UNITED STATES
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 March 31, 1998 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.)
1290 Avenue of the Americas, New York, New York 10104
- ------------------------------------------------------ ------------------------
(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 May 11, 1998
- ------------------------------------------- -----------------------------------
Common Stock, $1.25 par value 2,000,000
Page 1 of 28
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
FORM 10-Q
FOR THE THREE MONTHS ENDED MARCH 31, 1998
TABLE OF CONTENTS
Page #
PART I FINANCIAL INFORMATION
Item 1: Unaudited Consolidated Financial Statements
Consolidated Balance Sheets as of March 31, 1998 and December 31, 1997.............. 3
Consolidated Statements of Earnings for the Three Months Ended
March 31, 1998 and 1997.............................................................. 4
Consolidated Statements of Shareholder's Equity and Comprehensive
Income for the Three Months Ended March 31, 1998 and 1997............................ 5
Consolidated Statements of Cash Flows for the Three Months Ended
March 31, 1998 and 1997.............................................................. 6
Notes to Consolidated Financial Statements.......................................... 7
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................................. 14
PART II OTHER INFORMATION
Item 1: Legal Proceedings...................................................................... 27
Item 6: Exhibits and Reports on Form 8-K....................................................... 27
SIGNATURES............................................................................................. 28
2
PART I FINANCIAL INFORMATION
Item 1: Unaudited Consolidated Financial Statements.
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
March 31, December 31,
1998 1997
----------------- -----------------
(In Millions)
ASSETS
Investments:
Fixed maturities:
Available for sale, at estimated fair value............................. $ 20,373.1 $ 19,630.9
Mortgage loans on real estate............................................. 2,541.5 2,611.4
Equity real estate........................................................ 2,381.8 2,495.1
Policy loans.............................................................. 1,956.4 2,422.9
Other equity investments.................................................. 1,005.5 951.5
Investment in and loans to affiliates..................................... 782.7 731.1
Other invested assets..................................................... 474.7 616.2
----------------- -----------------
Total investments..................................................... 29,515.7 29,459.1
Cash and cash equivalents................................................... 636.6 300.5
Deferred policy acquisition costs........................................... 3,283.9 3,236.6
Amounts due from discontinued operations.................................... 360.5 572.8
Other assets................................................................ 2,781.3 2,683.4
Closed Block assets......................................................... 8,591.4 8,566.6
Separate Accounts assets.................................................... 39,740.8 36,538.7
----------------- -----------------
Total Assets................................................................ $ 84,910.2 $ 81,357.7
================= =================
LIABILITIES
Policyholders' account balances............................................. $ 20,955.4 $ 21,579.5
Future policy benefits and other policyholders liabilities.................. 4,615.0 4,553.8
Short-term and long-term debt............................................... 1,612.9 1,716.7
Other liabilities........................................................... 4,130.1 3,267.2
Closed Block liabilities.................................................... 9,086.5 9,073.7
Separate Accounts liabilities............................................... 39,413.4 36,306.3
----------------- -----------------
Total liabilities..................................................... 79,813.3 76,497.2
----------------- -----------------
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.............................................. 3,105.8 3,105.8
Retained earnings........................................................... 1,449.2 1,235.9
Accumulated other comprehensive income...................................... 539.4 516.3
----------------- -----------------
Total shareholder's equity............................................ 5,096.9 4,860.5
----------------- -----------------
Total Liabilities and Shareholder's Equity.................................. $ 84,910.2 $ 81,357.7
================= =================
See Notes to Consolidated Financial Statements.
3
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
CONSOLIDATED STATEMENTS OF EARNINGS
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(UNAUDITED)
1998 1997
----------------- -----------------
(In Millions)
REVENUES
Universal life and investment-type product policy fee income................ $ 259.6 $ 230.5
Premiums.................................................................... 146.5 151.8
Net investment income....................................................... 600.1 532.7
Investment gains, net....................................................... 72.4 19.9
Commissions, fees and other income.......................................... 377.1 295.3
Contribution from the Closed Block.......................................... 14.5 35.8
----------------- -----------------
Total revenues........................................................ 1,470.2 1,266.0
----------------- -----------------
BENEFITS AND OTHER DEDUCTIONS
Interest credited to policyholders' account balances........................ 299.5 312.7
Policyholders' benefits..................................................... 262.2 254.9
Other operating costs and expenses.......................................... 566.3 509.9
----------------- -----------------
Total benefits and other deductions................................... 1,128.0 1,077.5
----------------- -----------------
Earnings from continuing operations before Federal income taxes
and minority interest..................................................... 342.2 188.5
Federal income taxes........................................................ 99.9 48.5
Minority interest in net income of consolidated subsidiaries................ 29.5 22.6
----------------- -----------------
Earnings from continuing operations......................................... 212.8 117.4
Discontinued operations, net of Federal income taxes........................ .5 (3.3)
----------------- -----------------
Net Earnings................................................................ $ 213.3 $ 114.1
================= =================
See Notes to Consolidated Financial Statements.
4
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
AND COMPREHENSIVE INCOME
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(UNAUDITED)
1998 1997
----------------- -----------------
(In Millions)
SHAREHOLDER'S EQUITY
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......... 3,105.8 3,105.8
----------------- -----------------
Retained earnings, beginning of year........................................ 1,235.9 798.7
Net earnings................................................................ 213.3 114.1
----------------- -----------------
Retained earnings, end of period............................................ 1,449.2 912.8
----------------- -----------------
Accumulated other comprehensive income, beginning of year................... 516.3 177.0
Other comprehensive income.................................................. 23.1 (236.5)
----------------- -----------------
Accumulated other comprehensive income, end of period....................... 539.4 (59.5)
----------------- -----------------
Total Shareholder's Equity, End of Period................................... $ 5,096.9 $ 3,961.6
================= =================
COMPREHENSIVE INCOME
Net earnings................................................................ $ 213.3 $ 114.1
----------------- -----------------
Change in unrealized gains (losses), net of reclassification adjustment..... 23.1 (236.5)
Minimum pension liability adjustment........................................ - -
----------------- -----------------
Other comprehensive income.................................................. 23.1 (236.5)
----------------- -----------------
Comprehensive Income........................................................ $ 236.4 $ (122.4)
================= =================
See Notes to Consolidated Financial Statements.
5
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(UNAUDITED)
1998 1997
----------------- -----------------
(In Millions)
Net earnings................................................................ $ 213.3 $ 114.1
Adjustments to reconcile net earnings to net cash provided (used)
by operating activities:
Interest credited to policyholders' account balances.................... 299.5 312.7
Universal life and investment-type policy fee income.................... (259.6) (230.5)
Investment gains........................................................ (72.4) (19.9)
Change in Federal income tax payable.................................... 74.5 54.9
Other, net.............................................................. 103.2 12.6
----------------- -----------------
Net cash provided by operating activities................................... 358.5 243.9
----------------- -----------------
Cash flows from investing activities:
Maturities and repayments................................................. 471.9 651.5
Sales.................................................................... 3,893.5 2,497.6
Purchases................................................................. (4,327.9) (3,023.9)
Decrease (increase) in short-term investments............................. 184.2 (50.2)
Decrease in loans to discontinued operations.............................. 300.0 109.0
Other, net................................................................ (343.4) (212.7)
----------------- -----------------
Net cash provided (used) by investing activities............................ 178.3 (28.7)
----------------- -----------------
Cash flows from financing activities:
Policyholders' account balances:
Deposits................................................................ 325.7 435.9
Withdrawals............................................................. (423.8) (549.9)
Increase in short-term financings......................................... 1.6 276.7
Repayments of long-term debt.............................................. (5.8) (5.5)
Other, net................................................................ (98.4) (102.4)
----------------- -----------------
Net cash (used) provided by financing activities............................ (200.7) 54.8
----------------- -----------------
Change in cash and cash equivalents......................................... 336.1 270.0
Cash and cash equivalents, beginning of year................................ 300.5 538.8
----------------- -----------------
Cash and Cash Equivalents, End of Period.................................... $ 636.6 $ 808.8
================= =================
Supplemental cash flow information
Interest Paid............................................................. $ 53.9 $ 22.8
================= =================
Income Taxes Paid......................................................... $ 20.0 $ -
================= =================
See Notes to Consolidated Financial Statements.
