SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended June 30, 1996 Commission File No. 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
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 554-1234
----------------------------
None
- --------------------------------------------------------------------------------
(Former name, former address, and former fiscal year if changed
since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) been subject to such filing requirements
for the past 90 days.
Yes X No
---- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Shares Outstanding
Class at August 9, 1996
- --------------------------------------------------------------------------------
Common Stock, $1.25 par value 2,000,000
Page 1 of 34
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1996
TABLE OF CONTENTS
Page #
------
PART I FINANCIAL INFORMATION
Item 1: Unaudited Consolidated Financial Statements
Consolidated Balance Sheets as of June 30, 1996 and December 31, 1995.. 3
Consolidated Statements of Earnings for the Three Months and Six
Months Ended June 30, 1996 and 1995.................................. 4
Consolidated Statements of Shareholder's Equity for the Six Months
Months June 30, 1996 and 1995........................................ 5
Consolidated Statements of Cash Flows for the Six Months Ended
June 30, 1996 and 1995............................................... 6
Notes to Consolidated Financial Statements............................. 7
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations..................................................... 15
PART II OTHER INFORMATION
Item 1: Legal Proceedings......................................................... 33
Item 6: Exhibits and Reports on Form 8-K.......................................... 33
SIGNATURES............................................................................. 34
2
PART I FINANCIAL INFORMATION
Item 1: Unaudited Consolidated Financial Statements.
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
June 30, December 31,
1996 1995
------------ -------------
(In Millions)
ASSETS
Investments:
Fixed maturities:
Available for sale, at estimated fair value .............. $ 16,463.8 $ 15,899.9
Mortgage loans on real estate .............................. 3,425.9 3,638.3
Equity real estate ......................................... 3,730.0 3,916.2
Policy loans ............................................... 2,107.0 1,976.4
Investment in and loans to affiliates ...................... 682.4 636.6
Other equity investments ................................... 593.7 621.1
Other invested assets ...................................... 330.8 706.1
----------- -----------
Total investments ...................................... 27,333.6 27,394.6
Cash and cash equivalents .................................... 642.6 774.7
Deferred policy acquisition costs ............................ 3,279.9 3,083.3
Amounts due from discontinued GIC Segment .................... 1,604.6 2,097.1
Other assets ................................................. 2,524.1 2,713.1
Closed Block assets .......................................... 8,321.0 8,612.8
Separate Accounts assets ..................................... 27,204.3 24,566.6
----------- -----------
Total Assets ................................................. $ 70,910.1 $ 69,242.2
=========== ===========
LIABILITIES
Policyholders' account balances .............................. $ 21,760.9 $ 21,911.2
Future policy benefits and other policyholders' liabilities .. 4,098.1 4,013.2
Short-term and long-term debt ................................ 2,031.6 1,899.3
Other liabilities ............................................ 2,874.2 3,379.5
Closed Block liabilities ..................................... 9,183.4 9,507.2
Separate Accounts liabilities ................................ 27,135.7 24,531.0
----------- -----------
Total liabilities ...................................... 67,083.9 65,241.4
Commitments and contingencies (Note 10)
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 ............................................ 933.2 781.6
Net unrealized investment gains .............................. 12.0 338.2
Minimum pension liability .................................... (35.1) (35.1)
----------- -----------
Total shareholder's equity ............................. 3,826.2 4,000.8
----------- -----------
Total Liabilities and Shareholder's Equity ................... $ 70,910.1 $ 69,242.2
=========== ===========
See Notes to Consolidated Financial Statements.
3
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- --------------------
1996 1995 1996 1995
----------- ---------- ---------- ---------
(In Millions)
REVENUES
Universal life and investment-type
product policy fee income ..................... $ 217.8 $ 191.8 $ 430.7 $ 384.3
Premiums ........................................ 152.4 164.1 293.4 312.5
Net investment income ........................... 535.3 523.4 1,071.6 1,034.2
Investment (losses) gains, net .................. (17.2) 31.8 (16.0) 18.9
Commissions, fees and other income .............. 278.1 215.0 524.3 418.2
Contribution from the Closed Block .............. 23.4 28.7 50.1 57.2
---------- -------- -------- ---------
Total revenues ............................ 1,189.8 1,154.8 2,354.1 2,225.3
---------- -------- -------- ---------
BENEFITS AND OTHER DEDUCTIONS
Interest credited to policyholders' account
balances ...................................... 312.6 310.8 633.0 606.5
Policyholders' benefits ......................... 274.0 274.0 527.2 520.4
Other operating costs and expenses .............. 475.8 423.4 921.8 860.6
---------- -------- -------- ---------
Total benefits and other deductions ....... 1,062.4 1,008.2 2,082.0 1,987.5
---------- -------- -------- ---------
Earnings before Federal income taxes,
minority interest and cumulative effect of
accounting change ............................. 127.4 146.6 272.1 237.8
Federal income taxes ............................ 24.2 37.4 58.5 56.0
Minority interest in net income of consolidated
subsidiaries .................................. 20.0 14.9 38.9 28.5
---------- -------- -------- ---------
Earnings before cumulative effect of
accounting change ............................. 83.2 94.3 174.7 153.3
Cumulative effect of accounting change,
net of Federal income taxes ................... -- -- (23.1) --
---------- -------- -------- ---------
Net Earnings .................................... $ 83.2 $ 94.3 $ 151.6 $ 153.3
========== ========= ======== =========
See Notes to Consolidated Financial Statements.
4
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
SIX MONTHS ENDED JUNE 30, 1996 AND 1995
(UNAUDITED)
1996 1995
---------- ----------
(In Millions)
Common stock, at par value, beginning of year and end of period ..... $ 2.5 $ 2.5
---------- ----------
Capital in excess of par value, beginning of year and end of period . 2,913.6 2,913.6
---------- ----------
Retained earnings, beginning of year ................................ 781.6 484.0
Net earnings ........................................................ 151.6 153.3
---------- ----------
Retained earnings, end of period .................................... 933.2 637.3
---------- ----------
Net unrealized investment gains (losses), beginning of year ......... 338.2 (203.0)
Change in unrealized investment (losses) gains ...................... (326.2) 259.2
---------- ----------
Net unrealized investment gains, end of period ...................... 12.0 56.2
---------- ----------
Minimum pension liability, beginning of year and end of period ...... (35.1) (2.7)
---------- ----------
Total Shareholder's Equity, End of Period ........................... $ 3,826.2 $ 3,606.9
========== ==========
See Notes to Consolidated Financial Statements.
5
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1996 AND 1995
(UNAUDITED)
1996 1995
----------- -----------
(In Millions)
Net earnings ........................................................... $ 151.6 $ 153.3
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Interest credited to policyholders' account balances ............... 633.0 606.5
General Account policy charges ..................................... (430.7) (384.3)
Investment losses (gains) .......................................... 16.0 (18.9)
Change in Federal income taxes payable ............................. (127.0) 94.1
Changes in Closed Block assets and liabilities, net ................ (32.0) (35.2)
Other, net ......................................................... (132.2) (6.9)
---------- ----------
Net cash provided by operating activities .............................. 78.7 408.6
---------- ----------
Cash flows from investing activities:
Maturities and repayments ............................................ 1,204.0 871.0
Sales ................................................................ 5,033.6 3,725.7
Return of capital from joint ventures and limited partnerships ....... 48.5 20.9
Purchases ............................................................ (7,056.4) (5,053.0)
Decrease in loans to discontinued GIC Segment ........................ 492.5 1,155.4
Other, net ........................................................... 348.1 (116.6)
---------- ----------
Net cash provided by investing activities .............................. 70.3 603.4
---------- ----------
Cash flows from financing activities:
Policyholders' account balances:
Deposits ........................................................... 913.9 1,541.5
Withdrawals ........................................................ (1,265.8) (1,481.5)
Net increase in short-term financings ................................ 174.1 207.3
Additions to long-term debt .......................................... .1 --
Repayments of long-term debt ......................................... (71.3) (5.2)
Payment of obligation to fund accumulated deficit of discontinued
GIC Segment ........................................................ -- (1,215.4)
Other, net ........................................................... (32.1) (21.3)
---------- ----------
Net cash used by financing activities .................................. (281.1) (974.6)
---------- ----------
Change in cash and cash equivalents .................................... (132.1) 37.4
Cash and cash equivalents, beginning of year ........................... 774.7 693.6
---------- ----------
Cash and Cash Equivalents, End of Period ............................... $ 642.6 $ 731.0
========== ==========
Supplemental cash flow information
Interest Paid ........................................................ $ 28.1 $ 38.2
========== ==========
Income Taxes Paid .................................................... $ 7.3 $ --
========== ==========
See Notes to Consolidated Financial Statements.
6
THE EQUITABLE ASSURANCE SOCIETY OF THE UNITED STATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1) BASIS OF PRESENTATION
The preparation of the accompanying consolidated financial statements in
conformity with GAAP required management to make estimates and assumptions
(including normal, recurring accruals) that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Such statements should
be read in conjunction with the consolidated financial statements of the
Company for the year ended December 31, 1995. The results of operations
for the six months ended June 30, 1996 are not necessarily indicative of
the results to be expected for the full year.
Certain reclassifications have been made in the amounts presented for
prior periods to conform those periods with the current presentation.
2) ACCOUNTING CHANGES AND PRONOUNCEMENTS
The Company implemented SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of," as of
January 1, 1996. The statement requires long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever events or
changes in circumstances indicate the carrying value of such assets may
not be recoverable. Effective with SFAS No. 121's adoption, impaired real
estate is written down to fair value with the impairment loss being
included in Investment gains/losses, net. Before implementing SFAS No.
