in all material respects, the financial position of The
Equitable Life Assurance Society of the United States and its subsidiaries
("Equitable Life") at December 31, 1995, 1994 and 1993 results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of Equitable Life's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
As discussed in Note 2 to the consolidated financial statements, Equitable Life
changed its methods of accounting for loan impairments in 1995, for
postemployment benefits in 1994 and for investment securities in 1993.
F-1
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND 1994
1995 1994
------------ ------------
(In Millions)
ASSETS
Investments:
Fixed maturities:
Available for sale, at estimated fair value ............. $ 15,899.9 $ 7,586.0
Held to maturity, at amortized cost ..................... -- 5,223.0
Mortgage loans on real estate ............................. 3,638.3 4,018.0
Equity real estate ........................................ 3,916.2 4,446.4
Policy loans .............................................. 1,976.4 1,731.2
Other equity investments .................................. 621.1 678.5
Investment in and loans to affiliates ..................... 636.6 560.2
Other invested assets ..................................... 706.1 489.3
----------- -----------
Total investments ..................................... 27,394.6 24,732.6
Cash and cash equivalents ................................... 774.7 693.6
Deferred policy acquisition costs ........................... 3,083.3 3,221.1
Amounts due from discontinued GIC Segment ................... 2,097.1 2,108.6
Other assets ................................................ 2,713.1 2,078.6
Closed Block assets ......................................... 8,612.8 8,105.5
Separate Accounts assets .................................... 24,566.6 20,469.5
----------- -----------
Total Assets ................................................ $ 69,242.2 $ 61,409.5
=========== ===========
LIABILITIES
Policyholders' account balances ............................. $ 21,752.6 $ 21,238.0
Future policy benefits and other policyholders' liabilities.. 4,171.8 3,840.8
Short-term and long-term debt ............................... 1,899.3 1,337.4
Other liabilities ........................................... 3,379.5 2,300.1
Closed Block liabilities .................................... 9,507.2 9,069.5
Separate Accounts liabilities ............................... 24,531.0 20,429.3
----------- -----------
Total liabilities ..................................... 65,241.4 58,215.1
----------- -----------
Commitments and contingencies (Notes 10, 12, 13, 14 and 15)
SHAREHOLDER'S EQUITY
Common stock, $1.25 par value 2.0 million shares authorized,
issued and outstanding .................................... 2.5 2.5
Capital in excess of par value .............................. 2,913.6 2,913.6
Retained earnings ........................................... 781.6 484.0
Net unrealized investment gains (losses) .................... 338.2 (203.0)
Minimum pension liability ................................... (35.1) (2.7)
----------- -----------
Total shareholder's equity ............................ 4,000.8 3,194.4
----------- -----------
Total Liabilities and Shareholder's Equity .................. $ 69,242.2 $ 61,409.5
=========== ===========
See Notes to Consolidated Financial Statements.
F-2
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
CONSOLIDATED STATEMENTS OF EARNINGS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
1995 1994 1993
---------- ---------- ----------
(In Millions)
REVENUES
Universal life and investment-type product
policy fee income ................................... $ 771.0 $ 715.0 $ 644.5
Premiums .............................................. 606.8 625.6 599.1
Net investment income ................................. 2,127.7 2,030.9 2,599.3
Investment gains, net ................................. 5.3 91.8 533.4
Commissions, fees and other income .................... 886.8 845.4 1,717.2
Contribution from the Closed Block .................... 124.4 151.0 128.3
---------- ---------- ----------
Total revenues .................................. 4,522.0 4,459.7 6,221.8
---------- ---------- ----------
BENEFITS AND OTHER DEDUCTIONS
Interest credited to policyholders' account balances .. 1,244.2 1,201.3 1,330.0
Policyholders' benefits ............................... 1,011.3 920.6 1,003.9
Other operating costs and expenses .................... 1,856.5 1,943.1 3,584.2
---------- ---------- ----------
Total benefits and other deductions ............. 4,112.0 4,065.0 5,918.1
---------- ---------- ----------
Earnings before Federal income taxes and cumulative
effect of accounting change ......................... 410.0 394.7 303.7
Federal income taxes .................................. 112.4 101.2 91.3
---------- ---------- ----------
Earnings before cumulative effect of accounting change 297.6 293.5 212.4
Cumulative effect of accounting change, net of Federal
income taxes ........................................ -- (27.1) --
---------- ---------- ----------
Net Earnings .......................................... $ 297.6 $ 266.4 $ 212.4
========== ========== ==========
See Notes to Consolidated Financial Statements.
F-3
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
1995 1994 1993
--------- --------- ---------
(In Millions)
Common stock, at par value, beginning of year ....... $ 2.5 $ 2.5 $ 2.0
Increase in par value ............................... -- -- .5
--------- --------- ---------
Common stock, at par value, end of year ............. 2.5 2.5 2.5
--------- --------- ---------
Capital in excess of par value, beginning of year ... 2,913.6 2,613.6 2,273.9
Additional capital in excess of par value ........... -- 300.0 340.2
Increase in par value ............................... -- -- (.5)
--------- --------- ---------
Capital in excess of par value, end of year ......... 2,913.6 2,913.6 2,613.6
--------- --------- ---------
Retained earnings, beginning of year ................ 484.0 217.6 5.2
Net earnings ........................................ 297.6 266.4 212.4
--------- --------- ---------
Retained earnings, end of year ...................... 781.6 484.0 217.6
--------- --------- ---------
Net unrealized investment (losses) gains,
beginning of year .................................. (203.0) 131.9 78.8
Change in unrealized investment gains (losses) ...... 541.2 (334.9) (9.5)
Effect of adopting new accounting standard .......... -- -- 62.6
--------- --------- ---------
Net unrealized investment gains (losses),
end of year......................................... 338.2 (203.0) 131.9
--------- --------- ---------
Minimum pension liability, beginning of year ........ (2.7) (15.0) --
Change in minimum pension liability ................. (32.4) 12.3 (15.0)
--------- --------- ---------
Minimum pension liability, end of year .............. (35.1) (2.7) (15.0)
--------- --------- ---------
Total Shareholder's Equity, End of Year ............. $ 4,000.8 $ 3,194.4 $ 2,950.6
========= ========= =========
See Notes to Consolidated Financial Statements.
F-4
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
1995 1994 1993
----------- ---------- ------------
(In Millions)
Net earnings ............................................... $ 297.6 $ 266.4 $ 212.4
Adjustments to reconcile net earnings to net cash
provided (used) by operating activities:
Net change in trading activities and broker-dealer
related receivables/payables ........................... -- -- (4,177.8)
Increase in matched resale agreements .................... -- -- (2,900.5)
Increase in matched repurchase agreements ................ -- -- 2,900.5
Investment gains, net of dealer and trading gains ........ (5.3) (91.8) (160.8)
Change in amounts due from discontinued GIC Segment ...... -- 57.3 47.8
General Account policy charges ........................... (769.7) (711.9) (623.4)
Interest credited to policyholders' account balances ..... 1,244.2 1,201.3 1,330.0
Changes in Closed Block assets and liabilities, net ...... (69.6) (95.1) (73.3)
Other, net ............................................... 627.1 7.8 (416.1)
---------- ---------- -----------
Net cash provided (used) by operating activities ........... 1,324.3 634.0 (3,861.2)
---------- ---------- -----------
Cash flows from investing activities:
Maturities and repayments ................................ 1,863.1 2,319.7 3,479.6
Sales .................................................... 8,901.4 5,661.9 7,399.2
Return of capital from joint ventures and limited
partnerships ........................................... 65.2 39.0 119.5
Purchases ................................................ (11,675.5) (7,417.6) (11,184.2)
Decrease (increase) in loans to discontinued GIC Segment.. 1,226.9 (40.0) (880.0)
Cash received on sale of 61% interest in DLJ ............. -- -- 346.7
Other, net ............................................... (625.5) (371.1) (317.0)
---------- ---------- -----------
Net cash (used) provided by investing activities ........... (244.4) 191.9 (1,036.2)
---------- ---------- -----------
Cash flows from financing activities: Policyholders'
account balances:
Deposits ............................................... 2,414.9 2,082.7 2,410.7
Withdrawals ............................................ (2,692.7) (2,887.4) (2,433.5)
Net (decrease) increase in short-term financings ......... (16.4) (173.0) 4,717.2
Additions to long-term debt .............................. 599.7 51.8 97.7
Repayments of long-term debt ............................. (40.7) (199.8) (64.4)
Proceeds from issuance of Alliance units ................. -- 100.0 --
Payment of obligation to fund accumulated deficit of
discontinued GIC Segment ............................... (1,215.4) -- --
Capital contribution from the Holding Company ............ -- 300.0 --
Other, net ............................................... (48.2) -- --
---------- ---------- -----------
Net cash (used) provided by financing activities ........... (998.8) (725.7) 4,727.7
---------- ---------- -----------
Change in cash and cash equivalents ........................ 81.1 100.2 (169.7)
Cash and cash equivalents, beginning of year ............... 693.6 593.4 763.1
---------- ---------- -----------
Cash and Cash Equivalents, End of Year ..................... $ 774.7 $ 693.6 $ 593.4
========== ========== ===========
Supplemental cash flow information
Interest Paid ............................................ $ 89.6 $ 34.9 $ 1,437.2
========== ========== ===========
Income Taxes (Refunded) Paid ............................. $ (82.7) $ 49.2 $ 41.0
========== ========== ===========
See Notes to Consolidated Financial Statements.
F-5
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1) ORGANIZATION
The Equitable Life Assurance Society of the United States ("Equitable
Life") converted to a stock life insurance company on July 22, 1992 and
became a wholly owned subsidiary of The Equitable Companies Incorporated
(the "Holding Company"). Equitable Life's insurance business, which is
comprised of an Individual Insurance and Annuities segment and a Group
Pension segment is conducted principally by Equitable Life and its
wholly owned life insurance subsidiary, Equitable Variable Life
Insurance Company ("EVLICO"). Equitable Life's investment management
business, which comprises the Investment Services segment, is conducted
principally by Alliance Capital Management L.P. ("Alliance"), Equitable
Real Estate Investment Management, Inc. ("EREIM") and Donaldson, Lufkin
& Jenrette, Inc. ("DLJ"), an investment banking and brokerage affiliate.
AXA, a French holding company for an international group of insurance
and related financial services companies is the Holding Company's
largest shareholder, owning approximately 60.6% at December 31, 1995
(63.5% assuming conversion of Series E Convertible Preferred Stock held
by AXA and 54.2% if all securities convertible into, or options on,
common stock were to be converted or exercised).
2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Principles of Consolidation
-----------------------------------------------------
The accompanying consolidated financial statements are prepared in
conformity with generally accepted accounting principles ("GAAP").
The accompanying consolidated financial statements include the accounts
of Equitable Life and its wholly owned life insurance subsidiaries
(collectively, the "Insurance Group"); non-insurance subsidiaries,
principally Alliance, an investment advisory subsidiary and EREIM, a
real estate investment management subsidiary; and those partnerships and
joint ventures in which the Company has control and a majority economic
interest (collectively, including its consolidated subsidiaries, the
"Company"). The consolidated statement of earnings and cash flow for the
year ended December 31, 1993 include the results of operations and cash
flow of DLJ, an investment banking and brokerage affiliate, on a
consolidated basis through December 15, 1993 (see Note 20). Subsequent
to that date, DLJ is accounted for on the equity basis. The Closed Block
assets and liabilities and results of operations are presented in the
consolidated financial statements as single line items (see Note 6).
Unless specifically stated, all disclosures contained herein supporting
the consolidated financial statements exclude the Closed Block related
amounts.
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
All significant intercompany transactions and balances have been
eliminated in consolidation other than intercompany transactions and
balances with the Closed Block and the discontinued Guaranteed Interest
Contract ("GIC") Segment (see Note 7).
Certain reclassifications have been made in the amounts presented for
prior periods to conform these periods with the 1995 presentation.
F-6
Closed Block
------------
As of July 22, 1992, Equitable Life established the Closed Block for the
benefit of certain classes of individual participating policies for
which Equitable Life had a dividend scale payable in 1991 and which were
in force on that date. Assets were allocated to the Closed Block in an
amount which, together with anticipated revenues from policies included
in the Closed Block, was reasonably expected to be sufficient to support
such business, including provision for payment of claims, certain
expenses and taxes, and for continuation of dividend scales payable in
1991, assuming the experience underlying such scales continues.
Assets allocated to the Closed Block inure solely to the benefit of the
holders of policies included in the Closed Block and will not revert to
the benefit of the Holding Company. The plan of demutualization
prohibits the reallocation, transfer, borrowing or lending of assets
between the Closed Block and other portions of Equitable Life's General
Account, any of its Separate Accounts or to any affiliate of Equitable
Life without the approval of the New York Superintendent of Insurance.
Closed Block assets and liabilities are carried on the same basis as
similar assets and liabilities held in the General Account.
The excess of Closed Block liabilities over Closed Block assets
represents the expected future post-tax contribution from the Closed
Block which would be recognized in income over the period the policies
and contracts in the Closed Block remain in force. If the actual
contribution from the Closed Block in any given period equals or exceeds
the expected contribution for such period as determined at the
establishment of the Closed Block, the expected contribution would be
recognized in income for that period. Any excess of the actual
contribution over the expected contribution would also be recognized in
income to the extent that the aggregate expected contribution for all
prior periods exceeded the aggregate actual contribution. Any remaining
excess of actual contribution over expected contributions would be
accrued in the Closed Block as a liability for future dividends to be
paid to the Closed Block policyholders. If, over the period the policies
and contracts in the Closed Block remain in force, the actual
contribution from the Closed Block is less than the expected
contribution from the Closed Block, only such actual contribution would
be recognized in income.
Discontinued Operations
-----------------------
In 1991, the Company's management adopted a plan to discontinue the
business operations of the GIC Segment, consisting of the Guaranteed
Interest Contract and Group Non-Participating Wind-Up Annuities lines of
business. The Company established a pre-tax provision for the estimated
future losses of the GIC line of business and a premium deficiency
reserve for the Group Non-Participating Wind-Up Annuities. Subsequent
losses incurred have been charged to the allowance for future losses and
the premium deficiency reserve. Total allowances are based upon
management's best judgment and there is no assurance that the ultimate
losses will not differ.
Accounting Changes
------------------
In the first quarter of 1995, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 114, "Accounting by Creditors for
Impairment of a Loan". This statement applies to all loans, including
loans restructured in a troubled debt restructuring involving a
modification of terms. This statement addresses the accounting for
impairment of a loan by specifying how allowances for credit losses
should be determined. Impaired loans within the scope of this statement
are measured based on the present value of expected future cash flows
discounted at the loan's effective interest rate, at the loan's
observable market price or the fair value of the collateral if the loan
is collateral dependent. The Company provides for impairment of loans
through an allowance for possible losses. The adoption of this statement
did not have a material effect on the level of these allowances or on
the Company's consolidated statements of earnings and shareholder's
equity.
F-7
In the fourth quarter of 1994 (effective as of January 1, 1994), the
Company adopted SFAS No. 112, "Employers' Accounting for Postemployment
Benefits," which required employers to recognize the obligation to
provide postemployment benefits. Implementation of this statement
resulted in a charge for the cumulative effect of accounting change of
$27.1 million, net of a Federal income tax benefit of $14.6 million.
At December 31, 1993, the Company adopted SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities," which expanded the
use of fair value accounting for those securities that a company does
not have positive intent and ability to hold to maturity. Implementation
of this statement increased consolidated shareholder's equity by $62.6
million, net of deferred policy acquisition costs, amounts attributable
to participating group annuity contracts and deferred Federal income
tax. Beginning coincident with issuance of SFAS No. 115 implementation
guidance in November 1995, the Financial Accounting Standards Board
("FASB") permitted companies a one-time opportunity, through December
31, 1995, to reassess the appropriateness of the classification of all
securities held at that time. On December 1, 1995, the Company
transferred $4,794.9 million of securities classified as held to
maturity to the available for sale portfolio. As a result consolidated
shareholder's equity increased by $126.2 million, net of deferred policy
acquisition costs, amounts attributable to participating group annuity
contracts and deferred Federal income tax.
New Accounting Pronouncements
-----------------------------
In January 1995, the FASB issued SFAS No. 120, "Accounting and Reporting
by Mutual Life Insurance Enterprises and by Insurance Enterprises for
Certain Long-Duration Participating Contracts," which permits, but does
not require, stock life insurance companies with participating life
contracts to account for those contracts in accordance with Statement of
Position No. 95-1, "Accounting for Certain Insurance Activities of
Mutual Life Insurance Enterprises". The Company has decided to retain
the existing methodology to account for traditional participating
policies and, therefore, will not adopt this statement.
