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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------------------
FORM 10-K
(Mark One) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
x OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 0-25280
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
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
- - --------------------------------------------- ----------------------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock (Par Value $1.25 Per Share)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. x
No voting stock of the registrant is held by non-affiliates of the registrant as
of March 10, 1997.
As of March 10, 1997, 2,000,000 shares of the registrant's Common Stock were
outstanding.
REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION I(1)(a) AND (b)
OF FORM 10-K AND IS THEREFORE FILING THIS FORM WITH THE REDUCED DISCLOSURE
FORMAT.
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TABLE OF CONTENTS
Part I
Item 1. Business................................................................. 1-1
General.................................................................. 1-1
Insurance Operations..................................................... 1-1
Investment Services...................................................... 1-5
Discontinued Operations ................................................. 1-10
Closed Block............................................................. 1-10
General Account Investment Portfolio..................................... 1-11
Competition.............................................................. 1-16
Regulation............................................................... 1-18
Principal Shareholder.................................................... 1-24
Item 2. Properties............................................................... 2-1
Item 3. Legal Proceedings........................................................ 3-1
Item 4. Submission of Matters to a Vote of Security Holders...................... 4-1
Part II
Item 5 Market for Registrant's Common Equity and Related Stockholders Matters... 5-1
Item 6. Selected Consolidated Financial Information.............................. 6-1
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................. 7-1
Item 8. Financial Statements and Supplementary Data.............................. FS-1
Item 9. Changes In and Disagreements With Accountants On Accounting and
Financial Disclosure................................................... 9-1
Part III
Item 10. Directors and Executive Officers of the Registrant....................... 10-1
Item 11. Executive Compensation................................................... 11-1
Item 12. Security Ownership of Certain Beneficial Owners and Management........... 12-1
Item 13. Certain Relationships and Related Transactions........................... 13-1
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K......... 14-1
Signatures ......................................................................... S-1
Index to Exhibits ......................................................................... E-1
TOC-1
Part I, Item 1.
BUSINESS 1
General. Equitable Life, together with its insurance and investment
subsidiaries, constitutes a diversified financial services organization serving
a broad spectrum of insurance, investment management and, through its minority
interest in DLJ, investment banking customers. Equitable Life's insurance
business, which comprises the Insurance Operations segment, is conducted by the
Insurance Group. Equitable Life's investment management and investment banking
business, which comprises the Investment Services segment, is conducted
principally by Alliance, Equitable Real Estate, and DLJ, in which Equitable Life
owns a minority 36.1% interest. For additional information on Equitable Life's
business segments, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Combined Results of Continuing Operations
by Segment" and Note 18 of Notes to Consolidated Financial Statements. Since
Equitable Life's demutualization in 1992, it has been a wholly owned subsidiary
of the Holding Company, shares of which are listed on the New York Stock
Exchange ("NYSE"). AXA-UAP ("AXA"), a French holding company for an
international group of insurance and related financial services companies, is
the Holding Company's largest shareholder. For more information on Equitable
Life's demutualization, including the establishment of the Closed Block, see
Notes 2 and 6 of Notes to Consolidated Financial Statements and "Principal
Shareholder".
Segment Information
Insurance Operations
General. The Insurance Operations segment accounted for approximately $3.74
billion or 77% of consolidated revenue for the year ended December 31, 1996. It
offers a variety of life insurance and annuity products, mutual funds and other
investment products as well as disability income products and association plans.
These products are marketed in all 50 states by a career agency force of over
7,200 agents (except association plans, which are marketed directly to clients
by the Insurance Group). The Insurance Group's Income Manager series of annuity
products, which was introduced in May, 1995, is also distributed through
securities firms, financial planners and banks, as well as by the career agency
force. As of December 31, 1996, the Insurance Group had over two million policy
or contractholders. Equitable Life, which was established in the State of New
York in 1859, has been among the largest life insurance companies in the United
States for more than 100 years. For additional information on the Insurance
Operations segment, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Combined Results of Continuing Operations
by Segment," Note 18 of Notes to Consolidated Financial Statements, as well as
"Employees and Agents," "Competition" and "Regulation".
- - --------
1 As used in this Form 10-K, "Equitable Life" refers to The Equitable Life
Assurance Society of the United States, a New York stock life insurance
company, "Holding Company" refers to The Equitable Companies Incorporated, a
Delaware corporation, and the "Company" or "The Equitable" refers to
Equitable Life and its consolidated subsidiaries. See Note 2 of Notes to
Consolidated Financial Statements (Item 8 of this report) for information on
the principles of consolidation. The term "Insurance Group" refers
collectively to Equitable Life and its wholly owned subsidiary, The
Equitable of Colorado, Inc. ("EOC") and, prior to January 1, 1997, Equitable
Variable Life Insurance Company ("EVLICO"). The term "Investment
Subsidiaries" refers collectively to Equitable Life's wholly owned
subsidiary, Equitable Real Estate Investment Management, Inc., together with
its affiliates Equitable Agri-Business, Inc., and EQ Services, Inc.
(collectively referred to herein as "Equitable Real Estate"), to Equitable
Life's publicly traded affiliates, Alliance Capital Management L.P.
("Alliance") and Donaldson, Lufkin & Jenrette, Inc. ("DLJ") and in each case
their respective subsidiaries. The term "General Account" refers to the
assets held in the respective general accounts of Equitable Life, EOC and,
prior to January 1, 1997, EVLICO and all of the investment assets held in
certain of Equitable Life's separate accounts on which the Insurance Group
bears the investment risk. The term "Separate Accounts" refers to the
Separate Account investment assets of Equitable Life and, prior to January
1, 1997, EVLICO, excluding those separate accounts on which the Insurance
Group bears the investment risk. The term "General Account Investment
Assets" refers to assets held in the General Account associated with the
Insurance Group's continuing operations and does not include assets held in
the General Account associated with the Insurance Group's discontinued
guaranteed interest contract ("GIC") Segment which are referred to herein as
"GIC Segment Investment Assets".
1-1
Products. The Insurance Group emphasizes the sale of individual variable life
insurance products and individual variable annuity products (both tax-qualified
and non-qualified). These products are designed to meet the life insurance,
asset accumulation, retirement funding and estate planning needs of the
Insurance Group's targeted markets. They offer multiple Separate Account
investment options, including bond funds, domestic and global equity funds, a
balanced fund, and a series of asset allocation funds, as well as General
Account guaranteed interest options. The range of investment options creates
flexibility in meeting individual customer needs. The Insurance Group's Separate
Accounts and the underlying funds in which they invest are managed principally
by Alliance. In 1997, funds managed by unaffiliated managers will be added.
In 1995, the Insurance Group introduced its Income Manager series of retirement
products which are annuities designed to provide for both the accumulation and
distribution of retirement assets. In addition to a choice of variable funds,
these products offer 10 market value adjusted fixed rate options held in a
Separate Account which provide a guaranteed interest rate to a fixed maturity
date and a market value adjustment for withdrawals or transfers prior to such
date. In 1996, Income Manager accumulation products added a guaranteed minimum
income benefit which, subject to certain restrictions and limitations, provides
a guaranteed minimum life annuity regardless of investment performance. The
distribution products offer the guarantee of a lifetime income similar to
traditional immediate annuities, while giving the annuitant access to cash
values during the early years following retirement
To fund the pension plans (both defined benefit and defined contribution) of
small to medium-sized employers, the Insurance Group offers annuity products
tailored to the small pension market. These products offer both Separate Account
and General Account investment options.
The overall growth of Separate Account assets is a strategic objective of
Equitable Life. To the extent the investment funds associated with variable life
insurance and variable annuity products are placed in the Separate Accounts
rather than in the General Account, the investment risk (and reward) is
transferred to policyholders while Equitable Life earns fee income from the
management of assets held in the Separate Accounts. Management believes that
this fee income produces a more predictable income stream than the spread income
from traditional products. In addition, variable products, because they involve
less risk to the Insurance Group than traditional products, require less
capital. Separate Account options also permit policy owners to choose more
personalized investment strategies without affecting the composition of General
Account assets. Over the past five years, Separate Account balances for
individual variable life and variable annuities have increased by $11.99 billion
to $17.66 billion at December 31, 1996.
The Insurance Group also sells traditional whole life insurance and term
insurance products, disability income products, and, through its wholly owned
broker-dealer subsidiary EQ Financial Consultants, Inc. ("EQ Financial"),
formerly known as Equico Securities, Inc. ("Equico"), mutual funds. During 1996,
the Insurance Group's career agency force sold approximately $1.36 billion in
mutual funds and other investments through EQ Financial. In cases where the
Insurance Group does not offer an insurance product suitable for the needs of a
particular customer, the Insurance Group provides its agents with access to a
number of additional insurance products through EquiSource, Inc., a wholly owned
insurance brokerage subsidiary.
In addition to the sale of insurance products, the Insurance Group acts as a
professional retrocessionaire by assuming life, disability income and annuity
reinsurance from professional reinsurers. The Insurance Group also assumes
accident, health, group LTD, aviation and space risks by participating in
various reinsurance pools.
Effective September 15, 1992, the Insurance Group ceased to sell new individual
major medical policies. Since July 1, 1993, new disability income policies have
been 80% reinsured through an arrangement with Paul Revere Life Insurance
Company.
1-2
The following table summarizes premiums and deposits for the Individual
Insurance and Annuities segment's products combining amounts for the Closed
Block and amounts for operations outside the Closed Block.
Insurance Operations
Premiums/Deposits
(In Millions)
Years Ended December 31,
--------------------------------------
1996 1995 1994
----------- ----------- ----------
Individual annuities.............................. $ 3,342.6 $ 2,847.4 $ 2,766.9
Variable and interest-sensitive life insurance.... 1,479.7 1,358.4 1,264.9
Traditional life insurance........................ 867.0 887.4 925.9
Other............................................. 753.7 818.3 668.1
----------- ----------- ----------
Total Premiums/Deposits........................... $ 6,443.0 $ 5,556.8 $ 5,391.4
=========== =========== ==========
Markets. The Insurance Group's targeted customers include middle and upper
income individuals such as professionals, owners of small businesses, employees
of tax-exempt organizations and existing customers. For variable life, the
Insurance Group has targeted certain markets, particularly non-qualified
retirement planning, the estate planning market, the market for business
continuation needs (e.g., the use of variable life insurance to fund buy/sell
agreements and similar arrangements), as well as the middle-to-upper income
savings and life protection markets. The Insurance Group's target markets for
variable annuities include the tax exempt markets (particularly retirement plans
for educational and non-profit organizations), corporate pension plans
(particularly 401K defined contribution plans covering 25 to 250 employees) and
the IRA retirement planning market. The Insurance Group's Income Manager series
of annuity products is designed to address the growing market of those at or
near retirement who have a need to convert retirement savings into retirement
income.
Demographic studies suggest that, as the post-World War II "baby boom"
generation ages over the next decade, there will be growth in the number of
individuals who management believes are most likely to purchase the Insurance
Group's savings-oriented products. These baby boomers have indicated a strong
need for long-term planning services. Those studies also suggest that over the
next 15 years there will be significant growth in the number of new retirees.
Management believes this growth in the retiree population represents an
opportunity for the Insurance Group's Income Manager products. In addition,
management believes the trend among U.S. employers away from defined benefit
plans (under which the employer makes the investment decisions) toward
employee-directed, defined contribution retirement and savings plans (which
allow employees to choose from a variety of investment options) will continue.
Management believes the asset accumulation needs of customers in these target
markets for estate planning, the planning for and management of retirement and
education funds and other forms of long-term savings, as well as their
traditional insurance protection needs, can be satisfied by the range of
insurance and annuity products offered by the Insurance Group.
In 1996, the Insurance Group collected premiums and deposits from policy or
contractholders in all 50 states, the District of Columbia and Puerto Rico. For
the Insurance Group, the states of New York (14.5%), New Jersey (7.7%),
Pennsylvania (7.0%), California (6.9%), Michigan (6.3%) and Illinois (6.0%)
contributed the greatest amounts of premiums (accounted for on a statutory
basis), and no other state represented more than 5% of the Insurance Group's
statutory premiums. The Insurance Group also collected premiums in Canada and
certain other foreign countries, but premiums from all foreign countries
represented less than 1% of the Insurance Group's 1996 aggregate statutory
premiums.
Distribution. Products are distributed primarily through a career agency force
of over 7,200 professionals organized into approximately 80 agencies across the
United States which are owned and managed by the Insurance Group and which
provide agents with training, marketing and sales support. After an initial
training period, agents are compensated by commissions based on product sales
1-3
levels and key profitability factors, including persistency. The Insurance Group
sponsors pension and other benefit plans and sales incentive programs for its
agents to focus their sales efforts on the Insurance Group's products. Most of
the Insurance Group's career agents are not prohibited from selling traditional
insurance products offered by other companies. Equitable Life's Law Department
maintains a Compliance Group staffed with compliance professionals who, working
together with attorneys in the Law Department, review and approve advertising
and sales literature prior to use by the Insurance Group's agency force and
monitor customer complaints.
As of December 31, 1996, approximately 85% of the Insurance Group's agents were
licensed to sell variable insurance and annuity products as well as certain
investment products, including mutual funds. The Insurance Group leads the
insurance industry in the number of agents and employees who hold both the
Chartered Life Underwriter (CLU) and Chartered Financial Consultant (ChFC)
designations, which are awarded by the American College, a professional
organization for insurance and financial planning professionals. Management
believes that the professionalism of its agency force provides it with a
competitive advantage in the marketing of the Insurance Group's sophisticated
insurance products, including variable insurance and annuities.
In a continuing effort to enhance the quality of the Insurance Group's agency
force, during 1996 management continued to focus its recruiting efforts on
attracting professionals from related fields such as accounting, banking and
law. Management believes that the knowledge and experience of these individuals
enables them to add significant value to client service and that recruiting more
experienced individuals has had a positive impact on the retention rate of first
year agents. The Insurance Group, in 1995, began repositioning its career agency
force for the planning opportunities created by changing demographics.
Management implemented its new needs-based selling strategy with the
introduction of its Financial Fitness Profile. Financial Fitness Profile is
designed to make the client's long-term financial needs the key ingredient of
the sales process and is used by the Insurance Group to identify a client's risk
exposure and financial goals in order to develop a comprehensive financial
strategy addressing the client's unique situation. Management believes its
Financial Fitness Profile adds significant value to client service and provides
an excellent foundation for building long-term relationships with the Insurance
Group's customers. In 1996, the Insurance Group, through its broker-dealer, EQ
Financial, also introduced a formal investment advisor program for qualified
associates to offer fee-based plans, products and seminars.
Equitable Life has begun to centralize its life insurance processing and
servicing functions in a new National Operations Center in Charlotte, North
Carolina. This will result in the closing of the operations facilities in Des
Moines, Iowa and Fresno, California, and should enhance service to
policyholders, streamline operations and provide cost savings.
During 1996 management made a strategic decision to create its own wholesale
distribution company to offer the Income Manager series of products to
securities firms, financial planners and banks. During the last nine months of
1996, Equitable Distributors, Inc. ("EDI") hired staff and by year end employed
26 field and 36 home office personnel. A specially designed product series was
developed for EDI during 1996, and EDI began marketing the new series in
November through a major securities firm and several regional and financial
planning firms. EDI ended the year with executed sales agreements with 70
broker-dealers. Agreements were also reached with two major banks. During 1996,
the agency force increasingly began to incorporate the Income Manager series of
products into their sales process. Nearly 1,700 agents sold an Income Manager
product during 1996.
During 1995, management also undertook a number of initiatives to increase the
efficiency and lower the costs of the Insurance Group's distribution system.
These initiatives included the consolidation of new business processing, the
implementation of a new underwriting system, and the introduction of Equitable
Life Workstation which gives each agent on-line access to information about
clients, policy transactions and home office announcements.
1-4
Insurance Underwriting. The risk selection process is carried out in the
Insurance Group by underwriters who evaluate policy applications on the basis of
information provided by the applicant and other sources. Specific tests, such as
blood analysis, are used to evaluate policy applications based on the size of
the policy, the age of the applicant and other factors. Underwriting rules and
procedures established by the Insurance Group's underwriting area are designed
to produce mortality results consistent with assumptions used in product pricing
while providing for competitive risk selection.
The Insurance Group limits risk retention on new policies to a maximum of $5.0
million on single-life policies, and $15.0 million on second-to-die policies.
All in-force business above those amounts has been reinsured. Automatic
reinsurance arrangements have been negotiated that permit single-life policies
to be written up to $35 million, and second-to-die policies to be written up to
$25 million. A contingent liability exists with respect to reinsurance ceded
should the reinsurers be unable to meet their obligations. The Insurance Group
evaluates the financial condition of its reinsurers to minimize its exposure to
significant losses from reinsurer insolvencies. The Insurance Group is not party
to any risk reinsurance arrangement with any reinsurer pursuant to which the
amount of reserves on reinsurance ceded to such reinsurer equals more than 1% of
the total policy reserves of the Insurance Group (including Separate Accounts).
The Insurance Group also assumes mortality risk as a reinsurer. Mortality risk
on any single life (through reinsurance assumed and directly written coverage)
is limited to $5.0 million. For additional information on the Insurance Group's
reinsurance agreements, see Note 10 of Notes to Consolidated Financial
Statements.
Insurance Liabilities. The Insurance Group has established liabilities for
policyholders' account balances and future policy benefits to meet obligations
on various policies and contracts. Policyholders' account balances for universal
life and variable life and other investment-type policies are equal to
cumulative account balances, which are the sum of net premiums or considerations
plus credited interest or net investment results, less expense, mortality and
risk charges and withdrawals. For participating traditional life policies,
future policy benefits are calculated using a net level premium method on the
basis of actuarial assumptions equal to guaranteed mortality and dividend fund
interest rates. The liability for annual dividends represents the accrual of
annual dividends earned. Terminal dividends are accrued in proportion to gross
margins over the life of the contract. Future policy benefits for
non-participating traditional products are computed on the basis of assumed
investment yields, mortality, persistency, morbidity and expenses (including a
margin for adverse deviation), which are established at the time of issuance of
a policy and generally vary by product, year of issue and policy duration.
During the fourth quarter of 1996, management took reserve strengthening and
other actions which significantly affected the net performance of The Equitable
for the fourth quarter and full year 1996. For additional information on these
actions, see Note 2 of Notes to Consolidated Financial Statements and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Combined Results of Continuing Operations by Segment - Insurance
Operations - Disability Income", "- Group Pension Products" and "- Discontinued
Operations".
The insurance liabilities reflected in the consolidated balance sheets included
herein are prepared in accordance with GAAP and differ from the reserves
prescribed by statutory accounting practices and carried on the Insurance
Group's statutory financial statements. The variances arise from differences in
the reserve calculation methods and from the use of different mortality,
morbidity, interest rate and persistency assumptions. See Note 17 of Notes to
Consolidated Financial Statements.
Investment Services
General. The Investment Services segment, which in 1996 accounted for
approximately $1.13 billion or 23% of consolidated revenues, provides investment
management, investment banking, securities transaction and brokerage services to
both corporate and institutional clients, including the Insurance Group, and to
high net worth individuals. In recent years, rapid growth in sales of mutual
funds to individuals and retail clients has augmented the traditional focus on
institutional markets. This segment also includes the institutional Separate
Accounts, which provide various investment options for group clients through
pooled or single group accounts. The results of DLJ were included in Equitable
1-5
Life's consolidated statements of earnings until December 15, 1993, the date on
which Equitable Life sold a 61% interest in DLJ to the Holding Company.
Subsequent to that date, DLJ is accounted for on the equity basis. See Note 20
of Notes to Consolidated Financial Statements. For additional information on the
Investment Subsidiaries, including their respective results of operations, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Combined Results of Continuing Operations by Segment - Investment
Services".
The Equitable continues to pursue its strategy of increasing third party assets
under management. The Investment Subsidiaries have steadily added to third party
assets under management, while continuing to provide investment management
services to the Insurance Group. At December 31, 1996, Equitable Life and its
subsidiaries had $229.3 billion of assets under management and DLJ had $10.5
billion of assets under management for a total of $239.8 billion. Of this total,
$184.8 billion (or 77.1%) were managed by the Investment Subsidiaries for third
parties, including domestic and overseas investors, mutual funds, pension funds,
endowment funds and, through the Insurance Group's Separate Accounts, insurance
and annuity customers of the Insurance Group. Approximately $140.7 million
(12.5%) of the revenues of the Investment Services segment for the year ended
December 31, 1996 consisted of fees earned by the Investment Subsidiaries for
investment management and other services provided to the Insurance Group and to
unconsolidated real estate joint ventures. For additional information on fees
and assets under management, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Investment Services - Fees From
Assets Under Management".
Alliance
General - Alliance, one of the nation's largest investment advisors, provides
diversified investment management services to a variety of institutional
clients, including pension funds, endowments and foreign financial institutions,
as well as to individual investors principally through a broad line of mutual
funds. As of December 31, 1996, Alliance had approximately $182.8 billion in
assets under management (including $159.6 billion for third party clients).
Alliance's assets under management at December 31, 1996 consisted of
approximately $119.5 billion from separately managed accounts for institutional
investors and high net worth individuals and approximately $63.3 billion from
mutual fund accounts. Alliance's greatest growth in recent years has been in
products for individual investors, primarily mutual funds, which generate
relatively high management and servicing fees as compared to fees charged to
separately managed accounts. As of December 31, 1996, The Equitable owned a 1%
general partnership interest in Alliance and approximately 57.3% of the units
representing assignments of beneficial ownership of limited partnership
interests in Alliance ("Alliance Units").
On February 29, 1996, Alliance acquired substantially all of the assets and
liabilities of Cursitor Holdings, L.P. and all of the outstanding shares of
Cursitor Holdings Limited, currently Cursitor Alliance Holdings Limited
(collectively, "Cursitor") for Units, cash and notes equaling approximately
$159.0 million, and substantial additional consideration which will be
determined at a later date. Cursitor specializes in providing global asset
allocation services to U.S. and non-U.S. institutional investors. Significant
account terminations have occurred and assets under management in Cursitor
portfolios as of February 28, 1997 were less than $7 billion.
In August 1996, Alliance, Equitable Life and two principals of Albion Asset
Advisors LLC formed Albion Alliance LLC to manage private investments on behalf
of institutional and large private investors. The new joint venture will have a
global focus and will expand Alliance's existing corporate finance and private
investing business, particularly in emerging markets. For additional information
on these transactions, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Combined Results of Continuing Operations
by Segment - Investment Services".
Alliance's business can be divided into two broad categories: Separately Managed
Accounts and Mutual Funds Management. Alliance's separately managed account
business consists primarily of the active management of equity and fixed income
accounts for institutional investors and high net worth individuals. Alliance's
mutual fund management services, which developed as a diversification of its
separately managed account business, consist of the management, distribution and
servicing of mutual funds and cash management products, including money market
funds and deposit accounts.
1-6
Separately Managed Accounts - At December 31, 1996, separately managed accounts
(other than investment companies and deposit accounts) represented approximately
65.4% of Alliance's total assets under management while the fees earned from the
management of those accounts represented approximately 35.6% of Alliance's
revenues for the year ended December 31, 1996. Alliance's separately managed
account business consists primarily of the active management of equity accounts,
balanced (equity and fixed income) accounts and fixed income accounts. Alliance
also provides active management for international (non U.S.) and global
(including U.S.) equity, balanced and fixed income portfolios, asset allocation
and management for private investments, venture capital portfolios, and hedge
fund portfolios. In addition, Alliance provides "passive" management services
for equity, fixed income and international accounts.
As of December 31, 1996, Alliance acted as investment manager for approximately
1,550 separately managed accounts (other than investment companies) which
include corporate employee benefit plans, public employee retirement systems,
endowment funds, foundations, foreign governments, financial and other
institutions and the General and Separate Accounts of Equitable Life and its
insurance company subsidiaries. The General and Separate Accounts of the
Insurance Group are Alliance's largest institutional clients. Alliance's
separately managed accounts are managed pursuant to written investment
management agreements between the clients and Alliance, which are usually
terminable at any time or upon relatively short notice by either party.
Mutual Funds Management - Alliance also (i) manages The Hudson River Trust which
is the funding vehicle for the individual variable life insurance and annuity
products offered by the Insurance Group; (ii) manages and sponsors a broad range
of open and closed-end mutual funds other than The Hudson River Trust ("Alliance
Mutual Funds"); and (iii) provides cash management services (money market funds
and Federally insured deposit accounts) that are marketed to individual
investors through broker-dealers, banks, insurance companies, and other
financial intermediaries. The assets comprising all Alliance Mutual Funds, The
Hudson River Trust and deposit accounts on December 31, 1996, amounted to
approximately $63.3 billion.
Other - Alliance generally is not subject to Federal, state and local income
taxes, with the exception of the New York City unincorporated business tax,
which is currently imposed at a rate of 4%. Domestic subsidiaries of Alliance
are subject to Federal, State and local income taxes. Its subsidiaries organized
and operating outside the United States are generally subject to taxes in the
foreign jurisdictions where they are located. Under the Revenue Act of 1987, the
exemption from Federal income taxes for publicly traded limited partnerships,
including Alliance, will expire on December 31, 1997. As a consequence, if
Alliance retains its current structure, it will be taxed as a corporation as of
January 1, 1998. In response to this pending loss of Alliance's partnership tax
status, the management of Equitable Life and the management of Alliance are
presently reviewing alternatives which may result in Equitable Life's Alliance
Units ceasing to be publicly traded. The management of Alliance expects to
announce its plans during the second quarter of 1997. For a discussion of the
possible effects of these matters on the valuation of Equitable Life's Alliance
Units for statutory purposes and on statutory capital, see "Management's
Discussion and Analysis of Financial Conditions and Results of Operations
Liquidity and Capital Resources - Insurance Group - Sources of Insurance Group
Liquidity".
For additional information on Alliance, see Alliance's Annual Report on Form
10-K for the year ended December 31, 1996.
Donaldson, Lufkin & Jenrette, Inc.
DLJ, in which Equitable Life owns a minority 36.1% interest, is a leading
integrated investment and merchant bank that serves institutional, corporate,
governmental and individual clients both domestically and internationally. DLJ's
businesses include securities underwriting, sales and trading; merchant banking;
financial advisory services; investment research; correspondent brokerage
services; and asset management. On October 30, 1995, DLJ completed an initial
public offering ("IPO") of 10.58 million shares of its common stock and the sale
of $500.0 million aggregate principal amount of its senior notes due November 1,
2005. See Note 20 of Notes to Consolidated Financial Statements for additional
information. At December 31, 1996, Equitable Life owned approximately 36.1% and
the Holding Company owned approximately 43.8% of DLJ's issued and outstanding
common stock following a sale on that date by the Holding Company to AXA of
85,000 shares of DLJ's stock. Assuming full vesting of the forfeitable
restricted stock units and the exercise of stock options granted to certain
1-7
employees in connection with DLJ's IPO (but excluding any shares issued under
employee stock options which may be granted after the IPO), Equitable Life would
own approximately 28.4% and the Holding Company would own approximately 34.6% of
DLJ's common stock. While DLJ is now accounted for on the equity basis in
Equitable Life's consolidated financial statements, the financial data contained
in the following description reflects DLJ's business in total. "See Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Combined Results of Continuing Operations by Segment Investment Services".
DLJ conducts its business through three principal operating groups, each of
which is an important contributor to revenues and earnings: the Banking Group,
which includes DLJ's Investment Banking, Merchant Banking and Emerging Markets
groups; the Capital Markets Group, consisting of DLJ's Fixed Income,
Institutional Equities and Equity Derivatives Divisions, Autranet, a distributor
of investment research products, as well as Sprout, its venture capital
affiliate, and the Financial Services Group, comprised of the Pershing Division,
the Investment Services Group and the Asset Management Group.
DLJ's Banking Group is a major participant in the raising of capital and the
providing of financial advice to companies throughout the U.S. and has
significantly expanded its activities abroad. Through its Investment Banking
group, DLJ manages and underwrites public offerings of securities, arranges
private placements and provides advisory and other services in connection with
mergers, acquisitions, restructurings and other financial transactions. Its
Merchant Banking group pursues direct investments in a variety of areas through
a number of investment vehicles funded with capital provided primarily by
institutional investors, DLJ and its employees. Emerging Markets Group
specializes in client advisory services for mergers, acquisitions and financial
restructurings, as well as merchant banking and the underwriting, placement and
trading of equity, debt derivative securities in Latin America, Eastern Europe,
Asia and South Africa.
The Capital Markets Group encompasses a broad range of activities including
trading, research, origination and distribution of equity and fixed income
securities, private equity investments and venture capital. Its Fixed Income
Division provides institutional clients with research, trading and sales
services for a broad range of taxable fixed income products including high yield
corporate, investment grade corporate, U.S. government and mortgage-backed
securities. The Institutional Equities division provides institutional clients
with research, trading and sales services in U.S. listed and over the counter
equity securities. In addition, DLJ's Equity Derivatives Division provides a
broad range of equity and index options products, while Sprout is one of the
oldest and largest groups in the private equity investment and venture capital
industry. Autranet Inc., a registered broker-dealer and member firm of the NYSE,
is active in the distribution of investment research products purchased from
approximately 430 sources known as "independent originators." Independent
originators are research specialists, not primarily employed by securities
firms, and range in size and scope from large economic consulting firms to
individual freelance analysts. Autranet generates its revenues from a client
base of over 400 domestic and international institutions.
The Financial Services Group provides a broad array of services to individual
investors and the financial intermediaries which represent them. Pershing is a
leading provider of correspondent brokerage services, clearing transactions for
over 550 U.S. brokerage firms which collectively maintain over 1.4 million
client accounts. DLJ's Investment Services Group provides high net worth
individuals and medium and smaller sized institutions with access to DLJ's
equity and fixed income research, trading services and underwriting. Through its
Asset Management Group, DLJ provides cash management, investment advisory and
trust services primarily to high net worth individual and institutional
investors.
The securities industry generally experienced favorable market conditions in
1996, as strong rallies in the stock and bond markets and strong trading volumes
on all major exchanges helped fuel merger and acquisition activity as well as
underwriting activity. DLJ's principal business activities are, by their nature,
highly competitive and subject to general market conditions, volatile trading
markets and fluctuations in the volume of market activity. Consequently, DLJ's
net income and revenues have been, and are likely to continue to be, subject to
wide fluctuations, reflecting the impact of many factors beyond DLJ's control,
including securities market conditions, the level and volatility of interest
rates, competitive conditions, and the size and timing of transactions.
1-8
In January 1997, DLJ reached an agreement to acquire (the "Acquisition") a
London-based financial advisory firm, Phoenix Group Limited ("Phoenix"). Phoenix
is an international financial advisory and investment management business with
offices in London and Hong Kong. It has two principal operations, a corporate
finance and advisory business and a private equity fund management business
investing in unquoted securities. It also makes acquisitions as principal. As a
portion of the total consideration paid in connection with the Acquisition, DLJ
issued on March 26, 1997, $28,779,000 aggregate principal amount of 5% Junior
Subordinated Convertible Debentures due 2004 (the "DLJ Convertible Debentures")
to the current shareholders of Phoenix, pursuant to Regulation S under the
Securities Act of 1933, as amended. The DLJ Convertible Debentures are
convertible into common stock of DLJ beginning 40 days after issuance at a
conversion price of $42.00 per share. The Acquisition does not have a material
effect on DLJ's results of operations.
For additional information on DLJ, see DLJ's Annual Report on Form 10-K for the
year ended December 31, 1996.
Equitable Real Estate
General - As of December 31, 1996, Equitable Real Estate had $24.8 billion of
assets under management (including $14.7 billion for third party clients).
Equitable Real Estate is ranked as the largest United States manager of
tax-exempt assets invested in real estate and provides real estate investment
management services, property management services (through its two COMPASS
subsidiaries), mortgage servicing and loan asset management, mortgage loan
origination (through its affiliate Column Financial, Inc.) and agricultural
investment management (through its affiliate Equitable Agri-Business, Inc.). See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Combined Results of Continuing Operations by Segment - Investment
Services".
Equitable Real Estate has capabilities in a variety of major real estate
disciplines including acquisitions and financings, portfolio management, asset
management, appraisals, asset disposition and workouts and capital markets.
Equitable Real Estate offers a broad range of products and services to its
third-party client base, which includes more than 300 corporate, public and
multi-employer pension funds, insurance companies, foreign investors and
individual accounts.
In March 1997, Equitable Real Estate purchased a 50% interest in AMB Rosen Real
Estate Securities, LLC, an investment firm specializing in the management of
investment portfolios of real estate investment trust stocks. The company was
renamed ERE Rosen, LLC and has approximately $126 million in assets under
management for clients that include pension funds, endowments and foundations.
As of December 31, 1996, Equitable Real Estate managed equity and joint venture
interests in approximately 3,664 investments covering over 297 million square
feet of real estate, and managed mortgage loans with a carrying value of
approximately $7.7 billion. The equity real estate and mortgage portfolios
managed by Equitable Real Estate include investments in a range of commercial,
agricultural and industrial properties including regional and neighborhood
shopping centers, downtown and suburban office buildings, apartments, warehouse
and distribution facilities and hotels. As of December 31, 1996, Equitable Real
Estate managed one of the largest portfolios of regional shopping malls in the
United States and managed substantial holdings in major center city office
properties.
The Equitable is exploring strategic alternatives regarding Equitable Real
Estate. Such alternatives may include a possible sale of all or a portion of
Equitable Real Estate.