6
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1) BASIS OF PRESENTATION
The accompanying consolidated financial statements are prepared in
conformity with GAAP which requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. These statements should be read in
conjunction with the consolidated financial statements of the Company for
the year ended December 31, 1997. The results of operations for the three
months ended March 31, 1998 are not necessarily indicative of the results
to be expected for the full year.
The terms "first quarter 1998" and "first quarter 1997" refer to the three
months ended March 31, 1998 and 1997, respectively.
Certain reclassifications have been made in the amounts presented for
prior periods to conform these periods with the current presentation.
2) ACCOUNTING CHANGES
In March 1998, the AICPA issued SOP 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use". SOP 98-1
requires capitalization of external and certain internal costs incurred to
obtain or develop internal-use computer software during the application
development stage. The SOP is to be applied prospectively for fiscal years
beginning after December 15, 1998; earlier application is encouraged. The
Company adopted the provisions of SOP 98-1 effective January 1, 1998. The
adoption of SOP 98-1 did not have a material impact on the Company's
consolidated financial statements. Capitalized internal-use software is
amortized on a straight-line basis over the estimated useful life of the
software. Prior to adopting SOP 98-1, software development costs were
expensed as incurred.
3) INVESTMENTS
Investment valuation allowances and changes thereto are shown below:
Three Months Ended
March 31,
-----------------------------------
1998 1997
--------------- ---------------
(In Millions)
Balances, beginning of year............................................... $ 384.5 $ 137.1
Additions charged to income............................................... 35.6 23.7
Deductions for writedowns and asset dispositions.......................... (28.3) (31.2)
--------------- ---------------
Balances, End of Period................................................... $ 391.8 $ 129.6
=============== ===============
Balances, end of period:
Mortgage loans on real estate........................................... $ 63.5 $ 42.7
Equity real estate...................................................... 328.3 86.9
--------------- ---------------
Total..................................................................... $ 391.8 $ 129.6
=============== ===============
For the first quarters of 1998 and 1997, investment income is shown net of
investment expenses (including interest expense to finance short-term
trading instruments) of $80.3 million and $78.8 million, respectively.
7
As of March 31, 1998 and December 31, 1997, fixed maturities classified as
available for sale had amortized costs of $19,472.3 million and $18,759.7
million, respectively. Other equity investments included equity securities
with carrying values of $447.3 million and $442.1 million and costs of
$402.7 million and $408.4 million as of March 31, 1998 and December 31,
1997, respectively.
For the first quarters of 1998 and 1997, proceeds received on sales of
fixed maturities classified as available for sale amounted to $3,699.5
million and $2,393.9 million, respectively. Gross gains of $54.0 million
and $43.3 million and gross losses of $37.0 million and $42.5 million were
realized on these sales for the first quarters of 1998 and 1997,
respectively. Unrealized investment gains (losses) related to fixed
maturities classified as available for sale increased by $29.6 million
during the first three months of 1998, resulting in a balance of $900.8
million at March 31, 1998.
Impaired mortgage loans (as defined under SFAS No. 114) along with the
related provision for losses were as follows:
March 31, December 31,
1998 1997
--------------- -----------------
(In Millions)
Impaired mortgage loans with provision for losses....................... $ 196.0 $ 196.7
Impaired mortgage loans without provision for losses.................... 10.5 3.6
--------------- -----------------
Recorded investment in impaired mortgage loans.......................... 206.5 200.3
Provision for losses.................................................... (59.4) (51.8)
--------------- -----------------
Net Impaired Mortgage Loans............................................. $ 147.1 $ 148.5
=============== =================
During the first quarters of 1998 and 1997, respectively, the Company's
average recorded investment in impaired mortgage loans was $167.1 million
and $402.2 million. Interest income recognized on these impaired mortgage
loans totaled $3.2 million and $5.1 million ($.3 million and $.6 million
recognized on a cash basis) for the first quarters of 1998 and 1997,
respectively.
4) CLOSED BLOCK
Summarized financial information for the Closed Block follows:
March 31, December 31,
1998 1997
----------------- -----------------
(In Millions)
Assets
Fixed maturities:
Available for sale, at estimated fair value (amortized cost of
$4,082.2 and $4,059.4)............................................. $ 4,261.8 $ 4,231.0
Mortgage loans on real estate.......................................... 1,398.3 1,341.6
Policy loans........................................................... 1,674.3 1,700.2
Cash and other invested assets......................................... 273.0 282.7
Deferred policy acquisition costs...................................... 763.5 775.2
Other assets........................................................... 220.5 235.9
----------------- -----------------
Total Assets........................................................... $ 8,591.4 $ 8,566.6
================= =================
Liabilities
Future policy benefits and other policyholders' account balances....... $ 8,991.2 $ 8,993.2
Other liabilities...................................................... 95.3 80.5
----------------- -----------------
Total Liabilities...................................................... $ 9,086.5 $ 9,073.7
================= =================
8
Three Months Ended
March 31,
-----------------------------------
1998 1997
---------------- ---------------
(In Millions)
Revenues
Premiums and other income................................................. $ 167.1 $ 174.8
Investment income (net of investment expenses of $5.4 and $7.1)........... 136.4 138.8
Investment (losses) gains, net............................................ (4.7) 2.3
--------------- ---------------
Total revenues............................................................ 298.8 315.9
--------------- ---------------
Benefits and Other Deductions
Policyholders' benefits and dividends..................................... 277.3 271.0
Other operating costs and expenses........................................ 7.0 9.1
--------------- ---------------
Total benefits and other deductions....................................... 284.3 280.1
--------------- ---------------
Contribution from the Closed Block........................................ $ 14.5 $ 35.8
=============== ===============
Investment valuation allowances amounted to $13.1 million and $18.5
million on mortgage loans and $22.9 million and $16.8 million on equity
real estate at March 31, 1998 and December 31, 1997, respectively.
Impaired mortgage loans (as defined under SFAS No. 114) along with the
related provision for losses were as follows:
March 31, December 31,
1998 1997
----------------- -----------------
(In Millions)
Impaired mortgage loans with provision for losses...................... $ 108.2 $ 109.1
Impaired mortgage loans without provision for losses................... .7 .6
----------------- -----------------
Recorded investment in impaired mortgages.............................. 108.9 109.7
Provision for losses................................................... (11.8) (17.4)
----------------- -----------------
Net Impaired Mortgage Loans............................................ $ 97.1 $ 92.3
================= =================
During the first quarters of 1998 and 1997, respectively, the Closed
Block's average recorded investment in impaired mortgage loans was $109.3
million and $122.4 million. Interest income recognized on these impaired
mortgage loans totaled $1.3 million and $2.6 million ($.6 million and $1.2
million recognized on a cash basis) for the first quarters of 1998 and
1997, respectively.