121, valuation allowances on real estate held for the production of income
were computed using the forecasted cash flows of the respective properties
discounted at a rate equal to the Company's cost of funds. The adoption of
the statement resulted in the release of existing valuation allowances of
$152.4 million and recognition of impairment losses of $144.0 million on
real estate held and used. Real estate which management has committed to
disposing of by sale or abandonment is classified as real estate to be
disposed of. Valuation allowances on real estate to be disposed of
continue to be computed using the lower of estimated fair value or
depreciated cost, net of disposition costs. Implementation of the SFAS No.
121 impairment requirements relative to other assets to be disposed of
resulted in a charge for the cumulative effect of an accounting change of
$23.1 million, net of a Federal income tax benefit of $12.4 million, due
to the writedown to fair value of building improvements relating to
facilities being vacated beginning in 1996.
In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities". SFAS
No. 125 specifies the accounting and reporting requirements for transfers
of financial assets, the recognition and measurement of servicing assets
and liabilities and extinguishments of liabilities. SFAS No. 125 is
effective for transactions occurring after December 31, 1996 and is to be
applied prospectively. Management has not yet determined the effect of
implementing SFAS No. 125.
3) FEDERAL INCOME TAXES
Federal income taxes for interim periods have been computed using an
estimated annual effective tax rate. This rate is revised, if necessary,
at the end of each successive interim period to reflect the current
estimate of the annual effective tax rate.
7
4) INVESTMENTS
Investment valuation allowances and changes thereto are shown below:
Six Months Ended
June 30,
----------------------
1996 1995
--------- ----------
(In Millions)
Balances, beginning of year ............................ $ 325.3 $ 284.9
SFAS No. 121 release ................................... (152.4) --
Additions charged to income ............................ 73.9 47.2
Deductions for writedowns and asset dispositions ....... (82.7) (36.3)
-------- --------
Balances, End of Period ................................ $ 164.1 $ 295.8
======== ========
Balances, end of period:
Mortgage loans on real estate .......................... $ 102.1 $ 55.8
Equity real estate ..................................... 62.0 240.0
-------- --------
Total .................................................. $ 164.1 $ 295.8
======== ========
For the three months and six months ended June 30, 1996 and 1995,
investment income is shown net of investment expenses of $88.0 million,
$182.2 million, $119.4 million and $228.1 million, respectively.
As of June 30, 1996 and December 31, 1995, fixed maturities classified as
available for sale had amortized costs of $16,459.6 million and $15,284.0
million, respectively. Other equity investments included equity securities
with carrying values of $126.5 million and $128.4 million and costs of
$96.7 million and $97.3 million as of June 30, 1996 and December 31, 1995,
respectively.
For the six months ended June 30, 1996 and 1995, proceeds received on
sales of fixed maturities classified as available for sale amounted to
$4,936.3 million and $3,607.6 million, respectively. Gross gains of $68.5
million and $96.2 million and gross losses of $44.9 million and $41.1
million were realized on these sales for the six months ended June 30,
1996 and 1995, respectively. The decrease in unrealized investment gains
related to fixed maturities classified as available for sale for the six
months ended June 30, 1996 amounted to $611.7 million.
During the six months ended June 30, 1995, one security classified as held
to maturity was sold and nine securities classified as held to maturity
were transferred to the available for sale portfolio. All actions were
taken as a result of significant deterioration in creditworthiness. The
amortized cost of the security sold was $4.2 million. The aggregate
amortized cost of the securities transferred was $71.0 million with gross
unrealized investment losses of $5.3 million transferred to equity for the
six months ended June 30, 1995.
Impaired mortgage loans along with the related provision for losses
follows:
June 30, December 31,
1996 1995
---------- ------------
(In Millions)
Impaired mortgage loans with provision for losses ........ $ 458.1 $ 310.1
Impaired mortgage loans with no provision for losses ..... 164.2 160.8
-------- --------
Recorded investment in impaired mortgage loans ........... 622.3 470.9
Provision for losses ..................................... 99.8 62.7
-------- --------
Net Impaired Mortgage Loans .............................. $ 522.5 $ 408.2
======== ========
8
Impaired mortgage loans with no provision for losses are loans where the
fair value of the collateral or the net present value of the loans equals
or exceeds the recorded investment. Interest income earned on loans where
the collateral value is used to measure impairment is recorded using the
cash basis method. Interest income on loans where the present value method
is used to measure impairment is accrued on the net carrying value amount
of the loan at the interest rate used to discount the cash flows. Changes
in the present value attributable to changes in the amount or timing of
expected cash flows are reported as investment gains or losses.
During the six months ended June 30, 1996 and 1995, respectively, the
Company's average recorded investment in impaired mortgage loans was
$541.2 million and $317.1 million. Interest income recognized on these
impaired mortgage loans totaled $20.8 million and $10.1 million for the
six months ended June 30, 1996 and 1995, respectively, including $7.3
million and $7.6 million recognized on the cash basis method.
5) ALLIANCE - CURSITOR TRANSACTION
On February 29, 1996, Alliance acquired the business of Cursitor-Eaton
Asset Management Company and Cursitor Holdings Limited in exchange for
approximately 1.8 million Alliance Units, $84.9 million in cash, $21.5
million in notes which are payable ratably over the next four years and
substantial additional consideration which will be determined at a later
date. The Company recognized an investment gain of $20.6 million as a
result of the issuance of Units in this transaction. At June 30, 1996, the
Company's ownership of Alliance Units was approximately 57.5%.
6) BUSINESS SEGMENT INFORMATION
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ -----------------------
1996 1995 1996 1995
----------- ---------- ---------- -----------
(In Millions)
Revenues
Individual insurance and annuities . $ 835.9 $ 848.5 $ 1,655.2 $ 1,643.1
Group pension ...................... 65.9 74.9 128.6 132.3
Attributed insurance capital ....... 13.0 14.0 31.3 28.6
---------- ---------- ---------- ----------
Insurance operations ............. 914.8 937.4 1,815.1 1,804.0
Investment services ................ 280.9 225.5 551.3 437.4
Consolidation/elimination .......... (5.9) (8.1) (12.3) (16.1)
---------- ---------- ---------- ----------
Total .............................. $ 1,189.8 $ 1,154.8 $ 2,354.1 $ 2,225.3
========== ========== ========== ==========
9
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- -------------------
1996 1995 1996 1995
---------- ---------- --------- ----------
(In Millions)
Earnings (Loss) Before Federal
Income Taxes, Minority Interest
and Cumulative Effect
of Accounting Change
Individual insurance and annuities ....... $ 69.5 $ 92.7 $ 153.5 $ 151.6
Group pension ............................ (8.6) (.1) (20.3) (11.8)
Attributed insurance capital ............. 6.6 5.7 13.8 12.6
-------- -------- -------- --------
Insurance operations ................... 67.5 98.3 147.0 152.4
Investment services ...................... 76.4 55.0 158.0 98.0
-------- -------- -------- --------
Subtotal ............................... 143.9 153.3 305.0 250.4
Corporate interest expense ............... (16.5) (6.7) (32.9) (12.6)
-------- -------- -------- --------
Total .................................... $ 127.4 $ 146.6 $ 272.1 $ 237.8
======== ======== ======== ========
June 30, December 31,
1996 1995
------------ -------------
(In Millions)
Assets
Individual insurance and annuities ........... $ 52,443.7 $ 50,328.8
Group pension ................................ 3,653.3 4,033.3
Attributed insurance capital ................. 1,979.3 2,391.6
----------- -----------
Insurance operations ....................... 58,076.3 56,753.7
Investment services .......................... 13,218.6 12,842.9
Consolidation/elimination .................... (384.8) (354.4)
----------- -----------
Total ........................................ $ 70,910.1 $ 69,242.2
=========== ===========
7) DISCONTINUED OPERATIONS
Summarized financial information of the discontinued GIC Segment follows:
June 30, December 31,
1996 1995
----------- -------------
(In Millions)
Assets
Mortgage loans on real estate .................... $ 1,338.2 $ 1,485.8
Equity real estate ............................... 1,087.3 1,122.1
Cash and other invested assets ................... 657.2 665.2
Other assets ..................................... 193.6 579.3
---------- ----------
Total Assets ..................................... $ 3,276.3 $ 3,852.4
========== ==========
Liabilities
Policyholders' liabilities ....................... $ 1,386.7 $ 1,399.8
Allowance for future losses ...................... 135.5 164.2
Amounts due to continuing operations ............. 1,604.6 2,097.1
Other liabilities ................................ 149.5 191.3
---------- ----------
Total Liabilities ................................ $ 3,276.3 $ 3,852.4
========== ==========
10
Three Months Ended Six Months Ended
June 30, June 30,
------------------ --------------------
1996 1995 1996 1995
-------- --------- --------- ----------
(In Millions)
Revenues
Investment income (net of investment
expenses of $33.6, $40.7, $64.3
and $77.4) ............................. $ 59.7 $ 71.5 $ 132.2 $ 149.5
Investment losses, net ................... (6.6) (5.7) (17.6) (18.9)
Policy fees, premiums and other
income, net ............................ -- .4 .1 .5
-------- -------- --------- ---------
Total revenues ........................... 53.1 66.2 114.7 131.1
Benefits and Other Deductions ............ 67.3 92.8 139.3 177.3
-------- -------- --------- ---------
Losses Charged to Allowance
for Future Losses ...................... $ (14.2) $ (26.6) $ (24.6) $ (46.2)
======== ======== ========= =========
Investment valuation allowances amounted to $19.4 million on mortgage
loans and $15.9 million on equity real estate for an aggregate of $35.3
million at June 30, 1996. As of January 1, 1996, the adoption of SFAS No.
121 resulted in a release of existing valuation allowances of $71.9
million on equity real estate and recognition of impairment losses of
$69.8 million on real estate held and used. At December 31, 1995,
valuation allowances amounted to $19.2 million on mortgage loans and $77.9
million on equity real estate for an aggregate of $97.1 million.