Institutional Account Management - As of December 31, 1996 Equitable Real Estate
managed $12.1 billion in real estate assets on behalf of approximately 253
pension funds. Equitable Real Estate's largest real estate investment account is
Prime Property Fund which had net assets of $3.0 billion as of December 31,
1996, making it the largest open-end real estate investment fund for pension
funds in the United States.
In addition, Equitable Real Estate offers a series of special focus, closed-end
pooled funds, certain single and multi-property pooled funds, single client
accounts tailored to achieve a specific set of investment goals and certain
other accounts tailored to meet the objectives of large public pension fund
clients.
1-9
Mortgage Operations - At December 31, 1996, Equitable Real Estate managed a
mortgage portfolio on behalf of the Insurance Group with an outstanding balance
of approximately $6.3 billion. Services provided by Equitable Real Estate to the
Insurance Group and other clients include mortgage and asset management services
including due diligence, portfolio valuation, loan custody, maintenance,
reporting and cash management, loan restructuring, foreclosures, equity real
estate management and disposition.
Property Management Operations - At December 31, 1996, COMPASS Management and
Leasing and COMPASS Retail managed over 187.3 million square feet of commercial
office and retail space for Equitable Life and third party clients. Services
provided by these two subsidiaries of Equitable Real Estate include property and
facilities management of commercial properties and management and development of
regional shopping centers.
Other Operations - At December 31, 1996, Equitable Real Estate's International
Group managed approximately $1.3 billion in U.S. real estate investments for 35
Pacific Rim and European investors. Equitable Real Estate's international
products include direct equity real estate investments and pooled equity real
estate funds. In addition, Equitable Agri-Business offers agricultural
investment management advisory services to the Insurance Group and third party
clients. Equitable Real Estate also has various joint venture relationships,
including Column Financial, Inc., a venture with DLJ, which originates, packages
and securitizes mortgage loans, and Equitable Real Estate Hyperion Capital
Advisors, LLP., a venture with Hyperion Capital Management, Inc., which provides
advice with respect to investments in commercial mortgage-backed securities.
Institutional Separate Accounts
The Investment Services segment includes the Insurance Group's Separate Accounts
for group clients. Pooled Separate Accounts offer pension fund clients
diversification and economies of scale in asset management. Investment options
range across the risk spectrum from short-term fixed income portfolios, to
equity oriented growth and small capitalization portfolios, to real estate
funds. At December 31, 1996, assets held in the institutional Separate Accounts
totaled $11.99 billion. Alliance and Equitable Real Estate derive fee income
from management of assets invested in these institutional Separate Accounts.
Discontinued Operations
In September 1991, Equitable Life discontinued the operations of the Wind-Up
Annuity and GIC lines of business, reflecting management's strategic decision to
focus its attention and capital on its core individual insurance and investment
services businesses. For additional information on the recent strengthening of
loss provisions, see Note 7 of Notes to Consolidated Financial Statements and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Discontinued Operations".
The GIC line of business includes several types of GIC products pursuant to
which Equitable Life is contractually obligated to credit an interest rate which
was set at the date of issue. These contracts have fixed maturity dates on which
funds are to be returned to the contractholder. Wind-Up annuity products, the
terms of which are fixed at issue, were sold to corporate sponsors of
terminating qualified defined benefit plans. At December 31, 1996, $1.34 billion
of GIC Segment liabilities to contractholders were outstanding, of which $290.7
million were related to GIC products and the balance to Wind-Up annuities.
Closed Block
In connection with the demutualization, Equitable Life established the Closed
Block, consisting of certain classes of individual participating policies in
respect of which Equitable Life had a dividend scale payable in 1991 and which
were in force on July 22, 1992. Since the Closed Block was funded to provide for
payment of guaranteed benefits under such policies and, in addition, for
continuation of dividends paid under 1991 dividend scales, it will not be
necessary to use general funds to pay guaranteed benefits unless the Closed
Block experiences very substantial adverse deviations in investment, mortality,
persistency or other experience factors. If the assets allocated to the Closed
Block, the cash flows therefrom and the revenues from the Closed Block prove to
be insufficient to pay the benefits guaranteed under the policies included in
the Closed Block, Equitable Life will be required to make such payments from its
1-10
general funds. In addition, if the investment, mortality, persistency or other
experience of the Closed Block was substantially worse than that of Equitable
Life's principal competitors, management might, for competitive reasons, use
Equitable Life's general funds to maintain competitive dividend levels. For more
information on the Closed Block, see Notes 2 and 6 of Notes to Consolidated
Financial Statements.
General Account Investment Portfolio
General. The Insurance Group's General Account consists of a diversified
portfolio of investments. The General Account liabilities can be divided into
two primary types, participating and non-participating. For participating
products, the investment results of the underlying assets determine, to a large
extent, the return to the policyholder, and the Insurance Group's profits are
earned from investment management, mortality and other charges. For
non-participating or interest-sensitive products, the Insurance Group's profits
are earned from a positive spread between the investment return and the
crediting or reserve interest rate.
Although all the assets of the General Account of each insurer in the Insurance
Group support all of that insurer's liabilities, the Insurance Group has
developed an asset/liability management approach with separate investment
segments within each insurer for specific classes of product liabilities, such
as insurance, annuity and group pension. As part of this approach, the Insurance
Group develops investment guidelines for each product line which form the basis
for investment strategies to manage each product's return and liquidity
requirements. Specific investments frequently meet the requirements of, and are
acquired by, more than one investment segment, with each such investment segment
holding a pro rata interest in such investments and the investment return
therefrom.
The Closed Block assets are a part of continuing operations and have been
combined on a line-by-line basis with assets outside of the Closed Block. In
view of the similar asset quality characteristics of the major asset categories
in the two portfolios, management believes it is appropriate to discuss the
Closed Block assets and the assets outside of the Closed Block on a combined
basis. The General Account Investment Assets and the Holding Company Group
investment portfolio are discussed below. For further information on these
portfolios and on GIC Segment Investment Assets, see "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Continuing
Operations Investment Portfolio" and "- Discontinued Operations". Most
individual investments in the portfolios of the GIC Segment are also included in
General Account Investment Assets (which include the Closed Block).
The following table summarizes General Account Investment Assets by asset
category for the periods shown.
General Account Investment Assets
Net Amortized Cost
(Dollars In Millions)
At December 31, 1996 At December 31, 1995
------------------------ -------------------------
Amount % of Total Amount % of Total
----------- ----------- ----------- -----------
Fixed maturities(1).................... $21,711.6 62.6% $19,149.9 56.7%
Mortgages.............................. 4,513.7 13.0 5,007.1 14.8
Equity real estate..................... 3,518.6 10.1 4,130.3 12.2
Other equity investments............... 392.4 2.0 764.1 2.3
Policy loans........................... 3,962.0 11.4 3,773.6 11.2
Cash and short-term investments(2)..... 277.7 0.9 952.1 2.8
----------- ----------- ----------- -----------
Total.................................. $34,676.0 100.0% $33,777.1 100.0%
=========== =========== =========== ===========
(1) Excludes unrealized gains of $432.9 million and $857.9 million on fixed
maturities classified as available for sale at December 31, 1996 and 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.
1-11
The present composition of the General Account reflects decisions made in 1990
to increase the credit quality of the investment portfolio to support the
Insurance Group's objectives of strengthening the balance sheet and improving
profitability. The Insurance Group has substantially reduced its exposure to
commercial mortgages since December 31, 1990 when they comprised $7.52 billion
or 22.4% of the net amortized cost of General Account Investment Assets to $2.84
billion or 8.2% at December 31, 1996 due to repayments and foreclosures. The
equity real estate portfolio has decreased modestly from $3.87 billion or 11.6%
of net amortized cost at the end of 1990 to $3.52 billion or 10.1% at December
31, 1996, as portfolio sales have been offset by foreclosures and capital
additions to safeguard the values in existing investments. Other equity
investments have declined from $1.30 billion or 3.9% at December 31, 1990 to
$692.4 million or 2.0% at December 31, 1996. In addition, management has reduced
the General Account's exposure to below investment grade bonds from a net
amortized cost of $3.33 billion or 9.9% of General Account Investment Assets at
December 31, 1990 to $2.72 billion or 7.8% at December 31, 1996.
Investment Surveillance. As part of the Insurance Group's investment management
process, management, with the assistance of its asset managers, constantly
monitors General Account investment performance. Fixed maturity investments are
reviewed upon receipt of the obligor's financial statements, generally
quarterly, for financial performance and compliance with financial covenants. In
situations where the trends in financial performance are negative or where
financial covenants are breached, a detailed analysis is performed. To the
extent such analysis raises concern about the quality or future performance of
the obligor, management then monitors the obligor on an ongoing basis.
Similarly, commercial and agricultural mortgage loans are carefully reviewed
monthly for the presence of certain objective and subjective characteristics
that cause management to perform additional monitoring. This process culminates
with a quarterly review of certain assets by the Insurance Group's Surveillance
Committee which decides whether values of any investments are other than
temporarily impaired, whether specific investments should be classified as
problems, potential problems or restructured, and whether specific investments
should be put on an interest non-accrual basis. With the adoption of SFAS 121,
the valuation methodology for equity real estate is based upon management's
classification of each asset as either held for the production of income or
available for sale.
For information on the valuation of assets held in the General Account,
including information on writedowns and valuation allowances for specific
classes of assets and the impact of the implementation of new accounting
standards, see Notes 2, 3 and 5 of Notes to Consolidated Financial Statements
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Continuing Operations Investment Portfolio - General Account
Investment Assets Portfolio".
Description of General Account Investment Assets. For portfolio management
purposes, General Account Investment Assets are divided into four asset
categories: fixed maturities, mortgages, equity real estate and other equity
investments.
Fixed Maturities. As of December 31, 1996, the fixed maturities category was the
largest asset class of General Account Investment Assets with $21.71 billion in
net amortized cost or 62.6% of total General Account Investment Assets. The
fixed maturities category consists of both investment grade and below investment
grade public and private debt securities, as well as small amounts of redeemable
preferred stock. As of December 31, 1996, publicly traded debt securities
represented 72.4% of the amortized cost of the asset category, and privately
placed debt securities and redeemable preferred stock represented 26.9% and
0.7%, respectively. As of December 31, 1996, 87.5% ($18.99 billion) of the
amortized cost of fixed maturities were rated investment grade (National
Association of Insurance Commissioners ("NAIC") bond rating 1 or 2). For a
discussion of the credit quality of fixed maturities, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations
Continuing Operations Investment Portfolio - General Account Investment
Portfolio - Investment Results of General Account Investment Assets - Fixed
Maturities".
1-12
The following table summarizes fixed maturities by remaining average life as of
December 31, 1996.
Fixed Maturity Investments By Remaining Average Life
December 31, 1996
(Dollars In Millions)
Amortized Cost
-----------------------------------------
Public Private % of Total
Fixed Fixed Fixed
Maturities Maturities Maturities
------------ ------------ ----------
Remaining Average Life:(1)
Less than one year............................ $ 318.5 $ 347.7 3.1%
One or more and less than three years......... 650.8 637.0 5.9
Three or more and less than five years........ 1,547.5 1,307.0 13.1
Five or more and less than seven years........ 1,925.2 1,218.1 14.5
Seven or more and less than ten years......... 3,353.7 1,485.2 22.3
Ten or more and less than fifteen years....... 1,268.5 466.3 8.0
Fifteen or more and less than twenty years.... 553.2 99.8 3.0
More than twenty years........................ 1,492.2 147.4 7.6
------------ ------------ ----------
Subtotal................................ 11,109.6 5,708.5 77.5
Collateralized mortgage obligations(2)........ 2,416.4 132.6 11.7
Mortgage pass-through securities(2)........... 2,202.9 0.0 10.1
Redeemable preferred stock and other.......... 116.7 24.9 0.7
------------ ------------ ----------
Total......................................... $ 15,845.6 $ 5,866.0 100.0%
============ ============ ==========
(1) Assumes debt securities are not called for redemption prior to stated
maturity. Declines in prevailing interest rates may result in higher levels
of redemptions prior to maturity of fixed maturities that do not have
adequate call protection. At December 31, 1996, approximately 60.4%
(measured by amortized cost) of fixed maturities (excluding collateralized
mortgage obligations ("CMOs"), asset-backed securities, mortgage
pass-through securities and preferred stock and other) were non-callable.
An additional approximately 24.0% had call protection due to substantial
prepayment ("make-whole") premiums. Approximately 2.8% were callable bonds
with coupon rates of 7.50% or below.
(2) The average life of CMOs and mortgage pass-through securities is not
calculated due to the variability of timing of principal repayments.
Approximately 76.9% of the CMOs have underlying collateral which bears
interest at rates of 7.50% or less and 80.4% of the mortgage pass-through
securities bear interest at rates of 7.50% or less.
Investment grade fixed maturities (which includes redeemable preferred stocks)
include the securities of 977 different issuers, with no individual issuer
representing more than 0.8% of investment grade fixed maturities as a whole. The
investment grade fixed maturities are also diversified by industry, with
investments in manufacturing (18.1%), banking (10.5%), finance (9.1%), utilities
(7.2%), and transportation (5.6%) representing the five largest allocations of
investment grade fixed maturities at December 31, 1996. No other industry
represented more than 5.0% of the investment grade fixed maturities portfolio at
that date.
Below investment grade fixed maturities (NAIC bond rating 3 through 6 and
redeemable preferred stocks) include the securities of over 247 different
issuers with no individual issuer representing more than 0.7% of below
investment grade fixed maturities as a whole. At December 31, 1996, the five
largest industries represented in these below investment grade fixed maturities
were manufacturing (38.7%), finance (12.4%), agricultural/mining/construction
(7.9%), banking (6.6%) and wholesale and retail (6.5%). No other industry
represented 6.1% or more of this portfolio. The General Account also has
interests in below investment grade fixed maturities through equity interests in
a number of high yield funds. See "Other Equity Investments".
1-13
For information regarding problem, potential problem and restructured
investments in the fixed maturities category, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Continuing
Operations Investment Portfolio - Investment Results of General Account
Investment Assets - Fixed Maturities".
Mortgages. As of December 31, 1996, measured by amortized cost, commercial
mortgages totaled $2.90 billion (63.4% of the amortized cost of the category),
agricultural loans were $1.67 billion (36.5%) and residential loans were $4.0
million (0.1%). As of December 31, 1996, over 97.2% of all commercial mortgage
loans, measured by amortized cost, bore a fixed interest rate.
Commercial Mortgages - Commercial mortgages, substantially all of which are made
on a non-recourse basis, consist primarily of fixed rate first mortgages on
completed properties. As of December 31, 1996, first mortgages (which include
all mortgages where no other lender holds a senior position to Equitable Life)
represented $2.89 billion (99.6%) of the amortized cost of the commercial
mortgage portfolio and there were no construction loans in the category. These
loans are diversified by property type. As of December 31, 1996, there were 403
individual commercial mortgage loans collateralized by office buildings, retail
properties, industrial properties, apartment buildings, hotels and land. By
dollar amount of amortized cost, loans collateralized by downtown office
buildings comprised 70.6% of the loans on office properties and regional malls
comprised 73.4% of the loans collateralized by retail properties as of such
date.
The following tables set forth the distribution, by property type and by state,
of the commercial mortgages as of December 31, 1996.
Commercial Mortgages By Property Type and By State
December 31, 1996
(In Millions)
Amortized Amortized
Cost Cost
------------ -----------
Property Type: State:
Office..................... $ 1,366.9 New York............................ $ 401.6
Retail..................... 764.1 Pennsylvania........................ 255.2
Hotel...................... 368.6 Texas............................... 237.1
Industrial................. 263.8 California.......................... 223.3
Apartment.................. 121.1 Connecticut......................... 216.7
Land and other............. 16.7 Ohio................................ 196.5
------------
Total...................... 2,901.2 Maryland............................ 179.1
Less valuation allowances.. 64.2 Virginia............................ 148.1
------------
Carrying Value............. $ 2,837.0 Other (no state larger than 5%)..... 1,043.6
============ -----------
Total............................... 2,901.2
Less valuation allowances........... 64.2
-----------
Carrying Value...................... $ 2,837.0
===========
Substantially all the mortgage loans in the General Account were originated by
Equitable Life and not purchased from third parties. Equitable Life's investment
policy with regard to the origination of new General Account mortgage loans
involves a review of the economics of the property being financed, the loan to
value ratio, adherence to guidelines that provide for diversification of
Equitable Life's mortgage portfolio by property type and location and a review
of prevailing industry lending practices. In recent years, Equitable Life
substantially reduced its volume of new mortgage loan originations. Management
believes the current aggregate loan-to-value ratio of commercial mortgage loans
in the problem, potential problem or the restructured categories is higher than
the current aggregate loan-to-value ratio of performing loans not in those
categories.
1-14
The commercial mortgage portfolio includes both amortizing and balloon loans.
Management defines balloon loans to be mortgages for which the final principal
payment is more than half of the original loan amount. As of December 31, 1996,
22.5% of the portfolio was comprised of loans that provided for majority or
complete amortization prior to final maturity. For information on maturity and
principal repayment schedule for the commercial mortgage portfolio as of
December 31, 1996, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Continuing Operations Investment Portfolio
- - - General Account Investment Portfolio - Investment Results of General Account
Investment Assets".
For information regarding problem, potential problem and restructured commercial
mortgage loans, see "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Continuing Operations Investment Portfolio - General
Account Investment Portfolio - Investment Results of General Account Investment
Assets - Mortgages".
Agricultural Mortgages - The agricultural mortgage loans add diversity to the
mortgage loan portfolio. As of December 31, 1996, there were approximately 4,373
outstanding agricultural mortgages with an aggregate amortized cost of $1.67
billion. The agricultural loans are distributed across U.S. agricultural regions
and are diversified by property type. As of December 31, 1996, 26.7%, 26.3%,
18.9%, 13.8%, 6.9% and 7.4% of these assets were collateralized by land used for
grain crops, fruit/vine/timber, general farm purposes, ranch and livestock,
agri-business and food and timber production, respectively. By state, 30.3%,
7.9%, 6.0%, 4.8% and 4.1% of the properties collateralizing these loans were
located in California, Minnesota, Texas, Florida and Arkansas, respectively. Of
the remaining properties collateralizing agricultural loans no more than 4% are
located in any single state.
Equity Real Estate. The equity real estate category consists of office, retail,
hotel, industrial and other properties. Office properties constitute the largest
component of the category and primarily are significant downtown buildings in
major cities. The retail properties are largely regional malls, and the hotels
are generally members of major chains with national reservation systems. As of
December 31, 1996, 16.8% of the total amortized cost of equity real estate
included in General Account Investment Assets represented commercial properties
acquired as investment real estate after December 31, 1986. The remainder of the
equity real estate portfolio was acquired prior to 1987 or represents properties
acquired through foreclosure. While Equitable Life historically has been an
active investor in equity real estate, it has a policy of not investing
substantial new funds in equity real estate, except to safeguard values in
existing investments or to honor outstanding commitments. Equitable Life intends
to continue to seek to sell individual equity real estate properties on an
opportunistic basis. If a significant amount of equity real estate not currently
held for sale is sold, material investment losses would likely be incurred. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - General Account Investment Portfolio - Continuing Operations
Overview".
1-15
The following tables reflect the distribution by property type and state of the
equity real estate assets as of December 31, 1996.
Equity Real Estate By Property Type and By State
December 31, 1996
(In Millions)
Amortized Amortized
Cost Cost
------------ -----------
Property Type: State:
Office...................... $ 2,476.9 Massachusetts....................... $ 755.7
Retail...................... 389.9 California.......................... 540.5
Industrial.................. 221.5 New York............................ 440.6
Mixed Use................... 140.5 Georgia............................. 334.8
Agricultural................ 91.1 Illinois............................ 276.0
Hotel/Motel................. 24.3 Pennsylvania........................ 201.6
Apartment................... 0.3 Other (no state larger than 5%)..... 1,059.8
-----------
Other....................... 264.5 Total............................... 3,609.0
------------
Total....................... 3,609.0 Less valuation allowances........... 90.4
-----------
Less valuation allowances... 90.4 Carrying Value...................... $ 3,518.6
------------ ===========
Carrying Value.............. $ 3,518.6
============
Other Equity Investments. The other equity investments category consists
primarily of limited partnership interests in high yield debt and equity funds
managed by outside investment managers, (the largest of which at December 31,
1996 was Acadia Partners, L.P., with a net amortized value of $124.3 million),
The Deal Flow Fund, L.P. which had an amortized cost of $78.0 million at
December 31, 1996 (the "Deal Flow Fund"), common and preferred stock acquired in
connection with private leveraged buyout transactions and other below investment
grade investments (including common stock). Management expects to explore new
equity investments as existing investments mature and distribute their realized
gains. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Continuing Operations Investment Portfolio - Investment
Results of General Account Investment Assets - Other Equity Investments".
Employees and Agents
As of December 31, 1996, The Equitable had approximately 14,700 employees. Of
these, approximately 4,300 were employed by the Insurance Group and
approximately 10,400 were employed by the Investment Subsidiaries. In addition,
the Insurance Group's career sales force consists of over 7,200 agents, some of
whom, including agency and district managers and newer agents compensated on a
combined salary and commission basis, are employees of the Insurance Group.
Management believes relations with employees and agents are good.
Competition
Insurance and Annuities. There is strong competition among insurance companies
seeking clients for the types of insurance, annuity and group pension products
sold by the Insurance Group. Many other insurance companies offer one or more
products similar to those offered by the Insurance Group and in some cases
through similar marketing techniques. In addition, the Insurance Group competes
with banks and other financial institutions for sales of annuity and, to a
lesser extent, life insurance products and with mutual funds, investment
advisers and other financial entities for the investment of savings dollars.
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The principal competitive factors affecting the Insurance Group's business are
price, financial and claims-paying ratings, size, strength and professionalism
of agency force, range of product lines, product quality, reputation and
visibility in the marketplace, quality of service and, with respect to variable
insurance and annuity products, investment management performance. Management
believes the registration of a large majority of its agency force by the
National Association of Securities Dealers, Inc. ("NASD") and the training
provided to agents by the Insurance Group provide the Insurance Group with a
competitive advantage in effectively penetrating and communicating with its
target markets.
Ratings are an important factor in establishing the competitive position of
insurance companies. Since Equitable Life's demutualization, the financial
strength or claims-paying ratings of Equitable Life and EVLICO have been
upgraded by each of Moody's Investors Service ("Moody's"), Standard & Poor's
Corporation ("S&P"), A.M. Best Company, Inc. and Duff & Phelps Credit Rating Co.
As of December 31, 1996, the financial strength or claims-paying rating of
Equitable Life and EVLICO was AA- from S&P (4th highest of 18 ratings), Aa3 from
Moody's (4th highest of 19 ratings), A from A.M. Best Company, Inc. (3rd highest
of 15 ratings), AA from Fitch Investors Service, L.P. (3rd highest of 18
ratings) and AA- from Duff & Phelps Credit Rating Co. (4th highest of 18
ratings). After AXA's acquisition of UAP, four of the rating agencies just named
placed Equitable Life on ratings watch. As of March 14, 1997, Moody's, S&P and
Duff & Phelps Credit Rating Co. continued the ratings watch status.
During 1997, management intends to explore selective acquisition opportunities
in Equitable Life's core insurance and asset management businesses.
Investment Fund Management. The investment management industry is highly
competitive and new entrants continually are attracted to it, due in part to
relatively few barriers to entry. Alliance and Equitable Real Estate are subject
to substantial competition in all aspects of their business. Pension fund,
institutional, and corporate assets are managed by investment management firms,
broker-dealers, banks and insurance companies. Alliance and Equitable Real
Estate compete with these investment managers primarily on the basis of the
range of investment products offered, the investment performance of such
products and the services provided to clients. Consultants also play a major
role in the selection of managers for pension funds.
Many of the firms competing with these Investment Subsidiaries for institutional
clients also offer mutual fund shares and cash management services to individual
investors. Competitiveness in this area is chiefly a function of the investment
performance and range of mutual funds and cash management services offered, the
quality in servicing customer accounts and the capacity to provide financial
incentives to intermediaries through distribution assistance and administrative
services payments funded by "Rule 12b-1" plans and the manager's own resources.
Equitable Life is subject to New York Insurance Law limitations on the amount it
may invest in its Investment Subsidiaries (including Alliance and Equitable Real
Estate); however, these limitations do not apply to investments by the Holding
Company.
The Insurance Group and the Investment Subsidiaries compete with and are
expected to continue to compete with each other by providing investment
management services, including sponsoring mutual funds and other investment
funds and accounts. For example, Alliance's partnership agreement specifically
allows Equitable Life and its subsidiaries (other than Alliance Capital
Management Corporation, a wholly owned Equitable Life subsidiary) to compete
with Alliance and to seek to develop opportunities that also may be available to
Alliance.
Securities and Investment Banking. DLJ encounters significant competition in all
aspects of the securities business and competes worldwide directly with other
securities firms, both domestic and foreign, a number of which have greater
capital, financial and other resources than DLJ currently has at its disposal.
In addition to competition from firms currently in the securities business,
there has been increasing competition from other sources, such as commercial
banks and investment boutiques. The principal competitive factors influencing
DLJ's business are its professional staff, the firm's reputation in the
marketplace, its existing client relationships, the ability to commit capital to
client transactions and its mix of market capabilities. DLJ's ability to compete
effectively in securities brokerage and investment banking activities will also
be influenced by the adequacy of its capital levels.
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Regulation
State Supervision. The Insurance Group is licensed to transact its insurance
business in, and is subject to extensive regulation and supervision by, all 50
of the United States, the District of Columbia, Puerto Rico, the U.S. Virgin
Islands and Canada and nine of Canada's twelve provinces and territories.
Equitable Life is domiciled in New York and is primarily regulated by the New
York Superintendent as was EVLICO prior to its merger into Equitable Life. The
extent of state regulation varies, but most jurisdictions have laws and
regulations governing standards of solvency, levels of reserves, permitted types
and concentrations of investments, and business conduct to be maintained by
insurance companies as well as agent licensing, approval of policy forms and,
for certain lines of insurance, approval or filing of rates. The New York
Insurance Law limits sales commissions and certain other marketing expenses that
may be incurred. The Insurance Group is required to file detailed annual
financial statements, prepared on a statutory accounting basis, with supervisory
agencies in each of the jurisdictions in which it does business, and its
operations and accounts are subject to examination by such agencies at regular
intervals. During 1996 the New York Insurance Department ("NYID") conducted a
regular quinquennial examination of Equitable Life for the period from 1991
through 1995. While the report has not yet been filed, management does not
expect the results of the examination to be material to the consolidated
financial position of Equitable Life.
Holding Company Regulation. Several states, including New York, regulate
transactions between an insurer and its affiliates under insurance holding
company acts. These acts contain certain reporting requirements and restrictions
on transactions such as the transfer of assets, loans or the payment of
dividends between an insurer and its affiliates. Under such laws, transfers of
assets, loans or dividends to Equitable Life by its insurance subsidiaries, or
by Equitable Life to the Holding Company, may be subject to prior notice or
approval depending on the size of such transactions or payments. Equitable Life
has agreed in an undertaking to the New York Insurance Department ("NYID") that
similar approval requirements also apply to transactions between (i) material
subsidiaries of Equitable Life and (ii) the Holding Company (and certain
affiliates, including AXA). Changes in control (generally presumed at a
threshold of 10% or more of outstanding voting securities) are also regulated by
these laws.
Guaranty Funds. Under insurance guaranty fund laws existing in all states,
insurers doing business in those states can be assessed up to prescribed limits
to protect policyholders of companies which become impaired or insolvent.
Assessments levied against the Insurance Group during each of the past five
years have not been material. While the amount of any future assessments cannot
be predicted with certainty, management believes that assessments with respect
to pending insurance company impairments and insolvencies will not be material
to the financial position of Equitable Life.
Statutory Investment Valuation Reserves. Statutory accounting practices require
a life insurer to maintain two reserves, an asset valuation reserve ("AVR") and
an interest maintenance reserve ("IMR") to absorb both realized and unrealized
gains and losses on most of an insurer's invested assets.
AVR requires life insurers to establish statutory reserves for substantially all
invested assets other than policy loans and life insurance subsidiaries. AVR
generally captures all realized and unrealized gains or losses on invested
assets, other than those resulting from changes in interest rates. Each year the
amount of an insurer's AVR will fluctuate as additional gains or losses are
absorbed by the reserve. To adjust for such changes over time, an annual
contribution must be made to AVR equal to 20% of the difference between the
maximum AVR (as determined annually according to the type and quality of an
insurer's assets) and the actual AVR. In addition, voluntary contributions to
the AVR are permitted, to the extent that AVR does not exceed its maximum level.
As of December 31, 1996, the maximum AVR for the assets of the Insurance Group
was $1.8 billion and the actual AVR was $1.3 billion. The $524.7 million
difference between the maximum and actual AVR has no statutory or regulatory
significance other than its effect on the required future contribution to AVR.
IMR captures the net gains which are realized upon the sale of fixed income
investments and which result from changes in the overall level of interest
rates. These net realized gains or losses are then amortized into income over
the remaining life of each investment sold. IMR applies to all types of fixed
income securities (bonds, preferred stocks, mortgage-backed securities and
mortgage loans).
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In 1996, the AVR increased statutory surplus by $48.4 million and the IMR
decreased statutory surplus by $22.6 million, as compared to decreases of $365.7
million and $80.3 million, respectively, in 1995. The increase in statutory
surplus caused by the AVR in 1996 primarily was a result of realized capital
losses on real estate and mortgages. The decrease caused by the IMR resulted
from realized capital gains due to changes in interest rates.
Changes in statutory surplus resulting from increases or decreases in AVR and
IMR impact the funds available for shareholder dividends. See "Shareholder
Dividend Restrictions". AVR and IMR are not included in financial statements
prepared in conformity with GAAP. Asset valuation allowances reflected in
consolidated financial statements included herein are established under GAAP.
While the future effect of both AVR and IMR on the Insurance Group's statutory
surplus will depend on the actual composition (both as to type and quality) of
the Insurance Group's assets and gains/losses, management does not expect these
reserves will reduce its statutory surplus to levels that would constrain the
growth of the Insurance Group's operations. See "Regulation Insurance Statutory
Surplus and Capital".
Surplus Relief Reinsurance. The Insurance Group uses surplus relief reinsurance,
which has no GAAP financial reporting effect other than from the associated
expense and risk charge and administrative costs. However, surplus relief
reinsurance does have the effect of increasing current statutory surplus while
reducing future statutory earnings. As of December 31, 1996, $218.7 million
(6.1%) of the Insurance Group's total statutory capital (capital, surplus and
AVR) resulted from surplus relief reinsurance. Management reduced surplus relief
reinsurance by approximately $60.2 million in 1996 and by $445.3 million since
December 31, 1992. Management currently intends to eliminate all surplus relief
reinsurance by December 31, 2000. Such reductions will reduce the amount of the
Insurance Group's statutory surplus on a dollar-for-dollar basis. The ability of
Equitable Life to pay dividends to the Holding Company may be affected by the
reduction of statutory earnings caused by reductions in the levels of surplus
relief reinsurance.
Management believes the Insurance Group's surplus relief reinsurance agreements
are in substantial compliance with all applicable regulations.
NAIC Ratios. On the basis of statutory financial statements filed with state
insurance regulators, the NAIC calculates annually a number of financial ratios
to assist state regulators in monitoring the financial condition of insurance
companies. Twelve ratios were calculated based on the 1996 statutory financial
statements. A "usual range" of results for each ratio is used as a benchmark.
Departure from the "usual range" on four or more of the ratios can lead to
inquiries from individual state insurance departments.
For Equitable Life's 1996 statutory financial statements, three ratios fell
outside of the "usual range." These ratios include (i) the ratio of net gain to
total income, (ii) the ratio of investments in affiliates to capital and
surplus, and (iii) the reserving ratio for individual life insurance products.
This result reflects (i) Equitable Life's investment performance in 1996,
including realized and unrealized capital gains and losses, (ii) the fact that
Equitable Life conducts a substantial portion of its business through
subsidiaries, and (iii) the effects of Equitable Life's reinsurance contracts,
(see "Surplus Relief Reinsurance"). Based on Equitable Life's statutory
financial statements for 1995, four of eleven ratios fell outside of the "usual
range" established by the NAIC. After review, in 1995 an NAIC examiner team
designated Equitable Life as requiring second priority regulatory attention
based upon losses from operations, affiliated company transactions, investments
in affiliates, investments in mortgage loans and real estate and non-investment
grade bonds in each case as reflected in its 1995 statutory financial
statements. This designation advised state regulators to accord high priority to
Equitable Life in the surveillance process. No regulatory action by the NYID or
any other state insurance regulator occurred as a result of this designation.
Based on EVLICO's statutory financial statements for 1996, two ratios fell
outside of the "usual range." These include (i) the ratio of net gain to total
income, and (ii) the reserving ratio for individual life insurance products.
This result reflects (i) EVLICO's investment performance in 1996, including
realized and unrealized capital gains and losses, and (ii) the effects of
EVLICO's reinsurance contracts. On the basis of its statutory financial
statements for 1995, EVLICO had three of eleven ratios outside the "usual range"
and received third priority designation by an NAIC examiner team. This
designation advised state regulators to accord high priority to EVLICO in the
surveillance process. No regulatory actions by the NYID or any other state
insurance regulator occurred as a result of this designation.
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Management does not expect any 1996 designations accorded to Equitable Life or
EVLICO based on their respective 1996 statutory financial statements to have a
material adverse effect on the business or operations of Equitable Life or to
adversely affect its ratings.