9
5) DISCONTINUED OPERATIONS
Summarized financial information for discontinued operations follows:
March 31, December 31,
1998 1997
----------------- -----------------
(In Millions)
Assets
Mortgage loans on real estate.......................................... $ 667.6 $ 635.2
Equity real estate..................................................... 809.9 874.5
Other equity investments............................................... 166.3 209.3
Other invested assets.................................................. 38.2 152.4
----------------- -----------------
Total investments.................................................... 1,682.0 1,871.4
Cash and cash equivalents.............................................. 28.5 106.8
Other assets........................................................... 226.1 243.8
----------------- -----------------
Total Assets........................................................... $ 1,936.6 $ 2,222.0
================= =================
Liabilities
Policyholders liabilities.............................................. $ 1,041.2 $ 1,048.3
Allowance for future losses............................................ 254.4 259.2
Amounts due to continuing operations................................... 360.5 572.8
Other liabilities...................................................... 280.5 341.7
----------------- -----------------
Total Liabilities...................................................... $ 1,936.6 $ 2,222.0
================= =================
Three Months Ended
March 31,
-----------------------------------
1998 1997
---------------- ---------------
(In Millions)
Revenues
Investment income (net of investment expenses of $19.5 and $25.5)......... $ 28.0 $ 34.9
Investment gains (losses), net............................................ 5.6 (5.1)
Policy fees, premiums and other income.................................... (.1) .1
--------------- ---------------
Total revenues............................................................ 33.5 29.9
Benefits and Other Deductions............................................. 38.5 47.2
Losses charged to allowance for future losses............................. (5.0) (17.3)
--------------- ---------------
Pre-tax loss from operations.............................................. - -
Pre-tax earnings from releasing (loss from strengthening) the
allowance for future losses............................................. .7 (5.1)
Federal income tax (expense) benefit...................................... (.2) 1.8
--------------- ---------------
Earnings (Loss) from Discontinued Operations.............................. $ .5 $ (3.3)
=============== ===============
The Company's quarterly process for evaluating the allowance for future
losses applies the current period's results of discontinued operations
against the allowance, re-estimates future losses, and adjusts the
allowance, if appropriate. The evaluations performed in the first quarters
of 1998 and 1997 resulted in management's decision to release the
allowance by $.7 million for the first quarter of 1998 and to strengthen
the allowance by $5.1 million for the first quarter of 1997. This resulted
in after-tax earnings of $.5 million for first quarter 1998 and an
after-tax charge of $3.3 million to discontinued operations' results for
first quarter 1997.
10
Management believes the allowance for future losses at March 31, 1998 is
adequate to provide for all future losses; however, the determination of
the allowance involves numerous estimates and subjective judgments
regarding the expected performance of Discontinued Operations Investment
Assets. There can be no assurance the losses provided for will not differ
from the losses ultimately realized. To the extent actual results or
future projections of discontinued operations differ from management's
current estimates and assumptions underlying the allowance for future
losses, the difference would be reflected in the consolidated statements
of earnings in discontinued operations. In particular, to the extent
income, sales proceeds and holding periods for equity real estate differ
from management's previous assumptions, periodic adjustments to the loss
allowance are likely to result.
Investment valuation allowances amounted to $8.1 million and $28.4 million
on mortgage loans and $108.2 million and $88.4 million on equity real
estate at March 31, 1998 and December 31, 1997, respectively.
Impaired mortgage loans (as defined under SFAS No. 114) along with the
related provision for losses were as follows:
March 31, December 31,
1998 1997
----------------- -----------------
(In Millions)
Impaired mortgage loans with provision for losses...................... $ 133.2 $ 101.8
Impaired mortgage loans without provision for losses................... .4 .2
----------------- -----------------
Recorded investment in impaired mortgages.............................. 133.6 102.0
Provision for losses................................................... (6.9) (27.3)
----------------- -----------------
Net Impaired Mortgage Loans............................................ $ 126.7 $ 74.7
================= =================
During the first quarters of 1998 and 1997, discontinued operations'
average recorded investment in impaired mortgage loans was $117.8 million
and $98.2 million, respectively. Interest income recognized on these
impaired mortgage loans totaled $1.6 million and $2.0 million ($1.3
million and $1.4 million recognized on a cash basis) for the first
quarters of 1998 and 1997, respectively.
Benefits and other deductions included $10.1 million and $14.8 million of
interest expense related to amounts borrowed from continuing operations
for the first quarters of 1998 and 1997, respectively.
6) 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) RESTRUCTURING COSTS
During the first quarter 1997, the Company recorded a pre-tax provision of
$5.2 million, primarily for employee termination and exit costs. The
amounts paid during first quarter 1998 totaled $7.2 million. At March 31,
1998, the liabilities included costs related to employee termination and
exit costs, the termination of operating leases and the consolidation of
insurance operations' service centers and amounted to $54.8 million.
11
8) 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,
1997, except as follows:
On April 7, 1998, the federal district court in Tampa, Florida entered an
order preliminarily approving the settlement agreement relating to the
Golomb, Malvin, Bowler, Bachman and Fletcher cases and conditionally
certifying the settlement class. The order also deems filed an amended
complaint that asserts on a nationwide basis claims of the kind previously
made in the five pending cases. The court has scheduled a hearing on the
fairness of the settlement for August 21, 1998 and will decide whether to
finally approve the settlement after that hearing.
In Cole, the court on February 17, 1998, granted Equitable Life and EOC's
motion for summary judgment dismissing the remaining claims of breach of
contract and negligent misrepresentation. The court therefore denied
plaintiffs' motion to certify the class. In April 1998, plaintiffs noticed
their appeal from that decision and from the June 1996 decision (the
appeal from which had been dismissed). This appeal has yet to be briefed
and argued.
In Chaviano, plaintiff filed a substituted motion for class certification
which is scheduled for hearing on June 9, 1998.
In Luther, on February 29, 1998, Equitable Life responded to plaintiff's
demand letter with an offer of settlement pursuant to the provisions of
the Texas Deceptive Trade Practices Act.
In Brown, the court referred the case to mediation, which is pending.
In National Gypsum, DLJSC appealed the Bankruptcy Court's January ruling
to the U.S. District Court for the Northern District of Texas.
In April, 1998, DLJSC's motions for summary judgment were denied in a
litigation commenced in March 1991 by Dayton Monetary Associates and
Charles Davison, who, along with more than 200 other plaintiffs, filed
several complaints against DLJSC and a number of other financial
institutions and several individuals in the U.S. District Court for the
Southern District of New York. The plaintiffs allege that DLJSC and other
defendants violated civil provisions of RICO by inducing plaintiffs to
invest over $40.0 million during the years 1978 through 1982 in The
Securities Groups, a number of tax shelter limited partnerships. The
plaintiffs seek recovery of the loss of their entire investment and an
approximately equivalent amount of tax-related damages. Judgment for
damages under RICO are subject to trebling. Discovery is complete. No
trial date has been set by the court. DLJSC believes that it has
meritorious defenses to the complaints and will continue to contest the
suits vigorously. Although there can be no assurance, DLJ does not believe
that the ultimate outcome of this litigation will have a material adverse
effect on its consolidated financial condition and/or its results of
operations in any particular period.