Benefits and other deductions included $33.9 million, $71.5 million, $38.6
million and $77.3 million of interest expense related to amounts borrowed
from continuing operations for the three months and six months ended June
30, 1996 and 1995, respectively.
The allowance for future losses is based upon management's best judgment
and there can be no assurance ultimate losses will not differ.
8) CLOSED BLOCK
Summarized financial information of the Closed Block follows:
June 30, December 31,
1996 1995
------------ ------------
(In Millions)
Assets
Fixed maturities:
Available for sale, at estimated fair value (amortized cost of
$3,640.5 and $3,662.8) ....................................... $ 3,640.3 $ 3,896.2
Mortgage loans on real estate .................................... 1,402.1 1,368.8
Policy loans ..................................................... 1,784.1 1,797.2
Cash and other invested assets ................................... 404.0 440.9
Deferred policy acquisition costs ................................ 794.5 823.6
Other assets ..................................................... 296.0 286.1
---------- ----------
Total Assets ..................................................... $ 8,321.0 $ 8,612.8
========== ==========
Liabilities
Future policy benefits and other policyholders' account balances . $ 9,125.1 $ 9,346.7
Other liabilities ................................................ 58.3 160.5
---------- ----------
Total Liabilities ................................................ $ 9,183.4 $ 9,507.2
========== ==========
11
Three Months Ended Six Months Ended
June 30, June 30,
------------------- -------------------
1996 1995 1996 1995
--------- --------- -------- ---------
(In Millions)
Revenues
Premiums and other income ................ $ 182.9 $ 191.4 $ 367.8 $ 382.5
Investment income (net of investment
expenses of $7.2, $6.8, $14.1 and
$13.7) ................................. 131.4 135.7 268.2 267.4
Investment losses, net ................... (4.4) (2.8) (8.6) (6.9)
-------- -------- -------- --------
Total revenues ........................... 309.9 324.3 627.4 643.0
-------- -------- -------- --------
Benefits and Other Deductions
Policyholders' benefits and dividends .... 269.4 278.7 543.3 553.3
Other operating costs and expenses ....... 17.1 16.9 34.0 32.5
-------- -------- -------- --------
Total benefits and other deductions ...... 286.5 295.6 577.3 585.8
-------- -------- -------- --------
Contribution from the Closed Block ....... $ 23.4 $ 28.7 $ 50.1 $ 57.2
======== ======== ======== ========
Investment valuation allowances amounted to $31.4 million and $18.4
million on mortgage loans and $2.7 million and $4.3 million on equity real
estate for an aggregate of $34.1 million and $22.7 million at June 30,
1996 and December 31, 1995, respectively. As of January 1, 1996, the
adoption of SFAS No. 121 resulted in the recognition of impairment losses
of $5.6 million on real estate held and used.
9) RESTRUCTURE COSTS
At June 30, 1996, liabilities associated with 1994 and 1995 cost reduction
programs totaled $32.2 million. During the six months ended June 30, 1996
and 1995, the Company restructured certain operations in connection with
cost reduction programs and incurred costs of $1.7 million and $6.4
million, respectively, primarily associated with severance related
benefits. Amounts paid during the six months ended June 30, 1996 and
charged against the liabilities for the 1994 and 1995 cost reduction
programs totaled $7.3 million.
10) LITIGATION
There have been no new material legal proceedings and no material
developments in matters which were previously reported in the Company's
Notes to Consolidated Financial Statements for the year ended December 31,
1995, except as follows:
On May 29, 1996, the New York County Supreme Court entered a judgment
dismissing the complaint with prejudice in the previously reported action
Golomb, et al. v. The Equitable Life Assurance Society of the United
States. Plaintiffs have filed a notice of appeal of that judgment. On
February 9, 1996, Equitable Life removed the Pennsylvania action, Malvin
v. The Equitable Life Assurance Society of the United States, to the
United States District Court for the Middle District of Pennsylvania.
Following the decision granting Equitable Life's motion to dismiss the New
York action (Golomb), on the consent of the parties, the District Court
ordered an indefinite stay of all proceedings in the Pennsylvania action,
pending either party's right to reinstate the proceeding, and ordered that
for administrative purposes the case be deemed administratively closed. On
February 2, 1996, Equitable Life removed the Texas action, Bowler, et al.
v. The Equitable Life Assurance Society of the United States, to the
United States District Court for the Northern District of Texas. On July
1, 1996, Equitable Life filed a motion for summary judgment dismissing the
complaint in its entirety. The Company's management has been advised that
plaintiffs plan to oppose the motion for summary judgment. In addition,
plaintiffs have sought leave of the court to supplement their complaint to
add claims based upon alleged unfair rate discrimination.
12
On May 22, 1996, a separate action entitled Bachman v. The Equitable Life
Assurance Society of the United States, was filed in Florida state court
making claims similar to those in the previously reported Golomb action.
The Florida action is asserted on behalf of a proposed class of Florida
issued or renewed policyholders, insured after 1983 under Lifetime
Guaranteed Renewable Major Medical Insurance Policies issued by Equitable
Life. The Florida action seeks compensatory and punitive damages and
injunctive relief restricting the methods by which Equitable Life
increases premiums in the future, based on various common law claims. On
June 20, 1996, Equitable Life removed the Florida action to Federal court.
Although the outcome of any litigation cannot be predicted with certainty,
particularly in the early stages of an action, the Company'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.
In connection with the previously reported action entitled Sidney C. Cole
et al. v. The Equitable Life Assurance Society of the United States and
The Equitable of Colorado, Inc., on June 28, 1996, the court issued a
decision and order dismissing with prejudice plaintiff's causes of action
for fraud, constructive fraud, breach of fiduciary duty, negligence, and
unjust enrichment, and dismissing without prejudice plaintiff's cause of
action under the New York State consumer protection statute. The only
remaining causes of action are for breach of contract and negligent
misrepresentation. Plaintiffs have made a motion for reargument with
respect to this order, which will not be heard until September 1996.
On May 21, 1996, an action entitled Elton F. Duncan, III v. The Equitable
Life Assurance Society of the United States, was commenced against
Equitable Life in the Civil District Court for the Parish of Orleans,
State of Louisiana. The action is brought by an individual who purchased a
whole life policy. Plaintiff alleges misrepresentations concerning the
extent to which the policy was a proper replacement policy and the number
of years that the annual premium would need to be paid. Plaintiff purports
to represent a class consisting of all persons who purchased whole life or
universal life insurance policies from Equitable Life from January 1, 1982
to the present. Plaintiff seeks damages, including punitive damages, in an
unspecified amount. On June 21, 1996, Equitable Life removed the action to
the United States District Court for the Eastern District of Louisiana.
Plaintiff has made a motion to remand to the Louisiana Civil District
Court, and Equitable Life will oppose such motion. On July 26, 1996, an
action entitled Michael Bradley v. Equitable Variable Life Insurance
Company, was commenced in New York state court. The action is brought by
the holder of a variable life insurance policy issued by EVLICO. The
plaintiff purports to represent a class consisting of all persons or
entities who purchased one or more life insurance policies issued by
EVLICO from January 1, 1980. The complaint puts at issue various alleged
sales practices and alleges misrepresentations concerning the extent to
which the policy was a proper replacement policy and the number of years
that the annual premium would need to be paid. Plaintiff seeks damages,
including punitive damages, in an unspecified amount and also seeks
injunctive relief prohibiting EVLICO from canceling policies for failure
to make premium payments beyond the alleged stated number of years that
the annual premium would need to be paid. Although the outcome of any
litigation cannot be predicted with certainty, particularly in the early
stages of an action, the Company's management believes that the ultimate
resolution of the litigations discussed in this paragraph should not have
a material adverse effect on the financial position of the Company. Due to
the early stages 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.
In connection with the previously reported arbitration involving Equitable
Casualty Insurance Company ("Casualty"), the arbitration panel issued a
final award in favor of Casualty and GEICO General Insurance Company
("GEICO General") on June 17, 1996. The result of the arbitration is
expected to resolve in favor of Casualty and GEICO General two litigations
that were commenced by Houston General Insurance Company("Houston
13
General") and that have been stayed by the presiding courts pending the
completion of the arbitration. Houston General has informed Casualty,
through counsel, that it is considering whether to consent to entry of a
judgment enforcing the arbitration award or whether to contest the award.
The Company's management believes that Houston General has no valid basis
for contesting the arbitration award 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.
With respect to the previously reported National Gypsum litigation, the
Bankruptcy Court has remanded the Texas state court action to state court.
In addition to the matters previously reported and 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.
14
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following analysis of the consolidated results of operations and financial
condition of the Company should be read in conjunction with the Consolidated
Financial Statements and the related Notes to Consolidated Financial Statements
included elsewhere herein, and with the Management's Discussion and Analysis
section included in the Company's 1995 Report on Form 10-K.
COMBINED RESULTS OF OPERATIONS
The contribution from the Closed Block is reported on one line in the
consolidated statements of earnings. The following table presents the results of
operations of the Closed Block for the six months ended June 30, 1996 and 1995
combined with the results of operations outside of the Closed Block. See Closed
Block results as combined herein on page 17. Management's discussion and
analysis addresses the combined results of operations unless noted otherwise.