Statutory Surplus and Capital. As a licensed insurer in each of the 50 states of
the United States, each member of the Insurance Group is subject to the
supervision of the regulators of each such state. Such regulators have the
discretionary authority, in connection with the continual licensing of any
member of the Insurance Group, to limit or prohibit new issuances of business to
policyholders within their jurisdiction when, in their judgment, such regulators
determine that such member is not maintaining adequate statutory surplus or
capital. Equitable Life does not believe the current or anticipated levels of
statutory surplus of the Insurance Group present a material risk that any such
regulator would limit the amount of new insurance business the Insurance Group
may issue.
The NAIC has undertaken a comprehensive codification of statutory accounting
practices for insurers. The resulting changes, once the codification project has
been completed and the new principles adopted and implemented, could have a
significant adverse impact on the Insurance Group's statutory results and
financial position. The codification project is unlikely to become effective
until 1998 or later. For additional information concerning Equitable Life's
statutory capital, including the possible adverse effects of a restructuring of
Alliance to address changes in its tax status, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources - Insurance Group - Risk-Based Capital".
Risk-Based Capital. Since 1993, life insurers, including Equitable Life has been
subject to certain risk-based capital ("RBC") guidelines. The RBC guidelines
provide a method to measure the adjusted capital (statutory capital and surplus
plus AVR and other adjustments) that a life insurance company should have for
regulatory purposes taking into account the risk characteristics of the
company's investments and products. The RBC requirements establish capital
requirements for four categories of risk: asset risk, insurance risk, interest
rate risk and business risk. For each category, the capital requirement is
determined by applying factors to various asset, premium and reserve items, with
the factor being higher for those items with greater underlying risk and lower
for less risky items. The New York Insurance Law gives the insurance
commissioner explicit regulatory authority to require various actions by, or
take various actions against, insurance companies whose adjusted capital does
not meet the minimum acceptable level. Equitable Life was above its target RBC
ratios at year end 1996. Recent changes in the RBC formula that will become
effective for year end 1997 statutory financial statements and other changes
proposed to become effective for year end 1997 are not expected to affect
materially Equitable Life's RBC ratio. For additional information concerning
Equitable Life's RBC, including the possible adverse effects of a restructuring
of Alliance to address changes in its tax status, see "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources Insurance Group - Risk-Based Capital".
Shareholder Dividend Restrictions. Dividends from Equitable Life are not
expected to be a source of liquidity for the Holding Company for several years.
Since the demutualization, the Holding Company has not received any dividends
from Equitable Life. In addition, under the New York Insurance Law, Equitable
Life would be permitted to pay shareholder dividends to the Holding Company only
if it files notice of its intention to declare such a dividend and the amount
thereof with the New York Superintendent and the New York Superintendent does
not disapprove the distribution. The applicable statute gives the New York
Superintendent broad discretion in determining whether the financial condition
of a stock life insurance company supports the payment of dividends to its
shareholders. There can be no assurance that the New York Superintendent would
not prevent the payment of dividends to the Holding Company for several years.
See Note 17 of Notes to Consolidated Financial Statements.
In December 1995, Equitable Life issued $600.0 million aggregate principal
amount of surplus notes (the "Surplus Notes"). See Note 8 of Notes to
Consolidated Financial Statements. Under the New York Insurance Law, interest
and principal payments on the Surplus Notes may be made only out of "free and
divisible surplus ...with approval of the Superintendent whenever, in his
judgment, the financial condition of such insurer warrants." Accordingly, the
New York Superintendent has broad discretion in determining whether to allow
Equitable Life to make payments on the Surplus Notes. Any interest or principal
payments on the Surplus Notes by Equitable Life will reduce amounts, if any,
available for future payment of dividends to Equitable Life's shareholder.
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Regulation of Investments. The Insurance Group is subject to state laws and
regulations that require diversification of its investment portfolio and limit
the amount of investments in certain investment categories such as below
investment grade fixed maturities, equity real estate and other equity
investments. Failure to comply with these laws and regulations would cause
investments exceeding regulatory limitations to be treated as non-admitted
assets for purposes of measuring statutory surplus, and, in some instances,
require divestiture. As of December 31, 1996, the Insurance Group's investments
were in substantial compliance with all such regulations.
Federal Initiatives. Although the Federal government generally does not directly
regulate the insurance business, many Federal laws do affect the business in a
variety of ways. There are a number of existing or recently proposed Federal
laws which may significantly affect the Insurance Group, including employee
benefits regulation, removal of barriers preventing banks from engaging in the
insurance and mutual fund businesses, the taxation of insurance companies and
the taxation of insurance products. In addition, there has been some interest
among certain members of Congress concerning possible Federal roles in the
regulation of the insurance industry. These initiatives are generally in a
preliminary stage and, consequently management cannot assess their potential
impact on the Insurance Group at this time.
ERISA Considerations. The Insurance Group and the Investment Subsidiaries act as
fiduciaries and are subject to regulation by the Department of Labor ("DOL")
when providing a variety of products and services to employee benefit plans
governed by the Employee Retirement Income Security Act of 1974 ("ERISA").
Severe penalties are imposed by ERISA on fiduciaries which violate ERISA's
prohibited transaction provisions or breach their duties to ERISA - covered
plans. In a case decided by the United States Supreme Court in December, 1993
(John Hancock Mutual Life Insurance Company v. Harris Trust and Savings Bank)
the Court concluded that an insurance company general account contract that had
been issued to a pension plan should be divided into its guaranteed and
nonguaranteed components and that certain ERISA fiduciary obligations applied
with respect to the assets underlying the nonguaranteed components. Although
Equitable Life has not issued contracts identical to the one involved in Harris
Trust, some of its policies relating to ERISA-covered plans may be deemed to
have nonguaranteed components subject to the principles announced by the Court.
During 1994, Equitable Life added additional guarantees to certain of these
contracts.
The Supreme Court's opinion did not resolve whether the assets at issue in the
case may be subject to ERISA for some purposes and not others. Prohibited
Transaction Exemption 95-60, granted by the DOL on July 7, 1995, exempted from
the prohibited transaction rules, prospectively and retroactively to January 1,
1975, certain transactions engaged in by insurance company general accounts in
which employee benefit plans have an interest. In August 1996, Congress passed
the Small Business Job Protection Act of 1996 (Public Law 104-188) which added
Section 401(c) to ERISA. Section 401(c) provides that no later than December 31,
1997, the DOL must issue a final regulation providing guidance defining the
circumstances in which an insurer will be deemed to have plan assets in its
general account, and how Title I of ERISA will apply to general account assets.
Compliance with this anticipated regulation is intended by Congress to provide a
safe harbor from ERISA liability for general account contracts issued on or
before December 31, 1998. Thereafter, newly issued general account contracts
must comply with the applicable fiduciary provisions of ERISA. Equitable Life is
actively working with industry trade groups in the preparation of the new
regulation and is considering the operational changes it must effect to comply
with the regulation. Pending further development of these and other matters, The
Equitable is unable to determine whether the General Account will be deemed to
have plan assets, and if so, the nature and scope of resulting liability, if
any.
Environmental Considerations. As owners and operators of real property,
Equitable Life and certain Investment Subsidiaries are subject to extensive
Federal, state and local environmental laws and regulations. Inherent in such
ownership and operation is the risk there may be potential environmental
liabilities and costs in connection with any required remediation of such
properties. Equitable Life routinely conducts environmental assessments for real
estate being acquired for investment and before taking title through foreclosure
to real property collateralizing mortgages held by Equitable Life. Based on
these environmental assessments and compliance with Equitable Life's internal
environmental procedures, management believes that any costs associated with
compliance with environmental laws and regulations regarding such properties
would not be material to the consolidated financial position of Equitable Life.
1-21
Furthermore, although Equitable Life and certain of its subsidiaries hold equity
positions in companies that could potentially be subject to environmental
liabilities, management believes, based on its assessment of the businesses and
properties of these companies and the level of involvement of Equitable Life and
the subsidiaries in the operation and management of such companies, any
environmental liabilities with respect to these investments would not be
material to the consolidated financial position of Equitable Life.
Securities Laws. Equitable Life, certain of its insurance subsidiaries and
certain policies and contracts offered by them are subject to regulation under
the Federal securities laws administered by the Securities and Exchange
Commission (the "Commission") and under certain state securities laws. Certain
Separate Accounts of Equitable Life and EVLICO are registered as investment
companies under the Investment Company Act of 1940, as amended (the "Investment
Company Act"). Separate Account interests under certain annuity contracts and
insurance policies issued by Equitable Life are also registered under the
Securities Act of 1933, as amended (the "Securities Act"). Equitable Life, EQ
Financial, EDI, Donaldson, Lufkin & Jenrette Securities Corporation ("DLJSC")
and certain other subsidiaries of Equitable Life are registered as
broker-dealers (collectively the "Broker-Dealers") under the Securities Exchange
Act of 1934, as amended (the "Exchange Act"). The Broker-Dealers are subject to
extensive regulation (as discussed below in "Investment Banking" with reference
to DLJSC), and are members of, and subject to regulation by, the NASD and
various other self regulatory organizations ("SROs"). As a result of
registration under the Exchange Act and SRO memberships, the Broker-Dealers are
subject to overlapping schemes of regulation which cover all aspects of their
securities business. Such regulations cover matters including capital
requirements, the use and safekeeping of customers' funds and securities,
recordkeeping and reporting requirements, supervisory and organizational
procedures intended to assure compliance with securities laws and rules of the
SROs and to prevent improper trading on "material nonpublic" information,
employee-related matters, limitations on extensions of credit in securities
transactions, and clearance and settlement procedures. A particular focus of the
applicable regulations concerns the relationship between broker-dealers and
their customers. As a result, the Broker-Dealers in some instances may be
required to make "suitability" determinations as to certain customer
transactions, are limited in the amounts that they may charge customers, cannot
trade ahead of their customers and must make certain required disclosures to
their customers.
Equitable Life and certain of the Investment Subsidiaries also are registered as
investment advisors under the Investment Advisers Act of 1940, as amended (the
"Investment Advisers Act"). Many of the investment companies managed by the
Investment Subsidiaries, including a variety of mutual funds and other pooled
investment vehicles, are registered with the Commission under the Investment
Company Act. All aspects of Equitable Life's and the Investment Subsidiaries'
investment advisory activities are subject to various Federal and state laws and
regulations and to the law in those foreign countries in which they conduct
business. Such laws and regulations relate to, among other things, limitations
on the ability of investment advisers to charge performance-based or
non-refundable fees to clients, recordkeeping and reporting requirements,
disclosure requirements, limitations on principal transactions between an
adviser or its affiliates and advisory clients, as well as general anti-fraud
provisions. The failure to comply with such laws may result in possible
sanctions including the suspension of individual employees, limitations on the
activities in which the investment advisor may engage, suspension or revocation
of the investment advisor's registration as an advisor, censure and/or fines.
Investment Banking. DLJ's business is, and the securities industry generally is,
subject to extensive regulation in the United States at both the Federal and
state level. Various regulatory bodies are charged with safeguarding the
integrity of the securities and other financial markets and with protecting the
interests of customers participating in those markets. DLJSC is registered as a
broker-dealer with the Commission and in all 50 states and the District of
Columbia, as a futures commission merchant with the Commodities Futures Trading
Commission (the "CFTC"), as an investment advisor in certain states and with the
Commission and is also designated a primary dealer in U.S. Government securities
by the Federal Reserve Bank of New York. It is also a member of, and subject to
regulation by, the NASD, the NYSE, the Chicago Board of Trade ("CBOT"), the
National Futures Association and various other self-regulatory organizations.
Broker-dealers are subject to regulation by state securities administrators in
those states in which they conduct business. Broker-dealers are also subject to
regulations that cover all aspects of the securities business, including sales
1-22
and trading practices, use and safekeeping of customers' funds and securities,
capital structure, record-keeping and the conduct of directors, officers and
employees. The Commission, other governmental regulatory authorities, including
state securities commissions, and SROs may institute administrative or judicial
proceedings, which may result in censure, fine, the issuance of cease-and-desist
orders, the suspension or expulsion of a broker-dealer or member, its officers
or employees or other similar consequences.
DLJ's business may be materially affected not only by regulations applicable to
it as a financial market intermediary, but also by regulations of general
application. For example, the volume of DLJ's underwriting, merger and
acquisition and merchant banking businesses in any year could be affected by,
among other things, existing and proposed tax legislation, antitrust policy and
other governmental regulations and policies (including the interest rate
policies of the Federal Reserve Board) and changes in interpretation or
enforcement of existing laws and rules that affect the business and financial
communities. From time to time, various forms of anti-takeover legislation and
legislation that could affect the benefits associated with financing leveraged
transactions with high yield securities have been proposed that, if enacted,
could adversely affect the volume of merger and acquisition and merchant banking
business, which in turn could adversely affect DLJ's underwriting, advisory and
trading revenues related thereto.
As a broker-dealer registered with the Commission and a member firm of the NYSE,
DLJSC is subject to the capital requirements of the Commission and of the NYSE.
These capital requirements specify minimum levels of capital, computed in
accordance with regulatory requirements ("net capital"), that DLJSC is required
to maintain and also limit the amount of leverage that DLJSC is able to obtain
in its businesses. As a futures commission merchant, DLJSC is also subject to
the capital requirements of the CFTC and the CBOT. A failure by DLJSC to
maintain its minimum required capital would require it to cease executing
customer transactions until it came back into capital compliance, and could
cause it to lose its membership on the NYSE or other exchanges, its right to
registration with the Commission or CFTC, or require its liquidation. In
addition, the decline in DLJSC's net capital below certain "early warning
levels," even though above minimum capital requirements, could have material
adverse consequences including the imposition of a prohibition on DLJSC's
ability to pay dividends, redeem stock, prepay subordinated indebtedness or,
under certain circumstances, make principal payments in respect of subordinated
indebtedness. Compliance with the net capital requirements could limit those
operations of DLJSC that require the intensive use of capital, such as
underwriting, merchant banking and trading activities, and also could restrict
the Holding Company's ability to withdraw capital from DLJSC. Rule 15c3-1 under
the Exchange Act limits the ability of stockholders of a registered
broker-dealer to withdraw excess capital from that broker-dealer, if such
withdrawal would impair the broker-dealer's net capital. This rule could limit
the payment of dividends and the making of loans and advances to Equitable Life
by the Broker-Dealers and by Equitable Life to the Holding Company.
DLJSC is a member of the Securities Investor Protection Corporation, which
provides, in the event of the liquidation of a broker-dealer, protection for
customers' accounts held by the firm of up to $500,000 for each customer,
subject to a limitation of $100,000 for claims for cash balances. In addition,
DLJSC has excess coverage insurance purchased from an unaffiliated third party
insurer. Margin lending by certain subsidiaries of DLJ is subject to the margin
rules of the Board of Governors of the Federal Reserve System and the NYSE.
DLJSC is also subject to the SEC's Temporary Risk Assessment Rules which
require, among other things, that a broker-dealer maintain and preserve certain
information, describe risk management policies and procedures and report on the
financial condition of certain affiliates whose financial and securities
activities are reasonably likely to have a material impact on the financial and
operational condition of the broker-dealer.
DLJSC is designated a primary dealer in U.S. Government securities. Under the
Government Securities Act, which established an integrated system of regulation
of government securities brokers and dealers, the Department of the Treasury has
promulgated regulations concerning, among other things, capital adequacy,
custody and use of government securities and transfers and control of government
securities subject to repurchase transactions.
In addition to being regulated in the U.S., DLJ's business is subject to
regulation by various foreign governments and regulatory bodies. DLJ has
broker-dealer subsidiaries that are subject to regulation by the Securities and
Futures Authority of the United Kingdom, the Securities and Futures Commission
of Hong Kong and the Ontario Securities Commission.
1-23
Additional legislation and regulations, including those relating to the
activities of affiliates of broker-dealers, changes in rules promulgated by the
Commission, the CFTC or other U.S. or foreign governmental regulatory
authorities and SROs or changes in the interpretations or enforcement of
existing laws and rules may adversely affect the manner of operation and
profitability of DLJ.
Principal Shareholder
Equitable Life is a wholly owned subsidiary of the Holding Company. AXA is the
largest shareholder of the Holding Company, beneficially owning (together with
certain of its affiliates) at December 31, 1996 (i) $392.2 million stated value
of Series E convertible preferred stock of the Holding Company, and (ii) 60.8%
of the outstanding shares of Common Stock of the Holding Company (without giving
effect to conversion of the Series E convertible preferred stock beneficially
owned by AXA). All shares of the Holding Company's Common Stock and preferred
stock beneficially owned by AXA have been deposited in the voting trust referred
to below. AXA, a French company, is the holding company for an international
group of insurance and related financial services companies. AXA's insurance
operations include activities in life insurance, property and casualty insurance
and reinsurance. The insurance operations are diverse geographically, with
activities principally in Western Europe, North America and the Asia/Pacific
area. AXA is also engaged in asset management, investment banking, securities
trading, brokerage, real estate and other financial services activities
principally in the United States, as well as in Western Europe and the
Asia/Pacific area.
AXA acquired its interest in the Holding Company in 1992 upon Equitable Life's
demutualization. As a result of the demutualization and related transactions,
Equitable Life is likely to be treated as having undergone an "ownership change"
for purposes of Sections 382 and 383 of the Internal Revenue Code of 1986 (the
"Code"). These sections generally limit the utilization for Federal income tax
purposes of any loss carryforwards and other tax benefits from before the change
to offset the Federal income tax liabilities of Equitable Life for years
following the change. Although no assurance can be given because of the
uncertainties involved in applying Sections 382 and 383 to these transactions
and in determining the amount of the loss carryforwards and other tax benefits
that might be available at the time of the ownership change, management believes
it is unlikely these limitations will have a material adverse effect on the
consolidated financial position of Equitable Life.
Neither AXA nor any affiliate of AXA has any obligation to provide additional
capital or credit support to Equitable Life.
Voting Trust. In connection with AXA's application to the New York
Superintendent for approval of its acquisition of capital stock of the Holding
Company, AXA and the initial Trustees of the Voting Trust (Claude Bebear,
Patrice Garnier and Henri de Clermont-Tonnerre) have entered into a Voting Trust
Agreement dated as of May 12, 1992 (the "Voting Trust Agreement"). The Voting
Trust Agreement requires AXA and certain affiliates to deposit any shares of the
Holding Company's Common Stock and preferred stock held by them in the Voting
Trust. The Voting Trust Agreement also provides (subject to limited exceptions)
that in the event that any AXA Party acquires additional shares of such stock,
or any other stock of the Holding Company having the power to vote in the
election of directors of the Holding Company, it shall promptly deposit such
shares in the Voting Trust. Only AXA Parties and certain other affiliates of AXA
may deposit shares of Holding Company capital stock into the Voting Trust or be
holders of voting trust certificates representing deposited shares. The purpose
of the Voting Trust is to ensure for insurance regulatory purposes that certain
indirect minority shareholders of AXA will not be able to exercise control over
the Holding Company or Equitable Life.
AXA and any other holder of voting trust certificates will remain the beneficial
owner of the shares deposited by it, except that the Trustees will be entitled
to exercise all voting rights attaching to the deposited shares so long as such
shares remain subject to the Voting Trust. In voting the deposited shares, the
Trustees must act to protect the legitimate economic interests of AXA and any
other holders of voting trust certificates (but with a view to ensuring that
certain indirect minority shareholders of AXA do not exercise control over the
Holding Company or Equitable Life). All dividends and distributions (other than
those which are paid in the form of shares required to be deposited in the
Voting Trust) in respect of deposited shares will be paid directly to the
holders of voting trust certificates. If a holder of voting trust certificates
sells or transfers deposited shares to a person which is not an AXA Party and is
not (and does not, in connection with such sale or transfer, become) a holder of
voting trust certificates, the shares sold or transferred will be released from
the Voting Trust. The Voting Trust has an initial term of ten years and is
subject to extension with the prior approval of the New York Superintendent.
1-24
Part I, Item 2.
PROPERTIES
In 1995 The Equitable executed a long-term lease for approximately 500,000
square feet of office space located at 1290 Avenue of the Americas, New York,
New York, which now serves as The Equitable's headquarters. Most of The
Equitable's staff has moved from 787 Seventh Avenue, New York, New York and
other Manhattan office locations into its new headquarters. The relocation is
scheduled for completion in 1999. In addition, The Equitable leases property
both domestically and abroad, the majority of which houses insurance operations.
Management believes its facilities are adequate for its present needs in all
material respects. For additional information, see Notes 18 and 19 of Notes to
Consolidated Financial Statements.
In 1996 Equitable Life subleased its office space at 1290 Avenue of the Americas
to the New York City Industrial Development Agency (the "IDA"), and
sub-subleased that space back from the IDA, in connection with the IDA's
granting of sales tax benefits to Equitable Life.
DLJ's principal executive offices are presently located at 277 Park Avenue, New
York, New York and occupy approximately 793,000 square feet under a lease
expiring in 2016. DLJ also leases space at 120 Broadway, New York, New York,
aggregating approximately 94,000 square feet. This lease expires in 2006.
Pershing also leases approximately 440,000 square feet in Jersey City, New
Jersey, under leases which expire at various dates through 2009.
DLJ also purchased land and a building with approximately 133,000 square feet in
Florham Park, New Jersey in February 1996.
DLJ leases an aggregate of approximately 500,000 square feet for its domestic
and international regional offices, the leases for which expire at various dates
through 2014. Other domestic offices are located in Atlanta, Austin, Boston,
Chicago, Dallas, Houston, Jersey City, Los Angeles, Menlo Park, Miami, Oak
Brook, Philadelphia and San Francisco. Its foreign office locations are
Bangalore, Buenos Aires, Geneva, Hong Kong, London, Lugano, Mexico City, Paris,
Sao Paulo and Tokyo. In 1996, DLJ's principal London subsidiary entered into a
lease for approximately 76,000 square feet to accommodate the expansion of its
international operations. Such lease expires in 2008.
DLJ believes that its present facilities are adequate for its current needs.
Alliance's principal executive offices at 1345 Avenue of the Americas, New York,
New York are occupied pursuant to a lease which extends until 2016. Alliance
currently occupies approximately 290,000 square feet at this location. Alliance
also occupies approximately 79,700 square feet at 135 West 50th Street, New
York, New York under leases expiring in 1998 and 1999, respectively. Alliance
also occupies approximately 22,800 square feet at 709 Westchester Avenue, White
Plans, New York, under leases expiring in 1999 and 2000, respectively. Alliance
and two of its subsidiaries occupy approximately 114,000 square feet of space in
Secaucus, New Jersey pursuant to a lease which extends until 2016. Alliance
leases substantially all of the furniture and office equipment at the New York
City and New Jersey offices.
Alliance also leases space in San Francisco, California, Chicago, Illinois,
Greenwich, Connecticut, Minneapolis, Minnesota, and Beechwood, Ohio, and its
subsidiaries lease space in Boston, Massachusetts, London, England, Paris,
France, Tokyo, Japan, Sydney, Australia, Toronto, Canada, Luxembourg, Singapore,
Bahrain, Mumbai, India, Sao Paulo, Brazil, and Istanbul, Turkey.
Equitable Real Estate Investment Management, Inc. ("ERE") and Compass Management
and Leasing, each of whose principal executive offices are in Atlanta, Georgia,
began in March to consolidate in Monarch Tower, 3424 Peachtree Road, N.E.,
Atlanta, Georgia, where they lease approximately 193,000 square feet under a
lease that extends until 2007. This consolidation is expected to be completed by
May 1, 1997.
2-1
ERE also has ten regional offices with respect to which it leases approximately
147,000 square feet, under leases that expire at various dates through 2002, in
Boston, Chicago, Dallas, Irvine, New York, Philadelphia, Sacramento, San
Francisco, Seattle and Washington, D.C.
Compass Retail, Inc., a subsidiary of ERE, has principal executive offices at
5775 Peachtree Road, Atlanta Georgia of approximately 52,000 square feet held
under two separate leases which expire in 1999.
Equitable Agri-Business, Inc. has principal executive offices at 12747 Olive
Boulevard, St. Louis, Missouri, consisting of approximately 18,000 square feet
held under a lease expiring in March 2000.
2-2
Part I, Item 3.
LEGAL PROCEEDINGS
The matters set forth in Note 14 of Notes to Equitable Life's Consolidated
Financial Statements for the year ended December 31, 1996 (Item 8 of this
report) are incorporated herein by reference with the following additional
information.
The parties to the actions described therein relating to Harrah's Jazz Company
and Harrah's Jazz Finance Corp. have agreed to a settlement of such actions,
subject to the approval of the U.S. District Court for the Eastern District of
Louisiana.
3-1
Part I, Item 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Omitted pursuant to General Instruction I to Form 10-K.
4-1
Part II, Item 5.
MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
All of Equitable Life's common equity is owned by the Holding Company.
Consequently, there is no established public trading market for Equitable Life's
common equity. No dividends have been declared on Equitable Life's common equity
since it was issued on July 22, 1992. For information on Equitable Life's
present and future ability to pay dividends, see Note 17 of Notes to
Consolidated Financial Statements (Item 8 of this report).
5-1
Part II, Item 6.
SELECTED CONSOLIDATED FINANCIAL INFORMATION
At or For the Years Ended December 31,
------------------------------------------------------------
1996 1995 1994 1993 1992
------------ ----------- ----------- ----------- -----------
(In Millions)
Consolidated Statements of Earnings Data(1)
Total revenues(3)(4)(7).................... $ 4,844.5 $ 4,528.8 $ 4,415.4 $ 6,230.8 $ 6,262.9
Total benefits and other deductions(2)(7).. 4,635.9 4,032.7 3,973.9 5,897.6 6,244.8
------------ ----------- ----------- ----------- -----------
Earnings from continuing operations
before Federal income taxes and
minority interest........................ 208.6 496.1 441.5 333.2 18.1
Federal income tax expense................. 9.7 120.5 100.2 94.2 15.8
Minority interest in net income of
consolidated subsidiaries................ 81.7 62.8 50.4 28.6 35.0
------------ ----------- ----------- ------------ ----------
Earnings (loss) from continuing operations. 117.2 312.8 290.9 210.4 (32.7)
Discontinued operations, net of
Federal income taxes(2)(5)(6)(7)......... (83.8) - - - -
Extraordinary charge for demutualization
expenses................................. - - - - (93.8)
Cumulative effect of accounting changes,
net of Federal income taxes.............. (23.1) - (27.1) - 4.9
------------ ----------- ----------- ----------- -----------
Net Earnings (Loss)........................ $ 10.3 $ 312.8 $ 263.8 $ 210.4 $ (121.6)
============ =========== =========== =========== ===========
Consolidated Balance Sheets Data(1)
Total assets(7)............................ $73,607.8 $69,209.0 $61,583.8 $61,118.1 $80,538.8
Long-term debt............................. 1,592.8 1,899.3 1,317.4 1,458.8 1,897.9
Total liabilities(7)....................... 69,523.8 64,950.9 58,223.1 57,968.2 77,993.0
Shareholder's equity....................... 4,084.0 4,258.1 3,360.7 3,149.9 2,545.8
(1) In 1996, the Company changed its method of accounting for long-duration
participating life insurance contracts, primarily within the Closed Block,
in accordance with the provisions prescribed by Statement of Financial
Accounting Standards ("SFAS") No. 120, "Accounting and Reporting by Mutual
Life Insurance Enterprises and by Insurance Enterprises for Certain
Long-Duration Participating Contracts". The financial statements for 1995,
1994, 1993 and 1992 have been restated for the change. Shareholder's
equity increased $194.9 million as of January 1, 1992 for the effect of
retroactive application of the new method. See Note 2 of Notes to
Consolidated Financial Statements.
(2) During the fourth quarter of 1996, the Company completed experience and
loss recognition studies of participating group annuity contracts and
conversion annuities ("Pension Par") and disability income ("DI")
products. Additionally, the Company's management reviewed the loss
provisions for the GIC Segment lines of business. As a result of these
studies, $145.0 million of unamortized DI deferred policy acquisition
costs ("DAC") were written off and reserves were strengthened by $248.0
million for these lines of business. Consequently, earnings from
continuing operations decreased by $255.5 million ($393.0 million pre-tax)
and net earnings decreased by $339.3 million. See Notes 2 and 7 of Notes
to Consolidated Financial Statements.
(3) Total revenues included additions to asset valuation allowances and
writedowns of fixed maturities and, in 1996, equity real estate for
continuing operations aggregating $178.6 million, $197.6 million, $100.5
million, $108.7 million and $278.6 million for the years ended December
31, 1996, 1995, 1994, 1993 and 1992, respectively. As of January 1, 1996,
the Company implemented SFAS No. 121 "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of" ("SFAS No.
121"). The adoption of this statement resulted in the release of valuation
allowances of $152.4 million on equity real estate and recognition of
impairment losses of $144.0 million on real estate held and used.
6-1
(4) Total revenues for the year ended December 31, 1994 included a $52.4
million gain resulting from Alliance's sales of newly issued units. The
year ended December 31, 1993 included a $49.3 million gain (before
variable compensation and related expenses) related to the sale of shares
of one investment in the DLJ long-term corporate development portfolio.
The year ended December 31, 1992 included a gain on that same investment
of $166.2 million, which consisted of a $82.4 million investment gain on
shares sold and an $83.8 million investment gain from the recognition of
an increase in fair value of the investment.
(5) Discontinued operations, net of Federal income taxes, included additions
to asset valuation allowances and writedowns of fixed maturities and, in
1996, equity real estate for the GIC Segment aggregating $36.0 million,
$38.2 million, $50.8 million, $53.0 million and $105.6 million for the
years ended December 31, 1996, 1995, 1994, 1993 and 1992, respectively.
Additionally, the implementation of SFAS No. 121 as of January 1, 1996
resulted in the 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.
(6) Discontinued operations, net of Federal income taxes, included GIC Segment
after-tax losses of $83.8 million for the year ended December 31, 1996.
Incurred losses of $23.7 million, $25.1 million, $21.7 million, $24.7
million and $160.9 million for the years ended December 31, 1996, 1995,
1994, 1993 and 1992, respectively, were charged to the GIC Segment
allowance for future losses. See Note 7 of Notes to Consolidated Financial
Statements.
(7) The results of the Closed Block for the periods subsequent to July 22,
1992 are reported on one line in the consolidated statements of earnings.
Accordingly, total revenues and total benefits and other deductions are
not comparable for all periods presented. Total assets and total
liabilities include the assets and liabilities of the Closed Block,
respectively, and therefore amounts are comparable for all periods
presented. See Note 6 of Notes to Consolidated Financial Statements.
Assets and liabilities relating to the discontinued GIC Segment are not
reflected on the consolidated balance sheets of the Company, except that
as of December 31, 1996, 1995, 1994, 1993 and 1992 the net amount due to
continuing operations for intersegment loans made to the discontinued GIC
Segment in excess of continuing operations' obligations' to fund the
discontinued GIC Segment's accumulated deficit is reflected as "Amounts
due from discontinued GIC Segment". See Note 7 of Notes to Consolidated
Financial Statements.
6-2
Part II, Item 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following analysis of the consolidated results of operations and financial
condition of the Company should be read in conjunction with the Consolidated
Financial Statements and the related Notes to Consolidated Financial Statements
included elsewhere herein. The years "1996," "1995" and "1994" refer to the
years ended December 31, 1996, 1995 and 1994, respectively.
COMBINED RESULTS OF OPERATIONS
The Closed Block contribution is reported on one line in the consolidated
statements of earnings. The results of operations of the Closed Block for 1996,
1995 and 1994 are combined with the results of operations outside of the Closed
Block in the table below. See Closed Block results as combined herein on page
7-5. Management's discussion and analysis addresses the combined results of
operations unless noted otherwise.
Combined Results of Operations
1996 1995 1994
----------- ------------- ------------
(In Millions)
Policy fee income and premiums........................... $2,195.3 $ 2,146.2 $ 2,137.8
Net investment income.................................... 2,722.5 2,627.1 2,521.6
Investment (losses) gains, net........................... (15.3) (14.9) 67.8
Commissions, fees and other income....................... 1,082.9 899.3 848.3
----------- -------------- -------------
Total revenues..................................... 5,985.4 5,657.7 5,575.5
----------- -------------- -------------
Interest credited to policyholders' account balances..... 1,285.1 1,264.0 1,217.1
Policyholders' benefits.................................. 2,409.1 2,070.5 2,020.7
Other operating costs and expenses....................... 2,082.6 1,827.1 1,896.2
----------- -------------- -------------
Total benefits and other deductions................ 5,776.8 5,161.6 5,134.0
----------- -------------- -------------
Earnings from continuing operations before Federal
income taxes, minority interest and cumulative
effect of accounting change............................ 208.6 496.1 441.5
Federal income taxes..................................... 9.7 120.5 100.2
Minority interest in net income of consolidated
subsidiaries........................................... 81.7 62.8 50.4
----------- -------------- -------------
Earnings from continuing operations before
cumulative effect of accounting change................. 117.2 312.8 290.9
Discontinued operations, net of Federal income taxes..... (83.8) - -
Cumulative effect of accounting change, net of
Federal income taxes................................... (23.1) - (27.1)
----------- -------------- -------------
Net Earnings............................................. $ 10.3 $ 312.8 $ 263.8
=========== ============== =============
7-1
The Company's results of operations for both continuing and discontinued
operations during 1996 were significantly affected by certain actions during the
fourth quarter of 1996. Continuing operations' results for 1996 were impacted by
reserve strengthenings as the result of experience and loss recognition studies
completed in the fourth quarter for the disability income ("DI") and
participating pension ("Pension Par") lines of business. These studies resulted
in the need to increase DI reserves by $175.0 million, write off $145.0 million
of unamortized deferred policy acquisition costs ("DAC") on the DI products and
increase Pension Par reserves by $73.0 million. See "Combined Results of
Operations by Segment - Insurance Operations - Disability Income" and "Group
Pension Products". Additionally, during the fourth quarter of 1996, the loss
allowances related to the discontinued operations comprising the GIC Segment
were strengthened by $129.0 million. See "Discontinued Operations".