In addition to the matters previously reported and the matters described
above, the Holding Company 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.
12
9) BUSINESS SEGMENT INFORMATION
Three Months Ended
March 31,
-----------------------------------
1998 1997
---------------- ---------------
(In Millions)
Revenues
Insurance Operations...................................................... $ 1,085.0 $ 977.0
Investment Services....................................................... 389.8 295.2
Consolidation/elimination................................................. (4.6) (6.2)
---------------- ---------------
Total..................................................................... $ 1,470.2 $ 1,266.0
=============== ===============
Three Months Ended
March 31,
-----------------------------------
1998 1997
---------------- ---------------
(In Millions)
Earnings from Continuing Operations Before
Federal Income Taxes and Minority Interest
Insurance Operations...................................................... $ 220.8 $ 126.8
Investment Services....................................................... 132.6 78.4
--------------- ---------------
Subtotal................................................................ 353.4 205.2
Corporate interest expense................................................ (11.2) (16.7)
--------------- ---------------
Total..................................................................... $ 342.2 $ 188.5
=============== ===============
March 31, December 31,
1998 1997
----------------- -----------------
(In Millions)
Assets
Insurance Operations................................................... $ 72,149.9 $ 68,041.5
Investment Services.................................................... 13,099.6 13,719.8
Consolidation/elimination.............................................. (339.3) (403.6)
----------------- -----------------
Total.................................................................. $ 84,910.2 $ 81,357.7
================= =================
13
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
("MD&A") section included in the Company's 1997 Report on Form 10-K. The terms
"first quarter 1998" and "first quarter 1997" refer to the three months ended
March 31, 1998 and 1997, respectively.
RESULTS OF OPERATIONS
The following table presents the results of operations outside of the Closed
Block combined on a line-by-line basis with the contribution of the Closed
Block. The Insurance Operations analysis, which begins on page 15, likewise
reflects the Closed Block amounts on a line-by-line basis. The MD&A addresses
the combined results of operations unless noted otherwise. The Investment
Services discussion begins on page 17.
Three Months Ended
March 31,
-----------------------------------
1998 1997
--------------- ---------------
(In Millions)
Policy fee income and premiums.................................................. $ 573.4 $ 557.4
Net investment income........................................................... 736.5 671.5
Investment gains, net........................................................... 67.7 22.2
Commissions, fees and other income.............................................. 376.9 295.0
--------------- ---------------
Total revenues................................................................ 1,754.5 1,546.1
Total benefits and other deductions............................................. 1,412.3 1,357.6
--------------- ---------------
Earnings from continuing operations before Federal income taxes
and minority interest......................................................... 342.2 188.5
Federal income taxes............................................................ 99.9 48.5
Minority interest in net income of consolidated subsidiaries.................... 29.5 22.6
--------------- ---------------
Earnings from Continuing Operations............................................. $ 212.8 $ 117.4
=============== ===============
Continuing Operations
Compared to first quarter 1997, the higher pre-tax results of operations for
first quarter 1998 reflected increased earnings in Insurance Operations and
Investment Services. Federal income taxes increased due to higher pre-tax
results of operations and the 3.5% Federal tax imposed on certain publicly
traded master limited partnerships, including Alliance, which became effective
January 1, 1998. Minority interest in net income of consolidated subsidiaries
was higher principally due to increased earnings at Alliance.
The $208.4 million increase in revenues for first quarter 1998 compared to the
corresponding period in 1997 was attributed primarily to a $110.5 million
increase in investment results and a $81.9 million increase in commissions, fees
and other income principally due to increased business activity within
Investment Services. Net investment income increased $65.0 million for first
quarter 1998 due to increases of $74.3 million for Insurance Operations.
Investment gains increased by $45.5 million for first quarter 1998 from $22.2
million for the same period in 1997. In first quarter 1998, a $31.5 million
gross gain was recognized as a result of the exercise of Alliance Unit and DLJ
stock options and the conversion of DLJ restricted stock units. There was a
$14.1 million increase in investment gains on General Account Investment Assets.
14
For first quarter 1998, total benefits and other deductions increased by $54.7
million from the comparable period in 1997, reflecting increases in other
operating costs and expenses of $54.3 million. The increase in other operating
costs and expenses principally resulted from $40.4 million higher costs in
Investment Services associated with increased segment revenues.
COMBINED RESULTS OF CONTINUING OPERATIONS BY SEGMENT
Insurance Operations
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.
Insurance Operations
(In Millions)
Three Months Ended March 31,
------------------------------------------------------------------
1998
------------------------------------------------
As Closed 1997
Reported Block Combined Combined
------------- -------------- ------------- --------------
Policy fees, premiums and other income.......... $ 441.9 $ 167.1 $ 609.0 $ 585.1
Net investment income........................... 587.7 136.4 724.1 649.8
Investment gains (losses), net.................. 40.9 (4.7) 36.2 22.2
Contribution from the Closed Block.............. 14.5 (14.5) - -
------------- -------------- ------------- --------------
Total revenues................................ 1,085.0 284.3 1,369.3 1,257.1
Total benefits and other deductions............. 864.2 284.3 1,148.5 1,130.3
------------- -------------- ------------- --------------
Earnings from Continuing Operations
before Federal Income Taxes and
Minority Interest............................. $ 220.8 $ - $ 220.8 $ 126.8
============= ============== ============= ==============
For first quarter 1998, Insurance Operations earnings reflected an increase of
$94.0 million from the year earlier period. Higher investment results, higher
policy fees on variable and interest-sensitive life and individual annuities
contracts, improved DI results and lower interest credited on policyholders'
account balances were offset by higher mortality.
Total revenues increased by $112.2 million primarily due to a $88.3 million
increase in investment results and a $29.1 million increase in policy fees. The
increase in Insurance Operations' investment results principally was due to a
$74.3 million increase in investment income due to higher yields on General
Account Investment Assets principally related to other equity investments and
higher earnings on amounts invested in the Separate Account equity funds
partially offset by $4.7 million lower interest on lower amounts due from
discontinued operations. Policy fee income rose to $259.6 million due to higher
insurance and annuity account balances.
Total benefits and other deductions for first quarter 1998 rose $18.2 million
from the comparable 1997 period reflecting increases in other operating expenses
due to higher expenses related to increased sales and an increase in
policyholders' benefits primarily resulting from higher mortality experience
partially offset by a decrease in interest credited on policyholders' account
balances due to moderately lower crediting rates.
15
Premiums and Deposits - The following table lists premiums and deposits,
including universal life and investment-type contract deposits, for Insurance
Operations' major product lines.
Premiums and Deposits
(In Millions)
Three Months Ended
March 31,
-----------------------------------
1998 1997
--------------- ---------------
Individual annuities
First year.................................................................... $ 981.2 $ 647.3
Renewal....................................................................... 368.3 340.3
--------------- ---------------
1,349.5 987.6
Individual life(1)
First year.................................................................... 99.5 117.5
Renewal....................................................................... 543.4 546.7
--------------- ---------------
642.9 664.2
Other(2)
First year.................................................................... 2.8 4.0
Renewal....................................................................... 94.5 90.4
--------------- ---------------
97.3 94.4
Total first year................................................................ 1,083.5 768.8
Total renewal................................................................... 1,006.2 977.4
--------------- ---------------
Total individual insurance and annuity products................................. 2,089.7 1,746.2
Total group pension products.................................................... 90.8 80.8
--------------- ---------------
Total Premiums and Deposits..................................................... $ 2,180.5 $ 1,827.0
=============== ===============
<FN>
(1) Includes variable and interest-sensitive and traditional life products.