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- ------------------
1996 1995 1996 1995
---------- --------- --------- ----------
(In Millions)
Combined Results of Operations
Policy fee income and premiums ........... $ 552.8 $ 546.0 $ 1,091.4 $ 1,077.6
Net investment income .................... 666.7 659.1 1,339.8 1,301.6
Investment (losses) gains, net ........... (21.6) 29.0 (24.6) 12.0
Commissions, fees and other income ....... 278.4 216.3 524.8 419.9
----------- --------- --------- ----------
Total revenues ......................... 1,476.3 1,450.4 2,931.4 2,811.1
Total benefits and other deductions ...... 1,348.9 1,303.8 2,659.3 2,573.3
----------- --------- --------- ----------
Earnings before Federal income taxes,
minority interest and cumulative
effect of accounting change ............ 127.4 146.6 272.1 237.8
Federal income taxes ..................... 24.2 37.4 58.5 56.0
Minority interest in net income of
consolidated subsidiaries .............. 20.0 14.9 38.9 28.5
----------- --------- --------- ----------
Earnings before Cumulative Effect
of Accounting Change ................... $ 83.2 $ 94.3 $ 174.7 $ 153.3
========== ========= ========= ==========
Continuing Operations
Compared to the comparable prior year period, the higher pre-tax results of
operations for the six months ended June 30, 1996 reflected increased earnings
in the Investment Services segment partially offset by higher losses in the
Group Pension segment and higher Corporate interest expense. The increase in
Federal income taxes was attributed to higher pre-tax results of operations. The
increase in minority interest in net income of consolidated subsidiaries was
attributable to increased earnings at Alliance.
The $120.3 million increase in revenues for the six months ended June 30, 1996
compared to the corresponding period in 1995 was attributed primarily to a
$104.9 million increase in commissions, fees and other income principally due to
increased business activity within the Investment Services segment and a $13.8
million increase in policy fee income and premiums.
15
Net investment income increased $38.2 million for the six months ended June 30,
1996 principally due to an increase of $39.9 million for the Individual
Insurance and Annuities segment. The Individual Insurance and Annuities increase
was due to higher overall yields on a larger investment asset base.
There were investment losses of $24.6 million for the six months ended June 30,
1996 as compared to gains of $12.0 million for the same period in 1995. The gain
of $20.6 million recognized as a result of the issuance of Alliance Units to
third parties upon completion of the Cursitor acquisition was more than offset
by investment losses of $45.2 million on General Account Investment Assets as
compared to gains of $11.9 million in the first six months of 1995. Losses on
mortgage loans increased $43.8 million to $51.3 million, while losses on equity
real estate totaled $31.4 million, $12.2 million higher than in the first six
months of 1995. There were $2.4 million of gains on the General Account's other
equity investments as compared to $5.6 million during the first six months of
1995. Partially offsetting these decreases were gains of $35.1 million on fixed
maturities, an increase of $2.1 million over the comparable 1995 period.
On January 1, 1996, the Company implemented SFAS No. 121. As a result, existing
valuation allowances of $152.4 million on equity real estate were released and
impairment losses of $149.6 million were recognized on real estate held and
used. Due to the adoption of this statement, equity real estate classified as
available for sale is no longer depreciated. See Note 2 of Notes to Consolidated
Financial Statements.
For the first six months of 1996, total benefits and other deductions increased
by $86.0 million from the comparable period in 1995, reflecting increases in
other operating costs and expenses of $62.7 million and a $26.2 million increase
in interest credited to policyholders partially offset by a $2.9 million
decrease in policyholders' benefits. The increase in other operating costs and
expenses was attributable to increased operating costs of $53.9 million in the
Investment Services segment associated with increased segment activities and a
$20.2 million increase in Corporate interest expense, offset by a $20.1 million
decrease in other operating costs and expenses in the Individual Insurance and
Annuities segment. Higher Corporate interest expense resulted from the interest
on the Surplus Notes issued by Equitable Life in the fourth quarter of 1995.
There was a $19.9 million increase in interest credited to policyholders for the
Individual Insurance and Annuities segment, primarily due to moderately higher
crediting rates applied to a larger in force book of business. The Group Pension
segment's $6.3 million increase in interest credited to policyholders was due to
the impact of pass-throughs of lower investment losses to participating pension
contractholders offset by smaller policyholders' account balances.
Discontinued GIC Segment
In the first six months of 1996, $24.6 million of pre-tax losses were incurred
and charged to the GIC Segment's allowance for future losses as compared to
pre-tax losses of $46.2 million in the first six months of 1995. Investment
results declined by $16.0 million in the first six months of 1996 as compared to
the year-earlier period. Net investment income declined by $17.3 million,
principally due to lower income on mortgage loans and fixed maturities partially
offset by higher income on equity real estate. Investment losses decreased $1.3
million to $17.6 million in the first six months of 1996. There were $0.7
million of gains on fixed maturities as compared to $4.8 million in losses in
the first six months of 1995 and $3.7 million and $1.0 million lower losses on
mortgage loans and equity real estate, respectively, offset by $7.0 million of
losses on other equity investments in 1996 versus $1.9 million of gains during
the year earlier period. Benefits and other deductions declined by $38.0 million
principally due to the decrease of $22.3 million in interest credited on a
reduced GIC contract base and $5.8 million lower interest payments on loans from
continuing operations due to repayments.
16
COMBINED RESULTS OF CONTINUING OPERATIONS BY SEGMENT
Individual Insurance and Annuities
The Closed Block is part of the Individual Insurance and Annuities segment. The
following table combines the Closed Block amounts with the reported results of
operations outside of the Closed Block on a line-by-line basis.
Individual Insurance and Annuities
(In Millions)
Six Months Ended June 30,
---------------------------------------------
1996
----------------------------------
As Closed 1995
Reported Block Combined Combined
------------ -------- ----------- ----------
Policy fees, premiums and other income ... $ 749.2 $ 367.8 $ 1,117.0 $ 1,091.4
Net investment income .................... 865.4 268.2 1,133.6 1,093.7
Investment (losses) gains, net ........... (9.5) (8.6) (18.1) 43.8
Contribution from the Closed Block ....... 50.1 (50.1) -- --
---------- -------- ---------- ----------
Total revenues ......................... 1,655.2 577.3 2,232.5 2,228.9
Total benefits and other deductions ...... 1,501.7 577.3 2,079.0 2,077.3
---------- -------- ---------- ----------
Earnings before Federal Income Taxes,
Minority Interest and Cumulative
Effect of Accounting Change ............ $ 153.5 $ -- $ 153.5 $ 151.6
========== ======== ========== ==========
The earnings from operations in the Individual Insurance and Annuities segment
for the six months ended June 30, 1996 reflected an increase of $1.9 million
from the year-earlier period. Higher policy fees on variable and
interest-sensitive life and individual annuities contracts, favorable mortality
experience on term life insurance and lower deferred acquisition cost
amortization were offset by investment losses in 1996 versus gains in 1995,
higher employee benefit costs and higher claims experience on assumed
reinsurance. The effect of moderately increased crediting rates on
interest-sensitive life and annuity contracts were more than offset by the
increase in investment income.
Total revenues increased by $3.6 million primarily due to a $48.4 million
increase in policy fees and an $8.7 million increase in commissions, fees and
other income, offset by a $31.5 million decline in premiums and by investment
results which declined by $22.0 million. The decrease in premiums principally
was due to lower traditional life and individual health premiums. The decline in
investment results resulted from investment losses in 1996 as compared to gains
largely from the sale of fixed maturities in 1995, offset by higher investment
income.
Total benefits and other deductions for the six months ended June 30, 1996 rose
$1.7 million from the comparable 1995 period. Other operating expenses increased
$23.4 million principally due to higher employee benefit costs related to lower
interest rate assumptions used in the calculation of retirement program costs.
Interest credited on policyholders' account balances increased $19.9 million due
to the increased crediting rates noted above. Benefits paid increased by $1.9
million. Higher mortality experience on variable and interest-sensitive life
policies and investment losses contributed to the $44.8 million lower deferred
policy acquisition cost ("DAC") amortization, partially offset by lower DAC
capitalization of $1.3 million.
Losses on the disability income business were $21.7 million for the six months
ended June 30, 1996, a $2.2 million increase from the prior year's comparable
period. Incurred benefits (benefit payments plus additions to claims reserves)
for disability income products increased $12.9 million in the first six months
of 1996 from the comparable 1995 levels due to lower terminations of existing
claims.
17
Premiums and Deposits - The following table reflects premiums and deposits,
including universal life and investment-type contract deposits, for the
segment's major product lines.
Premiums and Deposits
(In Millions)
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- --------------------
1996 1995 1996 1995
---------- ---------- ---------- ----------
(In Millions)
Product Line:
Individual annuities
First year ........................ $ 562.2 $ 469.5 $ 1,071.9 $ 945.9
Renewal ........................... 331.7 295.4 661.8 580.1
---------- ---------- ---------- ----------
893.9 764.9 1,733.7 1,526.0
Variable and interest-sensitive life
First year recurring .............. 45.2 46.5 90.1 95.1
First year optional ............... 44.3 40.6 84.5 80.2
Renewal ........................... 264.8 240.4 602.9 535.6
---------- ---------- ---------- ----------
354.3 327.5 777.5 710.9
Traditional life
First year recurring .............. 4.8 6.0 9.7 12.1
First year optional ............... 1.2 1.4 2.5 3.0
Renewal ........................... 210.7 214.9 423.5 431.9
---------- ---------- ---------- ----------
216.7 222.3 435.7 447.0
Other(1)
First year ........................ 11.0 19.8 18.1 48.8
Renewal ........................... 98.3 110.4 187.9 203.3
---------- ---------- ---------- ----------
109.3 130.2 206.0 252.1
Total First Year .................... 668.7 583.8 1,276.8 1,185.1
Total Renewal ....................... 905.5 861.1 1,876.1 1,750.9
---------- ---------- ---------- ----------
Grand Total ......................... $ 1,574.2 $ 1,444.9 $ 3,152.9 $ 2,936.0
========== ========== ========== ==========
<FN>
(1) Includes health insurance and reinsurance assumed.