Also in the fourth quarter of 1996, the Company adopted SFAS No. 120, which
prescribes the accounting for certain individual participating life insurance
contracts, which for the Company are primarily included in the Closed Block. The
methodologies required by SFAS No. 120 produce results which more closely
reflect the economics of the participating life contracts and are considered to
be preferable accounting principles as compared to the SFAS No. 60 model
previously used for this type of contract. The application of this new
methodology resulted in increases to (decreases from) pre-tax results from
continuing operations of $29.5 million, $23.4 million and $(3.6) million in
1996, 1995 and 1994, respectively, and a $240.3 million aggregate increase in
shareholder's equity at December 31, 1996. Prior years' financial results have
been restated. See "Accounting Changes and New Accounting Pronouncements" and
Note 2 of Notes to Consolidated Financial Statements.
Continuing Operations
1996 Results Compared to 1995 - Compared to 1995, the lower pre-tax results from
continuing operations for 1996 reflected the impact on Insurance Operations'
results of the aforementioned reserve strengthenings totaling $248.0 million and
the writeoff of unamortized DAC on the DI business of $145.0 million. Absent
these actions, Insurance Operations' pre-tax results would have increased by
$53.3 million in 1996 over 1995. Offsetting the lower Insurance Operations'
results were increased earnings in Investment Services of $87.9 million. There
were higher losses in Corporate and Other of $35.9 million due to higher
interest expense related to the Surplus Notes. The decrease in Federal income
taxes was attributed to lower pre-tax results of operations. The increase in
minority interest in net income of consolidated subsidiaries was primarily
attributable to increased earnings for Alliance.
In 1996, revenues increased $327.7 million compared to 1995. Investment Services
earned higher commissions, fees and other income of $170.2 million due primarily
to increased business activity at Alliance and DLJ. DLJ is accounted for on the
equity basis. Insurance Operations contributed $140.3 million and $3.1 million
to the year's revenue growth.
Net investment income increased $95.4 million in 1996 as compared to 1995
principally due to an increase of $90.6 million for Insurance Operations. The
Insurance Operations' increase was due to higher overall investment yields on a
larger asset base, including the investment of proceeds received from the
issuance of $600.0 million of Surplus Notes in December 1995.
There were investment losses of $15.3 million for 1996 as compared to $14.9
million for 1995. In 1996, a gain of $20.6 million was recognized as a result of
the issuance of Alliance Units to third parties upon completion of the Cursitor
acquisition. This gain was more than offset by investment losses of $35.8
million on General Account Investment Assets as compared to losses of $21.5
million in 1995. Lower gains on fixed maturities of $32.3 million were partially
offset by $6.6 million higher gains on other equity investments and the lower
losses on mortgage loans and equity real estate of $8.9 million and $2.3
million, respectively.
7-2
For 1996, total benefits and other deductions increased by $615.2 million from
1995, reflecting the DI DAC writeoff and DI and Pension Par reserve
strengthening additions of $393.0 million, a $90.6 million increase in other
policyholders' benefits, increases in other operating expenses of $71.5 million,
$39.0 million higher Corporate interest expense and a $21.1 million increase in
interest credited to policyholders. The increase in other policyholders'
benefits primarily was attributable to higher claims experience on directly
written and reinsurance assumed DI policies (before reserve strengthening) and
higher mortality experience on variable and interest-sensitive and participating
life policies with the impact of the higher mortality being largely offset by
DAC amortization as reflected in other operating expenses. The increase in other
operating expenses was principally attributable to increased operating costs of
$89.1 million in Investment Services associated with increased business
activities at Alliance offset by $24.7 million lower operating expenses in
Insurance Operations, excluding the DI DAC writeoff. Higher Corporate interest
expense of $39.0 million primarily resulted from the interest on the Surplus
Notes issued by Equitable Life in the fourth quarter of 1995. The $21.1 million
increase in interest credited to policyholders for Insurance Operations'
primarily was due to small changes in crediting rates applied to a larger
individual life and annuity in force book of business.
1995 Results Compared to 1994 - Compared to 1994, the $54.6 million higher
pre-tax results of operations for 1995 reflected lower losses of $83.2 million
in Corporate and Other partially offset by $24.4 million and $3.9 million lower
earnings for Insurance Operations and Investment Services, respectively.
The $82.2 million increase in revenues for 1995 compared to 1994 primarily was
attributed to a $101.6 million increase in Insurance Operations reflecting
higher net investment income.
Net investment income increased $105.5 million in 1995 with increases of $101.6
million and $4.6 million for Insurance Operations and Investment Services,
respectively. The increase in investment income for Insurance Operations
principally was due to higher overall yields on a larger investment asset base
and income from the investment of the $300.0 million capital contribution
received from the Holding Company. These positive factors were principally
offset by the investment asset base reduction due to the $1.22 billion payment
of the obligation to fund the accumulated deficit of the GIC Segment in January
1995.
There were investment losses of $14.9 million in 1995 compared to investment
gains of $67.8 million for 1994. Investment losses on General Account Investment
Assets of $21.5 million as compared to $15.4 million of investment gains in 1994
were due to $87.9 million of losses on equity real estate as compared to gains
of $19.9 million in 1994 and a $73.9 million decrease in gains on other equity
investments offset by $102.0 million in gains on fixed maturities compared with
$20.5 million in losses in 1994 and a $22.2 million decrease in losses on
mortgages. Investment gains for 1994 included the $43.9 million gain (net of
$8.5 million of related state income tax) recognized in the third quarter of
1994 on Alliance's sales of newly issued Units to third parties.
During 1995, total benefits and other deductions increased by $27.6 million from
1994, primarily reflecting increases in policyholders' benefits of $49.8
million, interest credited to policyholders' account balances of $46.9 million
and other operating expenses of $17.2 million, offset in part by a decline in
Corporate interest expense of $86.3 million. Corporate interest expense declined
primarily as a result of the cash settlement in January 1995 with the GIC
Segment. The increase in policyholders' benefits primarily resulted from the
larger in force book of business for variable and interest-sensitive life
policies and higher morbidity experience on the disability income business,
offset by improved mortality experience on term life insurance policies and
policies within the Closed Block. The $46.9 million increase in interest
credited to policyholders for Insurance Operations was primarily due to higher
crediting rates applied to a larger individual life in force book of business,
partially offset by the impact of pass-throughs of investment losses to
participating pension contractholders and smaller policyholders' account
balances.
7-3
Federal Income Taxes
Federal income taxes resulted in an expense of $9.7 million for 1996, as
compared to $120.5 million in 1995 and $100.2 million in 1994, reflecting The
Company's earnings pattern over the three year period. See Note 9 of Notes to
Consolidated Financial Statements. At December 31, 1996, The Company's deferred
income tax account reflected a net liability of $237.2 million, as compared to a
net liability of $370.6 million at December 31, 1995. Management believes the
gross deferred tax asset of $259.2 million at December 31, 1996 is more likely
than not to be fully realizable and, consequently, no valuation allowance is
necessary.
Equitable Life is no longer subject to the add-on tax imposed on mutual life
insurance companies under Section 809 of the Internal Revenue Code. This tax
results from the disallowance of a portion of a mutual life insurance company's
policyholders' dividends as a deduction from taxable income. The add-on tax was
estimated each year and adjusted in subsequent years. The add-on tax provision
was a benefit of $16.8 million for 1994. The benefit in this year resulted from
revised estimates of prior years' add-on tax.
Accounting Changes and New Accounting Pronouncements
During 1996, the Company adopted SFAS No. 120, "Accounting and Reporting by
Mutual Life Insurance Enterprises and by Insurance Enterprises for Certain
Long-Duration Participating Contracts". Mutual life insurers' individual
participating life insurance contracts, on which dividends are expected to be
paid to policyholders based on actual experience and whose dividends are
computed consistent with the "contribution principle," are required to be
accounted for in accordance with the provisions of SFAS No. 120 and Statement of
Position ("SOP") 95-1, "Accounting for Certain Insurance Activities of Mutual
Life Insurance Enterprises". Stock life insurance companies with comparable
contracts have the option of adopting SFAS No. 120 or continuing to apply SFAS
No. 60. The individual participating life insurance contracts of mutual life
insurance companies, whose dividends are computed consistent with the
"contribution principle," are required to be accounted for in accordance with
the provisions of SFAS No. 120 and Statement of Position ("SOP") 95-1. Stock
life insurance companies with comparable policies have the option of adopting
SFAS No. 120 or continuing to apply SFAS No. 60.
The Company concluded the accounting in SFAS No. 120 and SOP 95-1 is preferable
to the accounting under a SFAS No. 60 approach for contracts which meet the SFAS
No. 120 criteria because it more accurately reflects the economics of these
contracts. Therefore, the Company has applied SFAS No. 120 to its qualifying
participating life insurance contracts, most of which are included in the Closed
Block. In accordance with SFAS No. 120, all prior years' reported results have
been restated.
The calculations of the liabilities for future policy benefits and DAC under
SFAS No. 120 differ from SFAS No. 60. While both models use net level premium
benefit reserve methodologies for calculating the liabilities for future policy
benefits, there are significant and complex differences in the underlying
assumptions and techniques. The liability for future policy benefits under SFAS
No. 120 is calculated using a net level premium method on the basis of actuarial
assumptions equal to guaranteed mortality and dividend fund interest rates. The
liability for annual dividends represents the accrual of annual dividends
earned. Terminal dividends are accrued in proportion to gross margins over the
life of the contracts. These compare to assumptions underlying SFAS No. 60
calculations which are experience expectations at the time the business was sold
with provisions for adverse deviation. Additionally, in applying SFAS No. 60,
the cumulative excess of the actual contribution from Closed Block policies over
the actuarially predetermined expected contribution, if any, was accrued in the
Closed Block as a liability for future dividends to be paid to the Closed Block
policyholders.
Under SFAS No. 120, DAC is amortized over the expected total life of the
contract group (40 years) as a constant percentage based on the present value of
the estimated gross margin amounts expected to be realized over the life of the
contracts using the expected investment yield. The estimated gross margin
amounts include anticipated premiums and investment results less claims and
administrative expenses, changes in the net level premium reserve, and expected
annual policyholder dividends. Deviations of actual results from estimated
experience are reflected in earnings in the period such deviations occur. Under
SFAS No. 60, DAC is amortized in proportion to anticipated premiums using
assumptions established at the date of policy issue and consistently applied
during the life of the contract.
7-4
Overall, the SFAS No. 120 methodology produces reported earnings which more
closely reflect the economics of the participating life contracts, compared to
the SFAS No. 60 model implemented upon demutualization. SFAS No. 120 reflects
the accounting The Equitable would have utilized for participating life
insurance products had these GAAP accounting standards for mutual life insurance
companies been established prior to Equitable Life's demutualization.
Additionally, amortization of DAC for contracts governed by SFAS No. 120
reflects emerging and expected future experience consistent with amortization of
DAC for other core interest-sensitive life and annuity products issued by The
Equitable which are governed by SFAS No. 97. Further, use of the SFAS No. 120
model will facilitate comparison to the business results of other companies with
comparable products, principally mutual life insurers who are required by the
FASB to utilize SFAS No. 120.
On January 1, 1996, the Company implemented SFAS No. 121. Upon adoption,
existing valuation allowances on equity real estate of $152.4 million and $71.9
million were released and impairment losses on real estate held and used of
$149.6 million and $69.8 million were recognized in continuing and discontinued
operations, respectively. Under SFAS No. 121, equity real estate classified as
available for sale is no longer depreciated. The SFAS No. 121 implementation
also resulted in a $23.1 million charge, net of a Federal income tax benefit of
$12.4 million, as building improvements of facilities vacated later in 1996 and
in early 1997 were written down to fair value.
For information on all the 1996 and the prior years' accounting changes, as well
as on new accounting pronouncements, see Note 2 of Notes to Consolidated
Financial Statements.
Combined Results Of Continuing Operations By Segment
Insurance Operations. The following table presents the combined results from
continuing operations for Insurance Operations:
Insurance Operations
(In Millions)
1996
--------------------------------------
As Closed 1995 1994
Reported Block Combined Combined Combined
----------- ---------- ----------- ---------- -----------
Policy fees, premiums and other
income............................... $ 1,570.3 $ 724.8 $ 2,295.1 $ 2,230.8 $ 2,220.0
Net investment income.................. 2,078.0 546.6 2,624.6 2,534.0 2,432.4
Investment (losses) gains, net......... (30.4) (5.5) (35.9) (21.3) 15.1
Contribution from the Closed Block..... 125.0 (125.0) - - -
----------- ----------- ------------ ---------- ----------
Total revenues................... 3,742.9 1,140.9 4,883.8 4,743.5 4,667.5
Total benefits and other deductions.... 3,779.5 1,140.9 4,920.4 4,440.4 4,340.0
----------- ----------- ------------ ---------- ----------
(Loss) Earnings from Continuing
Operations before Federal
Income Taxes, Minority Interest
and Cumulative Effect of
Accounting Change.................... $ (36.6) $ - $ (36.6) $ 303.1 $ 327.5
=========== =========== ============ ========== ==========
7-5
1996 Results Compared to 1995 - The loss from continuing operations of $36.6
million in 1996 primarily is due to the $393.0 million of reserve
strengthenings, including the writeoff of unamortized DAC on DI products, in the
fourth quarter of 1996. If the effect of these charges was eliminated, 1996
earnings from continuing operations for Insurance Operations would have totaled
$356.4 million, an increase of $53.3 million over the prior year, reflecting an
increase in earnings in the core life and annuity lines of business, partially
offset by increased losses in the reinsurance, disability income and group
pension lines of business.
Total revenues increased by $140.3 million primarily due to a $85.7 million
increase in policy fees on variable and interest-sensitive life and individual
annuity contracts, a $76.0 million increase in investment results and a $15.3
million increase in commissions, fees and other income, offset by a decrease of
$36.7 million in premiums. The decrease in premiums principally was due to lower
traditional life premiums and lower reinsurance assumed on individual annuity
contracts. Higher investment income attributed to higher overall investment
yields on a larger asset base, which included the net proceeds from the issuance
of the Surplus Notes in December 1995, was partially offset by higher investment
losses in 1996 principally due to lower gains on fixed maturities.
Excluding the $393.0 million effect of reserve strengthenings and DAC writeoff
in 1996, total benefits and other deductions for 1996 increased by $87.0 million
from 1995. Policyholders' benefits before the reserve strengthenings increased
$90.6 million due to higher claims experience on directly written and
reinsurance assumed DI policies and higher mortality in the participating and
variable and interest-sensitive life products, partially offset by favorable
mortality experience on term life insurance. The impact of the higher mortality
in the participating and variable and interest-sensitive life products was
substantially offset by reduced DAC amortization of $51.1 million attributed to
life insurance products. Other operating expenses increased $51.7 million
principally due to higher employee benefit costs related to lower interest rate
assumptions, higher costs associated with building new distribution channels and
new product initiatives, costs related to the consolidation of insurance
operations centers, higher volume related commissions and increasing costs
associated with litigation, partially offset by lower amortization of DAC
principally attributable to the mortality noted above and $21.8 million
principally attributable to estimates of enhanced future annuity gross margins.
There was a $21.1 million increase in interest credited to policyholders
reflecting the effect of small changes in the crediting rates multiplied by the
larger in force book of interest-sensitive life and annuity business.
Disability Income
During the competitive market conditions of the 1980s, the Company issued a
large amount of noncancelable individual DI policies with policy terms and
underwriting criteria that were competitive at the time but are more liberal
than those available today. These policies have fixed premiums and are not
cancelable as long as premiums are paid. The majority of the DI policies issued
before 1993 provide for lifetime benefits and many include cost of living riders
and provide benefits which exceed $5,000 per month, while defining disability as
the insured's inability to perform his or her own occupation. The Company also
had assumed reinsurance on a block of DI policies with characteristics similar
to its own pre-1993 policies.
In an effort to improve claims management and reduce exposure on new business,
in 1993, the Company and Paul Revere Life Insurance Company ("Paul Revere")
entered into an agreement whereby Paul Revere provides claims adjudication and
related administrative services for Equitable Life's DI business. Paul Revere
also reinsures 80% of the risk associated with DI contracts sold by Equitable
Life after July 1, 1993. Such contracts issued after July 1, 1993 include more
restrictive terms than the policies issued earlier. From 1993 through 1996,
claims management processes continued to evolve as they were mainstreamed into
Paul Revere's systems and procedures.
During the years 1994 through 1996, DI providers, including the Company,
experienced claims incidence rates higher than previous industry experience.
Incidence rates have been particularly high in Florida and California.
Additionally, despite the joint expertise of Paul Revere and Equitable Life, the
first year claims termination rates on policies issued before 1993 have been
significantly lower than anticipated, particularly for certain classes of
professionals such as physicians. The Company had recognized pre-tax losses from
operations of $72.5 million, $50.6 million and $28.3 million in 1996, 1995 and
1994, respectively, for the DI line of business before the fourth quarter 1996
reserve strengthening.
7-6
In light of recent results, particularly the lack of claims experience
improvement in 1996, during the fourth quarter, management initiated a
comprehensive experience analysis which included studies of market related data
and secular trends. Consequently, a loss recognition study of the DI business
was completed. The study incorporated management's revised estimates of future
experience with regard to morbidity, investment returns, claims and
administration expenses and other factors. Based on other DI providers'
announced reserve strengthening actions, management believes other industry
participants have likewise determined that adverse trends in claims incidence
and terminations are secular in nature. The study indicated the DAC was not
recoverable and the reserves were not sufficient. Therefore, $145.0 million of
unamortized DAC on DI policies at December 31, 1996 were written off and
reserves for directly written DI policies and DI reinsurance assumed were
strengthened by $175.0 million.
The determination of DI reserves requires making assumptions and estimates
covering a number of factors, including morbidity and interest rates, claims
experience and lapse rates based on then known facts and circumstances. Such
factors as claim incidence and termination rates can be affected by changes in
the economic, legal and regulatory environments, as well as societal factors
(e.g. work ethic). While management believes the DI reserves have been
calculated on a reasonable basis and are adequate, there can be no assurance
that they will be sufficient to provide for all future liabilities.
Group Pension Products
The Company has issued Pension Par products designed to provide participating
annuity guarantees and benefit payment services to corporate sponsored pension
plans. The Company has made no new sales of these products in several years.
Today, a significant portion of these contracts either have been converted into
non-participating contracts or effectively are non-participating because they
are unlikely to produce future dividends due to improving mortality trends and
recent poor investment performance.
Excluding the reserve strengthening effect, the group pension business produced
pre-tax losses of $24.9 million and $13.3 million in 1996 and 1995,
respectively, as compared to $15.8 million in earnings in 1994. Recent operating
losses primarily resulted from lower investment results, particularly related to
investment losses on mortgages and equity real estate and deteriorating in
mortality experience as evidenced by mortality losses of $2.4 million and $6.8
million experienced in 1996 and 1995, respectively.
During the fourth quarter of 1996, a loss recognition study was completed which
incorporated management's current assumptions. These assumptions included
expected mortality improvements based upon a review of industry and social
security data and future investment returns. Management reviewed the most
recently available data on annuitant longevity and chose a single new mortality
table that better reflected that data. In addition, after reviewing 1986-1994
social security data, management selected a projection method which allows for
future improvements in mortality. The equity real estate cash flow projections
used in the study are consistent with those used in the determination of
impairment pursuant to SFAS No. 121. The study's results prompted management to
establish a premium deficiency reserve, resulting in a $73.0 million pre-tax
charge to the results of continuing operations, principally attributable to the
improved mortality assumptions.
1995 Results Compared to 1994 - Insurance Operations' pre-tax results from
continuing operations for 1995 reflected a decrease of $24.4 million from the
year-earlier period. Investment losses in 1995 as compared to gains in 1994,
higher interest credited on interest-sensitive life and individual annuity
contracts and unfavorable morbidity experience on disability income policies
were partially offset by an increase in investment income.
Total revenues increased by $76.0 million primarily due to a $73.2 million
increase in policy fees and a $65.2 million increase in investment results
offset by a $64.8 million decline in premiums. The decrease in premiums
principally was due to lower traditional life and individual health premiums.
7-7
Total benefits and other deductions for 1995 rose $100.4 million from 1994. The
increase principally was due to higher interest credited on policyholders'
account balances, increased death claims due to the larger in force book of
business for variable and interest-sensitive life policies (offset by lower
death claims on policies within the Closed Block) and the morbidity experience
mentioned above, offset by a decrease in other operating costs and expenses
principally due to decreases in employee related compensation and benefits.
Interest credited on policyholders' account balances in Insurance Operations
increased by $46.9 million reflecting higher crediting rates applied to a larger
in force book of business.
7-8
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)
1996 1995 1994
------------- ----------- -------------
Individual annuities
First year...................................... $ 2,132.1 $ 1,756.7 $ 1,721.9
Renewal......................................... 1,210.5 1,090.7 1,045.0
------------- ----------- ------------
3,342.6 2,847.4 2,766.9
Variable and interest-sensitive life
First year recurring............................ 177.2 178.3 186.4
First year optional............................. 162.9 149.0 148.8
Renewal......................................... 1,139.6 1,031.1 929.7
------------- ----------- ------------
1,479.7 1,358.4 1,264.9
Traditional life
First year recurring............................ 18.3 23.4 31.3
First year optional............................. 4.5 5.5 7.6
Renewal......................................... 844.2 858.5 887.0
------------- ----------- ------------
867.0 887.4 925.9
Other(1)
First year...................................... 29.4 75.7 27.7
Renewal......................................... 368.8 387.9 406.0
------------- ----------- ------------
398.2 463.6 433.7
Total first year.................................. 2,524.4 2,188.6 2,123.7
Total renewal..................................... 3,563.1 3,368.2 3,267.7
------------- ----------- ------------
Total individual insurance and annuity products... 6,087.5 5,556.8 5,391.4
------------- ----------- ------------
Participating group annuities..................... 227.8 213.2 144.9
Conversion annuities.............................. 2.0 1.9 1.3
Association plans................................. 125.7 139.6 88.2
------------- ----------- ------------
Total group pension products...................... 355.5 354.7 234.4
------------- ----------- ------------
Total Premiums and Deposits....................... $ 6,443.0 $ 5,911.5 $ 5,625.8
============= =========== ============
(1) Includes reinsurance assumed and health insurance.
First year premiums and deposits for individual insurance and annuity products
in 1996 increased from prior year levels by $335.8 million primarily due to
higher sales of individual annuities offset in part by lower reinsurance assumed
on individual annuity contracts. Renewal premiums and deposits for individual
insurance and annuity products increased by $194.9 million during 1996 over the
prior year as increases in the larger block of variable and interest-sensitive
life and individual annuity policies were partially offset by decreases in
traditional life policies and other product lines. Traditional life premiums and
deposits for 1996 decreased from the prior year by $20.4 million reflecting the
ongoing marketing emphasis on variable and interest-sensitive products and the
decline in the traditional life book of business. The 21.4% increase in first
year individual annuities' premiums and deposits in 1996 over the prior year
included $214.8 million from a line of retirement annuity products introduced in
1995 partially offset by an approximately $148.4 million decrease in premiums
related to an exchange program that offered contractholders of existing SPDA
contracts with no remaining surrender charges an opportunity to exchange their
contracts for new flexible premium variable contracts thereby retaining assets
in the Company and establishing new surrender charge scales. Management believes
7-9
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 believes, are
beginning to positively affect variable and interest-sensitive life premium
results.
Total premiums and deposits in 1995 increased $285.7 million over 1994 levels,
with individual business accounting for 57.9% of the increase and group products
the remaining 42.1%. First year individual business premiums and deposits for
1995 increased from prior year levels by $64.9 million primarily due to higher
sales of individual annuities and reinsurance assumed on individual annuity
contracts. Renewal premiums and deposits on individual product lines increased
by $100.5 million during 1995 over 1994 as increases in the growing block of
variable and interest-sensitive life and individual annuity policies were offset
by decreases in traditional life policies and other product lines. Traditional
life premiums and deposits for 1995 decreased from 1994 by $38.5 million due to
the marketing focus on variable and interest-sensitive products and the decline
in the traditional life book of business. First year individual annuities'
premiums and deposits included $236.9 million for 1995 as compared to $126.0
million in 1994 resulting from the exchange program mentioned above. Group
business premiums and deposits in 1995 were $120.3 million higher than in 1994
with higher deposits received for existing participating group annuity contracts
(47.1%) and for association plans (58.3%).
Surrenders and Withdrawals; Policy Loans - The following table summarizes
surrenders and withdrawals (including universal life and investment-type
contract withdrawals) for Insurance Operations' major individual insurance and
annuities' product lines.
Surrenders and Withdrawals(1)
(In Millions)
1996 1995 1994
----------- ----------- -----------
Individual Insurance and Annuities:
Individual annuities..................... $ 2,277.0 $ 2,186.8 $ 1,879.9
Variable and interest-sensitive life..... 521.3 405.0 419.2
Traditional life......................... 350.1 340.6 350.7
----------- ----------- ----------
Total.................................... $ 3,148.4 $ 2,932.4 $ 2,649.8
=========== =========== ==========
(1) Surrendered traditional and variable and interest-sensitive life insurance
policies represented 4.4%, 4.1% and 4.5% of average surrenderable future
policy benefits and policyholders' account balances for such life insurance
contracts in force during 1996, 1995 and 1994, respectively. Surrendered
individual annuity contracts represented 10.3%, 11.5% and 10.9% of average
surrenderable policyholders' account balances for individual annuity
contracts in force during those same years, respectively.
Policy and contract surrenders and withdrawals increased $216.0 million during
1996 compared to 1995 due to the $116.3 million and $90.2 million increases in
the variable and interest-sensitive life and individual annuities surrenders and
withdrawals, respectively. These increases primarily were due to: the $88.0
million paid in January 1996 for two small pension annuity clients who
terminated their contracts; an $81.5 million surrender of a single corporate
owned life insurance contract in the fourth quarter of 1996; and the increased
size of the books of business.
7-10
During 1995, policy and contract surrenders and withdrawals increased $282.6
million compared to 1994 principally due to the $306.9 million increase in
individual annuities surrenders and withdrawals. This increase occurred during
the first six months of 1995 and primarily was due to increased surrenders of
Equi-Vest and SPDA contracts due to the aging book of business, the effect of
the aforementioned exchange program which was designed to retain assets in the
Company and the maintenance of crediting rates throughout 1994 despite an
increasing interest rate environment. The 1994 total for variable and
interest-sensitive life products included a scheduled withdrawal of
approximately $52.9 million of policy cash value from a large corporate owned
life insurance plan issued by Equitable of Colorado, Inc. Excluding the effect
of the 1994 scheduled withdrawal, surrenders and withdrawals of variable and
interest-sensitive life contracts for 1995 increased by $38.7 million from the
prior year due to the larger book of business.
The persistency of life insurance and annuity products is a critical element of
their profitability. As of December 31, 1996, all in force individual life
insurance policies (other than individual life term policies without cash values
which comprise 8.8% of in force policies) and more than 89% of individual
annuity contracts (as measured by reserves) were surrenderable. However, a
surrender charge often applies in the early contract years and declines to zero
over time. Contracts without surrender provisions cannot be terminated prior to
maturity.
Policy loan balances increased to $3.96 billion at December 31, 1996, as
compared to $3.77 billion at December 31, 1995. However, since policy cash
values increased at a similar rate during these years, the ratio of outstanding
policy loans to aggregate policy cash values has been generally stable since
1990.
Margins on Individual Insurance and Annuity Products - Insurance Operations'
results significantly depend on profit margins between investment results from
General Account Investment Assets and interest credited on individual insurance
and annuity products. During 1996, such margins increased as increases in
crediting rates were more than offset by the effect of the higher investment
yields. During 1996, the crediting rate ranges were: 4.50% to 6.75% for variable
and interest-sensitive life insurance; 5.00% to 6.30% for variable deferred
annuities; and 4.65% to 8.15% for SPDA contracts; the crediting rate of 6.15%
was used for retirement investment accounts throughout 1996.
Margins on individual insurance and annuity products are affected by interest
rate fluctuations. Rising interest rates result in a decline in the market value
of assets. However, the positive cash flows from renewal premiums, investment
income and maturities of existing assets would make an early disposition of
investment assets to meet operating cash flow requirements unlikely. Rising
interest rates also would result in available cash flows from maturities being
invested at higher interest rates, which would help support a gradual increase
in new business and renewal interest rates on interest-sensitive products. A
sharp, sudden rise in the interest rate environment without a concurrent
increase in crediting rates could result in higher surrenders, particularly for
annuities. The effect of such surrenders would be to reduce earnings modestly
over the long term while increasing earnings in the period of the surrenders to
the extent surrender charges were applicable. Beginning in 1995, Equitable Life
initiated an interest rate cap program designed to hedge crediting rate
increases on interest-sensitive individual annuity contracts. At December 31,
1996, the outstanding notional amounts of contracts purchased and sold totaled
$5.05 billion and $500.0 million, respectively, up from $2.6 billion and $300.0
million, respectively, at December 31, 1995.
If interest rates fall, crediting interest rates and dividends would be adjusted
subject to competitive pressures. Only a minority of this segment's policies and
contracts have fixed interest rates locked in at issue. The majority of
contracts are adjustable, having guaranteed minimum rates ranging from
approximately 2.5% to 5.5%. More than 89% of the life policies have a minimum
rate of 4.5% or lower. Should interest rates fall below such policy minimums,
adjustments to life policies' mortality and expense charges could cover the
shortfall in most situations. Lower crediting interest rates and dividends could
result in higher surrenders.
7-11
Investment Services. The following table summarizes the results of operations
for Investment Services.
Investment Services
(In Millions)
1996 1995 1994
----------- ---------- ----------
Third party commissions and fees................ $ 860.2 $ 722.0 $ 676.0
Affiliate fees(1)............................... 140.7 138.9 149.9
Other income(2)................................. 125.2 88.2 109.3
----------- ---------- ---------
Total revenues.................................. 1,126.1 949.1 935.2
Total costs and expenses........................ 814.2 725.1 707.3
----------- ---------- ---------
Earnings from Continuing Operations before
Federal Income Taxes, Minority Interest and
Cumulative Effect of Accounting Change........ $ 311.9 $ 224.0 $ 227.9
=========== ========== =========
(1) These fees are earned by the Investment Subsidiaries principally for
investment management and other services provided to the Insurance Group and
unconsolidated real estate joint ventures. These fees (except those related
to the GIC Segment and unconsolidated real estate joint ventures of $26.8
million, $28.1 million and $42.0 million in 1996, 1995 and 1994,
respectively) are eliminated as intercompany transactions in the
consolidated statements of earnings included elsewhere herein.
(2) Includes net dealer and trading gains, investment results and other items.
1996 Results Compared to 1995 - For 1996, pre-tax earnings for Investment
Services segment increased by $87.9 million from the year earlier period
primarily due to higher earnings for DLJ, Alliance and Equitable Real Estate.
DLJ's earnings were higher than in the comparable 1995 period largely due to
increased levels of underwriting, strong merger and acquisition activity, higher
dealer and trading gains the growth in trading volume on most major exchanges.
Total segment revenues were up $177.0 million principally due to higher revenues
at Alliance and higher equity in net earnings of DLJ. DLJ's revenue contribution
on the equity basis increased $29.9 million to $88.3 million for 1996. Other
income for 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.
Total costs and expenses increased by $89.1 million in 1996 to $814.2 million,
principally reflecting increases in compensation and benefits and other expenses
at Alliance due to increased activity.
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 was an indirect wholly owned subsidiary of National Mutual
Holdings Limited ("NMH"), in which AXA owns a 51% equity interest. NMFM managed
investments in North American securities of approximately $1.2 billion for NMH
affiliates and third parties at the date of acquisition.
On February 29, 1996, Alliance acquired the business of Cursitor for
approximately $159.0 million. The purchase price consisted of approximately 1.8
million Alliance Units, $94.3 million in cash and $21.5 million in notes which
are payable ratably over the next four years, as well as substantial additional
consideration which will be determined at a later date. The Equitable recognized
an investment gain of $20.6 million as a result of the issuance of Units in this
transaction. At December 31, 1996, The Equitable's ownership of Alliance Units
was approximately 57.3%.
1995 Results Compared to 1994 - For 1995, pre-tax earnings for the Investment
Services segment declined by $3.9 million from 1994. In 1994, revenues included
the $43.9 million gain on Alliance's sales of new Units to third parties.
Revenues for 1995 increased by $13.9 million to $949.1 million and included a
$9.4 million gain on the sale by EQ Services of mortgage servicing contracts.
Third party commission and fees increased by $46.0 million during 1995 while
affiliate fees decreased by $11.0 million to $138.9 million at December 31,
1995. DLJ's revenue contribution on the equity basis increased $20.3 million to
$58.4 million for 1995, as a result of higher earnings at DLJ.
7-12
Total costs and expenses increased $17.8 million during 1995 to $725.1 million
due to increases at Alliance and Equitable Real Estate of $14.2 million and $3.6
million, respectively.