In March 1995, the FASB issued SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of," which requires that long-lived assets and certain identifiable
intangibles be reviewed for impairment whenever events or changes in
circumstances indicate the carrying amount of such assets may not be
recoverable. The Company will implement this statement as of January 1,
1996. The cumulative effect of this accounting change will be a charge
of $23.4 million, net of a Federal income tax benefit of $12.1 million,
due to the writedown to fair value of building improvements relating to
facilities being vacated beginning in 1996. The Company currently
provides allowances for possible losses for other assets under the scope
of this statement. Management has not yet determined the impact of this
statement on assets to be held and used.
In May 1995, the FASB issued SFAS No. 122, "Accounting for Mortgage
Servicing Rights," which requires a mortgage banking enterprise to
recognize rights to service mortgage loans for others as separate assets
however those servicing rights are acquired. It further requires
capitalized mortgage servicing rights be assessed for impairment based
on the fair value of those rights. The Company will implement this
statement as of January 1, 1996. Implementation of this statement will
not have a material effect on the Company's consolidated financial
statements.
In October 1995, the FASB issued SFAS No. 123, "Accounting for
Stock-Based Compensation". This statement defines a fair value based
method of accounting for stock-based employee compensation plans while
continuing to allow an entity to measure compensation cost for such
plans using the intrinsic value based method of accounting. Management
has decided to retain the current compensation cost methodology
prescribed by Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees".
F-8
Valuation of Investments
------------------------
Fixed maturities, which the Company has both the ability and the intent
to hold to maturity, are stated principally at amortized cost. Fixed
maturities identified as available for sale are reported at estimated
fair value. The amortized cost of fixed maturities is adjusted for
impairments in value deemed to be other than temporary.
Mortgage loans on real estate are stated at unpaid principal balances,
net of unamortized discounts and valuation allowances. Effective with
the adoption of SFAS No. 114 on January 1, 1995, the valuation
allowances are based on the present value of expected future cash flows
discounted at the loan's original effective interest rate or the
collateral value if the loan is collateral dependent. However, if
foreclosure is or becomes probable, the measurement method used is
collateral value. Prior to the adoption of SFAS No. 114, the valuation
allowances were based on losses expected by management to be realized on
transfers of mortgage loans to real estate (upon foreclosure or
in-substance foreclosure), on the disposition or settlement of mortgage
loans and on mortgage loans management believed may not be collectible
in full. In establishing valuation allowances, management previously
considered, among other things the estimated fair value of the
underlying collateral.
Real estate, including real estate acquired in satisfaction of debt, is
stated at depreciated cost less valuation allowances. At the date of
foreclosure (including in-substance foreclosure), real estate acquired
in satisfaction of debt is valued at estimated fair value. Valuation
allowances on real estate held for the production of income are computed
using the forecasted cash flows of the respective properties discounted
at a rate equal to the Company's cost of funds; valuation allowances on
real estate available for sale are computed using the lower of current
estimated fair value, net of disposition costs, or depreciated cost.
Policy loans are stated at unpaid principal balances.
Partnerships and joint venture interests in which the Company does not
have control and a majority economic interest are reported on the equity
basis of accounting and are included either with equity real estate or
other equity investments, as appropriate.
Common stocks, are carried at estimated fair value and are included in
other equity investments.
Short-term investments are stated at amortized cost which approximates
fair value and are included with other invested assets.
Cash and cash equivalents includes cash on hand, amounts due from banks
and highly liquid debt instruments purchased with an original maturity
of three months or less.
All securities are recorded in the consolidated financial statements on
a trade date basis.
Investment Results and Unrealized Investment Gains (Losses)
-----------------------------------------------------------
Net investment income and realized investment gains and losses
(collectively, "investment results") related to certain participating
group annuity contracts are passed through to the contractholders as
interest credited to policyholders' account balances.
Realized investment gains and losses are determined by specific
identification and are presented as a component of revenue. Valuation
allowances are netted against the asset categories to which they apply
and changes in the valuation allowances are included in investment gains
or losses.
Unrealized investment gains and losses on fixed maturities available for
sale and equity securities held by the Company are accounted for as a
separate component of shareholder's equity, net of related deferred
Federal income taxes, amounts attributable to the discontinued GIC
Segment, Closed Block, participating group annuity contracts and
deferred policy acquisition costs related to universal life and
investment-type products.
F-9
Recognition of Insurance Income and Related Expenses
----------------------------------------------------
Premiums from universal life and investment-type contracts are reported
as deposits to policyholders' account balances. Revenues from these
contracts consist of amounts assessed during the period against
policyholders' account balances for mortality charges, policy
administration charges and surrender charges. Policy benefits and claims
that are charged to expense include benefit claims incurred in the
period in excess of related policyholders' account balances.
Premiums from traditional life and annuity policies with life
contingencies generally are recognized as income when due. Benefits and
expenses are matched with such income so as to result in the recognition
of profits over the life of the contracts. This match is accomplished by
means of the provision for liabilities for future policy benefits and
the deferral and subsequent amortization of policy acquisition costs.
For contracts with a single premium or a limited number of premium
payments due over a significantly shorter period than the total period
over which benefits are provided, premiums are recorded as income when
due with any excess profit deferred and recognized in income in a
constant relationship to insurance in force or, for annuities, the
amount of expected future benefit payments.
Premiums from individual health contracts are recognized as income over
the period to which the premiums relate in proportion to the amount of
insurance protection provided.
Deferred Policy Acquisition Costs
---------------------------------
The costs of acquiring new business, principally commissions,
underwriting, agency and policy issue expenses, all of which vary with
and are primarily related to the production of new business, are
deferred. Deferred policy acquisition costs are subject to
recoverability testing at the time of policy issue and loss recognition
testing at the end of each accounting period.
For universal life products and investment-type products, deferred
policy acquisition costs are amortized over the expected average life of
the contracts (periods ranging from 15 to 35 years and 5 to 17 years,
respectively) as a constant percentage of estimated gross profits
arising principally from investment results, mortality and expense
margins and surrender charges based on historical and anticipated future
experience, updated at the end of each accounting period. The effect on
the amortization of deferred policy acquisition costs of revisions to
estimated gross profits is reflected in earnings in the period such
estimated gross profits are revised. The effect on the deferred policy
acquisition cost asset that would result from realization of unrealized
gains (losses) is recognized with an offset to unrealized gains (losses)
in consolidated shareholder's equity as of the balance sheet date.
For traditional life and annuity policies with life contingencies,
deferred policy acquisition costs are amortized in proportion to
anticipated premiums. Assumptions as to anticipated premiums are
estimated at the date of policy issue and are consistently applied
during the life of the contracts. Deviations from estimated experience
are reflected in earnings in the period such deviations occur. For these
contracts, the amortization periods generally are for the estimated life
of the policy.
For individual health benefit insurance, deferred policy acquisition
costs are amortized over the expected average life of the contracts (10
years for major medical policies and 20 years for disability income
products) in proportion to anticipated premium revenue at time of issue.
Policyholders' Account Balances and Future Policy Benefits
----------------------------------------------------------
Policyholders' account balances for universal life and investment-type
contracts are equal to the policy account values. The policy account
values represent an accumulation of gross premium payments plus credited
interest less expense and mortality charges and withdrawals.
F-10
For traditional life insurance policies, future policy benefit and
dividend liabilities are estimated using a net level premium method on
the basis of actuarial assumptions as to mortality, persistency and
interest established at policy issue. Assumptions established at policy
issue as to mortality and persistency are based on the Insurance Group's
experience which, together with interest and expense assumptions,
provide a margin for adverse deviation. When the liabilities for future
policy benefits plus the present value of expected future gross premiums
for a product are insufficient to provide for expected future policy
benefits and expenses for that product, deferred policy acquisition
costs are written off and thereafter, if required, a premium deficiency
reserve is established by a charge to earnings. Benefit liabilities for
traditional annuities during the accumulation period are equal to
accumulated contractholders' fund balances and after annuitization are
equal to the present value of expected future payments. Interest rates
used in establishing such liabilities range from 2.25% to 11.5% for life
insurance liabilities and from 2.25% to 13.5% for annuity liabilities.
Individual health benefit liabilities for active lives are estimated
using the net level premium method, and assumptions as to future
morbidity, withdrawals and interest which provide a margin for adverse
deviation. Benefit liabilities for disabled lives are estimated using
the present value of benefits method and experience assumptions as to
claim terminations, expenses and interest.
Claim reserves and associated liabilities for individual disability
income and major medical policies were $639.6 million, $570.6 million at
December 31, 1995 and 1994, respectively. Incurred benefits (benefits
paid plus changes in claim reserves) and benefits paid for individual
disability income and major medical policies are summarized as follows:
Years Ended December 31,
------------------------------------
1995 1994 1993
---------- ---------- ----------
(In Millions)
Incurred benefits related to current year.... $ 176.0 $ 188.6 $ 193.1
Incurred benefits related to prior years..... 67.8 28.7 106.1
---------- ---------- ----------
Total Incurred Benefits...................... $ 243.8 $ 217.3 $ 299.2
========== ========== ==========
Benefits paid related to current year........ $ 37.0 $ 43.7 $ 48.9
Benefits paid related to prior years......... 137.8 132.3 123.1
---------- ---------- ----------
Total Benefits Paid.......................... $ 174.8 $ 176.0 $ 172.0
========== ========== ==========
The amount of policyholders' dividends to be paid (including those on
policies included in the Closed Block) is determined annually by
Equitable Life's Board of Directors. The aggregate amount of
policyholders' dividends is related to actual interest, mortality,
morbidity and expense experience for the year and judgment as to the
appropriate level of statutory surplus to be retained by Equitable Life.
Equitable Life is subject to limitations on the amount of statutory
profits which can be retained with respect to certain classes of
individual participating policies that were in force on July 22, 1992
which are not included in the Closed Block and with respect to
participating policies issued subsequent to July 22, 1992. Excess
statutory profits, if any, will be distributed over time to such
policyholders and will not be available to Equitable Life's shareholder.
Earnings in excess of limitations are accrued as policyholders'
dividends.
At December 31, 1995, participating policies including those in the
Closed Block represent approximately 27.2% ($58.4 billion) of directly
written life insurance in force, net of amounts ceded. Participating
policies represent primarily all of the premium income as reflected in
the consolidated statements of earnings and in the results of the Closed
Block.
F-11
Federal Income Taxes
--------------------
Equitable Life and its life insurance and non-life insurance
subsidiaries file a consolidated Federal income tax return with the
Holding Company and its non-life insurance subsidiaries. Current Federal
income taxes are charged or credited to operations based upon amounts
estimated to be payable or recoverable as a result of taxable operations
for the current year. Deferred income tax assets and liabilities are
recognized based on the difference between financial statement carrying
amounts and income tax bases of assets and liabilities using enacted
income tax rates and laws.
Separate Accounts
-----------------
Separate Accounts are established in conformity with the New York State
Insurance Law and generally are not chargeable with liabilities that
arise from any other business of the Insurance Group. Separate Accounts
assets are subject to General Account claims only to the extent the
value of such assets exceeds the Separate Accounts liabilities.
Assets and liabilities of the Separate Accounts, representing net
deposits and accumulated net investment earnings less fees, held
primarily for the benefit of contractholders, and for which the
Insurance Group does not bear the investment risk, are shown as separate
captions in the consolidated balance sheets. The Insurance Group bears
the investment risk on assets held in one Separate Account, therefore,
such assets are carried on the same basis as similar assets held in the
General Account portfolio. Assets held in the other Separate Accounts
are carried at quoted market values or, where quoted values are not
available, at estimated fair values as determined by the Insurance
Group.
The investment results of Separate Accounts on which the Insurance Group
does not bear the investment risk are reflected directly in Separate
Accounts liabilities. For the years ended December 31, 1995, 1994 and
1993, investment results of such Separate Accounts were $1,956.3
million, $676.3 million and $1,676.5 million, respectively.
Deposits to all Separate Accounts are reported as increases in Separate
Accounts liabilities and are not reported in revenues. Mortality, policy
administration and surrender charges on all Separate Accounts are
included in revenues.
F-12
3) INVESTMENTS
The following tables provide additional information relating to fixed
maturities and equity securities:
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
----------- ------------ ----------- ----------
(In Millions)
December 31, 1995
Fixed Maturities:
Available for Sale:
Corporate.......................... $ 10,910.7 $ 617.6 $ 118.1 $ 11,410.2
Mortgage-backed.................... 1,838.0 31.2 1.2 1,868.0
U.S. Treasury securities and
U.S. government and
agency securities................ 2,257.0 77.8 4.1 2,330.7
States and political subdivisions.. 45.7 5.2 - 50.9
Foreign governments................ 124.5 11.0 .2 135.3
Redeemable preferred stock......... 108.1 5.3 8.6 104.8
----------- ---------- ----------- -----------
Total Available for Sale............... $ 15,284.0 $ 748.1 $ 132.2 $ 15,899.9
=========== ========== =========== ===========
Equity Securities:
Common stock......................... $ 97.3 $ 49.1 $ 18.0 $ 128.4
=========== ========== =========== ===========
December 31, 1994
Fixed Maturities
Available for Sale:
Corporate.......................... $ 5,663.4 $ 34.6 $ 368.0 $ 5,330.0
Mortgage-backed.................... 686.0 2.9 44.8 644.1
U.S. Treasury securities and
U.S. government and
agency securities................ 1,519.3 6.7 71.9 1,454.1
States and political subdivisions.. 23.4 .1 .7 22.8
Foreign governments................ 43.8 .3 4.2 39.9
Redeemable preferred stock......... 108.4 .4 13.7 95.1
---------- ---------- ----------- -----------
Total Available for Sale............... $ 8,044.3 $ 45.0 $ 503.3 $ 7,586.0
========== ========== =========== ===========
Held to Maturity:
Corporate.......................... $ 4,661.0 $ 67.9 $ 233.8 $ 4,495.1
U.S. Treasury securities and
U.S. government and
agency securities............... 428.9 4.6 44.2 389.3
States and political subdivisions.. 63.4 .9 3.7 60.6
Foreign governments................ 69.7 4.2 2.0 71.9
----------- --------- ---------- -----------
Total Held to Maturity................. $ 5,223.0 $ 77.6 $ 283.7 $ 5,016.9
=========== ========= ========== ===========
Equity Securities:
Common stock......................... $ 126.4 $ 31.2 $ 23.5 $ 134.1
========== ========= ========== ===========
F-13
For publicly traded fixed maturities and equity securities, estimated
fair value is determined using quoted market prices. For fixed
maturities without a readily ascertainable market value, the Company has
determined an estimated fair value using a discounted cash flow
approach, including provisions for credit risk, generally based upon the
assumption that such securities will be held to maturity. Estimated fair
value for equity securities, substantially all of which do not have a
readily ascertainable market value, has been determined by the Company.
Such estimated fair values do not necessarily represent the values for
which these securities could have been sold at the dates of the
consolidated balance sheets. At December 31, 1995 and 1994, securities
without a readily ascertainable market value having an amortized cost of
$3,748.9 million and $3,980.4 million, respectively, had estimated fair
values of $3,981.8 million and $3,858.7 million, respectively.
The contractual maturity of bonds at December 31, 1995 is shown below:
Available for Sale
-----------------------------
Amortized Estimated
Cost Fair Value
------------ --------------
(In Millions)
Due in one year or less .................... $ 357.9 $ 360.0
Due in years two through five .............. 3,773.1 3,847.1
Due in years six through ten ............... 4,709.8 4,821.8
Due after ten years ........................ 4,497.1 4,898.2
Mortgage-backed securities ................. 1,838.0 1,868.0
----------- -----------
Total ...................................... $ 15,175.9 $ 15,795.1
=========== ===========
Bonds not due at a single maturity date have been included in the above
table in the year of final maturity. Actual maturities will differ from
contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
Investment valuation allowances and changes thereto are shown below:
Years Ended December 31,
-----------------------------------
1995 1994 1993
--------- ---------- ---------
(In Millions)
Balances, beginning of year ............. $ 284.9 $ 355.6 $ 512.0
Additions charged to income ............. 136.0 51.0 92.8
Deductions for writedowns and
asset dispositions .................... (95.6) (121.7) (249.2)
--------- --------- ---------
Balances, End of Year ................... $ 325.3 $ 284.9 $ 355.6
========= ========= ========
Balances, end of year comprise:
Mortgage loans on real estate ......... $ 65.5 $ 64.2 $ 144.4
Equity real estate .................... 259.8 220.7 211.2
--------- --------- ---------
Total ................................... $ 325.3 $ 284.9 $ 355.6
========= ========= ========
Deductions for writedowns and asset dispositions for 1993 include an
$87.1 million writedown of fixed maturity investments at December 31,
1993 as a result of adopting a new accounting statement for the
valuation of these investments that requires specific writedowns instead
of valuation allowances.
At December 31, 1995, the carrying values of investments held for the
production of income which were non-income producing for the twelve
months preceding the consolidated balance sheet date were $37.2 million
of fixed maturities and $84.7 million of mortgage loans on real estate.