</FN>
First year premiums and deposits for the six months ended June 30, 1996
increased from prior year levels by $91.7 million primarily due to higher sales
of individual annuities offset by lower reinsurance assumed on individual
annuity contracts. Renewal premiums and deposits increased by $125.2 million
during the six months ended June 30, 1996 over the prior year period as
increases in the larger block of variable and interest-sensitive life and
individual annuities policies were partially offset by decreases in traditional
life policies and other product lines. Traditional life premiums and deposits
for the first six months of 1996 decreased from the prior year's comparable
period by $11.3 million due to the marketing focus on variable and
interest-sensitive products and the decline in the traditional life book of
business. The 13.3% increase in first year individual annuities premiums and
deposits in 1996 over the prior year period included $93.3 million from a
recently introduced line of retirement annuity products and reflected an
approximately $113.2 million decrease in premiums related to an exchange program
that offers contractholders of existing SPDA contracts with no remaining
surrender charges an opportunity to exchange their contract for a new flexible
premium variable contract which retains assets in the Company and establishes
new surrender charge scales. Management believes the ongoing strategic
positioning of the Company's insurance operations continues to impact first year
life premiums and deposits. Particular emphasis has been devoted to the
implementation of a new needs based selling approach and the establishment of
consultative financial services as the cornerstone of the sales process. Changes
in agent recruitment and training practices have resulted in retention and
productivity improvements, which management expects will ultimately have a
positive effect upon life premium results.
18
Surrenders and Withdrawals - The following table summarizes surrenders and
withdrawals, including universal life and investment-type contract withdrawals,
for the segment's major product lines.
Surrenders and Withdrawals
(In Millions)
Three Months Ended Six Months Ended
June 30, June 30,
------------------- --------------------
1996 1995 1996 1995
--------- -------- --------- ----------
(In Millions)
Product Line:
Individual annuities ................... $ 588.2 $ 575.8 $ 1,198.7 $ 1,217.3
Variable and interest-sensitive life ... 116.7 109.5 229.0 210.1
Traditional life ....................... 92.9 85.6 186.5 174.7
-------- -------- ---------- ----------
Total .................................. $ 797.8 $ 770.9 $ 1,614.2 $ 1,602.1
======== ======== ========== ==========
Policy and contract surrenders and withdrawals increased $12.1 million during
the six months ended June 30, 1996 compared to the same period in 1995.
Surrenders of variable and interest-sensitive products increased by $18.9
million due to the increased size of the book of business. The $18.6 million
decrease in individual annuities surrenders was due to decreased surrenders of
Equi-Vest contracts and decreases in the volume of SPDA surrenders due to the
diminished effect of the aforementioned exchange program which was designed to
retain assets in the Company offset by $88.0 million paid in January 1996 for
two small pension clients who terminated their contracts. Management expects the
moderation in SPDA exchange program volume to continue.
Investment Services
The following table summarizes the results of operations for the Investment
Services segment.
Investment Services
(In Millions)
Three Months Ended Six Months Ended
June 30, June 30,
------------------- -----------------
1996 1995 1996 1995
--------- --------- ------- ---------
(In Millions)
Third party commissions and fees ........... $ 215.2 $ 173.3 $ 412.1 $ 337.1
Affiliate fees ............................. 32.0 34.2 62.1 67.5
Other income(1) ............................ 33.7 18.0 77.1 32.8
-------- -------- -------- --------
Total revenues ............................. 280.9 225.5 551.3 437.4
Total costs and expenses ................... 204.5 170.5 393.3 339.4
-------- -------- -------- --------
Earnings before Federal Income Taxes,
Minority Interest and Cumulative
Effect of Accounting Change .............. $ 76.4 $ 55.0 $ 158.0 $ 98.0
======== ======== ======== ========
<FN>
(1) Includes investment results and other items.
</FN>
For the six months ended June 30, 1996, pre-tax earnings for the Investment
Services segment increased by $60.0 million from the year-earlier period
primarily due to higher earnings for DLJ and Alliance. DLJ's earnings were
higher in 1996 largely due to increased levels of underwriting, strong merger
and acquisition activity, higher dealer and trading gains and the growth in
trading volume on most major exchanges. Total segment revenues were up $113.9
million principally due to higher equity in net earnings of DLJ. Other income
for the six months ended June 30, 1996 included a gross gain of $20.6 million on
the issuance of Alliance Units during the first quarter of the year in
connection with the Cursitor transaction.
19
Total costs and expenses increased by $53.9 million for the six-month period of
1996 as compared to the comparable period in 1995 principally reflecting
increases in compensation and benefits and other expenses at Alliance due to
increased activity.
The following table summarizes results of operations by business unit.
Investment Services
Results of Operations by Business Unit
(In Millions)
Three Months Ended Six Months Ended
June 30, June 30,
------------------- ------------------
1996 1995 1996 1995
--------- --------- ------- ---------
(In Millions)
Earnings before Federal income taxes,
minority interest and cumulative effect of
accounting change:
DLJ(1) ..................................... $ 145.9 $ 63.7 $ 244.7 $ 120.6
Alliance ................................... 48.0 38.0 94.1 72.5
Equitable Real Estate ...................... 9.0 11.2 16.5 16.9
Consolidation/elimination(2)(3)(4) ......... (126.5) (57.9) (197.3) (112.0)
-------- ------- -------- --------
Earnings before Federal Income Taxes,
Minority Interest and Cumulative
Effect of Accounting Change(5) ............. $ 76.4 $ 55.0 $ 158.0 $ 98.0
======== ======= ======== ========
<FN>
(1) Excludes amortization expense of $1.0 million, $1.4 million, $1.9 million
and $2.8 million for the three months and the six months ended June 30, 1996
and 1995, respectively, on goodwill and intangible assets related to
Equitable Life's acquisition of DLJ in 1985, which are included in
consolidation/elimination.
(2) Includes interest expense of $2.9 million, $4.9 million, $6.1 million and
$9.7 million related to intercompany debt issued by intermediate holding
companies payable to Equitable Life for the three months and the six months
ended June 30, 1996 and 1995, respectively.
(3) Includes the Holding Company and third party interests in DLJ's net
earnings, as well as taxes on the Company's equity interest in DLJ's pre-tax
earnings of $115.9 million, $49.8 million, $195.3 million and $94.6 million
for the three months and six months ended June 30, 1996 and 1995,
respectively.
(4) Includes a gain of $16.9 million (net of $3.7 million related state income
tax) for the six months ended June 30, 1996 on issuance of Alliance Units to
third parties upon the completion of the Cursitor transaction during the
first quarter of the year.
(5) Pre-tax minority interest in Alliance was $20.5 million, $15.3 million,
$39.8 million and $29.0 million for the three months and the six months
ended June 30, 1996 and 1995, respectively.
</FN>
DLJ - DLJ's earnings from operations for the six months ended June 30, 1996 were
$244.7 million, up $124.1 million from the comparable prior year period.
Revenues increased $493.7 million to $1.77 billion primarily due to increased
underwriting revenues of $219.8 million, higher dealer and trading gains of
$120.1 million, higher commissions of $74.1 million, higher gains on the
corporate development portfolio of $12.1 million and higher fees of $11.2
million. DLJ's expenses were $1.52 billion for the six months ended June 30,
1996, up $369.6 million from the comparable prior year period primarily due to a
$210.9 million increase in compensation and commissions, higher interest expense
of $43.6 million and $18.9 million higher brokerage and exchange fees.
20
DLJ's derivative activities are not as extensive as many of its competitors.
Instead, DLJ has focused its derivative activities on writing over the counter
("OTC") options to accommodate its customers' needs, trading in forward
contracts in U.S. government and agency issued or guaranteed securities and in
futures contracts on equity based indices, interest rate instruments and
currencies, and issuing structured notes. DLJ's involvement in swap contracts is
not significant. As a result, DLJ's involvement in derivatives products is
related primarily to revenue generation through the provision of products to its
clients as opposed to hedges against DLJ's own positions.
Options contracts are typically written for a duration of less than thirteen
months. Revenues from these activities (net of related interest expense) were
approximately $31.9 million and $44.2 million for the six months ended June 30,
1996 and 1995, respectively. Option writing revenues are primarily from the
amortization of option premiums.
The decrease in revenues primarily resulted from lower levels of activity, both
in size and number of transactions, by DLJ's institutional customers. These
reductions were caused by a number of factors, including market conditions and
competition from other financial institutions.
The notional value of written options contracts outstanding was approximately
$3.5 billion and $3.9 billion at June 30, 1996 and 1995, respectively. The
decrease in the notional value of options was primarily due to decreases in
customer activity related to U.S. government obligations. Such written options
contracts are substantially covered by various financial instruments that DLJ
had purchased or sold as principal.
As part of DLJ's trading activities, including trading activities in the related
cash market instruments, DLJ enters into forward and futures contracts primarily
involving securities, foreign currencies, indices and forward rate agreements.
Such forward and futures contracts are entered into as part of DLJ's covering
transactions and generally are not used for speculative purposes.
Net trading (losses) gains on forward contracts were $(39.1) million and $120.5
million and net trading gains (losses) on futures contracts were $8.5 million
and $(51.5) million for the six months ended June 30, 1996 and 1995,
respectively.
The notional contract and market values of the forward and futures contracts at
June 30, 1996 and 1995 were as follows:
June 30, 1996 June 30, 1995
-------------------- -------------------
Purchases Sales Purchases Sales
--------- -------- --------- --------
(In Millions)
Forward Contracts
(Notional Contract Value) ........ $17,102 $18,446 $16,516 $20,201
======= ======= ======= =======
Futures Contracts
(Market Value) ................... $ 803 $ 590 $ 309 $ 847
======= ======= ======= =======
Structured notes are customized derivative instruments in which the amount of
interest or principal paid on a debt obligation is linked to movements in the
value of cash market financial instruments. At June 30, 1996 and 1995, DLJ had
issued structured notes with principal amounts of $143.1 million and $113.0
million outstanding, respectively. DLJ expects the volume of this activity to
increase in the future. DLJ covers its obligations on structured notes primarily
by purchasing and selling the securities to which the value of its structured
notes are linked.