On October 30, 1995, DLJ completed an IPO of 10.58 million shares of its common
stock, which included 7.28 million of the Holding Company's shares in DLJ,
priced at $27 per share. The remaining 3.30 million common shares sold in the
DLJ IPO were shares newly issued by DLJ. Upon completion of the IPO, the Holding
Company recognized a net gain of $34.7 million while its ownership percentage
was reduced from 100% to 80.2%. Equitable Life continues to own a 36.1%
interest. In connection with the IPO, approximately 500 DLJ employees acquired
forfeitable restricted stock units and stock options covering common stock of
DLJ. Such restricted stock units and options will vest and become exercisable
over a four-year period beginning in February 1997. Assuming full vesting of the
forfeitable restricted stock units and the exercise of the stock options (but
excluding any shares issued under employee stock options granted in the future),
these employees would own approximately 21% of the outstanding common stock of
DLJ and The Equitable would own approximately 63% of such common stock, 35% held
by the Holding Company and 28% by Equitable Life. Concurrently, DLJ completed
the offering of $500.0 million aggregate principal amount of 6.875% senior notes
due November 1, 2005. DLJ's proceeds from this senior debt offering totaled
$493.5 million before deducting certain expenses related to the transaction. DLJ
used the net proceeds from the common stock and debt offerings to repay certain
outstanding indebtedness, effectively lengthening the average maturity of DLJ's
borrowings. DLJ did not receive any part of the proceeds from the sale of shares
by the Holding Company. Prior to these offerings, The Equitable made a capital
contribution to DLJ of equity securities with a market value of $55.0 million,
$33.8 million from the Holding Company and $21.2 million from Equitable Life.
On October 27, 1995, Equitable Real Estate sold 30 securitized commercial
mortgage servicing contracts on assets under management of $7.7 billion to a
third party, recognizing a $9.4 million gain on the transaction. The contracts,
mostly Resolution Trust Corporation ("RTC") related, were managed by EQ
Services, Equitable Real Estate's mortgage servicing affiliate. Equitable Real
Estate continues to manage and service the remaining $7.5 billion mortgage
portfolios of the General and Separate Accounts.
On March 7, 1994, Alliance completed the acquisition of the business and
substantially all of the assets of Shields Asset Management, Inc. ("Shields"),
and Shields' wholly owned subsidiary, Regent Investor Services, Inc. ("Regent"),
for a purchase price of approximately $74.0 million in cash. In addition,
Alliance issued new Units to key employees of Shields and Regent having an
aggregate value of approximately $15.0 million in connection with their entering
into long-term employment agreements.
Results By Business Unit - Though now accounted for on the equity basis since
December 1993, DLJ's business results in total are addressed in this section and
in "Fees From Assets Under Management". The following table summarizes results
of operations by business unit; the elimination of DLJ majority interest is
included in Consolidation/elimination:
Investment Services
Results of Operations by Business Unit
(In Millions)
1996 1995 1994
---------- --------- ------------
Earnings from continuing operations before
Federal income taxes, minority interest and
cumulative effect of accounting change:
DLJ(1)........................................... $ 440.6 $ 271.6 $ 192.7
Alliance......................................... 198.0 159.3 134.8
Equitable Real Estate............................ 46.2 43.6 40.7
Consolidation/elimination(2)(3)(4)............... (372.9) (250.5) (140.3)
---------- --------- -----------
Earnings from Continuing Operations before
Federal Income Taxes, Minority Interest and
Cumulative Effect of Accounting Change (5)....... $ 311.9 $ 224.0 $ 227.9
========== ========= ===========
7-13
(1) Excludes amortization expense of $3.8 million, $5.5 million and $5.9 million
for 1996, 1995 and 1994, 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 $12.4 million, $18.6 million and $14.1 million
related to intercompany debt issued by intermediate holding companies
payable to Equitable Life for 1996, 1995 and 1994, 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 $352.3 million, $211.3 million and $154.1 million for 1996, 1995
and 1994, respectively.
(4) Includes a gain of $16.9 million (net of $3.7 million related state income
tax) for 1996 on issuance of Alliance Units to third parties upon the
completion of the Cursitor transaction during the first quarter of the year.
Also includes a $43.9 million net gain recognized in connection with the
sales of newly issued Alliance Units to third parties in the third quarter
of 1994
(5) Pre-tax minority interest in Alliance was $83.6 million, $64.4 million and
$50.9 million for 1996, 1995 and 1994, respectively.
DLJ - DLJ's earnings from operations for 1996 were $440.6 million, up $169.0
million from the prior year. Revenues increased $731.8 million to $3.49 billion
primarily due to increased underwriting revenues of $272.7 million, $162.7
million higher net investment income, higher commissions of $113.1 million, fee
increases of $100.9 million and higher dealer and trading gains of $70.5
million. DLJ's expenses were $3.05 billion for 1996, up $562.8 million from the
prior year primarily due to a $271.1 million increase in compensation and
commissions, higher interest expense of $52.6 million, a $38.7 million increase
in rent related expenditures and $33.2 million higher brokerage and exchange
fees.
During the third quarter of 1995, DLJ provided $28.8 million for a potential
loss with respect to a bridge loan aggregating $150 million to a company
experiencing financial difficulties. In October 1996, a planned acquisition of
such company was announced, which, if completed, would result in the realization
by DLJ of amounts previously reserved, plus interest. The transaction is
expected to close in 1997.
DLJ's earnings from operations for 1995 were $271.6 million, up $78.9 million
from the prior year. Revenues increased $748.6 million to $2.76 billion
primarily due to higher dealer and trading gains of $199.2 million, increased
underwriting revenues of $180.4 million, fee increases of $87.8 million, higher
commissions of $84.1 million and $66.1 million higher gains on the corporate
development portfolio. Corporate development revenue for the third quarter of
1995 included the reserve for a potential loss with respect to a bridge loan to
a company experiencing financial difficulties as mentioned above. DLJ's expenses
were $2.49 billion for 1995, up $669.7 million from the prior year primarily due
to a $369.8 million increase in compensation and commissions, higher interest
expense of $176.8 million, a $35.2 million increase in rent related
expenditures, $32.5 million higher brokerage and exchange fees and a $7.2
million restructuring charge related to the wind down of its public finance
underwriting operations. During 1995, DLJ repurchased an additional $2.2 million
of certain mortgage-related securities previously underwritten by DLJ and made
advances of $25.1 million for certain expenses, bringing the total carrying
value of these securities to $278.5 million at December 31, 1995.
DLJ is engaged in various securities trading activities which resulted in net
dealer and trading gains of $435.4 million, $364.9 million and $165.7 million
for 1996, 1995 and 1994, respectively. A substantial portion of DLJ's
transactions are executed with and on behalf of DLJ's customers. DLJ's exposure
to credit risk associated with the nonperformance of these customers in
fulfilling their contractual obligations can be directly impacted by volatile
securities and credit markets and regulatory changes. DLJ manages this credit
risk by requiring customers to maintain margin collateral in compliance with
regulatory and internal guidelines. DLJ monitors compliance with these
guidelines on a daily basis.
7-14
DLJ's derivatives activities consist primarily of writing OTC options to
accommodate its customers needs, trading in forward contracts in U.S. government
and agency issued or guaranteed securities and in futures contracts on equity
based indices and currencies, and issuing structured notes. At December 31, 1996
and 1995, DLJ had issued long-term structured notes totaling $216.2 million and
$24.5 million, 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. DLJ's involvement in swap contracts, which generally involve greater
risk and volatility, is not significant.
By their nature, DLJ's principal business activities, investment and merchant
banking, securities sales and trading and correspondent brokerage services, are
highly competitive and subject to various risks, volatile trading markets and
fluctuations in the volume of market activity. Consequently, DLJ's net income
and revenues have been, and may continue to be, subject to wide fluctuations,
reflecting the impact of many factors beyond DLJ's control, including securities
market conditions, the level and volatility of interest rates, competitive
conditions and the size and timing of transactions.
Alliance - Alliance's earnings from operations for 1996 were $198.0 million, an
increase of $38.7 million from the prior year. Revenues totaled $788.2 million
for 1996, an increase of $148.5 million from 1995, due to increased investment
advisory fees from higher assets under management and higher distribution plan
fees resulting from high average equity long-term mutual fund and cash
management assets under management. Alliance's costs and expenses increased
$109.8 million to $590.2 million for 1996 primarily due to increases in employee
compensation and benefits and other promotional expenditures.
Alliance's earnings from operations for 1995 were $159.3 million, an increase of
$24.5 million from the prior year. Revenues totaled $639.7 million for 1995, an
increase of $38.7 million from 1994, due to increased investment advisory fees,
offset by lower distribution plan fees from lower average load mutual fund
assets. Alliance's costs and expenses increased $14.2 million to $480.4 million
for 1995 primarily due to increases in rent and related costs, offset by
decreases in employee compensation and benefits, interest expense and other
promotional expenditures.
In August 1996, Alliance, the two principals of Albion Asset Advisors LLC and
Equitable Life formed Albion Alliance LLC to manage private investments on
behalf of institutional and large private investors. The new joint venture will
have a global focus and will expand Alliance's existing corporate finance and
private investing business, particularly in emerging markets.
Equitable Real Estate - The 1996 earnings from operations for Equitable Real
Estate totaled $46.2 million, a $2.6 million increase from 1995. The revenue
decrease of $19.5 million to $226.1 million in 1996 was more than offset by
$22.1 million lower operating costs in 1996 as compared to 1995. These overall
declines primarily were due to the absence from 1996 results of the EQ Services'
mortgage servicing business, sold in October 1995. Equitable Real Estate
earnings for 1996 compared to 1995, excluding the results of EQ Services, were
higher principally due to increased third party fees and disposition fees from
the General Account. Earnings for 1996 include a $2.1 million provision for
restructuring. Equitable Real Estate's earnings from operations were $43.6
million for 1995, up $2.9 million from 1994. The increase primarily was due to a
$9.4 million gain on the sale by EQ Services of mortgage servicing contracts
offset by lower management fees from the General Account and $2.9 million of
restructuring charges. The results for 1994 included a $4.8 million disposition
fee received on a property sold in the first quarter of that year.
The Company is exploring strategic alternatives regarding Equitable Real Estate.
Such alternatives may include a possible sale of all or a portion of Equitable
Real Estate.
7-15
Fees From Assets Under Management - As the following table illustrates, third
party clients continue to constitute an important source of revenues and
earnings.
Fees and Assets Under Management
(In Millions)
At or for the Years Ended December 31,
------------------------------------------
1996 1995 1994
------------ ------------ -------------
Fees:
Third Party................................... $ 740.8 $ 613.0 $ 544.7
Equitable Life and the Holding Company........ 128.8 128.2 138.6
------------ ------------ -------------
Total......................................... $ 869.6 $ 741.2 $ 683.3
============ ============ ============
Assets Under Management:
Third Party(1)(2)............................. $ 184,784 $ 144,441 $ 125,145
Equitable Life and the Holding Company(3)..... 54,990 50,900 47,376
------------ ------------ -------------
Total......................................... $ 239,774 $ 195,341 $ 172,521
============ ============ ============
(1) Includes Separate Account assets under management of $29.87 billion, $24.72
billion and $20.67 billion at December 31, 1996, 1995 and 1994,
respectively. Also includes $1.77 billion of assets managed on behalf of
other AXA affiliates at December 31, 1996. Third party assets under
management include 100% of the estimated fair value of real estate owned by
joint ventures in which third party clients own an interest.
(2) Includes $2.4 billion of performing mortgages at December 31, 1994 under a
special stand-by services contract with the RTC. Stand-by fees were received
on the entire portfolio under the contract; servicing fees were earned only
on those mortgages that are delinquent.
(3) Includes invested assets of the Company not managed by the Investment
Subsidiaries, principally invested assets of subsidiaries and policy loans,
totaling approximately $21.75 billion, $17.59 billion and $14.26 billion at
December 31, 1996, 1995 and 1994, respectively.
Fees for assets under management increased 17.3% during 1996 as compared to 1995
as a result of the growth in assets under management for third parties. Assets
under management increased $44.43 billion, primarily due to $34.63 billion
higher third party assets under management at Alliance. The Alliance growth in
1996 was principally due to market appreciation, the acquisitions of Cursitor
and NMFM during 1996 and net mutual fund sales. The Cursitor acquisition
increased assets under management at year end 1996 by approximately $8.2
billion. In 1995, Alliance's third party assets under management increased by
$25.64 billion primarily due to market appreciation and net sales of money
market funds. DLJ's assets under management increased in 1996 by $4.94 billion
or 89.2% due to growth in merchant banking funds and the Asset Management Group.
Third party assets under management at Equitable Real Estate decreased by $8.15
billion in 1995 primarily due to the sale by EQ Services of mortgage servicing
contracts.
7-16
GENERAL ACCOUNT INVESTMENT PORTFOLIO
At December 31, 1996, Insurance Operations, including the Closed Block, had
$35.11 billion of General Account Investment Assets to support the insurance and
annuity liabilities of its continuing operations. The following discussion
analyzes the results of the major categories of General Account Investment
Assets, including the Closed Block investment assets. These categories are:
fixed maturities, which include both investment grade and below investment grade
public and private debt securities and redeemable preferred stock; mortgages,
principally on commercial and agricultural properties; equity real estate, which
includes significant investments in office and mixed use properties; and other
equity investments, which consists principally of limited partnership
investments in funds which invest in below investment grade debt and equity
securities, and other equity securities received in connection with private
below investment grade debt investments. Policy loans and cash and short-term
investments make up the remainder of General Account Investment Assets.
Insurance Operations' investment segments often hold pro rata interests in the
same investment assets and share on a pro rata basis the cash flows therefrom.
Most individual investment assets held in the GIC Segment are also held in the
General Account investment portfolio. At demutualization, General Account
Investment Assets were allocated between the Closed Block and operations outside
of the Closed Block. The Closed Block assets are a part of continuing operations
and have been combined on a line-by-line basis with assets outside of the Closed
Block for comparability purposes. In view of the similar asset quality
characteristics of the major asset categories in the two portfolios, management
believes it is appropriate to discuss the Closed Block assets and the assets
outside of the Closed Block on a combined basis. The investment results of
General Account Investment Assets and the Holding Company Group investment
assets are reflected in the Company's results from continuing operations;
investment results of GIC Segment Investment Assets are reflected in
discontinued operations.
The following table reconciles the consolidated balance sheet asset amounts to
General Account Investment Assets.
General Account Investment Asset Carrying Values
December 31, 1996
(In Millions)
General
Balance Account
Sheet Closed Investment
Balance Sheet Captions: Total Block Other (1) Assets
- - ------------------------------------------- ------------ ----------- ------------ -------------
Fixed maturities:
Available for sale(2)..................... $ 18,077.0 $ 3,889.5 $ (178.0) $ 22,144.5
Mortgage loans on real estate............... 3,133.0 1,380.7 - 4,513.7
Equity real estate.......................... 3,297.5 202.8 (18.3) 3,518.6
Policy loans................................ 2,196.1 1,765.9 - 3,962.0
Other equity investments.................... 597.3 105.0 9.9 692.4
Other invested assets....................... 973.7 87.4 1,079.8 (18.7)
------------ ----------- ----------- -----------
Total investments......................... 28,274.6 7,431.3 893.4 34,812.5
Cash and cash equivalents................... 538.8 (59.1) 183.3 296.4
------------ ----------- ----------- -----------
Total....................................... $ 28,813.4 $ 7,372.2 $ 1,076.7 $ 35,108.9
============ =========== =========== ===========
(1) Assets listed in the "Other" category principally consist of assets held in
portfolios other than the Holding Company Group and the General Account
(primarily securities held in inventory or for resale by DLJ) 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 General Account Investment Assets.
(2) Fixed maturities available for sale are reported at estimated fair value. At
December 31, 1996, the amortized cost of the General Account's fixed
maturity portfolio was $21.71 billion compared with an estimated market
value of $22.14 billion.
7-17
Asset Valuation Allowances and Writedowns
Impairments in the value of fixed maturities or equity real estate held for the
production of income that are other than temporary are treated as direct
writedowns to the asset value and are accounted for as realized losses.
Valuation allowances on real estate available for sale are computed using the
lower of current estimated fair value or depreciated cost, net of disposition
costs. Before adopting SFAS No. 121 as of January 1, 1996, valuation allowances
on real estate held for the production of income were computed using forecasted
cash flows of the respective properties discounted at a rate equal to the
Company's cost of funds. The Company provides for other than temporary declines
in the values of mortgages and equity real estate to be disposed of through
asset valuation allowances. Additions or deductions to these allowances are
recognized in investment gains (losses) for the period in which they are
recorded. The carrying values of assets on the consolidated balance sheets are
presented net of the applicable valuation allowance at the relevant date.
Management, with the assistance of its asset managers, regularly monitors the
performance of General Account Investment Assets. Based on recommendations from
these asset managers, as well as other factors, Equitable Life's Investments
Under Surveillance Committee (the "Surveillance Committee") decides on a
quarterly basis whether any investments are other than temporarily impaired. The
Surveillance Committee reviews proposed writedowns and the adequacy of the
valuation allowance for each asset category and adjusts such amounts, as
management deems appropriate, in accordance with the Company's valuation
policies for investments (see Note 2 of Notes to Consolidated Financial
Statements).
Fixed maturities identified as available for sale are carried at estimated fair
value while those identified as held to maturity are carried at amortized cost.
On December 1, 1995, as the result of a one-time reassessment of the
classification of fixed maturities permitted by the FASB's implementation guide
on SFAS No. 115, all General Account and GIC Segment fixed maturities then
classified as "held to maturity" were reclassified as "available for sale".
Equity real estate identified as available for sale is carried at the lower of
cost or estimated fair value less disposition costs. During the first quarter of
1996, the Company implemented SFAS No. 121, which prescribes the accounting for
the impairment of long-lived assets, including equity real estate. See Note 2 of
Notes to Consolidated Financial Statements for discussion of the impact of this
accounting change. Equity securities are carried at estimated fair value, with
other than temporary decreases in value reflected as realized losses in the
consolidated statements of earnings. The carrying value of equity in other
limited partnership interests is based on the net assets of the partnership,
which generally are determined by the relevant partnership using estimated fair
value of the underlying assets, with changes reflected by the Company in
investment income in the consolidated statements of earnings.
7-18
The following table shows asset valuation allowances and additions to and
deductions from such allowances for the periods indicated.
General Account Investment Assets
Valuation Allowances
(In Millions)
Equity Real
Mortgages Estate Total
------------- ------------ ------------
December 31, 1996
Assets Outside of the Closed Block:
Beginning balances................... $ 65.5 $ 259.8 $ 325.3
SFAS No. 121 releases(1)............. - (152.4) (152.4)
Additions............................ 31.4 93.6 125.0
Deductions(2)........................ (46.5) (114.3) (160.8)
------------- ------------ ------------
Ending Balances........................ $ 50.4 $ 86.7 $ 137.1
============= ============ ============
Closed Block:
Beginning balances................... $ 18.4 $ 4.3 $ 22.7
Additions............................ 12.3 2.1 14.4
Deductions(2)........................ (16.9) (2.7) (19.6)
------------- ------------ ------------
Ending Balances........................ $ 13.8 $ 3.7 $ 17.5
============= ============ ============
Total:
Beginning balances................... $ 83.9 $ 264.1 $ 348.0
SFAS No. 121 releases(1)............. - (152.4) (152.4)
Additions............................ 43.7 95.7 139.4
Deductions(2)........................ (63.4) (117.0) (180.4)
------------- ------------ ------------
Ending Balances........................ $ 64.2 $ 90.4 $ 154.6
============= ============ ============
December 31, 1995
Beginning balances................... $ 110.4 $ 223.3 $ 333.7
Additions............................ 53.6 92.9 146.5
Deductions(2)........................ (80.1) (52.1) (132.2)
------------- ------------ ------------
Ending Balances........................ $ 83.9 $ 264.1 $ 348.0
============= ============ ============
December 31, 1994
Beginning balances................... $ 216.6 $ 211.8 $ 428.4
Additions............................ 47.9 24.2 72.1
Deductions(2)........................ (154.1) (12.7) (166.8)
------------- ------------ ------------
Ending Balances........................ $ 110.4 $ 223.3 $ 333.7
============= ============ ============
(1) As a result of adopting 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 reflects releases of allowances due to asset dispositions and
writedowns.
Writedowns on fixed maturities (primarily related to below investment grade
securities) aggregated $42.7 million, $63.5 million and $46.7 million in 1996,
1995 and 1994, respectively. Writedowns on equity real estate subsequent to the
adoption of SFAS No. 121 totaled $23.7 million in 1996.
7-19
General Account Investment Assets
The following table shows the major categories of General Account Investment
Assets by amortized cost, valuation allowances and net amortized cost as of
December 31, 1996 and by net amortized cost as of December 31, 1995.
General Account Investment Assets
(Dollars In Millions)
December 31, 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)... $ 21,711.6 $ - $21,711.6 62.6% $ 19,149.9 56.7%
Mortgages............. 4,577.9 64.2 4,513.7 13.0 5,007.1 14.8
Equity real estate.... 3,609.0 90.4 3,518.6 10.1 4,130.3 12.2
Other equity
investments......... 692.4 - 692.4 2.0 764.1 2.3
Policy loans.......... 3,962.0 - 3,962.0 11.4 3,773.6 11.2
Cash and short-term
investments(2)...... 277.7 - 277.7 0.9 952.1 2.8
------------ ------------ ------------ ---------- ------------ ------------
Total................. $ 34,830.6 $ 154.6 $34,676.0 100.0% $ 33,777.1 100.0%
============ ============= ============= ========== ============ ============
(1) Excludes unrealized gains of $432.9 million and $857.9 million on fixed
maturities classified as available for sale at December 31, 1996 and 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.
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 on an opportunistic basis. Management anticipates that reductions
will depend on real estate market conditions, the level of mortgage foreclosures
and expenditures required to fund necessary or desired improvements to
properties.
In accordance with Equitable Life's plan of demutualization, new investments for
the Closed Block must consist of cash and short-term investments, fixed income
securities having an NAIC category 1 or category 2 rating and commercial and
agricultural mortgages having an "A" rating or better pursuant to an internal
rating system acceptable to the Superintendent. No new investments may be made
in equity real estate, mortgages (except as described in the preceding sentence)
or obligations rated below NAIC category 2, except to safeguard the value of
existing investments allocated to the Closed Block or to honor outstanding
commitments. The Closed Block reinvestment policies may be changed with the
Superintendent's prior approval.
Investment Results of General Account Investment Assets
For 1996, investment results from General Account Investment Assets totaled
$2.54 billion, as compared to $2.40 billion in 1995, an increase of 5.9%.
Investment yields, including investment gains and losses, increased to 7.62% in
1996 from 7.46% in 1995. Net investment income on General Account Investment
Assets was $2.58 billion in 1996, as compared to $2.42 billion in 1995. The
increase principally was due to higher income from a larger fixed maturity
portfolio and from other equity investments offset by lower income from smaller
mortgage and equity real estate portfolios. There were investment losses of
$35.8 million in 1996 as compared to $21.5 million in 1995. The $6.6 million
higher gains on other equity investments and lower losses on mortgages and
equity real estate of $8.9 million and $2.3 million, respectively, were more
than offset by $32.0 million lower gains on fixed maturities.
7-20
For 1995, investment results from General Account Investment Assets totaled
$2.40 billion, as compared to $2.30 billion in 1994, an increase of 4.1%.
Investment yields, including investment gains (losses), increased to 7.46% in
1995 from 7.41% in 1994. Net investment income on General Account Investment
Assets was $2.42 billion in 1995, as compared to $2.29 billion in 1994. The
increase principally was due to higher income from fixed maturities and other
equity investments offset by lower income from mortgages and equity real estate.
There were investment losses of $21.5 million as compared to gains of $15.4
million in 1994. Investment gains on fixed maturities in 1995 totaling $102.0
million as compared to losses of $20.5 million in 1994 and a $22.2 million
decrease in losses on mortgage loans were more than offset by losses of $87.9
million in 1995 as compared to gains of $19.9 million in 1994 for the equity
real estate category and a $73.9 million decrease in gains on other equity
investments.
7-21
The following table summarizes investment results by General Account Investment
Asset category for the periods indicated.
Investment Results By Asset Category
(Dollars In Millions)
1996 1995 1994
--------------------------- --------------------------- --------------------------
(1) (1) (1)
Yield Amount Yield Amount Yield Amount
------------ ------------- ----------- ------------- ------------ ------------
Fixed Maturities:
Income...................... 7.94% $ 1,615.1 8.05% $ 1,447.7 8.02% $ 1,313.9
Investment Gains(Losses).... 0.35% 70.0 0.57% 102.0 (0.13)% (20.5)
------------ ------------- ----------- ------------- ------------ ------------
Total....................... 8.29% $ 1,685.1 8.62% $ 1,549.7 7.89% $ 1,293.4
Ending Assets............... $ 21,711.6 $ 19,149.9 $ 16,871.6
Mortgages:
Income...................... 8.90% $ 427.1 8.82% $ 460.1 8.91% $ 532.0
Investment Gains(Losses).... (0.72)% (34.3) (0.83)% (43.2) (1.09)% (65.4)
------------ ------------- ----------- ------------- ------------ ------------
Total....................... 8.18% $ 392.8 7.99% $ 416.9 7.82% $ 466.6
Ending Assets............... $ 4,513.7 $ 5,007.1 $ 5,582.9
Equity Real Estate(2):
Income...................... 2.91% $ 88.6 2.59% $ 92.5 2.96% $ 107.8
Investment Gains(Losses).... (2.81)% (85.6) (2.46)% (87.9) 0.55% 19.9
------------ ------------- ----------- ------------- ------------ ------------
Total....................... 0.10% $ 3.0 0.13% $ 4.6 3.51% $ 127.7
Ending Assets............... $ 2,725.5 $ 3,210.5 $ 3,717.0
Other Equity Investments:
Income...................... 17.10% $ 119.6 11.20% $ 90.0 5.69% $ 56.3
Investment Gains(Losses).... 2.01% 14.1 0.93% 7.5 8.24% 81.4
------------ ------------- ----------- ------------- ------------ ------------
Total....................... 19.11% $ 133.7 12.13% $ 97.5 13.93% $ 137.7
Ending Assets............... $ 692.4 $ 764.1 $ 846.1
Policy Loans:
Income...................... 7.00% $ 272.1 6.95% $ 256.1 6.70% $ 233.3
Ending Assets............... $ 3,962.0 $ 3,773.6 $ 3,559.1
Cash and Short-term
Investments:
Income...................... 9.00% $ 52.9 8.18% $ 72.6 6.74% $ 43.4
Investment Gains(Losses).... 0.00% 0.0 0.01% 0.1 0.00% 0.0
------------ ------------- ----------- ------------- ------------ ------------
Total....................... 9.00% $ 52.9 8.19% $ 72.7 6.74% $ 43.4
Ending Assets............... $ 277.7 $ 952.1 $ 824.2
Total:
Income(3)................... 7.72% $ 2,575.4 7.52% $ 2,419.0 7.36% $ 2,286.7
Investment Gains(Losses).... (0.10)% (35.8) (0.06)% (21.5) 0.05% 15.4
------------ ------------- ----------- ------------- ------------ ------------
Total(4).................... 7.62% $ 2,539.6 7.46% $ 2,397.5 7.41% $ 2,302.1
Ending Assets............... $ 33,882.9 $ 32,857.3 $ 31,400.9
(1) Yields are based on the quarterly average asset carrying values, excluding
unrealized gains (losses) in the fixed maturity asset category.
(2) Equity real estate carrying values are shown, and equity real estate yields
are calculated, net of third party debt and minority interest of $793.1
million, $919.8 million and $937.7 million as of December 31, 1996, 1995 and
1994, 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 $56.6 million,
$59.3 million and $48.1 million for 1996, 1995 and 1994, respectively.
7-22
(3) Total investment income includes non-cash income from amortization,
payment-in-kind distributions and undistributed equity earnings of $69.0
million, $72.2 million and $51.2 million for 1996, 1995 and 1994,
respectively. Investment income is shown net of depreciation of $97.0
million, $126.3 million and $119.7 million for 1996, 1995 and 1994,
respectively.
(4) Total yields are shown before deducting investment fees paid to the
Investment Subsidiaries (which include asset management, acquisition,
disposition, accounting and legal fees). If such fees had been deducted,
total yields would have been 7.31%, 7.15% and 7.09% for 1996, 1995 and 1994,
respectively.
Fixed Maturities. Fixed maturities consist of publicly traded debt securities,
privately placed debt securities and small amounts of redeemable preferred
stock, which represented 72.4%, 26.9% and 0.7%, respectively, of the amortized
cost of this asset category at December 31, 1996.
Total investment results on fixed maturity investments during 1996 increased by
$135.4 million (8.7%) from results in 1995. Investment income increased $167.4
million reflecting a higher asset base and higher investment returns available
on below investment grade securities. There were investment gains of $70.0
million on fixed maturity investments in 1996 as compared to $102.0 million in
1995. The 1996 gains were due to $112.7 million of gains on sales and
prepayments offset by $42.7 million in writedowns.
The fixed maturities portfolio, which represented 62.6% of the net amortized
cost of General Account Investment Assets at December 31, 1996 (compared to
56.7% at December 31, 1995), consists largely of investment grade corporate debt
securities, including significant amounts of U.S. government and agency
obligations. As of December 31, 1996, 87.5% ($18.99 billion) of amortized cost
of fixed maturities were rated investment grade (NAIC bond rating of 1 or 2)
including $5.51 billion of publicly traded securities rated Aaa by Moody's
(34.8% of publicly traded fixed maturities). At December 31, 1995, 86.4% of
fixed maturities were investment grade and 42.6% of publicly traded fixed
maturities were rated Aaa. Using external rating agencies or an internal rating
system when a public rating does not exist, the weighted average quality of the
General Account public and private fixed maturity portfolios at December 31,
1996 was A2 and Baa1, respectively.
At December 31, 1996, the Company held collateralized mortgage obligations
("CMOs") with an amortized cost of $2.55 billion, including $2.42 billion in
publicly traded CMOs. About 57.1% of the public CMO holdings were collateralized
by GNMA, FNMA and FHLMC securities. Approximately 38.7% of the public CMO
holdings were in planned amortization class ("PAC") bonds. At December 31, 1996
interest only ("IO") strips amounted to $5.2 million of amortized cost. There
were no principal only strips. In addition, at December 31, 1996, the Company
held $2.20 billion of mortgage pass-through securities (GNMA, FNMA, or FHLMC
securities) and also held $1.15 billion of public and private asset-backed
securities, primarily backed by home equity and credit card receivables.
The Company reduced the net amortized cost of its below investment grade (NAIC
bond ratings 3 through 6) fixed maturity portfolio from $3.33 billion at
December 31, 1990 to $1.13 billion at December 31, 1993. In light of the
Insurance Group's significantly reduced exposure to below investment grade
securities at December 31, 1993, management increased its portfolio of below
investment grade securities in subsequent years, primarily through purchases of
below investment grade public fixed maturities. The below investment grade
securities in the fixed maturity portfolio (including redeemable preferred
stock), which had an amortized cost of $2.72 billion, or 12.5% of fixed
maturities, as of December 31, 1996 as compared to $2.61 billion (13.6%) at
December 31, 1995, primarily consisted of $2.00 billion of public below
investment grade securities and $716.3 million of privately placed debt
investments. At December 31, 1996, $773.9 million (28.5%) of the below
investment grade fixed maturities were rated NAIC 3, the highest below
investment grade rating. Of these "medium" grade assets, 65.5% were publicly
rated and the remainder were privately placed.
At December 31, 1996, the amortized costs of General Account Investment Asset
public and private fixed maturities which were investment grade when acquired
and were subsequently downgraded to below investment grade were $45.6 million
and $185.7 million, respectively.
7-23
Summaries of all fixed maturities, public fixed maturities and private fixed
maturities are shown by NAIC rating in the following table.