F-14
The Insurance Group's fixed maturity investment portfolio includes
corporate high yield securities consisting of public high yield bonds,
redeemable preferred stocks and directly negotiated debt in leveraged
buyout transactions. The Insurance Group seeks to minimize the higher
than normal credit risks associated with such securities by monitoring
the total investments in any single issuer or total investment in a
particular industry group. Certain of these corporate high yield
securities are classified as other than investment grade by the various
rating agencies, i.e., a rating below Baa or National Association of
Insurance Commissioners ("NAIC") designation of 3 (medium grade), 4 or 5
(below investment grade) or 6 (in or near default). At December 31,
1995, approximately 15.57% of the $15,139.9 million aggregate amortized
cost of bonds held by the Insurance Group were considered to be other
than investment grade.
In addition to its holdings of corporate high yield securities, the
Insurance Group is an equity investor in limited partnership interests
which primarily invest in securities considered to be other than
investment grade.
The Company has restructured or modified the terms of certain fixed
maturity investments. The fixed maturity portfolio, based on amortized
cost, includes $15.9 million and $30.5 million at December 31, 1995 and
1994, respectively, of such restructured securities. These amounts
include fixed maturities which are in default as to principal and/or
interest payments, are to be restructured pursuant to commenced
negotiations or where the borrowers went into bankruptcy subsequent to
acquisition (collectively, "problem fixed maturities") of $1.6 million
and $9.7 million as of December 31, 1995 and 1994, respectively. Gross
interest income that would have been recorded in accordance with the
original terms of restructured fixed maturities amounted to $3.0
million, $7.5 million and $11.7 million in 1995, 1994 and 1993,
respectively. Gross interest income on these fixed maturities included
in net investment income aggregated $2.9 million, $6.8 million and $9.7
million in 1995, 1994 and 1993, respectively.
At December 31, 1995 and 1994, mortgage loans on real estate with
scheduled payments 60 days (90 days for agricultural mortgages) or more
past due or in foreclosure (collectively, "problem mortgage loans on
real estate") had an amortized cost of $87.7 million (2.4% of total
mortgage loans on real estate) and $96.9 million (2.3% of total mortgage
loans on real estate), respectively.
The payment terms of mortgage loans on real estate may from time to time
be restructured or modified. The investment in restructured mortgage
loans on real estate, based on amortized cost, amounted to $531.5
million and $447.9 million at December 31, 1995 and 1994, respectively.
These amounts include $3.8 million and $1.0 million of problem mortgage
loans on real estate at December 31, 1995 and 1994, respectively. Gross
interest income on restructured mortgage loans on real estate that would
have been recorded in accordance with the original terms of such loans
amounted to $52.1 million, $44.9 million and $51.8 million in 1995, 1994
and 1993, respectively. Gross interest income on these loans included in
net investment income aggregated $37.4 million, $32.8 million and $46.0
million in 1995, 1994 and 1993, respectively.
Impaired mortgage loans (as defined under SFAS No. 114) along with the
related provision for losses were as follows:
December 31, 1995
-----------------
(In Millions)
Impaired mortgage loans with provision for losses ......... $ 310.1
Impaired mortgage loans with no provision for losses ...... 160.8
--------
Recorded investment in impaired mortgage loans ............ 470.9
Provision for losses ...................................... 62.7
--------
Net Impaired Mortgage Loans ............................... $ 408.2
========
F-15
Impaired mortgage loans with no provision for losses are loans where the
fair value of the collateral or the net present value of the loan equals
or exceeds the recorded investment. Interest income earned on loans
where the collateral value is used to measure impairment is recorded on
a cash basis. Interest income on loans where the present value method is
used to measure impairment is accrued on the net carrying value amount
of the loan at the interest rate used to discount the cash flows.
Changes in the present value attributable to changes in the amount or
timing of expected cash flows are reported as investment gains or
losses.
During the year ended December 31, 1995, the Company's average recorded
investment in impaired mortgage loans was $429.0 million. Interest
income recognized on these impaired mortgage loans totaled $27.9 million
for the year ended December 31, 1995, including $13.4 million recognized
on a cash basis.
At December 31, 1995, investments owned of any one issuer, including its
affiliates, for which the aggregate carrying values are 10% or more of
total shareholders' equity, were $508.3 million relating to Trammell
Crow and affiliates (including holdings of the Closed Block and the
discontinued GIC Segment). The amount includes restructured mortgage
loans on real estate with an amortized cost of $152.4 million. A $294.0
million commercial loan package which was in bankruptcy at the beginning
of the year was resolved in 1995, with part of the package reclassified
as restructured and the remainder reclassified as equity real estate.
The Insurance Group's investment in equity real estate is through direct
ownership and through investments in real estate joint ventures. At
December 31, 1995 and 1994, the carrying value of equity real estate
available for sale amounted to $255.5 million and $447.8 million,
respectively. For the years ended December 31, 1995, 1994 and 1993,
respectively, real estate of $35.3 million, $189.8 million and $261.8
million was acquired in satisfaction of debt. At December 31, 1995 and
1994, the Company owned $862.7 million and $1,086.9 million,
respectively, of real estate acquired in satisfaction of debt.
Depreciation of real estate is computed using the straight-line method
over the estimated useful lives of the properties, which generally range
from 40 to 50 years. Accumulated depreciation on real estate was $662.4
million and $703.1 million at December 31, 1995 and 1994, respectively.
Depreciation expense on real estate totaled $121.7 million, $117.0
million and $115.3 million for the years ended December 31, 1995, 1994
and 1993, respectively.
F-16
4) JOINT VENTURES AND PARTNERSHIPS
Summarized combined financial information of real estate joint ventures
(38 and 47 individual ventures as of December 31, 1995 and 1994,
respectively) and of limited partnership interests accounted for under
the equity method, in which the Company has an investment of $10.0
million or greater and an equity interest of 10% or greater is as
follows:
December 31,
----------------------
1995 1994
---------- -----------
(In Millions)
FINANCIAL POSITION
Investments in real estate, at depreciated cost .................... $ 2,684.1 $ 2,786.7
Investments in securities, generally at estimated fair value ....... 2,459.8 3,071.2
Cash and cash equivalents .......................................... 489.1 359.8
Other assets ....................................................... 270.8 398.7
---------- ----------
Total assets ....................................................... 5,903.8 6,616.4
---------- ----------
Borrowed funds - third party ....................................... 1,782.3 1,759.6
Borrowed funds - the Company ....................................... 220.5 238.0
Other liabilities .................................................. 593.9 987.7
---------- ----------
Total liabilities .................................................. 2,596.7 2,985.3
---------- ----------
Partners' Capital .................................................. $ 3,307.1 $ 3,631.1
========== ==========
Equity in partners' capital included above ......................... $ 902.2 $ 964.2
Equity in limited partnership interests not included above ......... 212.8 224.6
Excess (deficit) of equity in partners' capital over
investment cost and equity earnings .............................. 3.6 (1.8)
Notes receivable from joint venture ................................ 5.3 6.1
---------- ----------
Carrying Value ..................................................... $ 1,123.9 $ 1,193.1
========== ==========
Years Ended December 31,
-----------------------------
1995 1994 1993
--------- --------- ---------
(In Millions)
STATEMENTS OF EARNINGS
Revenues of real estate joint ventures .......... $ 463.5 $ 537.7 $ 602.7
Revenues of other limited partnership interests.. 242.3 103.4 319.1
Interest expense - third party .................. (135.3) (114.9) (118.8)
Interest expense - the Company .................. (41.0) (36.9) (52.1)
Other expenses .................................. (397.7) (430.9) (531.7)
--------- --------- --------
Net Earnings .................................... $ 131.8 $ 58.4 $ 219.2
======== ======== ========
Equity in net earnings included above ........... $ 49.1 $ 18.9 $ 71.6
Equity in net earnings of limited partnerships
interests not included above .................. 44.8 25.3 46.3
Excess of earnings in joint ventures over equity
ownership percentage and amortization of
differences in bases .......................... .9 1.8 9.2
Interest on notes receivable .................... .1 -- .5
-------- -------- --------
Total Equity in Net Earnings .................... $ 94.9 $ 46.0 $ 127.6
======== ======== ========
F-17
5) NET INVESTMENT INCOME AND INVESTMENT GAINS (LOSSES)
The sources of net investment income are summarized as follows:
Years Ended December 31,
------------------------------
1995 1994 1993
--------- --------- ----------
(In Millions)
Fixed maturities .............................. $ 1,151.0 $ 1,024.5 $ 981.7
Trading account securities .................... -- -- 709.3
Securities purchased under resale agreements .. -- -- 533.8
Mortgage loans on real estate ................. 329.0 384.3 457.4
Equity real estate ............................ 560.4 561.8 539.1
Other equity investments ...................... 76.9 35.7 110.4
Policy loans .................................. 144.4 122.7 117.0
Broker-dealer related receivables ............. -- -- 292.2
Other investment income ....................... 279.7 336.3 304.9
-------- --------- ---------
Gross investment income ..................... 2,541.4 2,465.3 4,045.8
--------- --------- ---------
Interest expense to finance short-term
trading instruments ......................... -- -- 983.4
Other investment expenses ..................... 413.7 434.4 463.1
--------- --------- ---------
Investment expenses ......................... 413.7 434.4 1,446.5
--------- --------- ---------
Net Investment Income ......................... $ 2,127.7 $ 2,030.9 $ 2,599.3
========= ========= =========
Investment gains (losses), net, including changes in the valuation
allowances, are summarized as follows:
Years Ended December 31,
--------------------------------
1995 1994 1993
--------- --------- ----------
(In Millions)
Fixed maturities ............................ $ 119.9 $ (14.1) $ 123.1
Mortgage loans on real estate ............... (40.2) (43.1) (65.1)
Equity real estate .......................... (86.6) 20.6 (18.5)
Other equity investments .................... 12.8 76.0 119.5
Dealer and trading gains .................... -- -- 372.5
Sales of newly issued Alliance Units ........ -- 52.4 --
Other ....................................... (.6) -- 1.9
--------- ------- --------
Investment Gains, Net ....................... $ 5.3 $ 91.8 $ 533.4
======== ======= ========
Writedowns of fixed maturities amounted to $46.7 million, $30.8 million
and 5.4 million for the years ended December 31, 1995, 1994 and 1993,
respectively.
For the years ended December 31, 1995 and 1994, respectively, proceeds
received on sales of fixed maturities classified as available for sale
amounted to $8,206.0 million and $5,253.9 million. Gross gains of $211.4
million and $65.2 million and gross losses of $64.2 million and $50.8
million, respectively, were realized on these sales. The change in
unrealized investment gains (losses) related to fixed maturities
classified as available for sale for the years ended December 31, 1995
and 1994 amounted to $1,077.2 million and $(742.2) million,
respectively.
Gross gains of $188.5 million and gross losses of $145.0 million were
realized on sales of investments in fixed maturities held for investment
and available for sale for the year ended December 31, 1993.
F-18
During each of the years ended December 31, 1995 and 1994, one security
classified as held to maturity was sold and during the eleven months
ended November 30, 1995 and the year ended December 31, 1994,
respectively, twelve and six securities so classified were transferred
to the available for sale portfolio. All actions were taken as a result
of a significant deterioration in creditworthiness. The aggregate
amortized cost of the securities sold were $1.0 million and $19.9
million with a related investment gain of $-0- million and $.8 million
recognized in 1995 and 1994, respectively; the aggregate amortized cost
of the securities transferred was $116.0 million and $42.8 million with
gross unrealized investment losses of $3.2 million and $3.1 million
charged to consolidated shareholders' equity for the eleven months ended
November 30, 1995 and the year ended December 31, 1994, respectively. On
December 1, 1995, the Company transferred $4,794.9 million of securities
classified as held to maturity to the available for sale portfolio. As a
result, unrealized gains on fixed maturities increased $307.0 million,
offset by deferred policy acquisition costs of $73.7 million, amounts
attributable to participating group annuity contracts of $39.2 million
and deferred Federal income tax of $67.9 million.
Investment gains from other equity investments for the year ended
December 31, 1993, included $79.9 million generated by DLJ's involvement
in long-term corporate development investments.
For the years ended December 31, 1995, 1994 and 1993, investment results
passed through to certain participating group annuity contracts as
interest credited to policyholders' account balances amounted to $131.2
million, $175.8 million and $243.2 million, respectively.
During 1995, Alliance entered into an agreement to acquire the business
of Cursitor-Eaton Asset Management Company and Cursitor Holdings Limited
(collectively, "Cursitor") for approximately $141.5 million consisting
of $84.9 million in cash, 1,764,115 of Alliance's publicly traded units
("Alliance Units"), 6% notes aggregating $21.5 million payable ratably
over four years, and substantial additional consideration which will be
determined at a later date. The transaction, which is expected to be
completed during the first quarter of 1996, is subject to the receipt of
consents, regulatory approvals, and certain other closing conditions,
including client approval of the transfer of Cursitor accounts. Upon
completion of this transaction, the Company's ownership percentage of
Alliance will be reduced.
In 1994, Alliance sold 4.96 million newly issued Alliance Units to third
parties at prevailing market prices. The sales decreased the Company's
ownership of Alliance's Units from 63.2% to 59.2%. In addition, the
Company continues to hold its 1% general partnership interest in
Alliance. The Company recognized an investment gain of $52.4 million as
a result of these transactions.
The Company's ownership interest in Alliance will be further reduced
upon the exercise of options granted to certain Alliance employees. At
December 31, 1995, Alliance had options outstanding to purchase an
aggregate of 4.8 million Alliance Units at a price ranging from $6.0625
to $22.25 per unit. Options are exercisable at a rate of 20% on each of
the first five anniversary dates from the date of grant.
Net unrealized investment gains (losses), included in the consolidated
balance sheets as a component of equity and the changes for the
corresponding years, are summarized as follows:
Years Ended December 31,
--------------------------------
1995 1994 1993
---------- ---------- ----------
(In Millions)
Balance, beginning of year ..................... $ (203.0) $ 131.9 $ 78.8
Changes in unrealized investment (losses) gains 1,117.7 (823.8) (14.1)
Effect of adopting SFAS No. 115 ................ -- -- 283.9
Changes in unrealized investment (gains)
losses attributable to:
Participating group annuity contracts ...... (78.1) 40.8 (36.2)
Deferred policy acquisition costs .......... (208.4) 269.5 (150.5)
Deferred Federal income taxes .............. (290.0) 178.6 (30.0)
----------- --------- ---------
Balance, End of Year ........................... $ 338.2 $ (203.0) $ 131.9
=========== ========= ========
F-19
Years Ended December 31,
------------------------------
1995 1994 1993
--------- ---------- ---------
(In Millions)
Balance, end of year comprises:
Unrealized investment (losses) gains on:
Fixed maturities ............................. $ 615.9 $ (461.3) $ 283.9
Other equity investments ..................... 31.1 7.7 75.8
Other ........................................ 31.6 14.5 25.0
--------- --------- ---------
Total ...................................... 678.6 (439.1) 384.7
Amounts of unrealized investment (gains)
losses attributable to:
Participating group annuity contracts ...... (72.2) 5.9 (34.9)
Deferred policy acquisition costs .......... (89.4) 119.0 (150.5)
Deferred Federal income taxes .............. (178.8) 111.2 (67.4)
--------- --------- ---------
Total ............................................ $ 338.2 $ (203.0) $ 131.9
======== ========= ========
6) CLOSED BLOCK
Summarized financial information of the Closed Block follows:
December 31,
----------------------
1995 1994
---------- ----------
(In Millions)
Assets
Fixed Maturities:
Available for sale, at estimated fair value (amortized cost,
$3,662.8 and $1,270.3) .................................... $ 3,896.2 $ 1,197.0
Held to maturity, at amortized cost (estimated fair value of
$1,785.0 in 1994) ......................................... -- 1,927.8
Mortgage loans on real estate ................................. 1,368.8 1,543.7
Policy loans .................................................. 1,797.2 1,827.9
Cash and other invested assets ................................ 440.9 442.5
Deferred policy acquisition costs ............................. 823.6 878.1
Other assets .................................................. 286.1 288.5
----------- ----------
Total Assets .................................................. $ 8,612.8 $ 8,105.5
=========== ==========
Liabilities
Future policy benefits and policyholders' account balances .... $ 9,346.7 $ 8,965.3
Other liabilities ............................................. 160.5 104.2
----------- ----------
Total Liabilities ............................................. $ 9,507.2 $ 9,069.5
=========== ==========
F-20
Years Ended December 31,
-----------------------------------
1995 1994 1993
---------- ----------- -----------
(In Millions)
Revenues
Premiums and other revenue ............... $ 753.4 $ 798.1 $ 860.2
Investment income (net of investment
expenses of $26.7, $19.0 and $17.3) .... 538.9 523.0 526.5
Investment losses, net ................... (20.2) (24.0) (15.0)
----------- ---------- -----------
Total revenues ..................... 1,272.1 1,297.1 1,371.7
----------- ---------- ----------
Benefits and Other Deductions
Policyholders' benefits and dividends .... 1,085.1 1,075.6 1,141.4
Other operating costs and expenses ....... 62.6 70.5 102.0
----------- ----------- -----------
Total benefits and other deductions. 1,147.7 1,146.1 1,243.4
----------- ----------- -----------
Contribution from the Closed Block ....... $ 124.4 $ 151.0 $ 128.3
=========== =========== ===========
The fixed maturity portfolio, based on amortized cost, includes $4.3
million and $23.8 million at December 31, 1995 and 1994, respectively,
of restructured securities which includes problem fixed maturities of
$1.9 million and $6.4 million, respectively.