(2) Includes health insurance and reinsurance assumed.
</FN>
First year premiums and deposits for individual insurance and annuity products
for first quarter 1998 increased from prior year levels by $314.7 million
primarily due to higher sales of individual annuities. Renewal premiums and
deposits increased by $28.8 million during first quarter 1998 over the prior
year period as increases in the larger block of individual annuities were
partially offset by decreases in traditional life policies and other product
lines. The 51.6% increase in first year individual annuities premiums and
deposits in first quarter 1998 over the prior year period included a $221.1
million increase in sales of a line of retirement annuity products sold through
expanded wholesale distribution channels, up from $53.3 million in first quarter
1997. Also in 1997, first year individual life premiums and deposits for the
quarter included $23.3 million of premiums from the sale of two large COLI
policies.
16
Surrenders and Withdrawals - The following table summarizes Insurance
Operations' surrenders and withdrawals, including universal life and
investment-type contract withdrawals, for major individual insurance and
annuities' product lines.
Individual Insurance and Annuities
Surrenders and Withdrawals by Product Line
(In Millions)
Three Months Ended
March 31,
-----------------------------------
1998 1997
--------------- ---------------
Individual annuities............................................................ $ 694.2 $ 594.4
Variable and interest-sensitive life............................................ 697.3 123.2
Traditional life................................................................ 98.6 105.6
--------------- ---------------
Total........................................................................... $ 1,490.1 $ 823.2
=============== ===============
Policy and contract surrenders and withdrawals increased $666.9 million during
first quarter 1998 compared to the same period in 1997 principally due to the
first quarter 1998 surrender of $561.8 million related to a single large COLI
contract. Since there were outstanding policy loans on the surrendered contract,
there were no cash outflows. Excluding the effect of this one surrender, the
remaining $105.1 million increase resulted from $112.9 million higher surrenders
and withdrawals in the larger book of variable and interest-sensitive life
policies and individual annuities partially offset by a decrease in traditional
life products surrenders and withdrawals.
Investment Services
The following table summarizes the results of continuing operations for
Investment Services.
Investment Services
(In Millions)
Three Months Ended
March 31,
-----------------------------------
1998 1997
--------------- ---------------
Third party commissions and fees................................................ $ 301.2 $ 235.4
Affiliate fees(1)............................................................... 13.6 30.7
Contribution to earnings by DLJ, investment results and other income............ 75.0 29.1
--------------- ---------------
Total revenues.................................................................. 389.8 295.2
Total costs and expenses........................................................ 257.2 216.8
--------------- ---------------
Earnings from Continuing Operations before Federal Income Taxes
and Minority Interest......................................................... $ 132.6 $ 78.4
=============== ===============
<FN>
(1) Includes EREIM in 1997.
</FN>
For first quarter 1998, pre-tax earnings for Investment Services increased by
$54.2 million from the year-earlier period primarily due to the $31.5 million
gain recognized as a result of Alliance Units issued upon the exercise of
options and increases in DLJ capital from tax benefits from the exercise of
options and conversion of restricted stock units, higher earnings for Alliance
and higher contributions to earnings by DLJ. DLJ's earnings contribution was
58.1% higher in 1998 largely due to increased underwriting revenues, strong
merger and acquisition activity and the growth in trading volume on most major
exchanges. Total segment revenues were up $94.6 million principally due to
higher revenues at Alliance and the aforementioned gain.
Total costs and expenses increased by $40.4 million for first quarter 1998 as
compared to the same period in 1997 principally reflecting increases in
compensation and promotional expenses at Alliance due to increased activity.
17
The following table summarizes results of operations by business unit.
Investment Services
Results of Operations by Business Unit
(In Millions)
Three Months Ended
March 31,
-----------------------------------
1998 1997
--------------- ---------------
Earnings from continuing operations before Federal income taxes
and minority interest:
DLJ........................................................................... $ 202.0 $ 131.0
Alliance...................................................................... 78.5 54.1
Equitable Real Estate(1)...................................................... - 6.5
Consolidation/elimination(2)(3)............................................... (147.9) (113.2)
--------------- ---------------
Earnings from Continuing Operations before Federal Income Taxes
and Minority Interest......................................................... $ 132.6 $ 78.4
=============== ===============
<FN>
(1) EREIM was sold on June 10, 1997.
(2) 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 $155.8 million and $99.8 million for the first quarters of 1998
and 1997, respectively.
(3) Includes the first quarter of 1998 gain on the exercise of DLJ and Alliance
options and the conversion of DLJ restricted stock units totaling $24.0
million (net of $7.4 million of state taxes) as well as interest expense of
$3.0 million related to intercompany debt issued by intermediate holding
companies payable to Equitable Life for the first quarters of both 1998 and
1997.
</FN>
DLJ - DLJ's earnings from continuing operations for first quarter 1998 were
$202.0 million, up $71.0 million from the comparable prior year period. Revenues
increased $511.9 million to $1.49 billion primarily due to higher net investment
income of $244.8 million, higher underwriting revenues of $146.9 million,
increased fees of $109.3 million, $40.4 million higher gains on the corporate
development portfolios and higher commissions of $30.1 million offset by lower
dealer and trading gains of $52.0 million. DLJ's expenses were $1.29 billion for
first quarter 1998, up $440.9 million from the comparable prior year period
primarily due to a $220.7 million increase in compensation and commissions and
higher interest expense of $155.7 million. The first quarter 1998 compensation
costs included a $29.0 million one-time provision for costs associated primarily
with DLJ's plans for significant expansion in Europe.
DLJ enters into certain contractual agreements referred to as derivatives or
off-balance-sheet financial instruments involving futures, forwards and options.
DLJ's derivative activities are not as extensive as many of its competitors.
Instead, DLJ has focused its derivative activities on writing OTC options to
accommodate its customers' needs, trading in forward contracts in U.S.
government and agency issued or guaranteed securities and in futures contracts
on equity based indices, 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. 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 as well as options on futures
contracts. Such forward and futures contracts are entered into as part of DLJ's
covering transactions and are generally not used for speculative purposes.
Revenues from option contracts (net of related interest expense) were
approximately $15.1 million and $9.6 million for the first quarters of 1998 and
1997, respectively. Option writing revenues are primarily from the amortization
of option premiums. The notional value of written options contracts outstanding
was approximately $6.7 billion and $9.3 billion at March 31, 1998 and 1997,
respectively. The overall decrease in the notional value of all options was
primarily due to decreases in customer activity related to foreign sovereign
debt securities. Such written options contracts are substantially covered by
various financial instruments that DLJ had purchased or sold as principal.