Fixed Maturities
By Credit Quality
(Dollars In Millions)
December 31, 1996 December 31, 1995
Rating Agency --------------------------------------- ---------------------------------------
NAIC Equivalent Amortized % of Estimated Amortized % of Estimated
Rating Designation Cost Total Fair Value Cost Total Fair Value
- - ---------- ------------------------ --------------- --------- ------------- --------------- ---------- -------------
Total Fixed Maturities:
1 Aaa/Aa/A............... $ 12,699.9 58.5% $ 12,925.9 $ 11,713.7 61.2% $ 12,307.2
2 Baa.................... 6,294.9 (1) 29.0 6,408.1 4,822.3 (1) 25.2 5,116.7
3 Ba..................... 773.9 (2) 3.6 800.2 801.9 (2) 4.2 802.1
4 B...................... 1,623.5 (2) 7.5 1,684.2 1,488.9 (2) 7.8 1,461.6
5 Caa and lower.......... 130.4 0.6 133.9 133.3 0.7 126.8
6 In or near default..... 47.4 0.2 47.4 59.3 0.3 57.8
--------------- --------- ------------- --------------- -----------------------
Subtotal.......................... 21,570.0 99.4 21,999.7 19,019.4 99.4 19,872.2
Redeemable preferred stock
and other....................... 141.6 0.6 144.8 130.5 0.6 126.5
--------------- --------- ------------- --------------- -----------------------
Total Fixed Maturities............ $ 21,711.6 100.0% $ 22,144.5 $ 19,149.9 100.0% $ 19,998.7
=============== ========= ============= =============== ========= =============
Public Fixed Maturities:
1 Aaa/Aa/A............... $ 9,991.9 (3) 63.1% $ 10,145.9 $ 9,205.6 (4) 68.4% $ 9,642.2
2 Baa.................... 3,853.2 24.3 3,928.8 2,318.8 17.2 2,472.3
3 Ba..................... 506.6 3.2 534.0 455.8 3.4 464.6
4 B...................... 1,230.0 7.8 1,283.4 1,275.9 9.5 1,236.6
5 Caa and lower.......... 126.0 0.8 129.5 108.3 0.8 101.1
6 In or near default..... 21.2 0.1 21.2 14.0 0.1 12.6
--------------- --------- ------------- --------------- -----------------------
Subtotal.......................... 15,728.9 99.3 16,042.8 13,378.4 99.4 13,929.4
Redeemable preferred stock
and other....................... 116.7 0.7 118.5 87.5 0.6 89.9
--------------- --------- ------------- --------------- -----------------------
Total Public Fixed Maturities..... $ 15,845.6 100.0% $ 16,161.3 $ 13,465.9 100.0% $ 14,019.3
=============== ========= ============= =============== ========= =============
Private Fixed Maturities:
1 Aaa/Aa/A............... $ 2,708.0 46.2% $ 2,780.0 $ 2,508.1 44.1% $ 2,665.0
2 Baa.................... 2,441.7 (1) 41.6 2,479.3 2,503.5 (1) 44.1 2,644.4
3 Ba..................... 267.3 (2) 4.6 266.2 346.1 (2) 6.1 337.5
4 B...................... 393.5 (2) 6.7 400.8 213.0 (2) 3.7 225.0
5 Caa and lower.......... 4.4 0.1 4.4 25.0 0.4 25.7
6 In or near default..... 26.2 0.4 26.2 45.3 0.8 45.2
--------------- --------- ------------- --------------- -----------------------
Subtotal.......................... 5,841.1 99.6 5,956.9 5,641.0 99.2 5,942.8
Redeemable preferred stock
and other....................... 24.9 0.4 26.3 43.0 0.8 36.6
--------------- --------- ------------- --------------- -----------------------
Total Private Fixed Maturities.... $ 5,866.0 100.0% $ 5,983.2 $ 5,684.0 100.0% $ 5,979.4
=============== ========= ============= =============== ========= =============
(1) Includes Class B Notes issued by the Trust ("Class B Notes") having an
amortized cost of $67.0 million and $100.0 million in 1996 and 1995,
respectively, eliminated in consolidation.
(2) Includes Class B Notes having an amortized cost of $50.0 million, eliminated
in consolidation.
7-24
(3) Includes $5.51 billion amortized cost of Aaa rated securities (55.1% of the
NAIC 1 public fixed maturities) with an estimated market value of $5.57
billion, $852.3 million amortized cost of Aa rated securities (8.5%) with an
estimated market value of $861.7 million, and $3.47 billion amortized cost
of A rated securities (34.7%) with an estimated market value of $3.55
billion.
(4) Includes $5.74 billion amortized cost of Aaa rated securities (62.4% of the
NAIC 1 public fixed maturities) with an estimated market value of $5.95
billion, $643.2 million amortized cost of Aa rated securities (7.0%) with an
estimated market value of $680.5 million, and $2.79 billion amortized cost
of A rated securities (30.3%) with an estimated market value of $2.99
billion.
Management defines problem securities in the fixed maturity category as
securities (i) as to which principal and/or interest payments are in default or
are to be restructured pursuant to commenced negotiations or (ii) issued by a
company that went into bankruptcy subsequent to the acquisition of such
securities. The amortized cost of problem fixed maturities decreased to $50.6
million at December 31, 1996 (0.2% of the amortized cost of this category) from
$70.8 million (0.4%) at December 31, 1995, principally as assets were written
down or sold.
The Company does not accrue interest income on problem fixed maturities unless
management believes the full collection of principal and interest is probable.
For 1996, 1995 and 1994, investment income included $0.1 million, $0.0 million
and $1.3 million, respectively, of interest accrued on problem fixed maturities.
Interest not accrued on problem fixed maturity investments totaled $9.5 million,
$11.2 million and $10.7 million for 1996, 1995 and 1994, respectively. The
amortized cost of wholly or partially non-accruing problem fixed maturities was
$45.7 million, $70.8 million and $44.8 million at December 31, 1996, 1995 and
1994, respectively.
Fixed Maturities
Problems, Potential Problems and Restructureds
Amortized Cost
(In Millions)
December 31,
------------------------------------
1996 1995 1994
----------- ---------- ----------
FIXED MATURITIES (Public and Private)........ $21,711.6 $19,149.9 $16,871.6
Problem fixed maturities..................... 50.6 70.8 94.9
Potential problem fixed maturities........... 0.5 43.4 96.2
Restructured fixed maturities(1)............. 3.4 7.6 38.2
(1) Excludes restructured fixed maturities of $2.5 million, $3.5 million and
$24.0 million that are shown as problems at December 31, 1996, 1995 and
1994, respectively, and excludes $9.2 million of restructured fixed
maturities that are shown as potential problems at December 31, 1995.
The Company reviews all fixed maturities at least once each quarter and
identifies investments that management concludes require additional monitoring.
Among the criteria that may cause a fixed maturity security to be so identified
are (i) debt service coverage or cash flow falling below certain thresholds
which vary according to the issuer's industry and other relevant factors, (ii)
significant declines in revenues and/or margins, (iii) violation of financial
covenants, (iv) public securities trading at a substantial discount as a result
of specific credit concerns and (v) other subjective factors relating to the
issuer.
Based on its monitoring of fixed maturities, management identifies a class of
potential problem fixed maturities, which consists of fixed maturities not
currently classified as problems but for which management has serious doubts as
to the ability of the issuer to comply with the present debt payment terms and
which may result in the security becoming a problem or being restructured. The
decision whether to classify a performing fixed maturity security as a potential
7-25
problem involves significant subjective judgments by management as to likely
future industry conditions and developments with respect to the issuer. The
amortized cost of potential problem fixed maturities decreased to $0.5 million
at December 31, 1996 from $43.4 million at December 31, 1995 as new potential
problems were more than offset by assets sold, classified as problems or repaid.
In certain situations, the terms of some fixed maturity assets are restructured
or modified. Management defines restructured investments in accordance with SFAS
No. 15, "Accounting by Debtors and Creditors for Troubled Debt Restructurings".
Restructured fixed maturities decreased to $3.4 million at year end 1996 from
$7.6 million at December 31, 1995 as assets were reclassified as problems,
repaid or written down. These amounts exclude problem restructured and potential
problem restructured fixed maturities.
The foregone interest on restructured fixed maturities (including restructured
fixed maturities presented as problem or potential problem fixed maturities) for
1994 was $0.6 million. There was no foregone interest on restructured fixed
maturities in 1996 and 1995. The amortized cost of wholly or partially
non-accruing restructured fixed maturities (including restructured fixed
maturities presented as problem or potential problem fixed maturities) was $0.4
million, $2.8 million and $17.1 million at December 31, 1996, 1995 and 1994,
respectively.
Mortgages. Mortgages consist of commercial, agricultural and residential loans.
As of December 31, 1996, commercial mortgages totaled $2.90 billion (63.4% of
the amortized cost of the category), agricultural loans were $1.67 billion
(36.5%) and residential loans were $4.0 million (0.1%).
In 1996, total investment results on mortgages decreased by $24.1 million (5.8%)
from 1995 levels. The investment income decrease resulted from a declining asset
base, in large part resulting from loan repayments. There were investment losses
on mortgages of $34.3 million and $43.2 million in 1996 and 1995, respectively,
which reflected additions to asset valuation allowances of $43.7 million in 1996
as compared to $53.6 million in 1995.
At December 31, 1996 and 1995, respectively, management identified impaired
mortgage loans with a carrying value of $531.7 million and $507.2 million. The
provision for losses for these impaired loans was $59.3 million and $80.8
million at December 31, 1996 and 1995, respectively. Income earned on these
loans in 1996 and 1995, respectively, was $49.6 million and $33.8 million,
including cash received of $44.6 million and $29.7 million.
7-26
Mortgages
Problems, Potential Problems and Restructureds
Amortized Cost
(Dollars In Millions)
December 31,
----------------------------------
1996 1995 1994
---------- ---------- ----------
COMMERCIAL MORTGAGES...................................... $2,901.2 $3,413.7 $4,007.4
Problem commercial mortgages(1)........................... 11.3 41.3 107.0
Potential problem commercial mortgages.................... 425.7 194.7 349.4
Restructured commercial mortgages(2)...................... 269.3 522.2 459.4
VALUATION ALLOWANCES...................................... $ 64.2 $ 79.9 $ 106.4
As a percent of commercial mortgages...................... 2.2% 2.3% 2.7%
As a percent of problem commercial mortgages.............. 568.1% 193.5% 99.4%
As a percent of problem and potential problem
commercial mortgages.................................... 14.7% 33.9% 23.3%
As a percent of problem, potential problem and
restructured commercial mortgages....................... 9.1% 10.5% 11.6%
AGRICULTURAL MORTGAGES.................................... $1,672.7 $1,624.1 $1,618.5
Problem agricultural mortgages(3)......................... 5.4 82.9 17.5
Potential problem agricultural mortgages.................. 0.0 0.0 68.2
Restructured agricultural mortgages....................... 2.0 2.0 1.4
VALUATION ALLOWANCES...................................... $ 0.0 $ 4.0 $ 4.0
(1) Includes delinquent mortgage loans of $5.8 million, $41.3 million and $100.6
million at December 31, 1996, 1995 and 1994, respectively, and mortgage
loans in process of foreclosure of $5.5 million, $0.0 million and $6.4
million, respectively, at the same dates.
(2) Excludes restructured commercial mortgages of $1.7 million, $12.6 million
and $1.7 million that are shown as problems at December 31, 1996, 1995 and
1994, respectively, and excludes $229.5 million, $148.3 million and $180.9
million of restructured commercial mortgages that are shown as potential
problems at December 31, 1996, 1995 and 1994, respectively.
(3) Includes delinquent mortgage loans of $0.3 million, $77.2 million and $8.8
million at December 31, 1996, 1995 and 1994, respectively, and mortgage
loans in process of foreclosure of $5.1 million, $5.7 million and $8.7
million, respectively, at the same dates.
Management has a process to closely monitor the performance of its mortgage loan
portfolio and local market dynamics. When management believes a specific loan
will experience payment problems, the Company will discuss various restructuring
alternatives with the borrower, as well as consider foreclosure. Because the
mortgage portfolio is managed by Equitable Real Estate, which has expertise in a
variety of real estate disciplines, the Company is able to deal directly and
aggressively with its problem mortgages.
The volume of problem commercial mortgage loans (defined as mortgages 60 days or
more past due or mortgages in process of foreclosure) continued to decline
during 1996. At December 31, 1996, 1995 and 1994, problem commercial mortgage
loans totaled $11.3 million, $41.3 million and $107.0 million, respectively, or
0.4%, 1.2% and 2.7%, respectively, of the total amortized cost of commercial
mortgages at such dates.
7-27
The amortized cost of wholly or partially non-accruing problem commercial
mortgages was $11.3 million, $38.7 million and $107.0 million at December 31,
1996, 1995 and 1994, respectively. For 1995, investment income included $0.1
million of interest accrued on problem loans; no interest was accrued on problem
loans in 1996 and 1994. Interest not accrued on problem commercial mortgages
totaled $0.4 million, $3.3 million and $9.4 million for 1996, 1995 and 1994,
respectively.
The Company reviews its commercial mortgage loan portfolio and identifies
monthly all commercial mortgage loans that management concludes require
additional monitoring. Among the criteria that may cause a loan to be so
identified are (i) borrower bankruptcies, (ii) bankruptcies of major tenants of
mortgaged properties, (iii) requests from borrowers for loan restructuring or
other relief, (iv) known or suspected cash flow deficiencies, (v) lateness of
payments, (vi) noncompliance with covenants, (vii) known or suspected loan to
value imbalances, (viii) lease rollovers affecting debt service coverage or
property value, (ix) property vacancy rates, (x) maturing loans identified as
potential refinancing risks, and (xi) other subjective factors relating to the
borrower or the mortgaged property.
Based on its monthly monitoring of commercial mortgages, management identifies a
class of potential problem mortgages, which consists of mortgage loans that are
not currently classified as problems but for which management has serious doubts
as to the ability of the borrower to comply with the present loan payment terms
and which may result in the loan becoming a problem or being restructured. The
decision whether to classify a performing mortgage loan as a potential problem
involves significant subjective judgment by management as to likely future
market conditions and developments with respect to the borrower or the
individual mortgaged property. Potential problem commercial mortgages increased
during 1996 as new potential problems more than offset removals due to
improvements and repayments.
7-28
The following table shows the distribution of problem and potential problem
commercial mortgages by property type and by state.
December 31, 1996
-------------------------------------
(Dollars In Millions)
Number of Amortized % of
Loans Cost Total
------------ ------------ ----------
Problem Commercial Mortgages
Property Type:
Office......................................... 1 $ 5.5 48.7%
Retail......................................... 1 4.1 36.3
Apartment...................................... 1 1.7 15.0
------------ ------------ ----------
Total.......................................... 3 $ 11.3 100.0%
============ ============ ==========
State:
Connecticut.................................... $ 5.5 48.7%
Mississippi.................................... 4.1 36.3
Indiana........................................ 1.7 15.0
------------ ----------
Total.......................................... $ 11.3 100.0%
============ ==========
Potential Problem Commercial Mortgages
Property Type:
Retail......................................... 13 $ 188.4 44.3%
Hotel.......................................... 5 133.0 31.2
Office......................................... 8 77.0 18.1
Industrial..................................... 2 27.3 6.4
------------ ------------ ----------
Total.......................................... 28 $ 425.7 100.0%
============ ============ ==========
State:
Illinois....................................... $ 108.8 25.6%
New York....................................... 97.3 22.9
Pennsylvania................................... 60.0 14.1
Virginia....................................... 56.1 13.2
Massachusetts.................................. 35.3 8.3
Texas.......................................... 23.9 5.6
Other (no state larger than 5.0%).............. 44.3 10.3
------------ ----------
Total.......................................... $ 425.7 100.0%
============ ==========
In certain situations, mortgages may be restructured or modified within the
meaning of SFAS Nos. 114 and 15, as amended. The amount of restructured
commercial mortgages decreased during 1996, as new restructureds were offset by
reclassification to potential problems or performing status, as well as payoffs.
The original weighted average coupon rate of the $269.3 million of restructured
commercial mortgages was 9.7%. As a result of these restructurings, the
restructured weighted average coupon rate is 8.6% and the restructured cash
payment rate is 8.3%. The foregone interest on restructured commercial mortgages
(including restructured mortgages presented as problem or potential problem
mortgages) for 1996, 1995 and 1994 was $5.9 million, $7.6 million and $5.7
million, respectively.
7-29
The following table sets out the distribution, by property type and by state, of
restructured commercial mortgages.
Restructured Commercial Mortgages
By Property Type and By State
December 31, 1996
(Dollars In Millions)
Number of Amortized % of
Loans Cost Total
------------- ------------ ----------
Property Type:
Office.................................. 12 $ 140.1 52.0%
Industrial.............................. 2 78.3 29.1
Hotel................................... 3 45.9 17.0
Retail.................................. 1 5.0 1.9
------------- ------------ ----------
Total................................... 18 $ 269.3 100.0%
============= ============ ==========
State:
Texas................................... $ 109.9 40.8%
California.............................. 70.2 26.1
New Jersey.............................. 36.1 13.4
Maryland................................ 19.6 7.3
New York................................ 19.3 7.2
Other (no state larger than 5.0%)....... 14.2 5.2
------------ ----------
Total................................... $ 269.3 100.0%
============ ==========
For 1996, scheduled amortization payments and prepayments received on commercial
mortgage loans aggregated $291.1 million. For 1996, $355.5 million of commercial
mortgage loan maturity payments were scheduled, of which $202.6 million (57.0%)
were paid as due. Of the amount not paid, $53.3 million (15.0%) were granted
short-term extensions of up to six months, $52.7 million (14.8%) were extended
for a weighted average of 3.5 years at a weighted average interest rate of 8.8%,
$46.6 million (13.1%) were delinquent or in default for non-payment of principal
and the balance of $0.3 million (0.1%) was foreclosed upon.
During 1997, approximately $774.5 million of commercial mortgage principal
payments are scheduled, including $699.7 million of payments at maturity on
commercial mortgage balloon loans. An additional $636.8 million of commercial
mortgage principal payments, including $513.2 million of payments at maturity on
commercial mortgage balloon loans, are scheduled for 1998 and 1999. Depending on
market conditions and lending practices in future years, many maturing loans may
have to be refinanced, restructured or foreclosed upon.
During 1996, 1995 and 1994, the amortized cost of foreclosed commercial
mortgages totaled $18.3 million, $103.1 million and $469.1 million,
respectively. At the time of foreclosure, reductions in amortized cost
reflecting the writing down of these properties to estimated fair value totaled
$2.4 million, $54.4 million and $152.3 million in 1996, 1995 and 1994,
respectively.
As of December 31, 1996, problem agricultural mortgages (defined as mortgages
with payments 90 days or more past due or in foreclosure) totaled $5.4 million,
or 0.3% of the amortized cost of the agricultural mortgage portfolio, as
compared with $82.9 million (5.1%) and $17.5 million (1.1%) at December 31, 1995
and 1994, respectively. The 1996 decrease in problem agricultural mortgages was
largely due to foreclosures. There were no potential problem agricultural
mortgages at December 31, 1996 and 1995 as compared to $68.2 million (4.2%) at
December 31, 1994.
For 1996, 1995 and 1994, the amortized cost of foreclosed agricultural mortgages
totaled $64.6 million, $5.5 million and $19.8 million, respectively.
7-30
Equity Real Estate. The equity real estate category consists primarily of a
diversified group of office, retail, industrial, mixed use and other properties.
Office properties constituted the largest component (68.6% of amortized cost) of
this portfolio at December 31, 1996.
In 1996, total investment results on equity real estate assets declined by $1.6
million or 34.8%. The 1996 portfolio performance was significantly lower than
the $4.6 million reported in 1995 and the $127.7 million generated in 1994.
Investment income was $88.6 million in 1996, as compared to $92.5 million and
$107.8 million in 1995 and 1994, respectively. Investment losses in 1996 were
$85.6 million, $2.3 million lower than in 1995.
During 1996, 1995 and 1994, the Company received proceeds from the sale of
equity real estate of $624.2 million, $587.7 million and $268.5 million,
respectively. Management establishes allowances on individual properties
identified as held for sale with the objective of fully reserving for
anticipated shortfalls between amortized cost and sales proceeds. (For a
discussion of all asset valuation allowances on equity real estate, see "General
Account Investment Portfolio - Asset Valuation Allowances and Writedowns".) As
presented below, investment gains were recognized on sales in 1996 and 1994
primarily reflecting gains realized on the sale of properties as to which no
valuation allowance had been established.
Equity Real Estate Sold By Year
(In Millions)
1996 1995 1994
---------- ---------- ---------
Amortized cost at beginning of year............ $ 751.5 $ 635.4 $ 234.9
Writedowns and allowances:
Cumulative allowances established prior to
year of sale............................... (90.7) (17.6) (7.0)
Allowances established in year of sale....... (25.2) (29.6) (4.1)
Adoption of SFAS No. 121 writedowns at
January 1, 1996............................ (41.5) - -
---------- ---------- ---------
Total writedowns and allowances................ (157.4) (47.2) (11.1)
---------- ---------- ---------
Carrying value at date of sale................. 594.1 588.2 223.8
Sales proceeds................................. 624.2 587.7 268.5
---------- ---------- ---------
Gains(Losses) on Sales......................... $ 30.1 $ (0.5) $ 44.7
========== ========== =========
As presented in the table above, due to real estate market conditions, proceeds
from the sale of most equity real estate properties have been less than
amortized cost (before SFAS No. 121 writedowns and allowances) at the date of
sale. The amortized cost of equity real estate properties held for sale at
December 31, 1996 was $465.7 million for which allowances of $90.4 million have
been established. The Company intends to continue to seek to sell individual
equity real estate properties on an opportunistic basis. If a significant amount
of equity real estate not currently held for sale is sold, material investment
losses would likely be incurred.
At December 31, 1996, the overall vacancy rate for the Company's real estate
office properties was 14.3%, with a vacancy rate of 9.8% for properties acquired
as investment real estate and 27.4% for properties acquired through foreclosure.
The national commercial office vacancy rate was 12.8% (as of September 30, 1996)
as measured by CB Commercial. Lease rollover rates for such properties for 1997,
1998 and 1999 range from 6.3% to 12.4%.
At December 31, 1996, the equity real estate category included $2.58 billion
amortized cost of properties acquired as investment real estate (or 71.6% of
amortized cost of equity real estate held) and $1.03 billion (28.4%) amortized
cost of properties acquired through foreclosure (including in-substance
foreclosure). Asset valuation allowances related to the equity real estate
7-31
category at December 31, 1996 totaled $90.4 million (2.5% of amortized cost).
Cumulative writedowns recognized on foreclosed properties were $315.0 million
through December 31, 1996. As of December 31, 1996, the carrying value of the
equity real estate portfolio was 74.9% of its original cost. The amortized cost
of foreclosed equity real estate totaled $1.18 billion (26.9% of amortized cost)
and $1.36 billion (28.0%) at year end 1995 and 1994, respectively. Depending on
future real estate market conditions, there may be further acquisitions of
equity real estate through foreclosure.
The following table summarizes the distribution by property type and by state of
foreclosed equity real estate properties.
Foreclosed Equity Real Estate Properties
By Property Type and By State
December 31, 1996
(Dollars In Millions)
Number of Amortized % of
Properties Cost Total
------------- ------------ ----------
Property Type:
Office.................................. 22 $ 452.2 44.1%
Retail.................................. 17 196.3 19.2
Mixed Use............................... 1 140.5 13.7
Industrial.............................. 7 12.7 1.2
Apartment............................... 3 0.2 0.0*
Other................................... 41 223.5 21.8
------------- ------------ ----------
Total................................... 91 $ 1,025.4 100.0%
============= ============ ==========
State:
California.............................. $ 277.0 27.0%
Pennsylvania............................ 106.6 10.4
Georgia................................. 102.5 10.0
Illinois................................ 100.8 9.8
Florida................................. 92.9 9.1
Ohio.................................... 75.7 7.4
Other (no state larger than 5.0%)....... 269.9 26.3
------------ ----------
Total................................... $ 1,025.4 100.0%
============ ==========
* Less than 0.05%.
Total equity real estate with an aggregate carrying value of $375.3 million was
classified as available for sale at December 31, 1996, including $144.7 million
of foreclosed real estate. At foreclosure, the Company assesses each property
(except those properties acquired through in-substance foreclosure which are
always classified as available for sale) and makes a determination as to whether
the property should be classified as being available for sale or held for
investment. Because of Equitable Real Estate's expertise in a variety of real
estate management disciplines, the Company believes it has the capability to
manage certain foreclosed assets for the production of income in the same way as
properties originally purchased as investments. This treatment of foreclosed
assets is consistent with the Company's periodic review of all of its equity
real estate assets, including properties that were originally purchased as
investments, to determine whether the assets should be classified as available
for sale or held for investment.
7-32
Other Equity Investments. Other equity investments consist of limited
partnership interests in high yield funds managed by third parties ($485.7
million or 70.2% of amortized cost of this portfolio at December 31, 1996),
common and non-redeemable preferred stocks most of which were acquired in
connection with below investment grade fixed maturity investments ($128.7
million or 18.5%) and Equitable Deal Flow Fund, L.P., a high yield limited
partnership sponsored by Equitable Life ($78.0 million or 11.3%). The high yield
funds in which the Insurance Group holds equity interests principally invest in
below investment grade fixed maturities and associated equity securities. These
funds can create significant volatility in investment income since they are
accounted for in accordance with the equity method that treats increases and
decreases in the Company's allocable portion of the estimated fair value of the
underlying partnership assets, whether realized or unrealized, as investment
income or loss to the Company.
Returns on other equity investments have been very volatile. Total investment
results on other equity investments increased by $36.2 million in 1996 from 1995
and decreased $40.2 million in 1995 from 1994. Investment income increased by
$29.6 million in 1996 from 1995 and $33.7 million in 1995 from 1994. There were
investment gains of $14.1 million in 1996, as compared to $7.5 million in 1995
and $81.4 million in 1994. Investment gains have primarily resulted from the
gain on sale of certain common stock investments held in the portfolio.
Policy Loans. As of December 31, 1996, General Account Investment Assets
included $3.96 billion in outstanding policy loans which are collateralized by
the cash value of the underlying insurance policies. The policy loan interest
rates charged to policyholders are specified in the policies and ranged from
5.0% to 8.0% for policies with fixed rate provisions during 1996. For policies
with variable rate provisions, the loan interest rates were tied to external
indices. Interest rates charged on policy loans generally exceed interest rates
credited on the underlying policies.
DISCONTINUED OPERATIONS
In 1991, management adopted a plan to discontinue the business of certain
pension operations consisting of Wind-Up Annuities and GIC lines of business.
The loss allowance and premium deficiency reserve of $569.6 million provided for
in 1991 was based on management's best judgment at that time. Since that date,
the incurred losses of these discontinued operations have been charged to the
loss allowance and reserve. At December 31, 1996, investments for discontinued
operations were $2.47 billion, primarily consisting of $1.11 billion and $925.6
million of mortgages and equity real estate, respectively. At December 31, 1996,
$1.34 billion of policyholders' liabilities were outstanding, of which $290.7
million were related to GIC products. This is a decrease from the high in
September 1986 of $14.56 billion and from $6.47 billion at December 31, 1991.
Payments of maturing GIC contracts and voluntary client withdrawals totaled
$67.0 million and $562.6 million in 1996 and 1995, respectively, with scheduled
payments of maturing GIC contracts of $270.4 million anticipated in 1997.
Therefore, discontinued operations' policyholders' liabilities are expected to
decline by the end of 1997 to $1.07 billion, of which $32.3 million will be
represented by GICs and the balance by Wind-Up Annuities.
The Company's quarterly process for evaluating the loss provisions applies the
current period's results of the discontinued operations against the allowance,
re-estimates future losses, and adjusts the provisions, if appropriate.
Additionally, as part of the Company's annual planning process which takes place
in the fourth quarter of each year, investment and benefit cash flow projections
are prepared. These projections were utilized in the fourth quarter evaluation
of the adequacy of the loss provisions.
Projected investment cash flows, which primarily relate to mortgages, equity
real estate and other equity interests, have been revised to reflect
management's current expectations. Benefit cash flow assumptions also have been
revised to incorporate the expected trend in improving mortality experience for
Wind-Up Annuities which results in longer policyholder benefit streams.
Additionally, the methodology for the projection of cash flows was refined to
incorporate the expected remaining lives of the assets in the existing portfolio
in lieu of utilizing a five-year projection of specific asset cash flows. Real
estate cash flow projections incorporated are consistent with those used in the
determination of impairment pursuant to SFAS No. 121. This refinement in
methodology more fully recognizes the long term nature of the Wind-Up Annuities.
7-33
The evaluation performed in the fourth quarter utilizing the aforementioned
projections of cash flows resulted in the need to strengthen the loss provisions
by $129.0 million. The primary factors contributing to this strengthening were
changes in projected cash flows for mortgages and other equity investments due
to lower portfolio balances as the result of higher than anticipated redemptions
and repayments in 1996 and an increase in assumed mortgage defaults as well as
an increase in projected benefit payments due to the expected increase in
longevity of Wind-Up Annuities beneficiaries.
Management believes the loss provisions for Wind-Up Annuities and GIC contracts
at December 31, 1996 are adequate to provide for all future losses; however, the
determination of loss provisions continues to involve numerous estimates and
subjective judgments regarding the expected performance of discontinued
operations investment assets and ultimate mortality experience. 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 the discontinued
operations differ from management's current best estimates underlying the loss
provisions, the difference would be reflected as a loss on discontinued
operations within the consolidated statements of earnings. 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
provisions are likely to result.
Results of Operations. In 1996, excluding the aforementioned reserve
strengthening, $23.7 million of pre-tax losses were incurred compared to $25.1
million in 1995 and $21.7 million in 1994; these pre-tax losses incurred were
charged to the GIC Segment's loss provisions. The premium deficiency reserve and
loss allowance for Wind-Up Annuities and GIC contracts totaled $262.0 million at
December 31, 1996, including the $129.0 million pre-tax reserve strengthenings.
Discontinued operations' investment income of $245.4 million was $78.2 million
lower than 1995 primarily due to the absence of a tax settlement which benefited
discontinued operations in 1995 and lower investment assets due to net
repayments of $1.02 billion of borrowings from continuing operations by the GIC
Segment in 1996, partially offset by higher yield from other equity investments.
Investment income in 1995 of $323.6 million was $70.7 million lower than 1994
primarily due to the January 1995 partial repayment of $1.16 billion of
borrowings from continuing operations by the GIC Segment and the payment of
$562.6 million of GIC contract maturities, partially offset by higher interest
related to a tax settlement. Net investment (losses) gains were $(18.9) million,
$(22.9) million and $26.8 million in 1996, 1995 and 1994, respectively.
In January 1995, continuing operations transferred $1.22 billion in cash to the
GIC Segment in settlement of its obligation to fund the accumulated deficit of
the GIC Segment. Subsequently, the GIC Segment remitted $1.16 billion in cash to
continuing operations in partial repayment of borrowings by the GIC Segment. No
gains or losses were recognized on these transactions. As a result of these
transactions, the GIC Segment's total investment income and benefits and other
deductions for 1995 were both reduced from 1994 amounts. Total investment income
within Insurance Operations and Corporate interest expense were also reduced in
1995.
Interest credited on Wind-Up Annuities and GIC contracts was $126.4 million in
1996, down $35.3 million and $86.0 million, from 1995 and 1994, respectively,
primarily due to repayments of amounts due under GIC contracts. The weighted
average crediting rates were 9.2%, 9.2% and 9.5% in 1996, 1995 and 1994,
respectively. The interest expense on intersegment borrowings by the GIC Segment
from continuing operations was $114.3 million in 1996, down $40.3 million and
$105.4 million, respectively, from 1995 and 1994 levels.
Amounts due to continuing operations of $1.08 billion and $2.10 billion at
December 31, 1996 and 1995, respectively, consisted of intersegment borrowings
by the GIC Segment from continuing operations, offset in 1996 by $83.8 million
representing the obligation of continuing operations to provide assets to fund
the GIC Segment accumulated deficit.
7-34
Estimates of annual net cash flows for discontinued operations follow:
Projections at December 31,
--------------------------------------------
(In Billions)
1995 1996
--------------- ---------------
1996..... $ 0.65 $ -
1997..... (0.11) 0.19
1998..... - 0.02
Cash requirements are funded by cash flows from assets held by the GIC Segment
and new intersegment loans from continuing operations. The increase in projected
cash flows for 1997 resulted from a higher level of assumed real estate sales
and the expected settlement of $83.8 million by continuing operations of its
obligation to fund the accumulated deficit of the GIC Segment. The intersegment
loan balance at December 31, 1996 of $1.08 billion is expected to be reduced by
approximately $191.5 million during 1997 and by approximately $22.1 million and
$137.7 million in 1998 and 1999, respectively. The net cash flows for the GIC
Segment are projected to be approximately $728.8 million for the years 2000
through 2006, resulting in the complete repayment of the projected balance of
intersegment loans by December 31, 2006. The weighted average interest rate on
intersegment loans in 1996 was 7.11% as compared to 7.13% in 1995. The
projection at December 31, 1996 assumed new intersegment loans are made for a
term of three years.
Other material assumptions used in the determination of cash flow projections
follow:
(i) Future annual investment income projections on the GIC Segment investment
portfolio through maturity or assumed disposition of substantially all of
the existing investment assets ranged in the 1996 projection from 5.4% to
5.9% as compared to 6.8% to 7.2% in the 1995 projection. The decrease in
the expected yields is primarily attributable to the reduction of
projected other equity investments and mortgage investment assets, as the
balance of these asset classes decreased during 1996 due to higher than
anticipated redemptions and repayments.
(ii) Sales of equity real estate assets over time as market conditions improve,
with the proceeds therefrom and from other maturing GIC Segment Investment
Assets being used to pay maturing GIC Segment liabilities or to repay
outstanding intersegment borrowings. The assumptions underlying the equity
real estate cash flow projections are consistent with the cash flow
projections used in the determination of impairment pursuant to SFAS No.
121.
(iii)Interest to be credited to policyholders' accounts under the fixed terms
of the underlying agreements, which terms, in the case of the GIC
contracts, establish well defined liability payment schedules.
(iv) In the 1996 projections, Wind-Up Annuities' projected cash flows beyond
the year 2011 were discounted at 7.5%. In the 1995 projections, such cash
flows beyond the year 2000 were discounted at 7.43%.
(v) As a result of recent deteriorations in the Company's own Wind-Up
Annuities' mortality experience as evidenced by mortality losses of $3.5
million and $2.3 million experienced in 1996 and 1995, respectively, the
Company reviewed industry and social security population data. These
studies resulted in changes to assumptions recognizing further future
mortality improvements as applied to the 1983 GAM (Group Annuity Mortality
table). The result of improved mortality is to extend the periods that
payments will continue to be made to the annuitants and, therefore,
negatively impact the projections of future cash flows.