During the eleven months ended November 30, 1995, one security
classified as held to maturity was sold and ten securities classified as
held to maturity were transferred to the available for sale portfolio.
All actions resulted from a significant deterioration in
creditworthiness. The amortized cost of the security sold was $4.2
million. The aggregate amortized cost of the securities transferred was
$81.3 million with gross unrealized investment losses of $.1 million
transferred to equity. At December 1, 1995, $1,750.7 million of
securities classified as held to maturity were transferred to the
available for sale portfolio. As a result, unrealized gains of $88.5
million on fixed maturities were recognized and offset by an increase to
the deferred dividend liability. Implementation of SFAS No. 115 for the
valuation of fixed maturities at December 31, 1993 resulted in the
recognition of a deferred dividend liability of $49.6 million.
At December 31, 1995 and 1994, problem mortgage loans on real estate had
an amortized cost of $36.5 million and $27.6 million, respectively, and
mortgage loans on real estate for which the payment terms have been
restructured had an amortized cost of $137.7 million and $179.2 million,
respectively. At December 31, 1995 and 1994, the restructured mortgage
loans on real estate amount included $8.8 million and $.7 million,
respectively, of problem mortgage loans on real estate.
Valuation allowances amounted to $18.4 million and $46.2 million on
mortgage loans on real estate and $4.3 million and $2.6 million on
equity real estate at December 31, 1995 and 1994, respectively.
Writedowns of fixed maturities amounted to $16.8 million and $15.9
million and $1.7 million for the years ended December 31, 1995, 1994 and
1993, respectively.
Many expenses related to Closed Block operations are charged to
operations outside of the Closed Block; accordingly, the contribution
from the Closed Block does not represent the actual profitability of the
Closed Block operations. Operating costs and expenses outside of the
Closed Block are, therefore, disproportionate to the business outside of
the Closed Block.
F-21
7) DISCONTINUED OPERATIONS
Summarized financial information of the GIC Segment follows:
December 31,
-------------------------
1995 1994
---------- -----------
(In Millions)
Assets
Mortgage loans on real estate .................... $ 1,485.8 $ 1,730.5
Equity real estate ............................... 1,122.1 1,194.8
Other invested assets ............................ 665.2 978.8
Other assets ..................................... 579.3 529.5
---------- ----------
Total Assets ..................................... $ 3,852.4 $ 4,433.6
========== ==========
Liabilities
Policyholders' liabilities ....................... $ 1,399.8 $ 1,924.0
Allowance for future losses ...................... 164.2 185.6
Amounts due to continuing operations ............. 2,097.1 2,108.6
Other liabilities ................................ 191.3 215.4
---------- ----------
Total Liabilities ................................ $ 3,852.4 $ 4,433.6
========== ==========
Years Ended December 31,
-----------------------------
1995 1994 1993
--------- -------- ----------
(In Millions)
Revenues
Investment income (net of investment expenses
of $143.8, $174.0 and $175.8) .................. $ 325.1 $ 395.0 $ 535.1
Investment (losses) gains, net ................... (22.9) 26.8 (22.6)
Policy fees, premiums and other income ........... .7 .3 8.7
--------- --------- ---------
Total revenues ................................... 302.9 422.1 521.2
Benefits and other deductions .................... 328.0 443.8 545.9
--------- --------- ---------
Losses Charged to Allowance for Future Losses .... $ (25.1) $ (21.7) $ (24.7)
========= ========= =========
In 1991, the Company established a pre-tax provision of $396.7 million
for the estimated future losses of the GIC Segment. At December 31,
1993, implementation of SFAS No. 115 for the valuation of fixed
maturities resulted in a benefit of $13.1 million, offset by a
corresponding addition to the allowance for future losses.
The amounts due to continuing operations at December 31, 1994 consisted
of $3,324.0 million borrowed by the GIC Segment from continuing
operations, offset by $1,215.4 million representing an obligation of
continuing operations to provide assets to fund the accumulated deficit
of the GIC Segment. In January 1995, continuing operations transferred
$1,215.4 million in cash to the GIC Segment in settlement of its
obligation. Subsequently, the GIC Segment remitted $1,155.4 million in
cash to continuing operations in partial repayment of borrowings by the
GIC Segment. No gains or losses were recognized on these transactions.
Amounts due to continuing operations at December 31, 1995, consisted of
$2,097.1 million borrowed by the discontinued GIC Segment.
F-22
Investment income included $88.2 million and $97.7 million of interest
income for the years ended December 31, 1994 and 1993, respectively, on
amounts due from continuing operations. Benefits and other deductions
includes $154.6 million, $219.7 million and $197.1 million of interest
expense related to amounts borrowed from continuing operations in 1995,
1994 and 1993, respectively.
Valuation allowances amounted to $19.2 million and $50.2 million on
mortgage loans on real estate and $77.9 million and $74.7 million on
equity real estate at December 31, 1995 and 1994, respectively.
Writedowns of fixed maturities amounted to $8.1 million, $17.8 million
and $1.1 million for the years ended December 31, 1995, 1994 and 1993,
respectively.
The fixed maturity portfolio, based on amortized cost, includes $15.1
million and $43.3 million at December 31, 1995 and 1994, respectively,
of restructured securities. These amounts include problem fixed
maturities of $6.1 million and $9.7 million at December 31, 1995 and
1994, respectively.
At December 31, 1995 and 1994, problem mortgage loans on real estate had
amortized costs of $35.4 million and $14.9 million, respectively, and
mortgage loans on real estate for which the payment terms have been
restructured had amortized costs of $289.3 million and $371.2 million,
respectively.
At December 31, 1995 and 1994, the GIC Segment had $310.9 million and
$312.2 million, respectively, of real estate acquired in satisfaction
of debt.
8) SHORT-TERM AND LONG-TERM DEBT
Short-term and long-term debt consists of the following:
December 31,
-----------------------
1995 1994
--------- -----------
(In Millions)
Short-term debt ...................................... $ -- $ 20.0
---------- ----------
Long-term debt:
Equitable Life:
Surplus notes, 6.95%, scheduled to mature 2005 ..... 399.3 --
Surplus notes, 7.70%, scheduled to mature 2015 ..... 199.6 --
Eurodollar notes, 10.375% due 1995 ................. -- 34.6
Eurodollar notes, 10.5% due 1997 ................... 76.2 76.2
Zero coupon note, 11.25% due 1997 .................. 120.1 107.8
Other .............................................. 16.3 14.3
---------- ----------
Total Equitable Life ........................... 811.5 232.9
---------- ----------
Wholly Owned and Joint Venture Real Estate:
Mortgage notes, 4.98% - 12.75% due through 2019 .... 1,084.4 1,080.6
---------- ----------
Alliance:
Other .............................................. 3.4 3.9
---------- ----------
Total long-term debt ................................. 1,899.3 1,317.4
---------- ----------
Total Short-term and Long-term Debt .................. $ 1,899.3 $ 1,337.4
========== ==========
Short-term Debt
---------------
Equitable Life has a $350.0 million bank credit facility available to
fund short-term working capital needs and to facilitate the securities
settlement process. The credit facility consists of two types of
borrowing options with varying interest rates. The interest rates are
based on external indices dependent on the type of borrowing and at
December 31, 1995 range from 5.8% (the London Interbank Offering Rate
plus 22.5 basis points) to 8.5% (the prime rate). There were no
borrowings outstanding under this bank credit facility at December 31,
1995.
F-23
Equitable Life has a commercial paper program with an issue limit of
$500.0 million. This program is available for general corporate purposes
used to support Equitable Life's liquidity needs and is supported by
Equitable Life's existing $350.0 million five-year bank credit facility.
There were no borrowings outstanding under this program at December 31,
1995.
In 1994, Alliance established a $100.0 million revolving credit facility
with several banks. On March 31, 1997, the revolving credit facility
converts into a term loan payable in quarterly installments through
March 31, 1999. Outstanding borrowings generally bear interest at the
Eurodollar rate plus .875% per annum through March 31, 1997 and at the
Eurodollar rate plus 1.125% per annum after conversion through March 31,
1999. In addition, a quarterly commitment fee of .25% per annum is paid
on the average daily unused amount. At December 31, 1995, there were no
amounts outstanding under the facility.
In 1994, Alliance also established a $100.0 million commercial paper
program and entered into a three-year $100.0 million revolving credit
facility with a group of commercial banks to support commercial paper to
be issued under the program and for general corporate purposes. Amounts
outstanding under the facility bear interest at an annual rate ranging
from the Eurodollar rate plus .225% to the Eurodollar rate plus .2875%.
A fee of .125% per annum is paid quarterly on the entire facility. At
December 31, 1995, Alliance had not issued any commercial paper and
there were no amounts outstanding under the revolving credit facility.
During 1994, EREIM established two bank lines of credit totaling $30.0
million of which $20.0 million was outstanding at December 31, 1994.
Long-term Debt
--------------
Several of the long-term debt agreements have restrictive covenants
related to the total amount of debt, net tangible assets and other
matters. The Company is in compliance with all debt covenants.
On December 18, 1995, Equitable Life issued, in accordance with Section
1307 of the New York Insurance Law, $400.0 million of surplus notes
having an interest rate of 6.95% scheduled to mature in 2005 and $200.0
million of surplus notes having an interest rate of 7.70% scheduled to
mature in 2015. Proceeds from the issuance of the surplus notes were
$596.6 million, net of related issuance costs. The unamortized discount
on the surplus notes was $1.1 million at December 31, 1995. Payments of
interest on or principal of the surplus notes are subject to prior
approval by the New York Insurance Department.
The Company has pledged real estate, mortgage loans, cash and securities
amounting to $1,629.7 million and $1,744.4 million at December 31, 1995
and 1994, respectively, as collateral for certain long-term debt.
At December 31, 1995, aggregate maturities of the long-term debt based
on required principal payments at maturity for 1996 and the succeeding
four years are $124.0 million, $466.6 million, $309.5 million, $15.8
million, respectively, and $1,015.0 million thereafter.
9) FEDERAL INCOME TAXES
A summary of the Federal income tax expense (benefit) in the
consolidated statements of earnings is shown below:
Years Ended December 31,
--------------------------------
1995 1994 1993
--------- ---------- ---------
(In Millions)
Federal income tax expense (benefit):
Current ................................... $ (11.7) $ 4.0 $ 115.8
Deferred .................................. 124.1 97.2 (24.5)
--------- --------- ---------
Total ....................................... $ 112.4 $ 101.2 $ 91.3
========= ========= =========
F-24
The Federal income taxes attributable to consolidated operations are
different from the amounts determined by multiplying the earnings before
Federal income taxes and cumulative effect of accounting change by the
expected Federal income tax rate of 35%. The sources of the difference
and the tax effects of each are as follows:
Years Ended December 31,
--------------------------------
1995 1994 1993
--------- --------- ---------
(In Millions)
Expected Federal income tax expense ........ $ 143.5 $ 138.1 $ 106.3
Differential earnings amount ............... -- (16.8) (23.2)
Adjustment of tax audit reserves ........... 4.1 (4.6) 22.9
Tax rate adjustment ........................ -- -- (5.0)
Other ...................................... (35.2) (15.5) (9.7)
--------- --------- ---------
Federal Income Tax Expense ................. $ 112.4 $ 101.2 $ 91.3
======== ======== ========
Prior to the date of demutualization, Equitable Life reduced its
deduction for policyholder dividends by the differential earnings
amount. This amount was computed, for each tax year, by multiplying
Equitable Life's average equity base, as determined for tax purposes, by
an estimate of the excess of an imputed earnings rate for stock life
insurance companies over the average mutual life insurance companies'
earnings rate. The differential earnings amount for each tax year was
subsequently recomputed when actual earnings rates were published by the
Internal Revenue Service. As a stock life insurance company, Equitable
Life is no longer required to reduce its policyholder dividend deduction
by the differential earnings amount, but differential earnings amounts
for pre-demutualization years were still being recomputed in 1994 and
1993.
The components of the net deferred Federal income tax asset are as
follows:
December 31, 1995 December 31, 1994
---------------------- ----------------------
Assets Liabilities Assets Liabilities
--------- ----------- --------- -----------
(In Millions)
Deferred policy acquisition costs,
reserves and reinsurance ............. $ -- $ 303.2 $ -- $ 220.3
Investments ............................ -- 326.9 -- 18.7
Compensation and related benefits ...... 293.0 -- 307.3 --
Other .................................. -- 32.3 -- 5.8
--------- -------- -------- --------
Total .................................. $ 293.0 $ 662.4 $ 307.3 $ 244.8
======== ======== ======== =======
The deferred Federal income tax expense (benefit) impacting operations
reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The sources of
these temporary differences and the tax effects of each are as follows:
Years Ended December 31,
------------------------------
1995 1994 1993
-------- -------- ---------
(In Millions)
Deferred policy acquisition costs, reserves
and reinsurance ................................ $ 55.1 $ 13.0 $ (46.7)
Investments ...................................... 13.0 89.3 60.4
Compensation and related benefits ................ 30.8 10.0 (50.1)
Other ............................................ 25.2 (15.1) 11.9
-------- -------- --------
Deferred Federal Income Tax Expense (Benefit) .... $ 124.1 $ 97.2 $ (24.5)
======== ======= ========
F-25
The Internal Revenue Service completed its audit of the Company's
Federal income tax returns for the years 1984 through 1988. There was no
material effect on the Company's consolidated results of operations.
10) REINSURANCE AGREEMENTS
The Insurance Group assumes and cedes reinsurance with other insurance
companies. The Insurance Group evaluates the financial condition of its
reinsurers to minimize its exposure to significant losses from reinsurer
insolvencies. The effect of reinsurance (excluding group life and
health) is summarized as follows:
Years Ended December 31,
-----------------------------
1995 1994 1993
--------- --------- ---------
(In Millions)
Direct premiums .................................. $ 474.2 $ 476.7 $ 458.8
Reinsurance assumed .............................. 171.3 180.5 169.9
Reinsurance ceded ................................ (38.7) (31.6) (29.6)
--------- --------- ---------
Premiums ......................................... $ 606.8 $ 625.6 $ 599.1
========= ========= =========
Universal Life and Investment- type Product
Policy Fee Income Ceded ........................ $ 38.9 $ 27.5 $ 33.7
========= ========= =========
Policyholders' Benefits Ceded .................... $ 48.2 $ 20.7 $ 72.3
========= ========= =========
Interest Credited to Policyholders' Account
Balances Ceded ................................. $ 28.5 $ 25.4 $ 24.1
========= ========= =========
In February 1993, management established a practice limiting the risk
retention on new policies issued by the Insurance Group to a maximum of
$5.0 million. In addition, effective January 1, 1994, all in force
business above $5.0 million was reinsured. The Insurance Group also
reinsures the entire risk on certain substandard underwriting risks as
well as in certain other cases.
The Insurance Group cedes 100% of its group life and health business to
a third party insurance company. Premiums ceded totaled $260.6 million,
$241.0 million and $895.1 million for the years ended December 31, 1995,
1994 and 1993, respectively. Ceded death and disability benefits totaled
$188.1 million, $235.5 million and $787.8 million for the years ended
December 31, 1995, 1994 and 1993, respectively. Insurance liabilities
ceded totaled $724.2 million and $833.4 million at December 31, 1995 and
1994, respectively.
11) EMPLOYEE BENEFIT PLANS
The Company sponsors qualified and non-qualified defined benefit plans
covering substantially all employees (including certain qualified
part-time employees), managers and certain agents. The pension plans are
non-contributory and benefits are based on a cash balance formula or
years of service and final average earnings, if greater, under certain
grandfathering rules in the plans. The Company's funding policy is to
make the minimum contribution required by the Employee Retirement Income
Security Act of 1974.