18
Net trading losses on forward contracts were $23.8 million and $29.3 million and
net trading (losses) gains on futures contracts were $(27.0) million and $5.7
million for the first quarters of 1998 and 1997, respectively. The notional
contract and market values of the forward and futures contracts at March 31,
1998 and 1997 were as follows:
March 31, 1998 March 31, 1997
---------------------------------- -----------------------------------
Purchases Sales Purchases Sales
--------------- --------------- --------------- ---------------
(In Millions)
Forward Contracts
(Notional Contract Value).............. $ 23,288 $ 23,555 $ 17,222 $ 26,189
=============== =============== =============== ===============
Futures Contracts and Options on
Futures Contracts (Market Value)....... $ 1,210 $ 2,117 $ 2,193 $ 6,844
=============== =============== =============== ===============
DLJ issues structured notes which are customized financing instruments in which
the amount of interest or principal paid on a debt obligation is linked to the
return on specific cash instruments. At March 31, 1998 and December 31, 1997,
DLJ had issued long-term structured notes totaling $147.6 million and $123.7
million, respectively. DLJ covers its obligations on structured notes primarily
by purchasing and selling the financial instruments to which the value of its
structured notes are linked.
Alliance - Alliance's earnings from continuing operations for first quarter 1998
were $78.5 million, an increase of $24.4 million from the prior year's
comparable period. Revenues totaled $314.7 million for first quarter 1998, an
increase of $95.4 million from the comparable period in 1997, due to increased
investment advisory and service fees. Alliance's costs and expenses increased
$71.0 million for first quarter 1998 primarily due to increases in employee
compensation and benefits, mutual fund promotional expenditures and a $10.0
million provision for the estimated buyout price of the minority interest in
Cursitor.
Fees and Assets Under Management - As the following table illustrates, third
party clients represent the primary source of fees from assets under management.
Fees and Assets Under Management
(In Millions)
At or For the
Three Months Ended
March 31,
-----------------------------------
1998 1997
--------------- ---------------
Fees:
Third Party
Unaffiliated third parties.................................................. $ 252.6 $ 186.6
Separate Accounts........................................................... 24.1 18.1
Equitable Life and affiliates................................................. 10.9 27.7
--------------- ---------------
Total........................................................................... $ 287.6 $ 232.4
=============== ===============
Assets Under Management:
Third Party
Unaffiliated third parties.................................................. $ 209,219 $ 153,920
Separate Accounts........................................................... 37,081 30,217
Equitable Life and affiliates................................................. 60,015 56,684
---------------- ---------------
Total........................................................................... $ 306,315 $ 240,821
================ ===============
19
Fees from assets under management increased for first quarter 1998 from the
comparable 1997 period principally as a result of growth in assets under
management for third parties. Alliance's third party assets under management
increased by $63.52 billion primarily due to market appreciation and mutual fund
sales.
At March 31, 1997, third party assets under management by Equitable Real Estate,
including Separate Accounts, were $14.67 billion. For first quarter 1997, fees
received for assets under management by Equitable Real Estate totaled $48.5
million of which $31.4 million was received from third parties.
GENERAL ACCOUNT INVESTMENT PORTFOLIO
This discussion of the General Account portfolio analyzes the results of major
investment asset categories, including the Closed Block's investments. The
following table reconciles the consolidated balance sheet asset amounts to
General Account Investment Assets.
General Account Investment Assets
Carrying Values
March 31, 1998
(In Millions)
General
Account
Balance Closed Investment
Balance Sheet Captions: Sheet Block Other Assets(1)
- ---------------------------------------------- --------------- -------------- --------------- -------------
Fixed maturities:
Available for sale(2)....................... $ 20,373.1 $ 4,261.8 $ (108.4) $ 24,743.3
Mortgage loans on real estate................. 2,541.5 1,398.3 - 3,939.8
Equity real estate............................ 2,381.8 129.4 (1.5) 2,512.7
Policy loans.................................. 1,956.4 1,674.3 - 3,630.7
Other equity investments...................... 1,005.5 74.8 .4 1,079.9
Other invested assets......................... 1,257.4 (1.0) 1,064.6 191.8
----------------- -------------- --------------- -------------
Total investments........................... 29,515.7 7,537.6 955.1 36,098.2
Cash and cash equivalents..................... 636.6 68.2 125.0 579.8
----------------- -------------- --------------- -------------
Total......................................... $ 30,152.3 $ 7,605.8 $ 1,080.1 $ 36,678.0
================= ============== =============== =============
<FN>
(1) General Account Investment Assets are computed by adding the Balance Sheet
and Closed Block and deducting the Other amounts.
(2) At March 31, 1998, the amortized cost of the General Account's available
for sale fixed maturities portfolio was $23.64 billion compared with an
estimated market value of $24.74 billion.
</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.
20
General Account Investment Assets by Category
The following table shows the amortized cost, valuation allowances and net
amortized cost of the major categories of General Account Investment Assets at
March 31, 1998 and net amortized cost at December 31, 1997.
General Account Investment Assets
(Dollars In Millions)
March 31, 1998 December 31, 1997
----------------------------------------------------------- -----------------------------
% of % of
Net Total Net Net Total Net
Amortized Valuation Amortized Amortized Amortized Amortized
Cost Allowances Cost Cost Cost Cost
--------------- ------------- ------------- ------------- ------------- -------------
Fixed maturities(1).......... $ 23,639.2 $ - $ 23,639.2 66.5% $ 22,914.5 65.0%
Mortgages.................... 4,016.4 76.6 3,939.8 11.1 3,953.0 11.2
Equity real estate........... 2,863.9 351.2 2,512.7 7.1 2,637.8 7.5
Other equity investments..... 1,079.9 - 1,079.9 3.0 1,037.5 2.9
Policy loans................. 3,630.7 - 3,630.7 10.2 4,123.1 11.7
Cash and short-term
investments................ 771.6 - 771.6 2.1 607.6 1.7
--------------- ------------- ------------- ------------- ------------- -------------
Total........................ $ 36,001.7 $ 427.8 $ 35,573.9 100.0% $ 35,273.5 100.0%
=============== ============= ============= ============= ============= =============
<FN>
(1) Excludes unrealized gains of $1.10 billion and $1.07 billion in fixed
maturities classified as available for sale at March 31, 1998 and December
31, 1997, respectively.
</FN>
21
Investment Results of General Account Investment Assets
Investment Results by Asset Category
(Dollars In Millions)
Three Months Ended March 31,
---------------------------------------------------------
1998 1997
--------------------------- ---------------------------
(1) (1)
Yield Amount Yield Amount
----------- ------------- ----------- -------------
Fixed Maturities:
Income.................................................... 7.78% $ 453.0 8.00% $ 435.9
Investment Gains/(Losses)................................. 0.26% 15.1 0.57% 31.3
----------- ------------- ----------- -------------
Total..................................................... 8.04% $ 468.1 8.57% $ 467.2
Ending Assets............................................. $ 23,639.2 $ 21,892.8
Mortgages:
Income.................................................... 9.89% $ 97.6 9.47% $ 104.7
Investment Gains/(Losses)................................. (0.70)% (6.9) 0.14% 1.6
----------- ------------- ----------- -------------
Total..................................................... 9.19% $ 90.7 9.61% $ 106.3
Ending Assets............................................. $ 3,939.8 $ 4,335.5
Equity Real Estate(2):
Income.................................................... 5.27% $ 26.6 2.09% $ 14.2
Investment Gains/(Losses)................................. 0.49% 2.5 (1.54%) (10.5)
----------- ------------- ----------- -------------
Total..................................................... 5.76% $ 29.1 0.55% $ 3.7
Ending Assets............................................. $ 1,969.5 $ 2,705.5
Other Equity Investments:
Income.................................................... 14.58% $ 38.6 6.71% $ 15.9
Investment Gains/(Losses)................................. 9.68% 25.6 (0.08%) (0.2)
----------- ------------- ----------- -------------
Total..................................................... 24.26% $ 64.2 6.63% $ 15.7
Ending Assets............................................. $ 1,079.9 $ 938.9
Policy Loans:
Income.................................................... 7.21% $ 69.9 6.90% $ 69.0
Ending Assets............................................. $ 3,630.7 $ 4,043.2
Cash and Short-term Investments:
Income.................................................... 11.95% $ 20.6 10.59% $ 12.6
Ending Assets............................................. $ 771.6 $ 673.7
Total:
Income.................................................... 8.10% $ 706.3 7.59% $ 652.3
Investment Gains/(Losses)................................. 0.42% 36.3 0.26% 22.2
----------- ------------- ----------- -------------
Total(3).................................................. 8.52% $ 742.6 7.85% $ 674.5
Ending Assets............................................. $ 35,030.7 $ 34,589.6
<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.