Alliance - Alliance's earnings from operations for the six months ended June 30,
1996 were $94.1 million, an increase of $21.6 million from the prior year's
comparable period. Revenues totaled $377.7 million for the first six months of
1996, an increase of $78.8 million from the comparable period in 1995, due to
increased investment advisory and service fees. Alliance's costs and expenses
increased $57.2 million for the six months ended June 30, 1996 primarily due to
increases in employee compensation and benefits and promotional expenditures.
21
In April 1996, Alliance acquired the U.S. investment management business of
National Mutual Funds Management (North America) ("NMFM") for approximately $4.6
million in cash. NMFM is an indirect wholly owned subsidiary of National Mutual
Holdings Limited ("NMH"), in which AXA owns a 51% equity interest. NMFM manages
investments in North American securities of approximately $1.2 billion for NMH
affiliates and third parties.
Equitable Real Estate - Equitable Real Estate's earnings from operations were
$16.5 million for the first six months of 1996, down $0.4 million from the
preceding year's comparable period. Revenues declined $8.2 million to $102.0
million for the first half of 1996 when compared to the 1995 comparable period.
Operating expenses similarly decreased by $7.8 million totaling $85.5 million
for the six months ended June 30, 1996.
Fees From Assets Under Management - As the following table illustrates, third
party clients continued to represent an important source of revenues and
earnings.
Fees and Assets Under Management
(In Millions)
At or For the
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- ----------------------
1996 1995 1996 1995
----------- ----------- --------- ----------
Fees:
Equitable Life and the Holding
Company Group ................. $ 28.9 $ 31.1 $ 56.1 $ 61.5
Third Party ..................... 184.9 145.1 351.4 281.2
--------- ---------- --------- ----------
Total ............................. $ 213.8 $ 176.2 $ 407.5 $ 342.7
========= ========== ========= ==========
Assets Under Management:
Equitable Life and the Holding
Company Group ................. $ 50,058 $ 49,163
Third Party(1) .................. 167,580 138,547
--------- ----------
Total ............................. $ 217,638 $ 187,710
========= ===========
<FN>
(1) Included $1.9 billion of performing mortgages at June 30, 1995 under a
special stand-by services contract with the RTC which expired in 1995.
Stand-by fees were received on the entire portfolio under the contract;
servicing fees were earned only on those mortgages that were delinquent.
</FN>
Fees from assets under management increased for the six months ended June 30,
1996 from the prior year's comparable period principally as a result of growth
in assets under management for third parties. Alliance's third party assets
under management increased by $33.56 billion primarily due to the completion of
the Cursitor acquisition in the first quarter of 1996 and market appreciation.
Third party assets at Equitable Real Estate decreased by $7.61 billion
principally due to the sale in October 1995 by EQ Services of mortgage servicing
contracts.
22
Group Pension
The following table summarizes the results of operations for the Group Pension
segment.
Group Pension
(In Millions)
Three Months Ended Six Months Ended
June 30, June 30,
------------------- ------------------
1996 1995 1996 1995
-------- -------- --------- ---------
(In Millions)
Policy fees, premiums and other income ... $ 11.9 $ 13.8 $ 23.9 $ 27.4
Net investment income .................... 62.4 66.8 126.8 137.1
Investment losses, net ................... (8.4) (5.7) (22.1) (32.2)
------- ------- -------- --------
Total revenues ........................... 65.9 74.9 128.6 132.3
Total benefits and other deductions ...... 74.5 75.0 148.9 144.1
------- ------- -------- --------
(Loss) Before Federal Income Taxes,
Minority Interest and Cumulative
Effect of Accounting Change ............ $ (8.6) $ (.1) $ (20.3) $ (11.8)
======= ======= ======== ========
The results for the Group Pension segment reflected an $8.5 million higher loss
for the six months ended June 30, 1996 compared to the same period a year ago.
Investment losses in 1996 were $22.1 million, a $10.1 million improvement from
comparable losses for the first six months of 1995. After reflecting the effect
of pass-throughs to participating pension contractholders, however, investment
losses net of pass-throughs increased by $3.9 million. Due to the cumulative
amount of investment losses realized on assets supporting participating pension
contractholder account balances, future investment losses are not expected to be
reduced by further pass-throughs. The investment losses principally resulted
from additions to asset valuation allowances on mortgage loans and writedowns of
equity real estate. Additionally, reserves were strengthened by $5.5 million in
1996 on certain pension par contracts. Investment income for the six months
ended June 30, 1996 decreased by $10.3 million from the comparable period of the
prior year primarily due to a smaller asset base. Policy fees, premiums and
other income declined by $3.5 million in the first six months of 1996 when
compared to the same 1995 period due to the smaller book of business.
23
GENERAL ACCOUNT INVESTMENT PORTFOLIO
The following table reconciles the consolidated balance sheet asset amounts to
the amounts of General Account Investment Assets.
General Account Investment Assets Carrying Values
June 30, 1996
(In Millions)
General
Balance Account
Sheet Closed Investment
Balance Sheet Captions: Total Block Other(1) Assets
- ------------------------------------------------ ------------- ----------- ----------- ------------
Fixed maturities:
Available for sale............................ $ 16,463.8 $ 3,640.3 $ (204.7) $ 20,308.8
Mortgage loans on real estate................... 3,425.9 1,402.1 (.1) 4,828.1
Equity real estate.............................. 3,730.0 189.7 (21.0) 3,940.7
Policy loans.................................... 2,107.0 1,784.1 - 3,891.1
Investment in and loans to affiliates........... 682.4 - 682.4 -
Other equity investments........................ 593.7 111.9 10.0 695.6
Other invested assets........................... 330.8 96.2 397.6 29.4
------------- ----------- ----------- ------------
Total investments............................. 27,333.6 7,224.3 864.2 33,693.7
Cash and cash equivalents....................... 642.6 4.8 147.8 499.6
------------- ----------- ----------- ------------
Total........................................... $ 27,976.2 $ 7,229.1 $ 1,012.0 $ 34,193.3
============= =========== =========== ============
<FN>
(1) Assets listed in the "Other" category principally consist of assets held in
portfolios other than the General Account which are not managed as part of
General Account Investment Assets and certain reclassifications and
intercompany adjustments. The "Other" category is deducted in arriving at
the General Account Investment Assets.
</FN>
The General Account Investment Assets presentation set forth in the following
pages includes the investments of the Closed Block on a line-by-line basis.
Management believes it is appropriate to discuss the information on a combined
basis in view of the similar asset quality characteristics of major asset
categories in the portfolios.
Writedowns on fixed maturities were $22.5 million and $25.6 million for the six
months ended June 30, 1996 and 1995, respectively. The following table shows
asset valuation allowances and additions to and deductions from such allowances
for mortgages and equity real estate for the six months ended June 30, 1996 and
1995.
24
General Account Investment Assets
Valuation Allowances
(In Millions)
Equity Real
Mortgages Estate Total
---------- ----------- ---------
June 30, 1996
Assets Outside of the Closed Block:
Beginning balances ......................... $ 65.5 $ 259.8 $ 325.3
SFAS No. 121 release(1) .................... -- (152.4) (152.4)
Additions .................................. 36.9 37.0 73.9
Deductions(2) .............................. (0.3) (82.4) (82.7)
-------- -------- --------
Ending Balances ............................ $ 102.1 $ 62.0 $ 164.1
======== ======== ========
Closed Block:
Beginning balances ......................... $ 18.4 $ 4.3 $ 22.7
Additions .................................. 13.2 0.8 14.0
Deductions(2) .............................. (0.2) (2.4) (2.6)
-------- -------- --------
Ending Balances ............................ $ 31.4 $ 2.7 $ 34.1
======== ======== ========
Total:
Beginning balances ......................... $ 83.9 $ 264.1 $ 348.0
SFAS No. 121 release(1) .................... -- (152.4) (152.4)
Additions .................................. 50.1 37.8 87.9
Deductions(2) .............................. (0.5) (84.8) (85.3)
-------- -------- --------
Ending Balances ............................ $ 133.5 $ 64.7 $ 198.2
======== ======== ========
June 30, 1995
Total:
Beginning balances ......................... $ 110.4 $ 223.3 $ 333.7
Additions .................................. 16.1 32.3 48.4
Deductions(2) .............................. (32.5) (12.8) (45.3)
-------- -------- --------
Ending Balances ............................ $ 94.0 $ 242.8 $ 336.8
======== ======== ========
<FN>
(1) As a result of the adoption of SFAS No. 121, $152.4 million of allowances on
assets held for investment were released and impairment losses of $149.6
million were recognized on real estate held and used.
(2) Primarily reflected releases of allowances due to asset dispositions and
writedowns.
</FN>
25
General Account Investment Assets by Category
The following table shows the amortized cost, valuation allowances and the net
amortized cost of the major categories of General Account Investment Assets at
June 30, 1996 and the net amortized cost at December 31, 1995.
General Account Investment Assets
(Dollars In Millions)
June 30, 1996 December 31, 1995
------------------------------------------------------ --------------------------
% of % of
Net Total Net Net Total Net
Amortized Valuation Amortized Amortized Amortized Amortized
Cost Allowances Cost Cost Cost Cost
------------ ------------ ------------- ------------- ------------- -----------
Fixed maturities(1) ...... $ 20,304.9 $ -- $ 20,304.9 59.4% $ 19,149.9 56.7%
Mortgages ................ 4,961.6 133.5 4,828.1 14.1 5,007.1 14.8
Equity real estate ....... 4,005.4 64.7 3,940.7 11.5 4,130.3 12.2
Other equity investments . 695.6 -- 695.6 2.0 764.1 2.3
Policy loans ............. 3,891.1 -- 3,891.1 11.4 3,773.6 11.2
Cash and short-term
investments(2) ......... 529.0 -- 529.0 1.6 952.1 2.8
----------- ----------- ----------- ------ ----------- ------
Total .................... $ 34,387.6 $ 198.2 $ 34,189.4 100.0% $ 33,777.1 100.0%
=========== =========== ============ ====== =========== ======
<FN>
(1) Excludes unrealized gains of $3.9 million and $857.9 million in fixed
maturities classified as available for sale at June 30, 1996 and December
31, 1995, respectively.