Components of net periodic pension (credit) cost for the qualified and
non-qualified plans are as follows:
Years Ended December 31,
-----------------------------
1995 1994 1993
--------- --------- ---------
(In Millions)
Service cost ..................................... $ 30.0 $ 30.3 $ 29.8
Interest cost on projected benefit obligations ... 122.0 111.0 108.0
Actual return on assets .......................... (309.2) 24.4 (178.6)
Net amortization and deferrals ................... 155.6 (142.5) 55.3
--------- --------- ---------
Net Periodic Pension (Credit) Cost ............... $ (1.6) $ 23.2 $ 14.5
========= ========= ========
F-26
The funded status of the qualified and non-qualified pension plans is as
follows:
December 31,
----------------------
1995 1994
---------- ----------
(In Millions)
Actuarial present value of obligations:
Vested ..................................................... $ 1,642.4 $ 1,295.5
Non-vested ................................................. 10.9 8.7
---------- ----------
Accumulated Benefit Obligation ............................... $ 1,653.3 $ 1,304.2
========== ==========
Plan assets at fair value .................................... $ 1,503.8 $ 1,193.5
Projected benefit obligation ................................. 1,743.0 1,403.4
---------- ----------
Projected benefit obligation in excess of plan assets ........ (239.2) (209.9)
Unrecognized prior service cost .............................. (25.5) (33.2)
Unrecognized net loss from past experience different from
that assumed ............................................... 368.2 298.9
Unrecognized net asset at transition ......................... (7.3) (20.8)
Additional minimum liability ................................. (51.9) (37.8)
---------- ----------
Prepaid (Accrued) Pension Cost ............................... $ 44.3 $ (2.8)
========== ==========
The discount rate and rate of increase in future compensation levels
used in determining the actuarial present value of projected benefit
obligations were 7.25% and 4.50%, respectively, at December 31, 1995 and
8.75% and 4.88%, respectively, at December 31, 1994. As of January 1,
1995 and 1994, the expected long-term rate of return on assets for the
retirement plan was 11% and 10%, respectively.
The Company recorded, as a reduction of shareholder's equity, an
additional minimum pension liability of $35.1 million and $2.7 million,
net of Federal income taxes, at December 31, 1995 and 1994,
respectively, representing the excess of the accumulated benefit
obligation over the fair value of plan assets and accrued pension
liability.
The pension plan's assets include corporate and government debt
securities, equity securities, equity real estate and shares of Group
Trusts managed by Alliance.
As of December 31, 1993, the Company changed the method of determining
the market-related value of plan assets from fair value to a calculated
value. This change in estimate had no material effect on the Company's
consolidated statements of earnings.
Prior to 1987, the qualified plan funded participants' benefits through
the purchase of non-participating annuity contracts from Equitable Life.
Benefit payments under these contracts were approximately $36.4 million,
$38.1 million and $39.9 million for the years ended December 31, 1995,
1994 and 1993, respectively.
The Company provides certain medical and life insurance benefits
(collectively, "postretirement benefits") for qualifying employees,
managers and agents retiring from the Company on or after attaining age
55 who have at least 10 years of service. The life insurance benefits
are related to age and salary at retirement. The costs of postretirement
benefits are recognized in accordance with the provisions of SFAS No.
106. The Company continues to fund postretirement benefits costs on a
pay-as-you-go basis and, for the years ended December 31, 1995, 1994 and
1993, the Company made estimated postretirement benefits payments of
$31.1 million, $29.8 million and $29.7 million, respectively.
F-27
The following table sets forth the postretirement benefits plan's
status, reconciled to amounts recognized in the Company's consolidated
financial statements:
Years Ended December 31,
-----------------------------
1995 1994 1993
--------- --------- --------
(In Millions)
Service cost ..................................... $ 4.0 $ 3.9 $ 5.3
Interest cost on accumulated postretirement
benefits obligation ............................ 34.7 28.6 29.2
Unrecognized prior service cost .................. (2.3) (3.9) (6.9)
Net amortization and deferrals ................... -- -- 1.5
-------- -------- --------
Net Periodic Postretirement Benefits Costs ....... $ 36.4 $ 28.6 $ 29.1
======== ======== ========
December 31,
---------------------
1995 1994
---------- ----------
(In Millions)
Accumulated postretirement benefits obligation:
Retirees ................................................... $ 391.8 $ 300.4
Fully eligible active plan participants .................... 50.4 33.0
Other active plan participants ............................. 64.2 44.0
--------- ---------
506.4 377.4
Unrecognized benefit of plan amendments ...................... -- 3.2
Unrecognized prior service cost .............................. 56.3 61.9
Unrecognized net loss from past experience different from
that assumed and from changes in assumptions ............... (181.3) (64.7)
--------- ---------
Accrued Postretirement Benefits Cost ......................... $ 381.4 $ 377.8
========= =========
In 1993, the Company amended the cost sharing provisions of
postretirement medical benefits. At January 1, 1994, medical benefits
available to retirees under age 65 are the same as those offered to
active employees and medical benefits will be limited to 200% of 1993
costs for all participants.
The assumed health care cost trend rate used in measuring the
accumulated postretirement benefits obligation was 10% in 1995,
gradually declining to 3.5% in the year 2008 and in 1994 was 10%,
gradually declining to 5% in the year 2004. The discount rate used in
determining the accumulated postretirement benefits obligation was 7.25%
and 8.75% at December 31, 1995 and 1994, respectively.
If the health care cost trend rate assumptions were increased by 1%, the
accumulated postretirement benefits obligation as of December 31, 1995
would be increased 6.5%. The effect of this change on the sum of the
service cost and interest cost would be an increase of 6.7%.
12) DERIVATIVES AND FAIR VALUE OF FINANCIAL INSTRUMENTS
Derivatives
-----------
The Insurance Group primarily uses derivatives for asset/liability risk
management and for hedging individual securities. Derivatives mainly are
utilized to reduce the Insurance Group's exposure to interest rate
fluctuations. Accounting for interest rate swap transactions is on an
accrual basis. Gains and losses related to interest rate swap
transactions are amortized as yield adjustments over the remaining life
of the underlying hedged security. Income and expense resulting from
interest rate swap activities are reflected in net investment income
except for hedging transactions related to insurance liabilities. The
notional amount of matched interest rate swaps outstanding at December
31, 1995 was $1,120.8 million. The average unexpired terms at December
31, 1995 range from 2.5 to 3.0 years. At December 31, 1995, the cost of
terminating outstanding matched swaps in a loss position was $15.9
million and the unrealized gain on outstanding matched swaps in a gain
F-28
position was $19.0 million. The Company has no intention of terminating
these contracts prior to maturity. During 1995, 1994 and 1993, net gains
(losses) of $1.4 million, $(.2) million and $-0- million, respectively,
were recorded in connection with interest rate swap activity. Equitable
Life has implemented an interest rate cap program designed to hedge
crediting rates on interest-sensitive individual annuities contracts.
The outstanding notional amounts at December 31, 1995 of contracts
purchased and sold were $2,625.0 million and $300.0 million,
respectively. The net premium paid by Equitable Life on these contracts
was $12.5 million and is being amortized ratably over the contract
periods ranging from 3 to 5 years. Income and expense resulting from
this program are reflected as an adjustment to interest credited to
policyholders' account balances.
Substantially all of DLJ's business related derivatives is by its nature
trading activities which are primarily for the purpose of customer
accommodations. DLJ's derivative activities consist of option writing
and trading in forward and futures contracts. Derivative financial
instruments have both on-and-off balance sheet implications depending on
the nature of the contracts. DLJ's involvement in swap contracts is not
significant.
Fair Value of Financial Instruments
-----------------------------------
The Company defines fair value as the quoted market prices for those
instruments that are actively traded in financial markets. In cases
where quoted market prices are not available, fair values are estimated
using present value or other valuation techniques. The fair value
estimates are made at a specific point in time, based on available
market information and judgments about the financial instrument,
including estimates of timing, amount of expected future cash flows and
the credit standing of counterparties. Such estimates do not reflect any
premium or discount that could result from offering for sale at one time
the Company's entire holdings of a particular financial instrument, nor
do they consider the tax impact of the realization of unrealized gains
or losses. In many cases, the fair value estimates cannot be
substantiated by comparison to independent markets, nor can the
disclosed value be realized in immediate settlement of the instrument.
Certain financial instruments are excluded, particularly insurance
liabilities other than financial guarantees and investment contracts.
Fair market value of off-balance-sheet financial instruments of the
Insurance Group was not material at December 31, 1995 and 1994.
Fair value for mortgage loans on real estate are estimated by
discounting future contractual cash flows using interest rates at which
loans with similar characteristics and credit quality would be made.
Fair values for foreclosed mortgage loans and problem mortgage loans are
limited to the estimated fair value of the underlying collateral if
lower.
The estimated fair values for the Company's liabilities under GIC and
association plan contracts are estimated using contractual cash flows
discounted based on the T. Rowe Price GIC Index Rate for the appropriate
duration. For durations in excess of the published index rate, the
appropriate Treasury rate is used plus a spread equal to the longest
duration GIC rate spread published.
The estimated fair values for those group annuity contracts which are
classified as investment contracts are measured at the estimated fair
value of the underlying assets. Deposit administration contracts
(included with group annuity contracts) classified as insurance
contracts are measured at estimated fair value of the underlying assets.
The estimated fair values for single premium deferred annuities ("SPDA")
are estimated using projected cash flows discounted at current offering
rates. The estimated fair values for supplementary contracts not
involving life contingencies ("SCNILC") and annuities certain are
derived using discounted cash flows based upon the estimated current
offering rate.
Fair value for long-term debt is determined using published market
values, where available, or contractual cash flows discounted at market
interest rates. The estimated fair values for non-recourse mortgage debt
are determined by discounting contractual cash flows at a rate which
takes into account the level of current market interest rates and
collateral risk. The estimated fair values for recourse mortgage debt
are determined by discounting contractual cash flows at a rate based
upon current interest rates of other companies with credit ratings
similar to the Company. The Company's fair value of short-term
borrowings approximates their carrying value.
F-29
The following table discloses carrying value and estimated fair value
for financial instruments not otherwise disclosed in Notes 3, 6 and 7:
December 31,
----------------------------------------------
1995 1994
---------------------- -----------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
---------- ---------- ----------- ------------
(In Millions)
Consolidated Financial Instruments:
Mortgage loans on real estate ...... $ 3,638.3 $ 3,973.6 $ 4,018.0 $ 3,919.4
Other joint ventures ............... 492.7 492.7 544.4 544.4
Policy loans ....................... 1,976.4 2,057.5 1,731.2 1,676.6
Policyholders' account balances:
Association plans ................ 101.0 100.0 141.0 141.0
Group annuity contracts .......... 2,335.0 2,395.0 2,450.0 2,469.0
SPDA ............................. 1,265.8 1,272.0 1,744.3 1,732.7
Annuities certain and SCNILC ..... 649.1 680.7 599.1 624.7
Long-term debt ..................... 1,899.3 1,962.9 1,317.4 1,249.2
Closed Block Financial Instruments:
Mortgage loans on real estate ...... 1,368.8 1,461.4 1,543.7 1,477.8
Other equity investments ........... 151.6 151.6 179.5 179.5
Policy loans ....................... 1,797.2 1,891.4 1,827.9 1,721.9
SCNILC liability ................... 34.8 34.5 39.5 37.0
GIC Segment Financial Instruments:
Mortgage loans on real estate ...... 1,485.8 1,666.1 1,730.5 1,743.7
Fixed maturities ................... 107.4 107.4 219.3 219.3
Other equity investments ........... 455.9 455.9 591.8 591.8
Guaranteed interest contracts ...... 329.0 352.0 835.0 855.0
Long-term debt ..................... 135.1 136.0 134.8 127.9
13) COMMITMENTS AND CONTINGENT LIABILITIES
The Company has provided, from time to time, certain guarantees or
commitments to affiliates, investors and others. These arrangements
include commitments by the Company, under certain conditions: to make
liquidity advances to cover delinquent principal and interest and
property protection expenses with respect to loan servicing agreements
for securitized mortgage loans which at December 31, 1995 totaled $2.8
billion (as of December 31, 1995, $4.0 million have been advanced under
these commitments); to make capital contributions of up to $246.7
million to affiliated real estate joint ventures; to provide equity
financing to certain limited partnerships of $129.4 million at December
31, 1995, under existing loan or loan commitment agreements; and to
provide short-term financing loans which at December 31, 1995 totaled
$45.8 million. Management believes the Company will not incur any
material losses as a result of these commitments.
Equitable Life is the obligor under certain structured settlement
agreements which it had entered into with unaffiliated insurance
companies and beneficiaries. To satisfy its obligations under these
agreements, Equitable Life owns single premium annuities issued by
previously wholly owned life insurance subsidiaries. Equitable Life has
directed payment under these annuities to be made directly to the
beneficiaries under the structured settlement agreements. A contingent
liability exists with respect to these agreements should the previously
wholly owned subsidiaries be unable to meet their obligations.
Management believes the satisfaction of those obligations by Equitable
Life is remote.
At December 31, 1995, the Insurance Group had $29.0 million of letters
of credit outstanding.
14) LITIGATION
A number of lawsuits have been filed against life and health insurers in
the jurisdictions in which Equitable Life and its subsidiaries do
business involving insurers' sales practices, alleged agent misconduct,
failure to properly supervise agents, and other matters. Some of the
lawsuits have resulted in the award of substantial judgments against
other insurers, including material amounts of punitive damages, or in
substantial settlements. In some states juries have substantial
F-30
discretion in awarding punitive damages. Equitable Life and its
insurance subsidiaries, like other life and health insurers, from time
to time are involved in such litigation. To date, no such lawsuit has
resulted in an award or settlement of any material amount against the
Company. Among litigations pending against Equitable Life and its
insurance subsidiaries of the type referred to in this paragraph are the
litigations described in the following two paragraphs.
An action entitled Golomb et al. v. The Equitable Life Assurance Society
of the United States was filed on January 20, 1995 in New York County
Supreme Court. The action purports to be brought on behalf of a class of
persons insured after 1983 under Lifetime Guaranteed Renewable Major
Medical Insurance Policies issued by Equitable Life (the "policies").
The complaint alleges that premium increases for these policies after
1983, all of which were filed with and approved by the New York State
Insurance Department and certain other state insurance departments,
breached the terms of the insurance policies, and that statements in the
policies and elsewhere concerning premium increases constituted
fraudulent concealment, misrepresentations in violation of New York
Insurance Law Section 4226 and deceptive practices under New York
General Business Law Section 349. The complaint seeks a declaratory
judgment, injunctive relief restricting the methods by which Equitable
Life increases premiums on the policies in the future, a refund of
premiums, and punitive damages. Plaintiffs also have indicated that they
will seek damages in an unspecified amount. Equitable Life has moved to
dismiss the complaint in its entirety on the grounds that it fails to
state a claim and that uncontroverted documentary evidence establishes a
complete defense to the claims. That motion is awaiting decision by the
court. In January 1996, separate actions were filed in Pennsylvania and
Texas state courts (entitled, respectively, Malvin et al. v. The
Equitable Life Assurance Society of the United States and Bowler et al.
v. The Equitable Life Assurance Society of the United States), making
claims similar to those in the New York action described above. These
new actions are asserted on behalf of proposed classes of Pennsylvania
issued or renewed policyholders and Texas issued or renewed
policyholders, insured under the policies. The Pennsylvania and Texas
actions seek compensatory and punitive damages and injunctive relief
restricting the methods by which Equitable Life increases premiums in
the future based on the common law and statutes of those states.
Although the outcome of any litigation cannot be predicted with
certainty, particularly in the early stages of an action, Equitable
Life's management believes that the ultimate resolution of those
litigations should not have a material adverse effect on the financial
position of the Company. Due to the early stage of such litigation,
Equitable Life's management cannot make an estimate of loss, if any, or
predict whether or not such litigation will have a material adverse
effect on the Company's results of operations in any particular period.
An action was instituted on April 6, 1995 against Equitable Life and its
wholly owned subsidiary, The Equitable of Colorado, Inc. ("EOC"), in New
York State Court, entitled Sidney C. Cole et al. v. The Equitable Life
Assurance Society of the United States and The Equitable of Colorado,
Inc., No. 95/108611 (N.Y. County). The action is brought by the holders
of a joint survivorship whole life policy issued by EOC. The action
purports to be on behalf of a class consisting of all persons who from
January 1, 1984 purchased life insurance policies sold by Equitable Life
and EOC based upon their allegedly uniform sales presentations and
policy illustrations. The complaint puts in issue various alleged sales
practices that plaintiffs assert, among other things, misrepresented the
stated number of years that the annual premium would need to be paid.
Plaintiffs seek damages in an unspecified amount, imposition of a
constructive trust, and seek to enjoin Equitable Life and EOC from
engaging in the challenged sales practices. Equitable Life and EOC
intend to defend vigorously and believe that they have meritorious
defenses which, if successful, would dispose of the action completely.