(2) Equity real estate carrying values are shown net of third party debt and
minority interest in real estate. Equity real estate income is shown net of
operating expenses, depreciation, third party interest expense and minority
interest.
(3) Total yields are shown before deducting investment fees paid to its
investment advisors. These fees include asset management, acquisition,
disposition, accounting and legal fees. If investment fees had been
deducted, total yields would have been 8.20% and 7.58% for the first
quarters of 1998 and 1997, respectively.
</FN>
22
Writedowns on fixed maturities were $6.1 million and $4.6 million for the first
quarters of 1998 and 1997, respectively. The following table shows asset
valuation allowances and additions to and deductions from such allowances for
mortgages and equity real estate for the first quarters of 1998 and 1997.
General Account Investment Assets
Valuation Allowances
(In Millions)
Equity Real
Mortgages Estate Total
--------------- --------------- --------------
March 31, 1998
Beginning balances............................................ $ 74.3 $ 345.5 $ 419.8
Additions..................................................... 10.0 33.9 43.9
Deductions(1)................................................. (7.7) (28.2) (35.9)
--------------- --------------- --------------
Ending Balances............................................... $ 76.6 $ 351.2 $ 427.8
=============== =============== ==============
March 31, 1997
Beginning balances............................................ $ 64.2 $ 90.4 $ 154.6
Additions..................................................... 14.8 14.7 29.5
Deductions(1)................................................. (18.4) (15.4) (33.8)
--------------- --------------- --------------
Ending Balances............................................... $ 60.6 $ 89.7 $ 150.3
=============== =============== ==============
<FN>
(1) Primarily reflected releases of allowances due to asset dispositions and
writedowns.
</FN>
Fixed Maturities. Fixed maturities consist of publicly traded debt and privately
placed debt securities and small amounts of redeemable preferred stock, which
represented 74.3%, 25.1% and 0.6%, respectively, of the amortized cost of this
asset category at March 31, 1998.
Fixed Maturities By Credit Quality
(Dollars In Millions)
March 31, 1998 December 31, 1997
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...... $ 20,187.8 85.4% $ 21,133.7 $ 19,488.9 85.0% $ 20,425.3
3-6 Ba and lower.......... 3,315.7(1) 14.0 3,448.7 3,294.9(2) 14.4 3,395.4
------------ ----------- -------------- ------------ -------- --------------
Subtotal........................ 23,503.5 99.4 24,582.4 22,783.8 99.4 23,820.7
Redeemable preferred stock
and other..................... 135.7 0.6 160.9 130.7 0.6 166.2
------------ ----------- -------------- ------------ ------------- -------------
Total........................... $ 23,639.2 100.0% $ 24,743.3 $ 22,914.5 100.0% $ 23,986.9
============ =========== ============== ============ ============= =============
<FN>
(1) Includes Class B Notes with an amortized cost of $93.5 million, eliminated in consolidation.
(2) Includes Class B Notes with an amortized cost of $95.2 million, eliminated in consolidation.
</FN>
At March 31, 1998, the Company held mortgage pass-through securities with an
amortized cost of $2.76 billion, $2.23 billion of CMOs, including $2.12 billion
in publicly traded CMOs, and $1.54 billion of public and private asset backed
securities, primarily backed by home equity, mortgage, airline and other
equipment, and credit card receivables.
23
Fixed Maturities
Problems, Potential Problems and Restructureds
Amortized Cost
(In Millions)
March 31, December 31,
1998 1997
--------------- -----------------
FIXED MATURITIES.............................................................. $ 23,639.2 $ 22,914.5
Problem fixed maturities...................................................... 60.9 31.0
Potential problem fixed maturities............................................ 38.6 17.9
Restructured fixed maturities(1).............................................. 0.2 1.8
<FN>
(1) Excludes restructured fixed maturities of $2.1 million and $2.1 million that
are shown as problems at March 31, 1998 and December 31, 1997, respectively.
</FN>
Mortgages. Mortgages consist of commercial, agricultural and residential loans.
At March 31, 1998, commercial mortgages totaled $2.30 billion (57.2% of the
amortized cost of the category), agricultural loans were $1.71 billion (42.7%)
and residential loans were $2.0 million (0.1%).
Mortgages
Problems, Potential Problems and Restructureds
Amortized Cost
(Dollars In Millions)
March 31, December 31,
1998 1997
--------------- -----------------
COMMERCIAL MORTGAGES.......................................................... $ 2,300.0 $ 2,305.8
Problem commercial mortgages.................................................. 15.0 19.3
Potential problem commercial mortgages........................................ 187.0 180.9
Restructured commercial mortgages(1).......................................... 193.3 194.9
AGRICULTURAL MORTGAGES........................................................ $ 1,714.4 $ 1,719.2
Problem agricultural mortgages................................................ 13.3 12.2
Potential problem agricultural mortgages...................................... 7.0 -
Restructured agricultural mortgages........................................... 1.1 1.1
<FN>
(1) No restructured commercial mortgages were shown as problems at either March
31, 1998 or December 31, 1997; excludes $57.9 million of restructured
commercial mortgages that are shown as potential problems at March 31, 1998
and December 31, 1997.
</FN>
The original weighted average coupon rate on the $193.3 million of restructured
mortgages was 9.5%. As a result of these restructurings, the restructured
weighted average coupon rate was 8.3% and the restructured weighted average cash
payment rate was 7.8%. The foregone interest on restructured commercial
mortgages (including restructured commercial mortgages presented as problem or
potential problem commercial mortgages) for first quarter 1998 was $0.6 million.
As of March 31, 1998, the distribution of problem commercial mortgages by
property type was: retail ($14.3 million or 95.3%), hotel ($0.4 million or 2.7%)
and industrial ($0.3 million or 2.0%). By state, the distribution was: Ohio
($14.3 million or 95.3%), Wyoming ($0.4 million or 2.7%) and California ($0.3
million or 2.0%). The distribution of potential problem commercial mortgages by
property type was: retail ($154.0 million or 82.4%), industrial ($18.8 million
24
or 10.1%), hotel ($12.4 million or 6.6%), apartment ($1.4 million or 0.7%) and
office ($0.4 million or 0.2%). By states representing 5% or more of the total,
the distribution was: New York ($102.0 million or 54.5%), Massachusetts ($26.8
million or 14.3%), Puerto Rico ($18.7 million or 10.0%), Pennsylvania ($18.4
million or 9.8%) and Ohio ($12.2 million or 6.5%).