(2) Comprised of "Cash and cash equivalents" and short-term investments included
within the "Other invested assets" caption on the consolidated balance
sheet.
</FN>
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.
26
Investment Results of General Account Investment Assets
Investment Results by Asset Category(1)
(Dollars In Millions)
Three Months Ended June 30, Six Months Ended June 30,
-------------------------------------------------- --------------------------------------------------
1996 1995 1996 1995
------------------------ ------------------------ ------------------------ ------------------------
(1) (1) (1) (1)
Yield Amount Yield Amount Yield Amount Yield Amount
---------- ------------- ---------- ------------- --------- -------------- ---------- -------------
Fixed Maturities:
Income.............. 7.92% $ 394.8 8.17% $ 362.9 7.91% $ 778.2 8.10% $ 707.4
Investment
Gains/(Losses).... 0.19% 9.6 0.95% 42.1 0.36% 35.1 0.38% 33.0
---------- ------------- ---------- ------------- -------- --------------- ---------- -------------
Total............... 8.11% $ 404.4 9.12% $ 405.0 8.27% $ 813.3 8.48% $ 740.4
Ending Assets....... $ 20,304.9 $ 18,146.9 $ 20,304.9 $ 18,146.9
Mortgages:
Income.............. 8.99% $ 109.7 8.66% $ 113.3 8.87% $ 218.3 8.61% $ 230.3
Investment
Gains/(Losses).... (2.02)% (24.6) 0.09% 1.2 (2.09)% (51.3) (0.28)% (7.5)
---------- ------------- ---------- ------------- --------- -------------- ----------- -------------
Total............... 6.97% $ 85.1 8.75% $ 114.5 6.78% $ 167.0 8.33% $ 222.8
Ending Assets....... $ 4,828.1 $ 5,165.8 $ 4,828.1 $ 5,165.8
Equity Real
Estate (2):
Income.............. 2.46% $ 19.1 2.77% $ 25.7 2.87% $ 45.0 2.87% $ 53.3
Investment
Gains/(Losses).... (1.63)% (12.7) (1.80)% (16.7) (2.00)% (31.4) (1.03)% (19.2)
---------- ------------- ---------- ------------- --------- -------------- ----------- -------------
Total............... 0.83% $ 6.4 0.97% $ 9.0 0.87% $ 13.6 1.84% $ 34.1
Ending Assets....... $ 3,100.1 $ 3,692.2 $ 3,100.1 $ 3,692.2
Other Equity
Investments:
Income.............. 16.17% $ 28.0 11.11% $ 22.3 13.68% $ 49.0 11.45% $ 46.8
Investment
Gains/(Losses).... 3.69% 6.4 1.14% 2.3 0.67% 2.4 1.37% 5.6
---------- ------------- ---------- ------------- -------- -------------- ------------ -------------
Total............... 19.86% $ 34.4 12.25% $ 24.6 14.35% $ 51.4 12.82% $ 52.4
Ending Assets....... $ 695.6 $ 794.1 $ 695.6 $ 794.1
Policy Loans:
Income.............. 6.95% $ 67.3 6.96% $ 64.1 6.90% $ 132.4 6.88% $ 125.4
Ending Assets....... $ 3,891.1 $ 3,695.1 $ 3,891.1 $ 3,695.1
Cash and Short-term
Investments:
Income.............. 5.00% $ 8.3 8.93% $ 18.4 8.13% $ 30.9 8.37% $ 34.5
Ending Assets....... $ 529.0 $ 841.7 $ 529.0 $ 841.7
Total:
Income.............. 7.57% $ 627.2 7.58% $ 606.7 7.59% $ 1,253.8 7.54% $ 1,197.7
Investment
Gains/(Losses).... (0.26)% (21.3) 0.36% 28.9 (0.28)% (45.2) 0.07% 11.9
---------- ------------- ---------- ------------- --------- ------------- ------------ -------------
Total(3)............ 7.31% $ 605.9 7.94% $ 635.6 7.31% $ 1,208.6 7.61% $ 1,209.6
Ending Assets....... $ 33,348.8 $ 32,335.8 $ 33,348.8 $ 32,335.8
<FN>
(1) Yields have been annualized and calculated based on the quarterly average
asset carrying values excluding unrealized gains (losses) in fixed
maturities. Annualized yields are not necessarily indicative of a full
year's results.
27
(2) Equity real estate carrying values are shown net of third party debt and
minority interest in real estate of $840.6 million and $921.9 million as of
June 30, 1996 and 1995, respectively. Equity real estate income is shown net
of operating expenses, depreciation, third party interest expense and
minority interest. Third party interest expense and minority interest
totaled $14.0 million, $16.0 million, $28.3 million and $29.4 million for
the three months and the six months ended June 30, 1996 and 1995,
respectively.
(3) Total yields are shown before deducting investment fees paid to the
Investment Subsidiaries (which include asset management, acquisition,
disposition, accounting and legal fees). If such fees had been deducted,
total yields would have been 7.05%, 7.64%, 7.04% and 7.32% for the three
months and the six months ended June 30, 1996 and 1995, respectively.
</FN>
For the six months ended June 30, 1996, General Account investment results were
down $1.0 million from the year-earlier period as lower income and higher losses
on both mortgages and equity real estate were offset principally by higher
investment results on fixed maturities. On an annualized basis, total investment
yield decreased to 7.31% from 7.61%. Investment income increased by $56.1
million or 4.7%, resulting in an increase in the annualized income yield to
7.59% from 7.54%. Excluding SFAS No. 121 related permanent impairment writedowns
of $149.6 million and releases of valuation allowances totaling $152.4 million
relating to equity real estate, additions to asset valuation allowances and
writedowns of fixed maturities were $110.4 million in the six months ended June
30, 1996 compared to $74.0 million in the six months ended June 30, 1995.
Total investment results for fixed maturities increased $72.9 million or 9.8%
for the six months ended June 30, 1996 compared to the year-earlier period.
Investment income increased by $70.8 million reflecting a higher asset base,
primarily from reinvesting nearly all available funds into fixed maturities.
Investment gains were $35.1 million for the six months ended June 30, 1996
compared to the year-earlier $33.0 million. Writedowns on fixed maturities were
$22.5 million in the first six months of 1996 as compared to $25.6 million in
the comparable period of 1995. Total investment results on mortgages declined by
$55.8 million or 25.0% in the six months ended June 30, 1996 compared to the
same period a year ago largely due to lower investment income attributable to a
lower asset base and higher additions to asset valuation allowances. Equity real
estate investment results were $20.5 million lower during the six months ended
June 30, 1996 than the year-earlier period reflecting lower investment income
and higher additions to asset valuation allowances.
Fixed Maturities. Fixed maturities consist of publicly traded debt securities,
privately placed debt securities and small amounts of redeemable preferred
stock, which represented 71.2%, 28.1% and 0.7%, respectively, of the amortized
cost of this asset category at June 30, 1996.
Fixed Maturities By Credit Quality
(Dollars In Millions)
June 30, 1996 December 31, 1995
Rating Agency ----------------------------------- --------------------------------------
NAIC Equivalent Amortized % of Estimated Amortized % of Estimated
Rating Designation Cost Total Fair Value Cost Total Fair Value
- ------ ---------------------- ------------ ------ ------------ -------------- ------ ------------
1-2 Aaa/Aa/A and Baa...... $ 17,602.9(1) 86.7% $ 17,600.5 $ 16,536.0(1) 86.4% $ 17,423.9
3-6 Ba and lower.......... 2,557.2(2) 12.6 2,569.2 2,483.4(2) 13.0 2,448.3
----------- ----- ------------- ----------- ------ -----------
Subtotal...................... 20,160.1 99.3 20,169.7 19,019.4 99.4 19,872.2
Redeemable preferred stock
and other................... 144.8 0.7 139.1 130.5 0.6 126.5
---------- ------ ----------- ---------- ------ ------------
Total......................... $ 20,304.9 100.0% $ 20,308.8 $ 19,149.9 100.0% $ 19,998.7
========== ====== =========== ========== ====== ============
<FN>
(1) Includes Class B Notes with an amortized cost of $100.0 million.
(2) Includes Class B Notes with an amortized cost of $100.0 million.
</FN>
28
At June 30, 1996, the Company held collateralized mortgage obligations ("CMOs")
with an amortized cost of $2.43 billion, including $2.33 billion in publicly
traded CMOs. About 66.2% of the public CMO holdings were collateralized by GNMA,
FNMA and FHLMC securities. Approximately 44.1% of the public CMO holdings were
in planned amortization class ("PAC") bonds. At June 30, 1996, interest only
("IO") strips amounted to $6.4 million at amortized cost. There were no holdings
of principal only ("PO") strips at that date. In addition, at June 30, 1996, the
Company held $2.37 billion of mortgage pass-through securities (GNMA, FNMA or
FHLMC securities) and also held $481.4 million of Aa or higher rated public
asset backed securities, primarily backed by home equity and credit card
receivables.