Equitable Life and EOC further do not believe that this case is an
appropriate class action. Although the outcome of any litigation cannot
be predicted with certainty, particularly in the early stages of an
action, Equitable Life's management believes that the ultimate
resolution of this litigation should not have a material adverse effect
on the financial position of the Company. Due to the early stage of such
litigation, the Company's management cannot make an estimate of loss, if
any, or predict whether or not such litigation will have a material
adverse effect on the Company's results of operations in any particular
period.
F-31
Equitable Casualty Insurance Company ("Casualty"), a captive property
and casualty insurance company organized under the laws of Vermont,
which is an indirect wholly owned subsidiary of Equitable Life, is a
party to an arbitration proceeding that commenced in August 1995 with
the selection of three arbitrators. The arbitration will resolve a
dispute among Casualty, Houston General Insurance Company ("Houston
General"), and GEICO General Insurance Company ("GEICO General")
regarding the interpretation of a reinsurance agreement that was entered
into as part of a 1980 transaction whereby Equitable General Insurance
Company ("Equitable General"), formerly an indirect subsidiary of
Equitable Life and the predecessor of GEICO General, sold its commercial
lines business along with the stock of Houston General to subsidiaries
of Tokio Marine & Fire Insurance Company, Ltd. ("Tokio Marine").
Casualty and GEICO General maintain that, under the reinsurance
agreement, Houston General assumed liability for all losses insured
under commercial lines policies written by Equitable General and its
predecessors in order to effect the transfer of that business to Tokio
Marine's subsidiaries. Houston General contends that it did not assume
reinsurance liability for losses insured under certain of those
commercial lines policies. The arbitration panel determined to begin
hearing evidence in the arbitration in June 1996. The result of the
arbitration is expected to resolve two litigations that were commenced
by Houston General and that have been stayed by the presiding courts
pending the completion of the arbitration (in one case, Houston General
named as a defendant only GEICO General but Casualty intervened as a
defendant with GEICO General, and in the other case, Houston General
named GEICO General and Equitable Life). The arbitration is expected to
be completed during the second half of 1996. While the ultimate outcome
of the arbitration cannot be predicted with certainty, the Company's
management believes that the arbitrators will recognize that Houston
General's position is without merit and contrary to the way in which the
reinsurance industry operates and therefore the ultimate resolution of
this matter should not have a material adverse effect on the Company's
financial position or results of operations.
On July 25, 1995, a Consolidated and Supplemental Class Action Complaint
("Complaint") was filed against the Alliance North American Government
Income Trust, Inc. (the "Fund"), Alliance and certain other defendants
affiliated with Alliance, including the Holding Company, alleging
violations of Federal securities laws, fraud and breach of fiduciary
duty in connection with the Fund's investments in Mexican and Argentine
securities. A similar complaint was filed on November 7, 1995 and was
subsequently consolidated with the Complaint. The Complaint, which seeks
certification of a plaintiff class of persons who purchased or owned
Class A, B or C shares of the Fund from March 27, 1992 through December
23, 1994, seeks an unspecified amount of damages, costs, attorneys' fees
and punitive damages. The principal allegations of the Complaint are
that the Fund purchased debt securities issued by the Mexican and
Argentine governments in amounts that were not permitted by the Fund's
investment objective, and that there was no shareholder vote to change
the investment objective to permit purchases in such amounts. The
Complaint further alleges that the decline in the value of the Mexican
and Argentine securities held by the Fund caused the Fund's net asset
value to decline to the detriment of the Fund's shareholders. On
September 26, 1995, the defendants jointly filed a motion to dismiss the
Complaint which has not yet been decided by the Court. Alliance believes
that the allegations in the Complaint are without merit and intends to
vigorously defend against these claims. While the ultimate results of
this action cannot be determined, management of Alliance does not expect
that this action will have a material adverse effect on Alliance's
business.
On January 26, 1996, a purported purchaser of certain notes and warrants
to purchase shares of common stock of Rickel Home Centers, Inc.
("Rickel") filed a class action complaint against Donaldson, Lufkin &
Jenrette Securities Corporation ("DLJSC"), a wholly owned subsidiary of
DLJ, and certain other defendants for unspecified compensatory and
punitive damages in the United States District Court for the Southern
District of New York. The suit was brought on behalf of the purchasers
of 126,457 units consisting of $126,457,000 aggregate principal amount
of 13 1/2% senior notes due 2001 and 126,457 warrants to purchase shares
of common stock of Rickel (the "Units") issued by Rickel in October
1994. The complaint alleges violations of Federal securities laws and
common law fraud against DLJSC, as the underwriter of the Units and as
an owner of 7.3% of the common stock of Rickel, Eos Partners, L.P., and
General Electric Capital Corporation, each as owners of 44.2% of the
common stock of Rickel, and members of the Board of Directors of Rickel,
including a DLJSC Managing Director. The complaint seeks to hold DLJSC
F-32
liable for alleged misstatements and omissions contained in the
prospectus and registration statement filed in connection with the
offering of the Units, alleging that the defendants knew of financial
losses and a decline in value of Rickel in the months prior to the
offering and did not disclose such information. The complaint also
alleges that Rickel failed to pay its semi-annual interest payment due
on the Units on December 15, 1995 and that Rickel filed a voluntary
petition for reorganization pursuant to Chapter 11 of the United States
Bankruptcy Code on January 10, 1996. DLJSC intends to defend itself
vigorously against all of the allegations contained in the complaint.
Although there can be no assurance, DLJ does not believe the outcome of
this litigation will have a material adverse effect on its financial
condition. Due to the early stage of this litigation, based on the
information currently available to it, DLJ's management cannot make an
estimate of loss or predict whether or not such litigation will have a
material adverse effect on DLJ's results of operations in any particular
period.
On June 12, 1995, a purported purchaser of certain securities issued by
Spectravision, Inc. ("Spectravision") filed a class action complaint
against DLJSC and certain other defendants for unspecified damages in
the U.S. District Court for the Northern District of Texas. The suit was
brought on behalf of the purchasers of $260,795,000 of securities issued
by Spectravision in November 1992, and alleges violations of the Federal
securities laws and the Texas Securities Act, common law fraud and
negligent misrepresentation. The securities were issued by Spectravision
pursuant to a prepackaged bankruptcy reorganization plan. DLJSC served
as financial advisor to Spectravision in its reorganization and as
Dealer Manager for Spectravision's 1992 issuance of the securities.
DLJSC is also being sued as a seller of certain notes of Spectravision
acquired and resold by DLJSC. The complaint seeks to hold DLJSC liable
for various alleged misstatements and omissions contained in
prospectuses and other materials issued between July 1992 and June 1994.
DLJSC intends to defend itself vigorously against all of the allegations
contained in the complaint. On June 8, 1995, Spectravision filed a
Chapter 11 petition in the United States Bankruptcy Court for the
District of Delaware. On January 5, 1996, the district court in the
litigation involving DLJSC ordered a partial stay of discovery until
Spectravision has emerged from bankruptcy or six months from the date of
the stipulated stay (whichever comes first). Accordingly, discovery of
DLJSC has not yet occurred. Although there can be no assurance, DLJ does
not believe that the ultimate outcome of this litigation will have a
material adverse effect on its financial condition. Due to the early
stage of such litigation, based upon information currently available to
it, DLJ's management cannot make an estimate of loss or predict whether
or not such litigation will have a material adverse effect on DLJ's
results of operations in any particular period. Plaintiff's counsel in
the class action against DLJSC described above has also filed another
securities class action based on similar factual allegations. Such suit
names as defendants Spectravision and its directors, and was brought on
behalf of a class of purchasers of $209.0 million of stock and $77.0
million of notes issued by Spectravision in October 1993. DLJSC served
as the managing underwriter for both of these issuances. DLJSC has not
been named as a defendant in this suit, although it has been reported to
DLJSC that plaintiff's counsel is contemplating seeking to amend the
complaint to add DLJSC as a defendant in that action.
In October 1995, DLJSC was named as a defendant in a purported class
action filed in a Texas State Court on behalf of the holders of $550.0
million principal amount of subordinated redeemable discount debentures
of National Gypsum Corporation ("NGC") canceled in connection with a
Chapter 11 plan of reorganization for NGC consummated in July 1993. The
named plaintiff in the State Court action also filed an adversary
proceeding in the Bankruptcy Court for the Northern District of Texas
seeking a declaratory judgment that the confirmed NGC plan of
reorganization does not bar the class action claims. Subsequent to the
consummation of NGC's plan of reorganization, NGC's shares traded for
values substantially in excess of, and in 1995 NGC was acquired for a
value substantially in excess of, the values upon which NGC's plan of
reorganization was based. The two actions arise out of DLJSC's
activities as financial advisor to NGC in the course of NGC's Chapter 11
reorganization proceedings. The class action complaint alleges that the
plan of reorganization submitted by NGC was based upon projections by
NGC and DLJSC which intentionally understated forecasts, and provided
misleading and incorrect information in order to hide NGC's true value
and that defendants breached their fiduciary duties by, among other
things, providing false, misleading or incomplete information to
deliberately understate the value of NGC. The class action complaint
seeks compensatory and punitive damages purportedly sustained by the
class. The Texas State Court action has subsequently been removed to the
F-33
Bankruptcy Court, which removal is being opposed by the plaintiff. DLJSC
intends to defend itself vigorously against all of the allegations
contained in the complaint. Although there can be no assurance, DLJ does
not believe that the ultimate outcome of this litigation will have a
material adverse effect on its financial condition. Due to the early
stage of such litigation, based upon the information currently available
to it, DLJ's management cannot make an estimate of loss or predict
whether or not such litigation will have a material adverse effect on
DLJ's results of operations in any particular period.
In November and December 1995, DLJSC, along with various other parties,
was named as a defendant in a number of purported class actions filed in
the U.S. District Court for the Eastern District of Louisiana. The
complaints allege violations of the Federal securities laws arising out
of a public offering in 1994 of $435.0 million of first mortgage notes
of Harrah's Jazz Company and Harrah's Jazz Finance Corp. The complaints
seek to hold DLJSC liable for various alleged misstatements and
omissions contained in the prospectus dated November 9, 1994. DLJSC
intends to defend itself vigorously against all of the allegations
contained in the complaints. Although there can be no assurance, DLJ
does not believe that the ultimate outcome of this litigation will have
a material adverse effect on its financial condition. Due to the early
stage of this litigation, based upon the information currently available
to it, DLJ's management cannot make an estimate of loss or predict
whether or not such litigation will have a material adverse effect on
DLJ's results of operations in any particular period.
In addition to the matters described above, Equitable Life and its
subsidiaries and DLJ and its subsidiaries are involved in various legal
actions and proceedings in connection with their businesses. Some of the
actions and proceedings have been brought on behalf of various alleged
classes of claimants and certain of these claimants seek damages of
unspecified amounts. While the ultimate outcome of such matters cannot
be predicted with certainty, in the opinion of management no such matter
is likely to have a material adverse effect on the Company's
consolidated financial position or results of operations.
15) LEASES
The Company has entered into operating leases for office space and
certain other assets, principally data processing equipment and office
furniture and equipment. Future minimum payments under noncancelable
leases for 1996 and the succeeding four years are $114.8 million, $101.8
million, $90.0 million, $73.6 million, $57.7 million and $487.0 million
thereafter. Minimum future sublease rental income on these noncancelable
leases for 1996 and the succeeding four years are $11.0 million, $8.7
million, $6.9 million, $4.6 million, $2.9 million and $1.1 million
thereafter.
At December 31, 1995, the minimum future rental income on noncancelable
operating leases for wholly owned investments in real estate for 1996
and the succeeding four years are $292.9 million, $271.2 million, $248.1
million, $226.4 million, $195.5 million and $1,018.8 million thereafter.
16) OTHER OPERATING COSTS AND EXPENSES
Other operating costs and expenses consisted of the following:
Years Ended December 31,
----------------------------------
1995 1994 1993
---------- --------- -----------
(In Millions)
Compensation costs ......................... $ 595.9 $ 690.0 $ 1,452.3
Commissions ................................ 314.3 313.0 551.1
Short-term debt interest expense ........... 11.4 19.0 317.1
Long-term debt interest expense ............ 108.1 98.3 86.0
Amortization of policy acquisition costs ... 320.4 318.1 275.9
Capitalization of policy acquisition costs . (391.0) (410.9) (397.8)
Rent expense, net of sub-lease income ...... 124.8 128.9 159.5
Other ...................................... 772.6 786.7 1,140.1
----------- ----------- -----------
Total ...................................... $ 1,856.5 $ 1,943.1 $ 3,584.2
=========== =========== ===========
F-34
During the years ended December 31, 1995, 1994 and 1993, the Company
restructured certain operations in connection with cost reduction
programs and recorded pre-tax provisions of $32.0 million, $20.4 million
and $96.4 million, respectively. The amounts paid during 1995,
associated with the 1995 and 1994 cost reduction programs, totaled $24.0
million. At December 31, 1995, the liabilities associated with the 1995
and 1994 cost reduction programs amounted to $37.8 million. The 1995
cost reduction program included relocation expenses, including the
accelerated amortization of building improvements associated with the
relocation of the home office. The 1994 cost reduction program included
costs associated with the termination of operating leases and employee
severance benefits in connection with the consolidation of 16 insurance
agencies. The 1993 cost reduction program primarily reflected severance
benefits of terminated employees in connection with the combination of a
wholly owned subsidiary of the Company with Alliance.
17) INSURANCE GROUP STATUTORY FINANCIAL INFORMATION
Equitable Life is restricted as to the amounts it may pay as dividends
to the Holding Company. Under the New York Insurance Law, the New York
Superintendent has broad discretion to determine whether the financia1
condition of a stock life insurance company would support the payment of
dividends to its shareholders. For the years ended December 31, 1995,
1994 and 1993, statutory (loss) earnings totaled $(352.4) million, $67.5
million and $324.0 million, respectively. No amounts are expected to be
available for dividends from Equitable Life to the Holding Company in
1996.
At December 31, 1995, the Insurance Group, in accordance with various
government and state regulations, had $18.9 million of securities
deposited with such government or state agencies.
Accounting practices used to prepare statutory financial statements for
regulatory filings of stock life insurance companies differ in certain
instances from GAAP. The following reconciles the Company's statutory
change in surplus and capital stock and statutory surplus and capital
stock determined in accordance with accounting practices prescribed by
the New York Insurance Department with net earnings and equity on a GAAP
basis.
Years Ended December 31,
-----------------------------
1995 1994 1993
--------- --------- ---------
(In Millions)
Net change in statutory surplus and capital stock . $ 78.1 $ 292.4 $ 190.8
Change in asset valuation reserves ................ 365.7 (285.2) 639.1
-------- --------- ---------
Net change in statutory surplus, capital stock
and asset valuation reserves .................... 443.8 7.2 829.9
Adjustments:
Future policy benefits and policyholders'
account balances .............................. (67.9) (11.0) (171.0)
Deferred policy acquisition costs ............... 70.6 92.8 121.8
Deferred Federal income taxes ................... (150.0) (59.7) (57.5)
Valuation of investments ........................ 189.1 45.2 202.3
Valuation of investment subsidiary .............. (188.6) 396.6 (464.9)
Limited risk reinsurance ........................ 416.9 74.9 85.2
Issuance of surplus notes ....................... (538.9) -- --
Sale of subsidiary and joint venture ............ -- -- (366.5)
Contribution from the Holding Company ........... -- (300.0) --
Postretirement benefits ......................... (26.7) 17.1 23.8
Other, net ...................................... 115.1 (44.0) 60.3
GAAP adjustments of Closed Block ................ (3.1) 4.5 (16.0)
GAAP adjustments of discontinued GIC
Segment ....................................... 37.3 42.8 (35.0)
--------- --------- ---------
Net Earnings ...................................... $ 297.6 $ 266.4 $ 212.4
========= ======== ========
F-35
December 31,
-----------------------------------
1995 1994 1993
--------- ---------- -----------
(In Millions)
Statutory surplus and capital stock ........ $ 2,202.9 $ 2,124.8 $ 1,832.4
Asset valuation reserves ................... 1,345.9 980.2 1,265.4
----------- ----------- -----------
Statutory surplus, capital stock and asset
valuation reserves ....................... 3,548.8 3,105.0 3,097.8
Adjustments:
Future policy benefits and policyholders'
account balances ....................... (1,017.4) (949.5) (938.5)
Deferred policy acquisition costs ........ 3,083.3 3,221.1 2,858.8
Deferred Federal income taxes ............ (450.8) (26.8) (137.8)
Valuation of investments ................. 417.7 (794.1) (29.8)
Valuation of investment subsidiary ....... (665.1) (476.5) (873.1)
Limited risk reinsurance ................. (429.0) (845.9) (920.8)
Issuance of surplus notes ................ (538.9) -- --
Postretirement benefits .................. (343.3) (316.6) (333.7)
Other, net ............................... 4.4 (79.2) (81.9)
GAAP adjustments of Closed Block ......... 575.7 578.8 574.2
GAAP adjustments of discontinued GIC
Segment ................................ (184.6) (221.9) (264.6)
----------- ----------- -----------
Total Shareholder's Equity ................. $ 4,000.8 $ 3,194.4 $ 2,950.6
========== ========== ==========
18) BUSINESS SEGMENT INFORMATION
The Company has three major business segments: Individual Insurance and
Annuities; Investment Services and Group Pension.