At March 31, 1998 and 1997, respectively, management identified impaired
mortgage loans with carrying values of $234.9 million and $403.5 million. The
provisions for losses for these impaired mortgage loans were $71.2 million and
$52.3 million at March 31, 1998 and 1997, respectively. For the first quarters
of 1998 and 1997, respectively, income accrued on these loans was $4.5 million
and $7.7 million, including cash received of $3.1 million and $7.6 million.
For first quarter 1998, scheduled principal amortization payments and
prepayments on commercial mortgage loans received aggregated $67.8 million. In
addition, $30.0 million of commercial mortgage loan maturity payments were
scheduled, of which $23.5 million were paid as due. Of the amount not paid, $6.5
million were granted extensions; none were foreclosed, delinquent or in default
for non-payment of principal.
Equity Real Estate. As of March 31, 1998, on the basis of amortized cost, the
equity real estate category included $1.96 billion (68.3%) acquired as
investment real estate and $906.6 million (31.7%) acquired through or in lieu of
foreclosure (including in-substance foreclosures).
Management announced in January 1998 plans to accelerate equity real estate
sales over the next 12 to 15 months. During the first quarters of 1998 and 1997,
respectively, proceeds from the sale of equity real estate totaled $91.0 million
and $66.1 million, with gains of $35.8 million and $4.2 million.
At March 31, 1998, the vacancy rate for the Company's office properties was
10.6% in total, with a vacancy rate of 8.3% for properties acquired as
investment real estate and 19.6% for properties acquired through foreclosure.
The national commercial office vacancy rate was 9.9% (as of December 31, 1997)
as measured by CB Commercial.
Other Equity Investments. Other equity investments consist of limited
partnership interests managed by third parties ($585.4 million or 54.2% of the
amortized cost of this portfolio at March 31, 1998) and other equity securities
($494.5 million or 45.8%). The other equity investments can create significant
volatility in investment income since they predominately are accounted for in
accordance with the equity method that treats increases and decreases in the
estimated fair value of the underlying assets (or allocable portion thereof, in
the case of partnerships), whether realized or unrealized, as investment income
or loss to the Company. Though not included in General Account Investment
Assets, the excess of Separate Account assets over Separate Accounts liabilities
at March 31, 1998 of $325.7 million represented an investment by the General
Account principally in equity securities. Returns on all equity investments are
very volatile and there can be no assurance recent performance will be
sustained.
YEAR 2000
Year 2000 compliance efforts continue at Equitable Life, DLJ and Alliance with
costs of $3.8 million, $11.0 million and $2.1 million, respectively, incurred
during first quarter 1998.
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 March 31, 1998, no amounts were outstanding
under either the commercial paper program or the revolving credit facility.
On March 16, 1998, members of the NAIC approved its Codification of Statutory
Accounting Principles ("Codification") project. Codification provides regulators
and insurers with uniform statutory guidance, addressing existing statutory
25
positions. Equitable Life will be subject to Codification to the extent and in
the form adopted in New York State, which would require action by both the New
York legislature and the New York Insurance Department. It is not possible to
predict whether, in what form, or when Codification will be adopted in New York,
and accordingly it is not possible to predict the effect of Codification on
Equitable Life.
Consolidated Cash Flows
Net cash provided by operating activities was $358.5 million for first quarter
1998 compared to $243.9 million for first quarter 1997.
Net cash provided by investing activities was $178.3 million for first quarter
1998 as compared to net cash used by investing activities of $28.7 million for
the same period in 1997. In 1998, investment sales, maturities and repayments
exceeded purchases by $37.5 million. Loans to the discontinued GIC segment were
reduced by $300.0 million during first quarter of 1998. Cash used by investing
activities during the first three months of 1997 primarily was attributable to
the increase in other invested assets partially offset by investment sales,
maturities and repayments exceeding purchases by approximately $125.2 million.
Net cash used by financing activities was $200.7 million for first quarter 1998
as compared to net cash provided by financing activities of $54.8 million for
first quarter 1997. During first quarter 1998, withdrawals from policyholders'
accounts exceeded additions by $98.1 million. Net cash provided by financing
activities during first quarter 1997 primarily resulted from a $276.7 million
increase in short-term financings, principally due to net repurchase agreement
activity. Withdrawals from policyholders' account balances exceeded deposits by
$114.0 million during first quarter 1997.
The operating, investing and financing activities described above resulted in an
increase in cash and cash equivalents during the first three months of 1998 of
$336.1 million to $636.6 million.
FORWARD-LOOKING STATEMENTS
The Company's management has made in this report, and from time to time may make
in its public filings and press releases as well as in oral presentations and
discussions, forward-looking statements concerning the Company's operations,
economic performance and financial condition. Forward-looking statements
include, among other things, discussions concerning the Company's potential
exposure to market risks, as well as statements expressing management's
expectations, beliefs, estimates, forecasts, projections and assumptions, as
indicated by words such as "believes," "estimates," "intends," "anticipates,"
"expects," "projects," "should," "probably," "risk," "target," "goals,"
"objectives," or similar expressions. The Company claims the protection afforded
by the safe harbor for forward-looking statements contained in the Private
Securities Litigation Reform Act of 1995, and assumes no duty to update any
forward-looking statement. Forward-looking statements are subject to risks and
uncertainties. Actual results could differ materially from those anticipated by
forward-looking statements due to a number of important factors including those
discussed elsewhere in this report and in the Company's other public filings,
press releases, oral presentations and discussions and the following: (i) the
intensity of competition from other financial institutions; (ii) secular trends
and the Company's experience with respect to mortality, morbidity, persistency
and claims experience; (iii) the Company's ability to develop, distribute and
administer competitive products and services in a timely, cost-effective manner;
(iv) the Company's visibility in the market place and its financial and claims
paying ratings; (v) the effect of changes in laws and regulations affecting the
Company's businesses, including changes in tax laws affecting insurance and
annuity products; (vi) the volatile nature of the securities business, the
future results of DLJ and Alliance and the potential losses that could result
from DLJ's merchant banking activities as a result of its capital intensive
nature; (vii) market risks related to interest rates, equity prices,
derivatives, foreign currency exchange and credit; (viii) the volatility of
returns from the Company's other equity investments; (ix) the Company's ability
to develop information technology and management information systems to support
strategic goals while continuing to control costs and expenses; (x) the costs of
defending litigation and the risk of unanticipated material adverse outcomes in
such litigation; (xi) changes in accounting and reporting practices; (xii) the
performance of others on whom the Company relies for distribution, investment
management, reinsurance and other services; (xiii) the Company's access to
adequate financing to support its future business and (xiv) the effect of any
future acquisitions.
26
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, 1997, except as set forth in Note 8 to the Registrant's
Unaudited Consolidated Financial Statements in Part I of this Form 10-Q for the
quarter ended March 31, 1998.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K
None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, The
Equitable Life Assurance Society of the United States has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: May 13, 1998 THE EQUITABLE LIFE ASSURANCE SOCIETY
OF THE UNITED STATES
By: /s/Stanley B. Tulin
-------------------------------------
Name: Stanley B. Tulin
Title: Vice Chairman and
Chief Financial Officer
Date: May 13, 1998 /s/Alvin H. Fenichel
-------------------------------------
Alvin H. Fenichel
Senior Vice President and Controller
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