7-35
GIC Segment Investment Portfolio
In 1996, investment results from GIC Segment Investment Assets totaled $229.0
million, unchanged from 1995 as the $4.0 million decrease in investment income
offset the $4.0 million lower investment losses. The investment income for 1996
reflected increases of $22.9 million, $9.7 million and $1.5 million for other
equity investments, equity real estate and cash and short-term investments,
respectively, which were more than offset by lower income on the mortgage loan
and fixed maturities portfolios of $24.7 million and $13.4 million,
respectively. A $2.0 million gain on mortgage loans compared to the 1995 loss of
$8.4 million and lower investment losses of $9.8 million for fixed maturities
were offset by $13.9 million higher losses on equity real estate and $2.3
million of lower gains on other equity investments. Investment yields increased
to 7.89% from 6.55% in 1995.
Investment results on the GIC Segment portfolios in 1995 declined $94.5 million
from $323.5 million in 1994. Investment income decreased $44.8 million primarily
due to $35.5 million lower income on the mortgage loan portfolio and a $9.5
million decrease on equity real estate. There were losses of $22.9 million in
1995 as compared with $26.8 million in investment gains in 1994. The decline was
due to the $26.4 million decrease in gains on other equity investments, losses
of $5.6 million on equity real estate in 1995 as compared with gains of $5.4
million in 1994 and $6.4 million and $5.9 million higher losses in 1995 on the
mortgage loan and fixed maturity portfolios, respectively. The total portfolio's
yield in 1995 was 6.55%, down from 7.71% in 1994.
Total investment income included non-cash amounts from amortization,
payment-in-kind distributions and undistributed equity earnings of $11.9
million, $8.0 million and $7.2 million for 1996, 1995 and 1994, respectively.
Investment income is shown net of depreciation of $25.9 million, $32.7 million
and $37.7 million, respectively, for such periods.
The following table shows the major categories of GIC Segment Investment Assets
by amortized cost, valuation allowances and net amortized cost as of December
31, 1996 and by net amortized cost as of December 31, 1995. See Note 7 of Notes
to Consolidated Financial Statements.
GIC Segment Investment Assets
(Dollars In Millions)
December 31, 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...... $ 43.2 $ - $ 43.2 1.7% $ 108.4 3.3%
Mortgages............. 1,120.1 9.0 1,111.1 44.6 1,485.8 45.7
Equity real estate.... 954.2 20.4 933.8 37.4 1,131.2 34.8
Other equity
investments......... 300.5 - 300.5 12.1 455.9 14.0
Cash and short-term
investments......... 105.8 - 105.8 4.2 72.4 2.2
------------- ---------- ----------- --------- ------------ ----------
Total................. $ 2,523.8 $ 29.4 $ 2,494.4 100.0% $ 3,253.7 100.0%
============= ============ =========== ========= ============ ==========
7-36
Asset Valuation Allowances and Writedowns
The following table shows asset valuation allowances at the dates indicated.
GIC Segment Investment Assets
Valuation Allowances
(In Millions)
Equity Real
Mortgages Estate Total
------------- ------------- ----------
December 31, 1996
Beginning balances................... $ 19.2 $ 77.9 $ 97.1
SFAS No. 121 releases(1)........... - (71.9) (71.9)
Additions.......................... 1.9 20.2 22.1
Deductions......................... (12.1) (5.8) (17.9)
------------- ------------- ----------
Ending Balances...................... $ 9.0 $ 20.4 $ 29.4
============= ============= ==========
December 31, 1995
Beginning balances................. $ 50.2 $ 74.7 $ 124.9
Additions.......................... 10.8 19.3 30.1
Deductions......................... (41.8) (16.1) (57.9)
------------- ------------- ----------
Ending Balances...................... $ 19.2 $ 77.9 $ 97.1
============= ============= ==========
December 31, 1994
Beginning balances................. $ 61.4 $ 61.5 $ 122.9
Additions.......................... 8.0 25.0 33.0
Deductions......................... (19.2) (11.8) (31.0)
------------- ------------- ----------
Ending Balances...................... $ 50.2 $ 74.7 $ 124.9
============= ============= ==========
(1) As a result of adopting SFAS No. 121, $71.9 million of allowances on assets
held for investment were released and impairment losses of $69.8 million
were recognized on real estate held and used.
Writedowns on fixed maturities (primarily related to below investment grade
securities) aggregated $1.6 million, $8.1 million and $17.8 million in 1996,
1995 and 1994, respectively. Writedowns on equity real estate subsequent to the
adoption of SFAS No. 121 totaled $12.3 million in 1996.
7-37
Investment Results by Asset Category
Fixed Maturities - At December 31, 1996, the amortized cost of the GIC Segment's
fixed maturity portfolio was $43.2 million compared with an estimated fair value
of $42.8 million. GIC Segment fixed maturities consist of publicly traded debt
securities, privately placed debt securities and redeemable preferred stock,
which represented 5.1%, 67.1% and 27.8%, respectively, of amortized cost of this
asset category at December 31, 1996. At that same date, approximately 44.3%
($19.1 million) of the GIC Segment's fixed maturities were scheduled to mature
within five years (with 4.2%, or $1.8 million, scheduled to mature in 1997).
Total investment results on fixed maturity investments fell to $7.6 million in
1996 from $11.2 million in 1995 and $25.8 million in 1994. The decrease in
investment results during this period was largely due to a decline in investment
income to $9.6 million in 1996, down from $23.0 million and $31.7 million in
1995 and 1994, respectively, principally as a result of a significantly smaller
asset base. Total yields were 10.27%, 6.51% and 8.37% in 1996, 1995 and 1994,
respectively. There were investment losses of $2.0 million on fixed maturity
investments during 1996, as compared to $11.8 million in 1995 and $5.9 million
in 1994. The losses primarily were due to asset writedowns of $1.6 million in
1996 compared to writedowns of $8.1 million and $17.8 million in 1995 and 1994,
respectively.
As of December 31, 1996, the GIC Segment fixed maturities with an amortized cost
of $43.2 million (compared to $108.4 million as of December 31, 1995) consisted
of $17.5 million of investment grade securities (NAIC 1 and 2), largely public
and private corporate debt, $13.7 million of below investment grade (NAIC 3-6)
securities, largely directly negotiated debt investments, and $12.0 million of
redeemable preferred stock.
The amount of problem fixed maturities decreased during 1996 as assets were
exchanged, written down or sold.
GIC Segment Fixed Maturities
Problems, Potential Problems and Restructureds
Amortized Cost
(In Millions)
December 31,
--------------------------------
1996 1995 1994
--------- --------- ---------
FIXED MATURITIES (Public and Private)..... $ 43.2 $ 108.4 $ 231.4
Problem fixed maturities.................. 0.5 6.2 20.3
Potential problem fixed maturities........ 1.0 7.2 25.0
Restructured fixed maturities(1).......... 5.7 9.0 33.7
(1) Excludes restructured fixed maturities of $0.5 million, $6.1 million and
$15.0 million that are shown as problems at December 31, 1996, 1995 and
1994, respectively. There were no restructured fixed maturities shown as
potential problems.
Mortgages - As of December 31, 1996, GIC Segment commercial mortgages totaled
$1.04 billion (92.8% of amortized cost of the category), agricultural loans were
$81.1 million (7.2%) and residential loans were $0.1 million (0.0%). Office,
retail and hotel properties accounted for 53.9%, 18.2% and 16.2%, respectively,
of amortized cost of GIC Segment commercial mortgages as of December 31, 1996.
Properties in New York (14.2% as measured by amortized cost), Texas (13.4%), New
Jersey (12.1%), the District of Columbia (10.8%), Louisiana (6.9%), Ohio (6.0%)
and Illinois (5.3%) represented the largest amounts of GIC Segment commercial
mortgages. Not more than 5.0% (as measured by amortized cost) of GIC Segment
commercial mortgages was located in any other single state.
7-38
For 1996, total investment results on GIC Segment mortgages were $123.5 million,
as compared to $137.8 million and $179.7 million in 1995 and 1994, respectively.
Total investment yields were 9.30%, 8.59% and 9.44% in 1996, 1995 and 1994,
respectively. The drop in investment income to $121.5 million in 1996, as
compared to $146.2 million in 1995 and $181.7 million in 1994, reflected the
shrinking asset base. There were investment gains of $2.0 million in 1996,
compared to investment losses of $8.4 million in 1995 and $2.0 million in 1994.
Investment gains in 1996 relative to 1995 reflected lower additions to asset
valuation allowances.
GIC Segment Mortgages
Problems, Potential Problems and Restructureds
Amortized Cost
(Dollars In Millions)
December 31,
----------------------------------
1996 1995 1994
---------- ---------- ---------
COMMERCIAL MORTGAGES............................... $1,038.9 $1,379.5 $1,630.5
Problem commercial mortgages(1).................... 6.7 33.4 13.0
Potential problem commercial mortgages............. 29.1 42.0 182.3
Restructured commercial mortgages(2)............... 198.9 252.6 223.6
VALUATION ALLOWANCES............................... $ 9.0 $ 19.2 $ 50.2
As a percent of commercial mortgages............... 0.9% 1.4% 3.1%
As a percent of problem commercial mortgages....... 134.3% 57.5% 386.2%
As a percent of problem and potential problem
commercial mortgages............................. 25.1% 25.5% 25.7%
As a percent of problem, potential problem and
restructured commercial mortgages................ 3.8% 5.9% 12.0%
AGRICULTURAL MORTGAGES............................. $ 81.1 $ 109.2 $ 131.3
Problem agricultural mortgages(3).................. 1.2 2.0 1.9
(1) Includes delinquent mortgage loans of $6.7 million, $33.4 million and $12.5
million at December 31, 1996, 1995 and 1994, respectively, and mortgage
loans in process of foreclosure of $0.0 million, $0.0 million and $0.5
million at the same respective dates.
(2) Excludes restructured commercial mortgages of $31.5 million that are shown
as problems at December 31, 1995, and excludes $9.2 million, $5.1 million
and $147.5 million of restructured commercial mortgages that are shown as
potential problems at December 31, 1996, 1995 and 1994, respectively.
(3) Includes delinquent mortgage loans of $0.4 million, $0.5 million and $0.1
million at December 31, 1996, 1995 and 1994, respectively, and mortgage
loans in process of foreclosure of $0.8 million, $1.5 million and $1.8
million, respectively, at the same dates.
As of December 31, 1996, problem commercial mortgages totaled $6.7 million,
collateralized 100.0% by retail properties. Properties with problem mortgages
were located in Mississippi and Arizona (52.2% and 47.8%, respectively, of
amortized cost of such mortgages). The amortized cost of wholly or partially
non-accruing problem commercial mortgages was $6.7 million, $31.7 million and
$13.0 million at December 31, 1996, 1995 and 1994, respectively.
7-39
At December 31, 1996, $20.0 million of potential problem mortgages (68.7% of
amortized cost of such mortgages) were collateralized by hotel properties, $5.2
million (17.9%) by retail properties, $3.2 million (11.0%) by office properties
and $0.7 million (2.4%) by industrial properties. Properties with potential
problem mortgages were principally located in Texas (67.7% of amortized cost),
New Jersey (13.4%) and New York (10.7%). Potential problem commercial mortgages
decreased in 1996 as new potential problems were more than offset by changes in
classification to in-good-standing or problems.
The 1996 decrease in restructured mortgages was largely due to loans
reclassified as in-good-standing or payoffs. At December 31, 1996, 46.7% of
restructured commercial mortgages, as measured by amortized cost, were
collateralized by office properties, 33.4% by industrial properties, 18.5% by
hotels and 1.4% by retail properties. These restructured mortgages were on
properties principally located in Texas (45.4% of amortized cost), Louisiana
(25.6%) and New Jersey (21.1%). Interest income foregone on restructured
commercial mortgages (including problem and potential problem restructured
commercial mortgages) totaled $1.4 million, $2.5 million and $0.8 million for
1996, 1995 and 1994, respectively.
For 1996, scheduled amortization payments and prepayments on commercial mortgage
loans aggregated $210.8 million. For 1996, $204.9 million of mortgage loan
maturity payments were scheduled, of which $124.5 million (60.8%) were paid as
due. Of the amount not paid, $63.8 million (31.1% of the amount scheduled) were
extended for a weighted average of 3.7 years at a weighted average interest rate
of 9.3%, $9.4 million (4.6%) were granted short-term extensions of up to six
months, $7.0 million (3.4%) were delinquent or in default for non-payment of
principal and $0.2 million (0.1%) were foreclosed upon.
During 1997, approximately $259.1 million of commercial mortgage principal
payments are scheduled, including $234.0 million of payments at maturity on
commercial mortgage balloon loans. An additional $240.4 million of principal
payments, including $191.9 million of payments at maturity on commercial
mortgage balloon loans, are scheduled from 1998 through 1999. Depending on the
condition of the real estate market and lending practices in future years, many
maturing loans may have to be refinanced, restructured or foreclosed upon.
During 1996, 1995 and 1994, the amortized cost of foreclosed commercial
mortgages totaled $3.0 million, $72.6 million and $68.1 million, respectively.
At the time of foreclosure, reductions in amortized cost reflecting the writing
down of these properties to estimated fair value totaled $0.1 million, $40.1
million and $6.3 million in 1996, 1995 and 1994, respectively. Foreclosed
agricultural mortgages totaled $1.1 million and $0.9 million for 1996 and 1994,
respectively.
Equity Real Estate - At December 31, 1996, the $954.2 million amortized cost of
equity real estate in the GIC Segment was principally comprised of office
(67.0%), retail (12.3%), industrial (7.1%), mixed use (4.9%) and hotel (1.4%)
properties. GIC Segment equity real estate was principally located in New York
(21.8%), California (18.0%), Illinois (11.8%), Texas (9.1%), Pennsylvania
(6.2%), Oklahoma (6.0%) and Florida (5.8%).
For 1996, total investment results on equity real estate assets were $10.5
million, as compared to $14.7 million in 1995 and $35.2 million in 1994,
reflecting yields of 1.07%, 1.38% and 2.81% in 1996, 1995 and 1994,
respectively. Investment income was $30.0 million in 1996, as compared to $20.3
million in 1995 and $29.8 million in 1994. There were investment losses of $19.5
million in 1996, as compared to $5.6 million in 1995 and to gains of $5.4
million in 1994. Writedowns and additions to asset valuation allowances were
$32.5 million, $19.3 million and $25.0 million for 1996, 1995 and 1994,
respectively.
During 1996, 1995 and 1994, the GIC Segment received proceeds from the sale of
equity real estate of $184.3 million, $142.2 million and $284.9 million,
respectively. Management establishes valuation allowances on individual
properties identified as held for sale with the objective of fully reserving for
anticipated shortfalls between amortized cost and sales proceeds. (For a
discussion of all asset valuation allowances on equity real estate, see
"Discontinued Operations - Asset Valuation Allowances and Writedowns"). As
presented below, investment gains were recognized on sales in each year
primarily reflecting gains realized on the sale of properties as to which no
valuation allowance had been established.
7-40
Equity Real Estate Sold By Year
(In Millions)
1996 1995 1994
------------- ---------- -----------
Amortized cost at the beginning of year......... $ 189.4 $ 144.8 $ 264.5
Writedowns and allowances:
Cumulative allowances established prior to
year of sale................................ (4.6) (6.7) (0.1)
Allowances established in year of sale........ (1.2) (8.5) (12.6)
Adoption of SFAS No. 121 writedowns at
January 1, 1996............................. (10.2) - -
------------- ---------- -----------
Total writedowns and allowances................. (16.0) (15.2) (12.7)
------------- ---------- -----------
Carrying value at date of sale.................. 173.4 129.6 251.8
Sales proceeds.................................. 184.3 142.2 284.9
------------- ---------- -----------
Gains on Sales.................................. $ 10.9 $ 12.6 $ 33.1
============= ========== ===========
As presented in the table, due to real estate market conditions, proceeds from
the sale of most equity real estate properties in 1996 and 1995 have been less
than amortized cost (before SFAS No. 121 writedowns and allowances) at the date
of sale. The amortized cost of equity real estate properties held for sale at
December 31, 1996 was $139.5 million for which allowances of $20.4 million have
been established. The Company intends to continue to seek to sell individual
equity real estate properties on an opportunistic basis. If a significant amount
of equity real estate not currently held for sale is sold, material investment
losses would likely be incurred.
At December 31, 1996, the equity real estate category included properties
acquired through foreclosure, including in-substance foreclosure, with an
amortized cost of $268.3 million (constituting 28.1% of amortized cost of equity
real estate held at that date). Cumulative writedowns recognized on foreclosed
properties were $95.0 million through December 31, 1996. At December 31, 1995
and 1994, the amortized cost of foreclosed equity real estate totaled $317.2
million and $317.3 million, respectively (26.2% and 24.8% of total amortized
cost, respectively). At December 31, 1996, office, mixed use, retail, industrial
and other properties made up 58.3%, 17.3%, 15.1%, 6.2% and 3.1%, respectively,
of amortized cost of foreclosed equity real estate. Foreclosed equity real
estate is located in Illinois (24.6% of amortized cost of such property), New
York (22.1%), California (19.8%), Texas (11.1%) and Colorado (8.2%), with no
other single state accounting for more than 5.0% of such amortized cost.
Other Equity Investments - At December 31, 1996, GIC Segment other equity
investments of $300.5 million consisted primarily of limited partnership
interests in high yield funds managed by third parties ($234.9 million or 78.2%
of amortized cost of this portfolio at that date). GIC Segment other equity
investments also included common and preferred stocks acquired in connection
with the below investment grade fixed maturity investments, as well as other
equity investments ($39.6 million or 13.2%) and an investment in the Deal Flow
Fund, L.P. ($26.0 million or 8.6%).
Total investment results on other equity investments were $76.7 million, $56.1
million and $80.8 million in 1996, 1995 and 1994, respectively. These investment
results reflected yields of 21.74%, 10.54% and 11.95%, for the years 1996, 1995
and 1994, respectively. Investment income amounted to $76.1 million, $53.2
million and $51.5 million in 1996, 1995 and 1994, respectively. Investment gains
were $0.6 million, $2.9 million and $29.3 million in 1996, 1995 and 1994,
respectively.
7-41
LIQUIDITY AND CAPITAL RESOURCES
Insurance Group
The Insurance Group's principal cash flow sources are premiums, deposits and
charges on policies and contracts, investment income, repayments of principal
and proceeds from maturities and sales of General Account Investment Assets and
dividends and distributions from subsidiaries.
The liquidity requirements of the Insurance Group principally relate to the
liabilities associated with its various life insurance, annuity and group
pension products in its continuing operations, the liabilities of the GIC
Segment and operating expenses, including debt service. These liabilities
include the payment of benefits under such life insurance, annuity and group
pension products, as well as the need to make cash payments in connection with
policy surrenders, withdrawals and loans.
In December 1995, Equitable Life completed the sale of the Surplus Notes in a
private placement to institutional investors. Interest on the $400.0 million
6.95% Surplus Notes and the $200.0 million 7.70% Surplus Notes is scheduled to
be paid on June 1 and December 1 of each year. The 6.95% Surplus Notes are
scheduled to mature on December 1, 2005 while the 7.70% Surplus Notes are
scheduled to mature on December 1, 2015. Under the New York Insurance Law,
payments of interest on or principal of the Surplus Notes may only be made out
of "free and divisible surplus ...with approval of the Superintendent whenever,
in his judgment, the financial condition of the insurer warrants." Interest
expense on the Surplus Notes totaled $43.2 million in 1996 and $1.5 million in
1995. For further information, see Note 8 of Notes to Consolidated Financial
Statements.
During 1997, management intends to continue to explore selective acquisition
opportunities in Equitable Life's core insurance and asset management
businesses.
The liquidity requirements of the Insurance Group are monitored regularly to
match cash inflows with cash requirements. The Insurance Group forecasts its
daily cash needs and periodically reviews its projected sources and uses of
funds, as well as the asset, liability, investment and cash flow assumptions
underlying these projections. Adjustments are periodically made to the Insurance
Group's investment policies with respect to, among other things, the maturity
and risk characteristics of General Account Investment Assets to reflect changes
in the Insurance Group's cash needs and also to reflect changing business and
economic conditions.
Sources of Insurance Group Liquidity
The primary source of short-term liquidity to support continuing and
discontinued operations is a pool of highly liquid, high quality, short-term
instruments structured to provide liquidity in excess of the Insurance Group's
expected cash requirements. At December 31, 1996, this asset pool provided the
Insurance Group an aggregate of $383.5 million in highly liquid short-term
investments, as compared to $1.02 billion and $966.8 million at December 31,
1995 and 1994, respectively.
The Insurance Group has available for its liquidity needs a substantial
portfolio of public bonds including U.S. Treasury and agency securities and
other investment grade fixed maturities.
Other sources of liquidity include dividends and distributions from Equitable
Life's Investment Subsidiaries, particularly Alliance. In 1996, Alliance
reported cash distributions of $2.10 per Unit as compared to $1.73 per Unit in
1995 and $1.64 per Unit in 1994. Alliance generally is not subject to a
corporate level tax for Federal income tax purposes. Current law provides that
as a consequence of public trading in Alliance Units, Alliance will be treated
as a corporation for Federal income tax purposes beginning in 1998. Accordingly,
were Alliance to make no change in its tax status prior to 1998, it would be
taxed as a corporation for Federal income tax purposes with respect to periods
beginning in 1998. The Federal tax would significantly reduce the post-tax
earnings reported by Alliance and available for distribution to Unit holders.
Additionally, the Holding Company and Equitable Life's consolidated earnings
will be reduced by taxation on Alliance cash distributions which generally will
be treated as corporate dividends for Federal income tax purposes. See
"Risk-Based Capital".
7-42
In the normal course of business, Equitable Life provides, from time to time,
certain guarantees and commitments and faces certain contingencies. These
commitments and contingencies are discussed more fully in Notes 10, 12, 13, 14
and 15 of Notes to Consolidated Financial Statements.
Management believes it has sufficient liquidity in the form of short-term assets
and its bond portfolio together with its cash flows from operations and
scheduled maturities of fixed maturities, to satisfy its liquidity needs.
Equitable Life also has a commercial paper program with an issue limit of $500.0
million. This program is available for general corporate purposes to support
Equitable Life's liquidity needs and is supported by Equitable Life's existing
$350.0 million five-year bank credit facility, which expires in June 2000. At
December 31, 1996, no amounts were outstanding under the commercial paper
program or the back-up credit facility.
Factors Affecting Insurance Group Liquidity
The Insurance Group's liquidity needs are affected by fluctuations in the level
of surrenders and withdrawals previously discussed in "Combined Results of
Continuing Operations by Segment - Insurance Operations - Surrenders and
Withdrawals; Policy Loans". Management believes the Insurance Group has adequate
internal sources of funds for its presently anticipated needs.
Risk-Based Capital
Since 1993, life insurers, including Equitable Life and EVLICO, have been
subject to certain risk-based capital ("RBC") guidelines. The RBC guidelines
provide a method to measure the adjusted capital (statutory capital and surplus
plus the Asset Valuation Reserve ("AVR") and other adjustments) that a life
insurance company should have for regulatory purposes, taking into account the
risk characteristics of the company's investments and products. A life insurance
company's RBC ratio will vary over time depending upon many factors, including
its earnings, the mix of assets in its investment portfolio, the nature of the
products it sells and its rate of sales growth, as well as to changes in the RBC
formulas required by regulators.
While the RBC guidelines are intended to be a regulatory tool only, and are not
intended as a means to rank insurers generally, comparisons of RBC ratios of
life insurers have become generally available. Equitable Life and EVLICO were
above their target RBC ratios at years end 1995 and 1996. Principally because of
the RBC formula's treatment of Equitable Life's large holdings of subsidiary
common stock (including its interest in Alliance, its 36.1% interest in DLJ, and
its wholly owned subsidiary Equitable Real Estate), equity real estate and
mortgages, Equitable Life's year end 1996 RBC ratio is expected to continue to
be lower than those of its competitors in the life insurance industry.
Alliance is not currently subject to Federal income taxes on its partnership
business; however, under the Revenue Act of 1987, Alliance, as a publicly traded
partnership, will become subject to Federal income taxes commencing on January
1, 1998. Alliance's becoming subject to Federal income tax on January 1, 1998
could be avoided under current law through a restructuring. Such a restructuring
could result in Equitable Life's Alliance Units ceasing to be publicly traded.
Pursuant to NAIC guidelines applicable to the valuation of subsidiaries with
publicly traded securities, Equitable Life currently uses a market value option
for the valuation of Alliance in Equitable Life's statutory financial
statements. Equitable Life's holdings of Alliance Units are valued at a 17%
discount from market value on the New York Stock Exchange at year end. As a
result, at December 31, 1996, the statutory carrying value of Equitable Life's
investment in Alliance increased to $1.06 billion from $914.3 million at
December 31, 1995, compared to a statutory cost of $292.3 million. The
management of Equitable Life has begun to examine possible responses to the
change in Alliance's tax status and, during 1997, will be discussing with
regulators alternative bases on which to value its Alliance holdings for
statutory purposes in the event Equitable Life were to cease to own publicly
traded Alliance Units. Management believes that these discussions should result
in an approach which would, in such event, continue to take into account for
statutory purposes a significant portion of the value of Equitable Life's
investment in Alliance in excess of statutory cost. If Equitable Life were to
cease to own publicly traded Alliance Units, and if a significant portion of
7-43
such excess were not recognized for statutory purposes, and if other offsetting
corporate actions available to Equitable Life were not taken, Equitable Life
would have a significant decline in its statutory capital and RBC ratio, which
may adversely affect the market's perception of the Insurance Group relative to
its principal competitors and could, therefore, make it more difficult to market
certain of its insurance and annuity products and also result in higher levels
of surrenders and withdrawals.
In addition, developments relating to changes in the RBC formula that may become
effective for year end 1997 statutory financial statements may adversely affect
Equitable Life's RBC ratio at year end 1997.
The NAIC has undertaken a comprehensive codification of statutory accounting
practices for life insurers. The resulting changes, once the codification
project has been completed and the new principles adopted and implemented, could
have a significant adverse impact on the Insurance Group's statutory results and
financial position. The codification is unlikely to become effective until 1998
or later.
At December 31, 1996, $218.7 million (or 9.7%) of the Insurance Group's
aggregate statutory capital and surplus (representing 6.1% of statutory capital
and surplus and AVR) resulted from surplus relief reinsurance. The level of
surplus relief reinsurance was reduced by approximately $60.2 million in 1996.
Investment Subsidiaries
Alliance's principal sources of liquidity are cash flows from operations,
proceeds from sales of newly issued Alliance Units and borrowings from lending
institutions. During the third quarter of 1994, Alliance issued $100.0 million
of new Units to two third-party investors. The proceeds from the 1994
transactions were used to repay in full Alliance's $105.0 million senior notes
and the outstanding balance under its revolving credit facility. In February
1996, approximately 1.8 million Alliance Units and $21.5 million of notes were
issued as partial consideration in the Cursitor acquisition. In February 1996,
Alliance terminated its $100.0 million revolving credit facility and its $100.0
million commercial paper program, replacing them with a new $250.0 million,
five-year revolving credit facility with a group of banks. The interest rate is
a floating rate generally based on a defined prime rate, a rate related to LIBOR
or the Federal Funds rate, at Alliance's option. At December 31, 1996, there
were no amounts outstanding under its new $250.0 million revolving credit
facility. As a result of the continued growth in Alliance's business and the use
of the deferred sales charge options on various Alliance mutual funds, Alliance
may require additional sources of capital from time to time.
DLJ reported total assets as of December 31, 1996 of approximately $55.50
billion. Most of these assets are highly liquid marketable securities and
short-term receivables arising from securities transactions. These assets
include collateralized resale and securities borrowing agreements, both of which
are secured by U.S. Government and agency securities and corporate debt and
equity securities. A relatively small portion of total assets is fixed or held
for a period longer than one year. A significant portion of DLJ's borrowings is
matched to the interest rate and expected holding period of the corresponding
assets. DLJ monitors overall liquidity by tracking the extent to which
unencumbered marketable assets exceed short-term unsecured borrowing.
DLJ continually reviews its overall capital needs to ensure that its capital
base can support the needs of its businesses. As a result of these ongoing
reviews, DLJ continues to be active in raising additional capital. In addition
to its October 1995 IPO and senior debt offering, there has been the February
1996 issuance of $250.0 million aggregate principal amount of 5 5/8% Medium Term
Notes due 2016. The net proceeds of approximately $248.3 million were used for
general corporate purposes. Debt service on these notes will total $14.1 million
annually. In July 1996, DLJ issued $43.5 million in 6.1875% junior subordinated
convertible debentures, the proceeds of which were used to pay $43.5 million of
its senior subordinated revolving credit. During October 1996, DLJ exercised its
option to exchange all 2.25 million shares of its $8.83 Cumulative Preferred
Stock for $225.0 million in aggregate principal amount of 9.58% Subordinated
Exchange Notes due 2003, including $20.0 million to Equitable Life. These notes
are redeemable, in whole or in part, at DLJ's option at any time. On November
19, 1996, DLJ issued 4.0 million shares of Fixed/Adjustable Rate Cumulative
Preferred Stock, Series A, with a liquidation preference of $50 per share.
Dividends on the preferred stock are cumulative and payable quarterly at a rate
of 5.94% per annum through November 30, 2001. Thereafter, the dividend rate will
be adjusted based on various indices, not to be less than 6.44% nor higher than
7-44
12.44%. The preferred stock is redeemable, in whole or in part, at the option of
DLJ, on or after November 30, 2001. At December 31, 1996, 4.0 million shares of
such preferred stock were authorized, issued and outstanding. In 1995, DLJ also
extended the maturity and increased the credit available under its revolving
credit agreement to $325.0 million, of which $206.5 million was outstanding at
December 31, 1996. DLJ also increased the amount of credit available under its
unsecured credit facility to $650 million; there were no borrowings outstanding
at December 31, 1996.
DLJ historically has satisfied its needs for funds primarily from capital
(including long-term debt), internally generated funds, uncommitted lines of
credit, free credit balances in customers' accounts, master notes and
collateralized borrowings primarily consisting of bank loans, repurchase
agreements and securities loaned. Short-term funding generally is obtained at
rates related to Federal Funds, LIBOR and money market rates. Other borrowing
costs are negotiated depending upon prevailing market conditions. DLJ maintains
borrowing relationships with a broad range of banks, financial institutions,
counterparties and others including $6.0 billion, at December 31, 1996, in
uncommitted and committed bank credit lines with 50 domestic and international
banks.
The primary source of cash flows for Equitable Real Estate is investment
management fee income derived from various kinds of financial and real estate
investments and from transaction fees related to acquiring, servicing and
disposing of such investments. Since Equitable Real Estate primarily is an
investment manager, its primary cash needs are to pay operating expenses such as
employee compensation and benefits, office rentals and information systems. In
1996, 1995 and 1994, Equitable Real Estate paid cash dividends of $27.0 million,
$23.4 million and $50.0 million to Equitable Life. In December 1994, Equitable
Real Estate established two bank lines of credit totaling $30.0 million. During
December 1996, Equitable Real Estate modified and extended one of its lines of
credit. The two bank lines of credit total $35.0 million with no outstanding
borrowings as of December 31, 1996.
Consolidated Cash Flows
Net cash provided by operating activities was $583.6 million for 1996 as
compared to $1.12 billion in 1995. Cash provided by operations in 1996 was
attributable to the $1.27 billion net change in interest credited to
policyholders' account balances, partially offset by net cash used of $874.0
million for the change in universal life and investment-type policy fee income.
Net cash used by investing activities amounted to $168.1 million for 1996 as
compared to $243.6 million in 1995. In 1996, investment purchases exceeded
sales, maturities, repayments and return of capital by $1.24 billion. The GIC
Segment repaid $1.02 billion of loans from continuing operations during 1996. In
1995, purchases exceeded sales, maturities, repayments and return of capital by
$845.8 million, as available funds were invested principally in the fixed
maturities category. In 1994, sales, maturities and repayments of investment
assets exceeded purchases by $614.7 million, principally in the mortgage loan
and other equity investment categories. Decreases in loans to the discontinued
GIC Segment totaled $1.23 billion in 1995 principally due to the January 1995
repayment of $1.16 billion in loans by the GIC Segment.
Net cash used by financing activities was $651.4 million in 1996 as compared to
cash used by financing activities of $791.8 million for 1995. During 1996,
withdrawals from policyholders' account balances exceeded deposits by $459.8
million as compared with $70.6 million in 1995. In 1995, the $1.22 billion
payment by continuing operations to the GIC Segment and $70.6 million in net
cash withdrawals from General Account policyholders' account balances (these
amounts exclude Separate Account activity for the Insurance Operations' segment)
were offset by $599.7 million of additions to long-term debt, primarily due to
the issuance of the Surplus Notes. Net cash used by financing activities of
$676.4 million in 1994 was primarily due to net cash withdrawals from General
Account policyholders' account balances of $781.9 million. In addition, in 1994,
the Holding Company issued $300.0 million of 9% Senior Notes while Alliance
issued $100.0 million of new Units to third parties. Alliance used the proceeds
of these third party Unit sales to repay $105.0 million of long-term debt.
The operating, investing and financing activities described above resulted in a
decrease in cash and cash equivalents of $235.9 million in 1996 as compared to
increases of $81.1 million and $97.4 million in 1995 and 1994, respectively.