Consolidation/elimination principally includes debt not specific to any
business segment. Attributed Insurance Capital represents net assets and
related revenues and earnings of the Insurance Group not assigned to the
insurance segments. Interest expense related to debt not specific to any
business segment is presented within Corporate interest expense.
Information for all periods is presented on a comparable basis.
The Individual Insurance and Annuities segment offers a variety of
traditional, variable and interest-sensitive life insurance products,
disability income, annuity products and mutual fund and other investment
products to individuals and small groups. This segment includes Separate
Accounts for certain individual insurance and annuity products.
The Investment Services segment provides investment fund management,
primarily to institutional clients. This segment includes Separate
Accounts which provide various investment options for group clients
through pooled or single group accounts.
Intersegment investment advisory and other fees of approximately $124.1
million, $135.3 million and $128.6 million for 1995, 1994 and 1993,
respectively, are included in total revenues of the Investment Services
segment. These fees, excluding amounts related to the discontinued GIC
Segment of $14.7 million, $27.4 million and $17.0 million for 1995, 1994
and 1993, respectively, are eliminated in consolidation.
The Group Pension segment administers traditional participating group
annuity contracts with conversion features, generally for corporate
qualified pension plans, and association plans which provide full
service retirement programs for individuals affiliated with professional
and trade associations.
F-36
Years Ended December 31,
------------------------------------
1995 1994 1993
---------- ---------- ------------
(In Millions)
Revenues
Individual insurance and annuities .......... $ 3,254.6 $ 3,110.7 $ 2,981.5
Group pension ............................... 292.0 359.1 426.6
Attributed insurance capital ................ 61.2 79.4 61.6
------------ ---------- -----------
Insurance operations ...................... 3,607.8 3,549.2 3,469.7
Investment services ......................... 949.1 935.2 2,792.6
Consolidation/elimination ................... (34.9) (24.7) (40.5)
------------ ----------- -----------
Total ....................................... $ 4,522.0 $ 4,459.7 $ 6,221.8
============ =========== ===========
Earnings (loss) before Federal income taxes
and cumulative effect of accounting change
Individual insurance and annuities .......... $ 274.4 $ 245.5 $ 76.2
Group pension ............................... (13.3) 15.8 2.0
Attributed insurance capital ................ 18.7 69.8 49.0
------------ ----------- -----------
Insurance operations ...................... 279.8 331.1 127.2
Investment services ......................... 161.2 177.5 302.1
Consolidation/elimination ................... (3.1) .3 .5
------------ ----------- -----------
Subtotal .............................. 437.9 508.9 429.8
Corporate interest expense .................. (27.9) (114.2) (126.1)
------------ ----------- -----------
Total ....................................... $ 410.0 $ 394.7 $ 303.7
============ =========== ===========
December 31,
------------------------------
1995 1994
------------ -------------
(In Millions)
Assets
Individual insurance and annuities ........... $ 50,328.8 $ 44,063.4
Group pension ................................ 4,033.3 4,222.8
Attributed insurance capital ................. 2,391.6 2,609.8
------------ ------------
Insurance operations ....................... 56,753.7 50,896.0
Investment services .......................... 12,842.9 12,127.9
Consolidation/elimination .................... (354.4) (1,614.4)
------------ ------------
Total ........................................ $ 69,242.2 $ 61,409.5
============ ============
F-37
19) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The quarterly results of operations for the years ended December 31,
1995, 1994 and 1993, are summarized below:
Three Months Ended
----------------------------------------------------
March 31 June 30 September 30 December 31
----------- ----------- ------------- ------------
(In Millions)
1995
- ----
Total Revenues ................. $ 1,074.7 $ 1,158.4 $ 1,127.1 $ 1,161.8
========== ========== ========== ===========
Net Earnings ................... $ 59.0 $ 94.3 $ 91.2 $ 53.1
========== ========== ========== ===========
1994
- ----
Total Revenues ................. $ 1,107.4 $ 1,075.0 $ 1,153.8 $ 1,123.5
========== ========== ========== ===========
Earnings before Cumulative
Effect of Accounting
Change ....................... $ 64.0 $ 68.4 $ 89.1 $ 72.0
========== ========== ========== ===========
Net Earnings ................... $ 36.9 $ 68.4 $ 89.1 $ 72.0
========== ========== ========== ===========
1993
- ----
Total Revenues ................. $ 1,502.2 $ 1,539.7 $ 1,679.4 $ 1,500.5
========== ========== ========== ===========
Net Earnings ................... $ 32.3 $ 47.1 $ 68.8 $ 64.2
========== ========== ========== ===========
20) INVESTMENT IN DLJ
On December 15, 1993, the Company sold a 61% interest in DLJ to the
Holding Company for $800.0 million in cash and securities. The excess of
the proceeds over the book value in DLJ at the date of sale of $340.2
million has been reflected as a capital contribution. In 1995, DLJ
completed the initial public offering ("IPO") of 10.58 million shares of
its common stock, which included 7.28 million of the Holding Company's
shares in DLJ, priced at $27 per share. Concurrent with the IPO, the
Company contributed equity securities to DLJ having a market value of
$21.2 million. Upon completion of the IPO, the Company's ownership
percentage was reduced to 36.1%. The Company's ownership interest will
be further reduced upon the issuance of common stock after the vesting
of forfeitable restricted stock units acquired by and/or the exercise of
options granted to certain DLJ employees. At December 31, 1995, DLJ had
options outstanding to purchase approximately 9.2 million shares of DLJ
common stock at $27.00 per share. Options are exercisable over a period
of up to ten years. DLJ restricted stock units represents forfeitable
rights to receive approximately 5.2 million shares of DLJ common stock
through February 2000.
The results of operations and cash flows of DLJ through the date of sale
are included in the consolidated statements of earnings and cash flow
for the year ended December 31, 1993. For the period subsequent to the
date of sale, the results of operations of DLJ are accounted for on the
equity basis and are included in commissions, fees and other income in
the consolidated statements of earnings. The Company's carrying value of
DLJ is included in investment in and loans to affiliates in the
consolidated balance sheets.
F-38
Summarized balance sheets information for DLJ, reconciled to the
Company's carrying value of DLJ, are as follows:
December 31,
-------------------------
1995 1994
----------- -----------
(In Millions)
Assets:
Trading account securities, at market value .................. $ 10,911.4 $ 8,970.0
Securities purchased under resale agreements ................. 18,748.2 10,476.4
Broker-dealer related receivables ............................ 13,023.7 11,784.8
Other assets ................................................. 1,893.2 2,030.4
----------- -----------
Total Assets ................................................. $ 44,576.5 $ 33,261.6
=========== ===========
Liabilities:
Securities sold under repurchase agreements .................. $ 26,744.8 $ 18,356.7
Broker-dealer related payables ............................... 12,915.5 10,618.0
Short-term and long-term debt ................................ 1,717.5 1,956.5
Other liabilities ............................................ 1,775.0 1,285.1
----------- -----------
Total liabilities ............................................ 43,152.8 32,216.3
Cumulative exchangeable preferred stock ...................... 225.0 225.0
Total shareholders' equity ................................... 1,198.7 820.3
----------- -----------
Total Liabilities, Cumulative Exchangeable Preferred Stock
and Shareholders' Equity ................................... $ 44,576.5 $ 33,261.6
=========== ===========
DLJ's equity as reported ..................................... $ 1,198.7 $ 820.3
Unamortized cost in excess of net assets acquired in 1985
and other adjustments ...................................... 40.5 50.8
The Holding Company's equity ownership in DLJ ................ (499.0) (532.1)
Minority interest in DLJ ..................................... (324.3) --
----------- -----------
The Company's Carrying Value of DLJ .......................... $ 415.9 $ 339.0
=========== ===========
Summarized statements of earnings information for DLJ reconciled to the
Company's equity in earnings of DLJ is as follows:
Years Ended December 31,
-------------------------
1995 1994
----------- -----------
(In Millions)
Commission, fees and other income ........................... $ 1,325.9 $ 953.5
Net investment income ....................................... 904.1 791.9
Dealer, trading and investment gains, net ................... 528.6 263.3
----------- ----------
Total Revenues .............................................. 2,758.6 2,008.7
Total expenses including income taxes ....................... 2,579.5 1,885.7
----------- ----------
Net earnings ................................................ 179.1 123.0
Dividends on preferred stock ................................ 19.9 20.9
----------- ----------
Earnings Applicable to Common Shares ........................ $ 159.2 $ 102.1
=========== ==========
DLJ's earnings applicable to common shares as reported ...... $ 159.2 $ 102.1
Amortization of cost in excess of net assets acquired in 1985 (3.9) (3.1)
The Holding Company's equity in DLJ's earnings .............. (90.4) (60.9)
Minority interest in DLJ .................................... (6.5) --
----------- ----------
The Company's Equity in DLJ's Earnings ...................... $ 58.4 $ 38.1
=========== ==========
F-39
21) RELATED PARTY TRANSACTIONS
On August 31, 1993, the Company sold $661.0 million of primarily
privately placed below investment grade fixed maturities to EQ Asset
Trust 1993, a limited purpose business trust, wholly owned by the
Holding Company. The Company recognized a $4.1 million gain net of
related deferred policy acquisition costs, deferred Federal income tax
and amounts attributable to participating group annuity contracts. In
conjunction with this transaction, the Company received $200.0 million
of Class B Notes issued by EQ Asset Trust 1993. These notes have
interest rates ranging from 6.85% to 9.45%. The Class B Notes are
reflected in investments in and loans to affiliates on the consolidated
balance sheets.
F-40
Report of Independent Accountants on
Financial Statement Schedules
February 7, 1996
To the Board of Directors of
The Equitable Life Assurance Society of the United States
Our audit of the consolidated financial statements referred to in our report
dated February 7, 1996 appearing on page F-1 of this Annual Report on Form 10-K
also included an audit of the financial statement schedules listed in Item 14(a)
of this Form 10-K. In our opinion, these financial statement schedules present
fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements.
F-41
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
SCHEDULE I
SUMMARY OF INVESTMENTS - OTHER THAN INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 1995
Estimated Carrying
Type of Investment Cost (A) Fair Value Value
- ------------------ ---------- ----------- -----------
(In Millions)
Fixed maturities:
United States Government and government
agencies and authorities ...................... $ 2,257.0 $ 2,330.7 $ 2,330.7
State, municipalities and political subdivisions. 45.7 50.9 50.9
Foreign governments ............................. 124.5 135.3 135.3
Public utilities ................................ 889.2 938.9 938.9
Convertibles and bonds with warrants attached ... 152.6 163.4 163.4
All other corporate bonds ....................... 11,706.9 12,175.9 12,175.9
Redeemable preferred stocks ..................... 108.1 104.8 104.8
--------- --------- ---------
Total fixed maturities .......................... 15,284.0 15,899.9 15,899.9
--------- --------- ---------
Equity securities:
Common stocks:
Industrial, miscellaneous and all other ..... 97.3 128.4 128.4
Mortgage loans on real estate ................... 3,638.3 3,973.6 3,638.3
Real estate ..................................... 2,422.3 xxx 2,422.3
Real estate acquired in satisfaction of debt .... 862.7 xxx 862.7
Real estate joint ventures ...................... 631.2 xxx 631.2
Policy loans .................................... 1,976.4 2,057.5 1,976.4
Other limited partnership interests ............. 492.7 492.7 492.7
Investment in and loans to affiliates ........... 636.6 636.6 636.6
Short-term investments .......................... 389.3 389.3 389.3
Other invested assets ........................... 316.8 316.8 316.8
--------- --------- ---------
Total Investments ............................... $26,747.6 $23,894.8 $27,394.6
========= ========= =========
<FN>
(A) Cost for fixed maturities represents original cost, reduced by repayments
and writedowns and adjusted for amortization of premiums or accretion of
discount; for equity securities, cost represents original cost; for other
limited partnership interests, cost represents original cost adjusted for
equity in earnings and distributions.
</FN>
F-42
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
SCHEDULE III
BALANCE SHEETS (PARENT COMPANY)
DECEMBER 31, 1995 AND 1994
1995 1994
----------- -----------
(In Millions)
ASSETS
Investment:
Fixed maturities:
Available for sale, at estimated fair value (amortized cost of
$10,812.8 and $5,533.4, respectively) ...................... $ 11,330.7 $ 5,233.2
Held to maturity, at amortized cost (estimated fair value of
$3,099.3 in 1994) .......................................... -- 3,201.4
Mortgage loans on real estate .................................. 3,033.3 3,294.7
Equity real estate ............................................. 2,478.6 2,934.0
Other equity investments ....................................... 412.0 427.5
Investments in and loans to affiliates ......................... 2,856.8 2,477.7
Other invested assets .......................................... 695.8 488.9
---------- -----------
Total investments .......................................... 20,807.2 18,057.4
Cash and cash equivalents ........................................ 250.9 314.9
Deferred policy acquisition costs ................................ 1,000.8 1,096.2
Amounts due from discontinued GIC Segment ........................ 2,097.1 2,108.6
Other assets ..................................................... 1,522.3 901.0
Closed Block assets .............................................. 8,612.8 8,105.5
Separate Accounts assets ......................................... 19,954.9 17,124.2
----------- -----------
Total Assets ..................................................... $ 54,246.0 $ 47,707.8
=========== ===========
LIABILITIES
Policyholders' account balances .................................. $ 13,998.0 $ 13,262.6
Future policy benefits and other policyholders' liabilities ...... 3,571.0 3,305.0
Short-term and long-term debt .................................... 1,130.9 556.4
Other liabilities ................................................ 2,093.7 1,205.5
Closed Block liabilities ......................................... 9,507.2 9,069.5
Separate Accounts liabilities .................................... 19,944.4 17,114.4
----------- -----------
Total liabilities .......................................... 50,245.2 44,513.4
----------- -----------
SHAREHOLDER'S EQUITY
Common stock, $1.25 par value, 2.0 million shares authorized,
issued and outstanding ......................................... 2.5 2.5
Capital in excess of par value ................................... 2,913.6 2,913.6
Retained earnings ................................................ 781.6 484.0
Net unrealized investment gains (losses) ......................... 338.2 (203.0)
Minimum pension liability ........................................ (35.1) (2.7)
----------- -----------
Total shareholder's equity ................................. 4,000.8 3,194.4
----------- -----------
Total Liabilities and Shareholder's Equity ....................... $ 54,246.0 $ 47,707.8
=========== ===========
The financial information of The Equitable Life Assurance Society of the United
States (Parent Company) should be read in conjunction with the Consolidated
Financial Statements and Notes thereto.