Fixed Maturities
Problems, Potential Problems and Restructureds
Amortized Cost
(In Millions)
June 30, December 31,
1996 1995
------------ -------------
FIXED MATURITIES ............................... $ 20,304.9 $ 19,149.9
Problem fixed maturities ....................... 60.6 70.8
Potential problem fixed maturities ............. 6.3 43.4
Restructured fixed maturities(1) ............... 6.3 7.6
<FN>
(1) Excludes restructured fixed maturities of $3.5 million and $3.5 million that
are shown as problems at June 30, 1996 and December 31, 1995, respectively,
and excludes $0.0 million and $9.2 million of restructured fixed maturities
that are shown as potential problems at June 30, 1996 and December 31, 1995,
respectively.
</FN>
The amount of potential problem fixed maturities decreased $37.1 million from
December 31, 1995 to June 30, 1996 primarily due to asset sales.
Mortgages. Mortgages consist of commercial, agricultural and residential loans.
At June 30, 1996, commercial mortgages totaled $3.20 billion (64.4% of the
amortized cost of the category), agricultural loans were $1.72 billion (34.6%)
and residential loans were $46.5 million (1.0%).
29
Mortgages
Problems, Potential Problems and Restructureds
Amortized Cost
(Dollars In Millions)
June 30, December 31,
1996 1995
----------- ------------
COMMERCIAL MORTGAGES .......................................... $ 3,196.6 $ 3,413.7
Problem commercial mortgages .................................. 184.5 41.3
Potential problem commercial mortgages ........................ 321.9 194.7
Restructured commercial mortgages(1) .......................... 401.8 522.2
VALUATION ALLOWANCES .......................................... $ 124.5 $ 79.9
As a percent of commercial mortgages ........................ 3.9% 2.3%
As a percent of problem commercial mortgages ................ 67.5% 193.5%
As a percent of problem and potential problem commercial
mortgages ................................................. 24.6% 33.9%
As a percent of problem, potential problem and restructured
commercial mortgages ...................................... 13.7% 10.5%
AGRICULTURAL MORTGAGES ........................................ $ 1,718.5 $ 1,624.1
Problem agricultural mortgages ................................ 82.9 82.9
Potential problem agricultural mortgages ...................... 0.0 0.0
Restructured agricultural mortgages ........................... 2.0 2.0
VALUATION ALLOWANCES .......................................... $ 9.0 $ 4.0
<FN>
(1) Excludes restructured commercial mortgages of $110.4 million and $12.6
million that are shown as problems at June 30, 1996 and December 31, 1995,
respectively, and excludes $167.9 million and $148.3 million of restructured
commercial mortgages that are shown as potential problems at June 30, 1996
and December 31, 1995, respectively.
</FN>
Problem commercial mortgages increased by $143.2 million from December 31, 1995
to June 30, 1996 primarily attributed to previously identified potential problem
loans which became delinquent. Potential problem loans increased as mortgages
previously classified as restructured or unclassified were identified as
potential problem loans. During the six months ended June 30, 1996, the
amortized cost of foreclosed commercial mortgages totaled $0.8 million with no
reduction in amortized cost required at the time of foreclosure.
The original weighted average coupon rate on the $401.8 million of restructured
mortgages was 9.6%. As a result of these restructurings, the restructured
weighted average coupon rate was 8.2% and the restructured weighted average cash
payment rate was 7.9%. The foregone interest on restructured commercial
mortgages (including restructured commercial mortgages presented as problem or
potential problem commercial mortgages) for the six months ended June 30, 1996
was $3.2 million.
30
The following table shows the distribution of problem and potential problem
commercial mortgages by property type and by state.
June 30, 1996
--------------------------------
(Dollars In Millions)
Amortized % of
Cost Total
----------- --------
Problem Commercial Mortgages
Property Type:
Office ............................................. $ 109.6 59.4%
Retail ............................................. 44.3 24.0
Industrial ......................................... 18.6 10.1
Hotel .............................................. 9.5 5.1
Apartment .......................................... 2.5 1.4
-------- ------
Total .............................................. $ 184.5 100.0%
======== ======
State:
California ......................................... $ 67.9 36.8%
Virginia ........................................... 51.2 27.8
Massachusetts ...................................... 26.8 14.5
Puerto Rico ........................................ 19.7 10.7
Pennsylvania ....................................... 13.6 7.4
Other (no state larger than 5.0%) .................. 5.3 2.8
-------- ------
Total .............................................. $ 184.5 100.0%
======== ======
Potential Problem Commercial Mortgages
Property Type:
Retail ............................................. $ 149.7 46.6%
Office ............................................. 147.9 45.9
Hotel .............................................. 24.3 7.5
-------- ------
Total .............................................. $ 321.9 100.0%
======== ======
State:
New York ........................................... $ 102.6 31.9%
Louisiana .......................................... 56.9 17.7
Pennsylvania ....................................... 38.6 12.0
South Carolina ..................................... 31.2 9.7
Texas .............................................. 23.9 7.4
Idaho .............................................. 17.8 5.5
Other (no state larger than 5.0%) .................. 50.9 15.8
-------- ------
Total .............................................. $ 321.9 100.0%
======== ======
At June 30, 1996, management identified impaired loans as defined under SFAS No.
114 with a carrying value of $595.8 million. The provision for losses for these
impaired mortgage loans was $122.1 million at June 30, 1996. Income earned on
these loans in the first six months of 1996 was $26.1 million, including cash
received of $20.9 million.
For the six months ended June 30, 1996, scheduled principal amortization
payments and prepayments on commercial mortgage loans received aggregated $139.4
million. In addition, during the first six months of 1996, $160.8 million of
commercial mortgage loan maturity payments were scheduled, of which $93.4
million were paid as due. Of the amount not paid, $29.9 million were granted
short term extensions of up to six months, $19.7 million were delinquent or in
default for non-payment of principal and $17.8 million were extended for a
weighted average of 7.0 years at a weighted average interest rate of 7.6%. There
were no foreclosures of maturing loans.
31
Equity Real Estate. As of June 30, 1996, on the basis of amortized cost, the
equity real estate category included $3.00 billion (or 75.0%) acquired as
investment real estate and $1.00 billion (or 25.0%) acquired through or in lieu
of foreclosure (including in-substance foreclosures).
Real estate properties with amortized costs of $247.0 million and $99.8 million
were sold during the first six months of 1996 and 1995, respectively. In the
first half of 1996 and 1995, respectively, gains of $2.5 million and $8.1
million were recognized on equity real estate which was sold.
As of January 1, 1996, the Company adopted SFAS No. 121. At June 30, 1996,
allowances totaling $64.7 million were held on properties identified as
available for sale with an amortized cost of $375.4 million.
At June 30, 1996, the vacancy rate for the Company's office properties was 14.4%
in total, with a vacancy rate of 10.4% for properties acquired as investment
real estate and 24.8% for properties acquired through foreclosure. The national
commercial office vacancy rate was 13.8% (as of March 31, 1996) as measured by
CB Commercial.
LIQUIDITY AND CAPITAL RESOURCES
Equitable Life has a commercial paper program with an issue limit of up to
$500.0 million. This program is available for general corporate purposes and is
supported by Equitable Life's existing $350.0 million bank credit facility,
which expires in June 2000. Equitable Life uses this program from time to time
in its liquidity management. At June 30, 1996, $79.6 million was outstanding
under the commercial paper program; there were no amounts outstanding under the
revolving credit facility.
In July 1996, DLJ filed a shelf registration for up to $500.0 million of
preferred and debt securities.
Consolidated Cash Flows
The net cash provided by operating activities was $78.7 million for the six
months ended June 30, 1996 compared to $408.6 million for the six months ended
June 30, 1995. The 1996 cash provided by operations principally was affected by
the $127.0 million change in Federal income taxes payable.
Net cash provided by investing activities was $70.3 million for the six months
ended June 30, 1996 as compared to $603.4 million for the same period in 1995.
In 1996, investment purchases exceeded sales, maturities, repayments and return
of capital by $770.3 million. Loans to the discontinued GIC segment were reduced
by $492.5 million during the first quarter of 1996. Cash provided by investing
activities during the first six months of 1995 primarily was attributable to the
$1.16 billion decrease in loans to the GIC Segment resulting from repayments in
January 1995. Investment purchases exceeded sales, maturities and repayments by
approximately $435.4 million, partially offsetting the effect of the GIC
repayment.
Net cash used by financing activities was $281.1 million for the six months
ended June 30, 1996 as compared to $974.6 million in the first half of 1995. In
the first half of 1996, withdrawals from policyholders' account balances
exceeded deposits by $351.9 million partially offset by a net increase of $174.1
million in short-term financing, principally at Equitable Life. Net cash used by
financing activities during the first six months of 1995 primarily resulted from
the $1.22 billion decrease in the amount due to the discontinued GIC Segment as
a result of continuing operations' $1.22 billion cash settlement at the
beginning of the year of its obligation to fund the GIC Segment's accumulated
deficit. Partially offsetting the effect of this repayment was the $207.3
million increase in short-term financings and deposits to policyholders' account
balances which exceeded withdrawals by $60.0 million during the six months ended
June 30, 1995.
The operating, investing and financing activities described above resulted in a
decrease in cash and cash equivalents during the first six months of 1996 of
$132.1 million to $642.6 million.
32
PART II OTHER INFORMATION
Item 1. Legal Proceedings
There have been no new material legal proceedings and no material developments
in matters which were previously reported in the Registrant's Form 10-K for the
year ended December 31, 1995, except as disclosed in Note 10 of Notes to
Consolidated Financial Statements included herein.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
None
33
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
The Equitable Life Assurance Society
of the United States
-------------------------------------------
(Registrant)
Date: August 9, 1996 /s/ Stanley B. Tulin
----------------------- -------------------------------------------
Senior Executive Vice President and
Chief Financial Officer
Date: August 9, 1996 /s/ Alvin H. Fenichel
----------------------- -------------------------------------------
Senior Vice President and Controller
34