F-43
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
SCHEDULE III
STATEMENTS OF EARNINGS (PARENT COMPANY)
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
1995 1994 1993
---------- ---------- ----------
(In Millions)
REVENUES
Premiums ............................................. $ 567.7 $ 583.7 $ 552.2
Universal life and investment-type product policy fee
income ............................................. 168.2 142.9 138.5
Net investment income ................................ 1,423.4 1,337.3 1,257.7
Investment (losses) gains, net ....................... (1.9) 46.7 73.8
Equity in earnings of subsidiaries before cumulative
effect of accounting change ........................ 169.9 164.6 222.5
Commissions, fees and other income ................... 18.5 18.4 16.3
Contribution from the Closed Block ................... 124.4 151.0 128.3
---------- ---------- ----------
Total revenues ................................. 2,470.2 2,444.6 2,389.3
---------- ---------- ----------
BENEFITS AND OTHER DEDUCTIONS
Policyholders' benefits .............................. 734.9 673.8 748.2
Interest credited to policyholders' account balances . 812.7 763.9 842.8
Other operating costs and expenses ................... 572.5 679.8 617.6
---------- ---------- ----------
Total benefits and other deductions ............ 2,120.1 2,117.5 2,208.6
---------- ---------- ----------
Earnings before Federal income taxes and cumulative
effect of accounting change ........................ 350.1 327.1 180.7
Federal income tax expense (benefit) ................. 52.5 33.6 (31.7)
---------- ---------- ----------
Earnings before cumulative effect of accounting change 297.6 293.5 212.4
Cumulative effect of accounting change, net of Federal
income taxes ....................................... -- (27.1) --
---------- ---------- ----------
Net Earnings ......................................... $ 297.6 $ 266.4 $ 212.4
========== ========== ==========
F-44
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
SCHEDULE III
STATEMENTS OF CASH FLOWS (PARENT COMPANY)
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
1995 1994 1993
----------- ----------- ----------
(In Millions)
Net earnings .................................................. $ 297.6 $ 266.4 $ 212.4
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Net change in trading activities and broker-dealer
related receivables/payables .............................. -- -- 86.2
Investment gains (losses), net of dealer and trading gains .. 1.9 (46.9) (73.7)
Change in amounts due to discontinued GIC Segment ........... -- 57.3 47.8
General Account policy charges .............................. (132.9) (119.8) (121.7)
Interest credited to policyholders' account balances ........ 812.7 763.9 842.8
Equity in net earnings of subsidiaries....................... (169.9) (153.0) (222.5)
Dividends from subsidiaries ................................. -- 95.9 208.1
Changes in Closed Block assets and liabilities, net ......... (69.6) (95.1) (73.3)
Other, net .................................................. 471.6 146.8 (253.7)
---------- ---------- ----------
Net cash provided by operating activities ..................... 1,211.4 915.5 652.4
---------- ---------- ----------
Cash flows from investing activities:
Maturities and repayments ................................... 1,197.8 1,778.7 2,287.7
Sales ....................................................... 6,026.4 3,423.5 4,291.5
Return of capital from joint ventures and limited
partnerships .............................................. 41.3 24.8 62.2
Purchases ................................................... (8,560.9) (5,085.4) (6,645.0)
Decrease (increase) in loans to discontinued GIC Segment .... 1,226.9 (40.0) (880.0)
Cash received on sale of 61% interest in DLJ ................ -- -- 346.7
Other, net .................................................. (349.8) (315.8) (114.6)
---------- ---------- ----------
Net cash used by investing activities ......................... (418.3) (214.2) (651.5)
---------- ---------- ----------
Cash flows from financing activities: Policyholders'
account balances:
Deposits .................................................. 1,820.9 1,494.6 1,771.5
Withdrawals ............................................... (2,028.5) (2,159.8) (1,891.0)
Net increase (decrease) in short-term financings ............ 3.6 (193.0) 194.6
Additions to long-term debt ................................. 599.7 1.8 20.9
Repayments of long-term debt ................................ (37.4) (42.4) (38.4)
Payment of obligation to fund accumulated deficit of
discontinued GIC Segment .................................. (1,215.4) -- --
Capital contributions from the Holding Company .............. -- 300.0 --
---------- ---------- ----------
Net cash (used) provided by financing activities .............. (857.1) (598.8) 57.6
---------- ---------- ----------
Change in cash and cash equivalents ........................... (64.0) 102.5 58.5
Cash and cash equivalents, beginning of year .................. 314.9 212.4 153.9
---------- ---------- ----------
Cash and Cash Equivalents, End of Year ........................ $ 250.9 $ 314.9 $ 212.4
========== ========== ==========
Supplemental cash flow information
Interest Paid ............................................... $ 87.8 $ 27.6 $ 19.1
========== ========== ==========
Income Taxes (Refunded) Paid ................................ $ (86.0) $ 49.2 $ 41.0
========== ========== ==========
F-45
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
SCHEDULE V
SUPPLEMENTARY INSURANCE INFORMATION
AT AND FOR THE YEAR ENDED DECEMBER 31, 1995
Future Policy Policy
Deferred Benefits Charges (1)
Policy Policyholders' and Other and Net
Acquisition Account Policyholders' Premium Investment
Segment Costs Balance Funds Revenue Income
- -------------------------- -------------- --------------- --------------- ----------- ---------------
(In Millions)
Individual
Insurance and
Annuities.............. $ 3,083.3 $ 19,215.0 $ 3,000.7 $ 1,323.2 $ 1,702.3
Group Pension............ - 2,537.6 1,087.1 54.6 273.3
Attributed Insurance
Capital................ - - 84.0 - 59.0
----------- ------------- ------------ ------------ -------------
Insurance
Operations............. 3,083.3 21,752.6 4,171.8 1,377.8 2,034.6
Investment
Services............... - - - - 16.1
Corporate Interest
Expense................ - - - - -
Consolidation/
Elimination............ - - - - 77.0
============= ================= ============== ============= ===============
Total.................... $ 3,083.3 $ 21,752.6 $ 4,171.8 $ 1,377.8 $ 2,127.7
============= ================= ============== ============= ===============
Amortization
Policyholders' of Deferred (2)
Benefits and Policy Other
Interest Acquisition Operating
Segment Credited Cost Expense
- -------------------------- ----------------- -------------- -----------
(In Millions)
Individual
Insurance and
Annuities.............. $ 1,974.9 $ 320.4 $ 684.9
Group Pension............ 271.7 - 33.6
Attributed Insurance
Capital................ 8.9 - 33.6
------------- -------------- ------------
Insurance
Operations............. 2,255.5 320.4 752.1
Investment
Services............... - - 787.9
Corporate Interest
Expense................ - - 27.9
Consolidation/
Elimination............ - - (31.8)
============= ============== ============
Total.................... $ 2,255.5 $ 320.4 $ 1,536.1
============= ============== ============
<FN>
(1) The allocation of net investment income is based upon specific
identification of certain portfolios within specific segments.
(2) Operating expenses are incurred directly by a segment, or allocated based
on usage rates maintained by the Insurance Group.
</FN>
F-46
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
SCHEDULE V
SUPPLEMENTARY INSURANCE INFORMATION
AT AND FOR THE YEAR ENDED DECEMBER 31, 1994
Future Policy Policy
Deferred Benefits Charges (1)
Policy Policyholders' and Other and Net
Acquisition Account Policyholders' Premium Investment
Segment Costs Balance Funds Revenue Income
- -------------------------- ------------- ------------- ---------------- ------------ ------------
(In Millions)
Individual
Insurance and
Annuities.............. $ 3,221.1 $ 18,647.4 $ 2,781.5 $ 1,289.0 $ 1,580.1
Group Pension............ - 2,590.6 980.9 51.6 285.8
Attributed Insurance
Capital................ - - 78.4 - 71.5
----------- -------------- --------------- ------------ -----------
Insurance
Operations............. 3,221.1 21,238.0 3,840.8 1,340.6 1,937.4
Investment
Services............... - - - - 11.5
Corporate Interest
Expense................ - - - - -
Consolidation/
Elimination............ - - - - 82.0
----------- -------------- --------------- ------------ -----------
Total.................... $ 3,221.1 $ 21,238.0 $ 3,840.8 $ 1,340.6 $ 2,030.9
=========== ============== =============== ============ ===========
Amortization
Policyholders' of Deferred (2)
Benefits and Policy Other
Interest Acquisition Operating
Segment Credited Cost Expense
- -------------------------- --------------- -------------- ------------
(In Millions)
Individual
Insurance and
Annuities.............. $ 1,820.3 $ 318.1 $ 726.8
Group Pension............ 314.8 - 28.5
Attributed Insurance
Capital................ (13.2) - 22.8
----------- -------------- -----------
Insurance
Operations............. 2,121.9 318.1 778.1
Investment
Services............... - - 757.7
Corporate Interest
Expense................ - - 114.2
Consolidation/
Elimination............ - - (25.0)
---------- -------------- -----------
Total.................... $ 2,121.9 $ 318.1 $ 1,625.0
========== ============= ===========
<FN>
(1) The allocation of net investment income is based upon specific
identification of certain portfolios within specific segments.
(2) Operating expenses are incurred directly by a segment, or allocated based
on usage rates maintained by the Insurance Group.
</FN>
F-47
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
SCHEDULE V
SUPPLEMENTARY INSURANCE INFORMATION
AT AND FOR THE YEAR ENDED DECEMBER 31, 1993
Policy Amortization
Charges (1) Policyholders' of Deferred (2)
and Net Benefits and Policy Other
Premium Investment Interest Acquisition Operating
Segment Revenue Income Credited Cost Expense
- ------------------------ ------------ ------------ --------------- --------------- -----------
(In Millions)
Individual
Insurance and
Annuities............ $ 1,183.4 $ 1,552.9 $ 1,936.2 $ 275.9 $ 693.2
Group Pension.......... 60.2 337.2 395.9 - 28.7
Attributed Insurance
Capital.............. - 58.2 1.8 - 10.8
------------ --------------- -------------- ------------- ------------
Insurance
Operations........... 1,243.6 1,948.3 2,333.9 275.9 732.7
Investment
Services............. - 583.4 - - 2,490.3
Corporate Interest
Expense.............. - - - - 126.1
Consolidation/
Elimination.......... - 67.6 - - (40.8)
------------ --------------- -------------- ------------- ------------
Total.................. $ 1,243.6 $ 2,599.3 $ 2,333.9 $ 275.9 $ 3,308.3
============ =============== ============== ============= =============
<FN>
(1) The allocation of net investment income is based upon specific
identification of certain portfolios within specific segments.
(2) Operating expenses are incurred directly by a segment, or allocated based
on usage rates maintained by the Insurance Group.
</FN>
F-48
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
SCHEDULE VI
REINSURANCE (A)
AT AND FOR THE YEARS ENDED DECEMBER 31, 1995 1994 AND 1993
Assumed Percentage
Ceded to from of Amount
Gross Other Other Net Assumed
Amount Companies Companies Amount to Net
------------- ------------- -------------- -------------- ------------
(In Millions)
1995
- ----
Life insurance in force(B)... $226,530.6 $ 12,348.2 $ 38,382.2 $ 252,564.6 15.20%
============= ============= ============== ==============
Premiums:
Life insurance and
annuities.................. $ 244.7 $ 14.3 $ 96.7 $ 327.1 29.56%
Accident and health.......... 490.1 285.0 74.6 279.7 26.67%
============= ============= ============== ==============
Total Premiums............... $ 734.8 $ 299.3 $ 171.3 $ 606.8 28.23%
============= ============= ============== ==============
1994
- ----
Life insurance in force(B)... $220,780.2 $ 13,937.5 $ 43,200.1 $ 250,042.8 17.27%
============= ============= ============== ==============
Premiums:
Life insurance and
annuities.................. $ 247.7 $ 29.8 $ 110.4 $ 328.3 33.62%
Accident and health.......... 470.0 242.8 70.1 297.3 23.58%
============= ============= ============== ==============
Total Premiums............... $ 717.7 $ 272.6 $ 180.5 $ 625.6 28.85%
============= ============= ============== ==============
1993
- ----
Life insurance in force(B)... $301,107.3 $ 96,905.7 $ 43,647.7 $ 247,849.3 17.61%
============= ============= ============== ==============
Premiums:
Life insurance and
annuities.................. $ 642.3 $ 466.2 $ 122.1 $ 298.2 40.95%
Accident and health.......... 704.0 458.5 55.4 300.9 18.41%
------------- ------------- -------------- --------------
Total Premiums............... $ 1,346.3 $ 924.7 $ 177.5 $ 599.1 29.63%
============= ============= ============== ==============
<FN>
(A) Includes amounts related to the discontinued group life and health business.
(B) Includes in force business related to the Closed Block.
</FN>
F-49
Part II, Item 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
9-1
Part III, Item 10.
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Omitted pursuant to General Instruction J to Form 10-K.
10-1
Part III, Item 11.
EXECUTIVE COMPENSATION
Omitted pursuant to General Instruction J to Form 10-K.
11-1
Part III, Item 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of Equitable Life's Common Stock as of March 20, 1996 all of which was
owned by the Holding Company. The Holding Company has sole investment and voting
power with respect to the shares beneficially held.
Amount and Nature
Name and Address of Beneficial Percent
Title of Class of Beneficial Owner Ownership of Class
- --------------- ------------------------------------ ------------------- ---------
Common Stock The Equitable Companies Incorporated 2,000,000 100%
12-1
Part III, Item 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Omitted pursuant to General Instruction J to Form 10-K.
13-1
Part IV, Item 14.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K
(A) The following documents are filed as part of this report:
1. Financial Statements
2. The financial statements are listed in the Index to Financial
Statements on page FS-1.
3. Consolidated Financial Statement Schedules
4. The consolidated financial statement schedules are listed in the
Index to Financial Statement Schedules on page FS-1.
5. Exhibits:
6. The exhibits are listed in the Index to Exhibits which begins on
page E-1.
(B) Reports on Form 8-K
None
14-1
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, The Equitable Life Assurance Society of the United States has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Date: March 28, 1996 THE EQUITABLE LIFE ASSURANCE SOCIETY
OF THE UNITED STATES
By:
--------------------------------------
Name: Joseph J. Melone
Chairman of the Board, Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Chairman of the Board, Director March 28, 1996
- ------------------------------------
Joseph J. Melone
President and Chief Executive March 28, 1996
- ------------------------------------ Officer, Director
James M. Benson
Senior Executive Vice President March 28, 1996
- ------------------------------------ and Chief Operating Officer,
William T. McCaffrey Director
Senior Executive Vice President March 28, 1996
- ------------------------------------ and Chief Financial Officer
Jerry M. de St. Paer
Senior Vice President and March 28, 1996
- ------------------------------------ Controller
Alvin H. Fenichel
/s/ Claude Bebear * Director March 28, 1996
- -------------------
Claude Bebear
/s/ Christopher J. Brocksom * Director March 28, 1996
- -----------------------------
Christopher J. Brocksom
/s/ Francoise Colloc'h * Director March 28, 1996
- ------------------------
Francoise Colloc'h
/s/ Henri de Castries * Director March 28, 1996
- -----------------------
Henri de Castries
/s/ Joseph L. Dionne * Director March 28, 1996
- ----------------------
Joseph L. Dionne
/s/ William T. Esrey * Director March 28, 1996
- ----------------------
William T. Esrey
/s/ Jean-Rene Fourtou * Director March 28, 1996
- -----------------------
Jean-Rene Fourtou
S-1
/s/ Norman C. Francis * Director March 28, 1996
- -----------------------
Norman C. Francis
/s/ Donald J. Greene * Director March 28, 1996
- ----------------------
Donald J. Greene
/s/ Anthony J. Hamilton * Director March 28, 1996
- -------------------------
Anthony J. Hamilton
/s/ John T. Hartley * Director March 28, 1996
- ---------------------
John T. Hartley
/s/ John H. F. Haskell, Jr. * Director March 28, 1996
- -----------------------------
John H. F. Haskell, Jr.
/s/ W. Edwin Jarmain * Director March 28, 1996
- ----------------------
W. Edwin Jarmain
/s/ G. Donald Johnston, Jr. * Director March 28, 1996
- -----------------------------
G. Donald Johnston, Jr.
/s/ Winthrop Knowlton *
Winthrop Knowlton Director March 28, 1996
Director March 28, 1996
- -----------------------------
Arthur L. Liman
/s/ George T. Lowy * Director March 28, 1996
- --------------------
George T. Lowy
/s/ Didier Pineau-Valencienne* Director March 28, 1996
Didier Pineau-Valencienne
/s/ George J. Sella, Jr. * Director March 28, 1996
- --------------------------
George J. Sella
/s/ Dave H. Williams * Director March 28, 1996
- ----------------------
Dave H. Williams
* By:
-------------------------
George H. Stansfield
Attorney-in-fact
S-2
INDEX TO EXHIBITS
Page
Number Description Method of Filing No.
- ---------- ----------------------------------------- --------------------------------------------- -----
3.1 Restated Charter of Equitable Life Filed as Exhibit 3.1 to registrant's annual
report on Form 10-K for the year ended
December 31, 1994 and incorporated
herein by reference
3.2 By-laws of Equitable Life Filed as Exhibit 3.2 to registrant's annual
report on Form 10-K for the year ended
December 31, 1994 and incorporated
herein by reference
10.1 Standstill and Registration Filed as Exhibit 10(c) to Amendment
Rights Agreement, dated as of July No. 1to the Holding Company's
18, 1991,as amended, between The Form S-1Registration Statement
Equitable Companies Incorporated, No.33-48115dated May 26, 1992 and
The Equitable Life Assurance incorporated herein by reference
Society of the United States
and AXA
10.2 Cooperation Agreement, Filed as Exhibit 10(d) to the Holding
dated as of July 18, 1991, Company's Form S-1 Registration
as amended among The Equitable Statement No. 33-48115 dated May 26,
Life Assurance Society of the 1992 and incorporated herein
United States, The Equitable by reference
Companies Incorporated and AXA
10.3 Letter Agreement, dated May Filed as Exhibit 10(e) to the Holding
12, 1992,among The Equitable Company's Form S-1 Registration
Companies Incorporated, The Statement No. 33-48115 dated May 26,
Equitable Life Assurance Society 1992 and incorporated herein
of the United States and AXA by reference
10.4 Amended and Restated Reinsurance Filed as Exhibit 10(o) to the Holding
Agreement, dated as of March Company's Form S-1 Registration
29, 1990,between The Equitable Life Statement No. 33-48115 dated May 26,
Assurance Society of the United 1992 and incorporated herein
States and First Equicor Life by reference
Insurance Company
10.5 Fiscal Agency Agreement between Filed herewith
The Equitable Life Assurance Society
of the United States and The Chase
Manhattan Bank, N.A.
24 Powers of Attorney Filed herewith