7-45
Part II, Item 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
Report of Independent Accountants........................................................... F-1
Consolidated Financial Statements:
Consolidated Balance Sheets, December 31, 1996 and 1995................................... F-2
Consolidated Statements of Earnings, Years Ended December 31, 1996, 1995 and 1994......... F-3
Consolidated Statements of Shareholder's Equity, Years Ended December 31, 1996,
1995 and 1994........................................................................... F-4
Consolidated Statements of Cash Flows, Years Ended December 31, 1996, 1995 and 1994....... F-5
Notes to Consolidated Financial Statements................................................ F-6
Report of Independent Accountants on Financial Statement Schedules.......................... F-47
Consolidated Financial Statement Schedules:
Schedule I - Summary of Investments - Other than Investments in Related Parties,
December 31, 1996......................................................................... F-48
Schedule III - Balance Sheets (Parent Company), December 31, 1996 and 1995.................. F-49
Schedule III - Statements of Earnings (Parent Company), Years Ended December 31, 1996,
1995 and 1994............................................................................. F-50
Schedule III - Statements of Cash Flows (Parent Company), Years Ended December 31, 1996,
1995 and 1994............................................................................. F-51
Schedule V - Supplementary Insurance Information, Years Ended December 31, 1996,
1995 and 1994............................................................................. F-52
Schedule VI - Reinsurance, Years Ended December 31, 1996, 1995 and 1994..................... F-55
FS-1
February 10, 1997
Report of Independent Accountants
To the Board of Directors and Shareholder of
The Equitable Life Assurance Society of the United States
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of earnings, of shareholder's equity and of cash flows
present fairly, in all material respects, the financial position of The
Equitable Life Assurance Society of the United States and its subsidiaries
("Equitable Life") at December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of Equitable Life's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
As discussed in Note 2 to the consolidated financial statements, Equitable Life
changed its methods of accounting for long-duration participating life insurance
contracts and long-lived assets in 1996, for loan impairments in 1995 and for
postemployment benefits in 1994.
/s/Price Waterhouse LLP
- - --------------------------
F-1
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
1996 1995
------------ ------------
(In Millions)
ASSETS
Investments:
Fixed maturities:
Available for sale, at estimated fair value...................... $ 18,077.0 $ 15,899.9
Mortgage loans on real estate...................................... 3,133.0 3,638.3
Equity real estate................................................. 3,297.5 3,916.2
Policy loans....................................................... 2,196.1 1,976.4
Investment in and loans to affiliates.............................. 685.0 636.6
Other equity investments........................................... 597.3 621.1
Other invested assets.............................................. 288.7 706.1
------------ ------------
Total investments.............................................. 28,274.6 27,394.6
Cash and cash equivalents............................................ 538.8 774.7
Deferred policy acquisition costs.................................... 3,104.9 3,075.8
Amounts due from discontinued GIC Segment............................ 996.2 2,097.1
Other assets......................................................... 2,552.2 2,718.1
Closed Block assets.................................................. 8,495.0 8,582.1
Separate Accounts assets............................................. 29,646.1 24,566.6
------------ ------------
Total Assets......................................................... $ 73,607.8 $ 69,209.0
============ ============
LIABILITIES
Policyholders' account balances...................................... $ 21,865.6 $ 21,911.2
Future policy benefits and other policyholders' liabilities.......... 4,416.6 4,007.3
Short-term and long-term debt........................................ 1,766.9 1,899.3
Other liabilities.................................................... 2,785.1 3,380.7
Closed Block liabilities............................................. 9,091.3 9,221.4
Separate Accounts liabilities........................................ 29,598.3 24,531.0
------------ ------------
Total liabilities.............................................. 69,523.8 64,950.9
------------ ------------
Commitments and contingencies (Notes 10, 12, 13, 14 and 15)
SHAREHOLDER'S EQUITY
Common stock, $1.25 par value 2.0 million shares authorized, issued
and outstanding.................................................... 2.5 2.5
Capital in excess of par value....................................... 3,105.8 3,105.8
Retained earnings.................................................... 798.7 788.4
Net unrealized investment gains...................................... 189.9 396.5
Minimum pension liability............................................ (12.9) (35.1)
------------ ------------
Total shareholder's equity..................................... 4,084.0 4,258.1
------------ ------------
Total Liabilities and Shareholder's Equity........................... $ 73,607.8 $ 69,209.0
============ ============
See Notes to Consolidated Financial Statements.
F-2
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
CONSOLIDATED STATEMENTS OF EARNINGS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994
------------ ------------ ------------
(In Millions)
REVENUES
Universal life and investment-type product policy fee
income................................................. $ 874.0 $ 788.2 $ 715.0
Premiums................................................. 597.6 606.8 625.6
Net investment income.................................... 2,175.9 2,088.2 1,998.6
Investment (losses) gains, net........................... (9.8) 5.3 91.8
Commissions, fees and other income....................... 1,081.8 897.1 847.4
Contribution from the Closed Block....................... 125.0 143.2 137.0
------------ ------------ ------------
Total revenues..................................... 4,844.5 4,528.8 4,415.4
------------ ------------ ------------
BENEFITS AND OTHER DEDUCTIONS
Interest credited to policyholders' account balances..... 1,270.2 1,248.3 1,201.3
Policyholders' benefits.................................. 1,317.7 1,008.6 914.9
Other operating costs and expenses....................... 2,048.0 1,775.8 1,857.7
------------ ------------ ------------
Total benefits and other deductions................ 4,635.9 4,032.7 3,973.9
------------ ------------ ------------
Earnings from continuing operations before Federal
income taxes, minority interest and cumulative
effect of accounting change............................ 208.6 496.1 441.5
Federal income taxes..................................... 9.7 120.5 100.2
Minority interest in net income of consolidated
subsidiaries........................................... 81.7 62.8 50.4
------------ ------------ ------------
Earnings from continuing operations before
cumulative effect of accounting change................. 117.2 312.8 290.9
Discontinued operations, net of Federal income taxes..... (83.8) - -
Cumulative effect of accounting change, net of Federal
income taxes........................................... (23.1) - (27.1)
------------ ------------ ------------
Net Earnings............................................. $ 10.3 $ 312.8 $ 263.8
============ ============ ============
See Notes to Consolidated Financial Statements.
F-3
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994
----------- ------------ ------------
(In Millions)
Common stock, at par value, beginning and end of year......... $ 2.5 $ 2.5 $ 2.5
----------- ------------ ------------
Capital in excess of par value, beginning of year as
previously reported......................................... 2,913.6 2,913.6 2,613.6
Cumulative effect on prior years of retroactive restatement
for accounting change....................................... 192.2 192.2 192.2
----------- ------------ ------------
Capital in excess of par value, beginning of year as restated. 3,105.8 3,105.8 2,805.8
Additional capital in excess of par value..................... - - 300.0
----------- ------------ ------------
Capital in excess of par value, end of year................... 3,105.8 3,105.8 3,105.8
----------- ------------ ------------
Retained earnings, beginning of year as previously reported... 781.6 484.0 217.6
Cumulative effect on prior years of retroactive restatement
for accounting change....................................... 6.8 (8.4) (5.8)
----------- ------------ ------------
Retained earnings, beginning of year as restated.............. 788.4 475.6 211.8
Net earnings.................................................. 10.3 312.8 263.8
----------- ------------ ------------
Retained earnings, end of year................................ 798.7 788.4 475.6
----------- ------------ ------------
Net unrealized investment gains (losses), beginning of year
as previously reported...................................... 338.2 (203.0) 131.9
Cumulative effect on prior years of retroactive restatement
for accounting change....................................... 58.3 (17.5) 12.7
----------- ------------ ------------
Net unrealized investment gains (losses), beginning of
year as restated............................................ 396.5 (220.5) 144.6
Change in unrealized investment (losses) gains................ (206.6) 617.0 (365.1)
----------- ------------ ------------
Net unrealized investment gains (losses), end of year......... 189.9 396.5 (220.5)
----------- ------------ ------------
Minimum pension liability, beginning of year.................. (35.1) (2.7) (15.0)
Change in minimum pension liability........................... 22.2 (32.4) 12.3
----------- ------------ ------------
Minimum pension liability, end of year........................ (12.9) (35.1) (2.7)
----------- ------------ ------------
Total Shareholder's Equity, End of Year....................... $ 4,084.0 $ 4,258.1 $ 3,360.7
=========== ============ ============
See Notes to Consolidated Financial Statements.
F-4
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994
------------- ------------- ------------
(In Millions)
Net earnings................................................ $ 10.3 $ 312.8 $ 263.8
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Interest credited to policyholders' account balances...... 1,270.2 1,248.3 1,201.3
Universal life and investment-type policy fee income...... (874.0) (788.2) (715.0)
Investment losses (gains)................................. 9.8 (5.3) (91.8)
Change in Federal income taxes payable.................... (197.1) 221.6 38.3
Other, net................................................ 364.4 127.3 (19.4)
------------- ------------- ------------
Net cash provided by operating activities................... 583.6 1,116.5 677.2
------------- ------------- ------------
Cash flows from investing activities:
Maturities and repayments................................. 2,275.1 1,897.4 2,323.8
Sales..................................................... 8,964.3 8,867.1 5,816.6
Return of capital from joint ventures and limited
partnerships............................................ 78.4 65.2 39.0
Purchases................................................. (12,559.6) (11,675.5) (7,564.7)
Decrease (increase) in loans to discontinued GIC Segment.. 1,017.0 1,226.9 (40.0)
Other, net................................................ 56.7 (624.7) (478.1)
------------- ------------- ------------
Net cash (used) provided by investing activities............ (168.1) (243.6) 96.6
------------- ------------- ------------
Cash flows from financing activities: Policyholders'
account balances:
Deposits................................................ 1,925.4 2,586.5 2,082.5
Withdrawals............................................. (2,385.2) (2,657.1) (2,864.4)
Net decrease in short-term financings..................... (.3) (16.4) (173.0)
Additions to long-term debt............................... - 599.7 51.8
Repayments of long-term debt.............................. (124.8) (40.7) (199.8)
Proceeds from issuance of Alliance units.................. - - 100.0
Payment of obligation to fund accumulated deficit of
discontinued GIC Segment................................ - (1,215.4) -
Capital contribution from the Holding Company............. - - 300.0
Other, net................................................ (66.5) (48.4) 26.5
------------- ------------- ------------
Net cash (used) by financing activities..................... (651.4) (791.8) (676.4)
------------- ------------- ------------
Change in cash and cash equivalents......................... (235.9) 81.1 97.4
Cash and cash equivalents, beginning of year................ 774.7 693.6 596.2
------------- ------------- ------------
Cash and Cash Equivalents, End of Year...................... $ 538.8 $ 774.7 $ 693.6
============= ============= ============
Supplemental cash flow information
Interest Paid............................................. $ 109.9 $ 89.6 $ 34.9
============= ============= ============
Income Taxes (Refunded) Paid.............................. $ (10.0) $ (82.7) $ 49.2
============= ============= ============
See Notes to Consolidated Financial Statements.
F-5
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1) ORGANIZATION
The Equitable Life Assurance Society of the United States ("Equitable
Life") converted to a stock life insurance company on July 22, 1992 and
became a wholly owned subsidiary of The Equitable Companies Incorporated
(the "Holding Company"). Equitable Life's insurance business is
conducted principally by Equitable Life and its wholly owned life
insurance subsidiary, Equitable Variable Life Insurance Company
("EVLICO"). Effective January 1, 1997, EVLICO was merged into Equitable
Life, which will continue to conduct the Company's insurance business.
Equitable Life's investment management business, which comprises the
Investment Services segment, is conducted principally by Alliance
Capital Management L.P. ("Alliance"), Equitable Real Estate Investment
Management, Inc. ("EREIM") and Donaldson, Lufkin & Jenrette, Inc.
("DLJ"), an investment banking and brokerage affiliate. AXA-UAP ("AXA"),
a French holding company for an international group of insurance and
related financial services companies, is the Holding Company's largest
shareholder, owning approximately 60.8% at December 31, 1996 (63.6%
assuming conversion of Series E Convertible Preferred Stock held by AXA
and 54.4% if all securities convertible into, and options on, common
stock were to be converted or exercised).
2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Principles of Consolidation
The accompanying consolidated financial statements are prepared in
conformity with generally accepted accounting principles ("GAAP").
The accompanying consolidated financial statements include the accounts
of Equitable Life and its wholly owned life insurance subsidiaries
(collectively, the "Insurance Group"); non-insurance subsidiaries,
principally Alliance, an investment advisory subsidiary, and EREIM, a
real estate investment management subsidiary; and those partnerships and
joint ventures in which Equitable Life or its subsidiaries has control
and a majority economic interest (collectively, including its
consolidated subsidiaries, the "Company"). The Company's investment in
DLJ is reported on the equity basis of accounting. Closed Block assets
and liabilities and results of operations are presented in the
consolidated financial statements as single line items (see Note 6).
Unless specifically stated, all disclosures contained herein supporting
the consolidated financial statements exclude the Closed Block related
amounts.
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
All significant intercompany transactions and balances have been
eliminated in consolidation other than intercompany transactions and
balances with the Closed Block and the discontinued Guaranteed Interest
Contract ("GIC") Segment (see Note 7).
The years "1996," "1995" and "1994" refer to the years ended December
31, 1996, 1995 and 1994, respectively.
Certain reclassifications have been made in the amounts presented for
prior periods to conform these periods with the 1996 presentation.
F-6
Closed Block
As of July 22, 1992, Equitable Life established the Closed Block for the
benefit of certain classes of individual participating policies for
which Equitable Life had a dividend scale payable in 1991 and which were
in force on that date. Assets were allocated to the Closed Block in an
amount which, together with anticipated revenues from policies included
in the Closed Block, was reasonably expected to be sufficient to support
such business, including provision for payment of claims, certain
expenses and taxes, and for continuation of dividend scales payable in
1991, assuming the experience underlying such scales continues.
Assets allocated to the Closed Block inure solely to the benefit of the
holders of policies included in the Closed Block and will not revert to
the benefit of the Holding Company. The plan of demutualization
prohibits the reallocation, transfer, borrowing or lending of assets
between the Closed Block and other portions of Equitable Life's General
Account, any of its Separate Accounts or to any affiliate of Equitable
Life without the approval of the New York Superintendent of Insurance
(the "Superintendent"). Closed Block assets and liabilities are carried
on the same basis as similar assets and liabilities held in the General
Account. The excess of Closed Block liabilities over Closed Block assets
represents the expected future post-tax contribution from the Closed
Block which would be recognized in income over the period the policies
and contracts in the Closed Block remain in force.
Discontinued Operations
In 1991, the Company's management adopted a plan to discontinue the
business operations of the GIC Segment, consisting of the Group
Non-Participating Wind-Up Annuities ("Wind-Up Annuities") and Guaranteed
Interest Contract ("GIC") lines of business. The Company established a
pre-tax provision for the estimated future losses of the GIC line of
business and a premium deficiency reserve for the Wind-Up Annuities.
Subsequent losses incurred have been charged to the two loss provisions.
Management reviews the adequacy of the allowance and reserve each
quarter. During the fourth quarter 1996 review, management determined it
was necessary to increase the allowance for expected future losses of
the GIC Segment. Management believes the loss provisions for GIC
contracts and Wind-Up Annuities at December 31, 1996 are adequate to
provide for all future losses; however, the determination of loss
provisions continues to involve 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 (See Note 7).
Accounting Changes
In 1996, the Company changed its method of accounting for long-duration
participating life insurance contracts, primarily within the Closed
Block, in accordance with the provisions prescribed by Statement of
Financial Accounting Standards ("SFAS") No. 120, "Accounting and
Reporting by Mutual Life Insurance Enterprises and by Insurance
Enterprises for Certain Long-Duration Participating Contracts". The
effect of this change, including the impact on the Closed Block, was to
increase earnings from continuing operations before cumulative effect of
accounting change by $19.2 million, net of Federal income taxes of $10.3
million for 1996. The financial statements for 1995 and 1994 have been
retroactively restated for the change which resulted in an increase
(decrease) in earnings before cumulative effect of accounting change of
$15.2 million, net of Federal income taxes of $8.2 million, and $(2.6)
million, net of Federal income tax benefit of $1.0 million,
respectively. Shareholder's equity increased $199.1 million as of
January 1, 1994 for the effect of retroactive application of the new
method. (See "Deferred Policy Acquisition Costs," "Policyholders'
Account Balances and Future Policy Benefits" and Note 6.)
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
F-7
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 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 the first quarter of 1995, the Company adopted SFAS No. 114,
"Accounting by Creditors for Impairment of a Loan". This statement
applies to all loans, including loans restructured in a troubled debt
restructuring involving a modification of terms. This statement
addresses the accounting for impairment of a loan by specifying how
allowances for credit losses should be determined. Impaired loans within
the scope of this statement are measured based on the present value of
expected future cash flows discounted at the loan's effective interest
rate, at the loan's observable market price or the fair value of the
collateral if the loan is collateral dependent. The Company provides for
impairment of loans through an allowance for possible losses. The
adoption of this statement did not have a material effect on the level
of these allowances or on the Company's consolidated statements of
earnings and shareholder's equity.
Beginning coincident with issuance of SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities," implementation
guidance in November 1995, the Financial Accounting Standards Board
("FASB") permitted companies a one-time opportunity, through December
31, 1995, to reassess the appropriateness of the classification of all
securities held at that time. On December 1, 1995, the Company
transferred $4,794.9 million of securities classified as held to
maturity to the available for sale portfolio. As a result, consolidated
shareholder's equity increased by $149.4 million, net of deferred policy
acquisition costs ("DAC"), amounts attributable to participating group
annuity contracts and deferred Federal income taxes.
In the fourth quarter of 1994 (effective as of January 1, 1994), the
Company adopted SFAS No. 112, "Employers' Accounting for Postemployment
Benefits," which required employers to recognize the obligation to
provide postemployment benefits. Implementation of this statement
resulted in a charge for the cumulative effect of accounting change of
$27.1 million, net of a Federal income tax benefit of $14.6 million.
New Accounting Pronouncements
The FASB issued SFAS No. 123, "Accounting for Stock-Based Compensation,"
which permits entities to recognize as expense over the vesting period
the fair value of all stock-based awards on the date of grant or,
alternatively, to continue to apply the provisions of Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations. Companies which elect to
continue to apply APB Opinion No. 25 must provide pro forma net income
disclosures for employee stock option grants made in 1995 and future
years as if the fair-value-based method defined in SFAS No. 123 had been
applied. The Company accounts for stock option plans sponsored by the
Holding Company, DLJ and Alliance in accordance with the provisions of
APB Opinion No. 25 (see Note 21).
F-8
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. In December 1996, the FASB
issued SFAS No. 127, "Deferral of the Effective Date of Certain
Provisions of FASB Statement No. 125," which defers for one year the
effective date of provisions relating to secured borrowings and
collateral and transfers of financial assets that are part of repurchase
agreements, dollar-roll, securities lending and similar transactions.
Management has not yet determined the effect of implementing SFAS No.
125.
Valuation of Investments
Fixed maturities identified as available for sale are reported at
estimated fair value. The amortized cost of fixed maturities is adjusted
for impairments in value deemed to be other than temporary.
Mortgage loans on real estate are stated at unpaid principal balances,
net of unamortized discounts and valuation allowances. Effective with
the adoption of SFAS No. 114 on January 1, 1995, the valuation
allowances are based on the present value of expected future cash flows
discounted at the loan's original effective interest rate or the
collateral value if the loan is collateral dependent. However, if
foreclosure is or becomes probable, the measurement method used is
collateral value. Prior to the adoption of SFAS No. 114, the valuation
allowances were based on losses expected by management to be realized on
transfers of mortgage loans to real estate (upon foreclosure or
in-substance foreclosure), on the disposition or settlement of mortgage
loans and on mortgage loans management believed may not be collectible
in full. In establishing valuation allowances, management previously
considered, among other things the estimated fair value of the
underlying collateral.
Real estate, including real estate acquired in satisfaction of debt, is
stated at depreciated cost less valuation allowances. At the date of
foreclosure (including in-substance foreclosure), real estate acquired
in satisfaction of debt is valued at estimated fair value. Impaired real
estate is written down to fair value with the impairment loss being
included in investment gains (losses) net. Valuation allowances on real
estate available for sale are computed using the lower of current
estimated fair value or depreciated cost, net of disposition costs.
Prior to the adoption of 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.
Policy loans are stated at unpaid principal balances.
Partnerships and joint venture interests in which the Company does not
have control and a majority economic interest are reported on the equity
basis of accounting and are included either with equity real estate or
other equity investments, as appropriate.
Common stocks are carried at estimated fair value and are included in
other equity investments.
Short-term investments are stated at amortized cost which approximates
fair value and are included with other invested assets.
Cash and cash equivalents includes cash on hand, amounts due from banks
and highly liquid debt instruments purchased with an original maturity
of three months or less.
All securities are recorded in the consolidated financial statements on
a trade date basis.
Investment Results and Unrealized Investment Gains (Losses)
Net investment income and realized investment gains and losses
(collectively, "investment results") related to certain participating
group annuity contracts which are passed through to the contractholders
are reflected as interest credited to policyholders' account balances.
F-9
Realized investment gains and losses are determined by specific
identification and are presented as a component of revenue. Valuation
allowances are netted against the asset categories to which they apply
and changes in the valuation allowances are included in investment gains
or losses.
Unrealized investment gains and losses on fixed maturities available for
sale and equity securities held by the Company are accounted for as a
separate component of shareholder's equity, net of related deferred
Federal income taxes, amounts attributable to the discontinued GIC
Segment, participating group annuity contracts, and DAC related to
universal life and investment-type products and participating
traditional life contracts.
Recognition of Insurance Income and Related Expenses
Premiums from universal life and investment-type contracts are reported
as deposits to policyholders' account balances. Revenues from these
contracts consist of amounts assessed during the period against
policyholders' account balances for mortality charges, policy
administration charges and surrender charges. Policy benefits and claims
that are charged to expense include benefit claims incurred in the
period in excess of related policyholders' account balances.
Premiums from participating and non-participating traditional life and
annuity policies with life contingencies generally are recognized as
income when due. Benefits and expenses are matched with such income so
as to result in the recognition of profits over the life of the
contracts. This match is accomplished by means of the provision for
liabilities for future policy benefits and the deferral and subsequent
amortization of policy acquisition costs.
For contracts with a single premium or a limited number of premium
payments due over a significantly shorter period than the total period
over which benefits are provided, premiums are recorded as income when
due with any excess profit deferred and recognized in income in a
constant relationship to insurance in force or, for annuities, the
amount of expected future benefit payments.
Premiums from individual health contracts are recognized as income over
the period to which the premiums relate in proportion to the amount of
insurance protection provided.
Deferred Policy Acquisition Costs
The costs of acquiring new business, principally commissions,
underwriting, agency and policy issue expenses, all of which vary with
and are primarily related to the production of new business, are
deferred. DAC is subject to recoverability testing at the time of policy
issue and loss recognition testing at the end of each accounting period.
For universal life products and investment-type products, DAC is
amortized over the expected total life of the contract group (periods
ranging from 15 to 35 years and 5 to 17 years, respectively) as a
constant percentage of estimated gross profits arising principally from
investment results, mortality and expense margins and surrender charges
based on historical and anticipated future experience, updated at the
end of each accounting period. The effect on the amortization of DAC of
revisions to estimated gross profits is reflected in earnings in the
period such estimated gross profits are revised. The effect on the DAC
asset that would result from realization of unrealized gains (losses) is
recognized with an offset to unrealized gains (losses) in consolidated
shareholder's equity as of the balance sheet date.
For participating traditional life policies (substantially all of which
are in the Closed Block), DAC is amortized over the expected total life
of the contract group (40 years) as a constant percentage based on the
present value of the estimated gross margin amounts expected to be
realized over the life of the contracts using the expected investment
yield. At December 31, 1996, the expected investment yield ranged from
7.30% grading to 7.68% over 13 years. Estimated gross margin includes
anticipated premiums and investment results less claims and
administrative expenses, changes in the net level premium reserve and
expected annual policyholder dividends. Deviations of actual results
from estimated experience are reflected in earnings in the period such
deviations occur. The effect on the DAC asset that would result from
realization of unrealized gains (losses) is recognized with an offset to
unrealized gains (losses) in consolidated shareholder's equity as of the
balance sheet date.
F-10
For non-participating traditional life and annuity policies with life
contingencies, DAC is amortized in proportion to anticipated premiums.
Assumptions as to anticipated premiums are estimated at the date of
policy issue and are consistently applied during the life of the
contracts. Deviations from estimated experience are reflected in
earnings in the period such deviations occur. For these contracts, the
amortization periods generally are for the total life of the policy.
For individual health benefit insurance, DAC is amortized over the
expected average life of the contracts (10 years for major medical
policies and 20 years for disability income ("DI") products) in
proportion to anticipated premium revenue at time of issue. In the
fourth quarter of 1996, the DAC related to DI contracts issued prior to
July 1993 was written off.
Policyholders' Account Balances and Future Policy Benefits
Policyholders' account balances for universal life and investment-type
contracts are equal to the policy account values. The policy account
values represents an accumulation of gross premium payments plus
credited interest less expense and mortality charges and withdrawals.
For participating traditional life policies, future policy benefit
liabilities are calculated using a net level premium method on the basis
of actuarial assumptions equal to guaranteed mortality and dividend fund
interest rates. The liability for annual dividends represents the
accrual of annual dividends earned. Terminal dividends are accrued in
proportion to gross margins over the life of the contract.
For non-participating traditional life insurance policies, future policy
benefit liabilities are estimated using a net level premium method on
the basis of actuarial assumptions as to mortality, persistency and
interest established at policy issue. Assumptions established at policy
issue as to mortality and persistency are based on the Insurance Group's
experience which, together with interest and expense assumptions,
include a margin for adverse deviation. When the liabilities for future
policy benefits plus the present value of expected future gross premiums
for a product are insufficient to provide for expected future policy
benefits and expenses for that product, DAC is written off and
thereafter, if required, a premium deficiency reserve is established by
a charge to earnings. Benefit liabilities for traditional annuities
during the accumulation period are equal to accumulated contractholders'
fund balances and after annuitization are equal to the present value of
expected future payments. Interest rates used in establishing such
liabilities range from 2.25% to 11.5% for life insurance liabilities and
from 2.25% to 13.5% for annuity liabilities.
During the fourth quarter of 1996, a loss recognition study on
participating group annuity contracts and conversion annuities ("Pension
Par") was completed which included management's revised estimate of
assumptions, including expected mortality and future investment returns.
The study's results prompted management to establish a premium
deficiency reserve which decreased earnings from continuing operations
and net earnings by $47.5 million ($73.0 million pre-tax).
Individual health benefit liabilities for active lives are estimated
using the net level premium method, and assumptions as to future
morbidity, withdrawals and interest. Benefit liabilities for disabled
lives are estimated using the present value of benefits method and
experience assumptions as to claim terminations, expenses and interest.
During the fourth quarter of 1996, the Company completed a loss
recognition study of the DI business which incorporated management's
revised estimates of future experience with regard to morbidity,
investment returns, claims and administration expenses and other
factors. The study indicated DAC was not recoverable and the reserves
were not sufficient. Earnings from continuing operations and net
earnings decreased by $208.0 million ($320.0 million pre-tax) as a
result of strengthening DI reserves by $175.0 million and writing off
unamortized DAC of $145.0 million. The determination of DI reserves
requires making assumptions and estimates relating to a variety of
factors, including morbidity and interest rates, claims experience and
F-11
lapse rates based on then known facts and circumstances. Such factors as
claim incidence and termination rates can be affected by changes in the
economic, legal and regulatory environments and work ethic. While
management believes its DI reserves have been calculated on a reasonable
basis and are adequate, there can be no assurance reserves will be
sufficient to provide for future liabilities.
Claim reserves and associated liabilities for individual disability
income and major medical policies were $711.8 million and $639.6 million
at December 31, 1996 and 1995, respectively (excluding $175.0 million of
reserve strengthening in 1996). Incurred benefits (benefits paid plus
changes in claim reserves) and benefits paid for individual DI and major
medical policies (excluding $175.0 million of reserve strengthening in
1996) are summarized as follows:
1996 1995 1994
----------- ------------ ----------
(In Millions)
Incurred benefits related to current year... $ 189.0 $ 176.0 $ 188.6
Incurred benefits related to prior years.... 69.1 67.8 28.7
----------- ------------ ----------
Total Incurred Benefits..................... $ 258.1 $ 243.8 $ 217.3
=========== =========== ==========
Benefits paid related to current year....... $ 32.6 $ 37.0 $ 43.7
Benefits paid related to prior years........ 153.3 137.8 132.3
----------- ------------ ----------
Total Benefits Paid......................... $ 185.9 $ 174.8 $ 176.0
=========== =========== ==========
Policyholders' Dividends
The amount of policyholders' dividends to be paid (including those on
policies included in the Closed Block) is determined annually by
Equitable Life's Board of Directors. The aggregate amount of
policyholders' dividends is related to actual interest, mortality,
morbidity and expense experience for the year and judgment as to the
appropriate level of statutory surplus to be retained by Equitable Life.
Equitable Life is subject to limitations on the amount of statutory
profits which can be retained with respect to certain classes of
individual participating policies that were in force on July 22, 1992
which are not included in the Closed Block and with respect to
participating policies issued subsequent to July 22, 1992. Excess
statutory profits, if any, will be distributed over time to such
policyholders and will not be available to Equitable Life's shareholder.
Earnings in excess of limitations, if any, would be accrued as
policyholders' dividends.
At December 31, 1996, participating policies, including those in the
Closed Block, represent approximately 24.2% ($52.3 billion) of directly
written life insurance in force, net of amounts ceded.
Federal Income Taxes
The Company files a consolidated Federal income tax return with the
Holding Company and its non-life insurance subsidiaries. Current Federal
income taxes were charged or credited to operations based upon amounts
estimated to be payable or recoverable as a result of taxable operations
for the current year. Deferred income tax assets and liabilities were
recognized based on the difference between financial statement carrying
amounts and income tax bases of assets and liabilities using enacted
income tax rates and laws.
Separate Accounts
Separate Accounts are established in conformity with the New York State
Insurance Law and generally are not chargeable with liabilities that
arise from any other business of the Insurance Group. Separate Accounts
assets are subject to General Account claims only to the extent the
value of such assets exceeds the Separate Accounts liabilities.
F-12
Assets and liabilities of the Separate Accounts, representing net
deposits and accumulated net investment earnings less fees, held
primarily for the benefit of contractholders, and for which the
Insurance Group does not bear the investment risk, are shown as separate
captions in the consolidated balance sheets. The Insurance Group bears
the investment risk on assets held in one Separate Account, therefore,
such assets are carried on the same basis as similar assets held in the
General Account portfolio. Assets held in the other Separate Accounts
are carried at quoted market values or, where quoted values are not
available, at estimated fair values as determined by the Insurance
Group.
The investment results of Separate Accounts on which the Insurance Group
does not bear the investment risk are reflected directly in Separate
Accounts liabilities. For 1996, 1995 and 1994, investment results of
such Separate Accounts were $2,970.6 million, $1,963.2 million and
$665.2 million, respectively.
Deposits to Separate Accounts are reported as increases in Separate
Accounts liabilities and are not reported in revenues. Mortality, policy
administration and surrender charges on all Separate Accounts are
included in revenues.
F-13
3) INVESTMENTS
The following tables provide additional information relating to fixed
maturities and equity securities:
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
------------ ------------- ------------ -------------
(In Millions)
December 31, 1996
Fixed Maturities:
Available for Sale:
Corporate.......................... $ 13,645.2 $ 451.5 $ 121.0 $ 13,975.7
Mortgage-backed.................... 2,015.9 11.2 20.3 2,006.8
U.S. Treasury securities and
U.S. government and
agency securities................ 1,539.4 39.2 19.3 1,559.3
States and political subdivisions.. 77.0 4.5 - 81.5
Foreign governments................ 302.6 18.0 2.2 318.4
Redeemable preferred stock......... 139.1 3.3 7.1 135.3
------------ -------------- ------------ -------------
Total Available for Sale............... $ 17,719.2 $ 527.7 $ 169.9 $ 18,077.0
============ ============== ============ =============
Equity Securities:
Common stock......................... $ 98.7 $ 49.3 $ 17.7 $ 130.3
============ ============== ============ =============
December 31, 1995
Fixed Maturities:
Available for Sale:
Corporate.......................... $ 10,910.7 $ 617.6 $ 118.1 $ 11,410.2
Mortgage-backed.................... 1,838.0 31.2 1.2 1,868.0
U.S. Treasury securities and
U.S. government and
agency securities................ 2,257.0 77.8 4.1 2,330.7
States and political subdivisions.. 45.7 5.2 - 50.9
Foreign governments................ 124.5 11.0 .2 135.3
Redeemable preferred stock......... 108.1 5.3 8.6 104.8
------------ -------------- ------------ -------------
Total Available for Sale............... $ 15,284.0 $ 748.1 $ 132.2 $ 15,899.9
============ ============== ============ =============
Equity Securities:
Common stock......................... $ 97.3 $ 49.1 $ 18.0 $ 128.4
============ ============== ============ =============
For publicly traded fixed maturities and equity securities, estimated
fair value is determined using quoted market prices. For fixed
maturities without a readily ascertainable market value, the Company has
determined an estimated fair value using a discounted cash flow
approach, including provisions for credit risk, generally based upon the
assumption such securities will be held to maturity. Estimated fair
value for equity securities, substantially all of which do not have a
readily ascertainable market value, has been determined by the Company.
Such estimated fair values do not necessarily represent the values for
which these securities could have been sold at the dates of the
consolidated balance sheets. At December 31, 1996 and 1995, securities
without a readily ascertainable market value having an amortized cost of
$3,915.7 million and $3,748.9 million, respectively, had estimated fair
values of $4,024.6 million and $3,981.8 million, respectively.
F-14
The contractual maturity of bonds at December 31, 1996 is shown below:
Available for Sale
---------------------------------
Amortized Estimated
Cost Fair Value
---------------- --------------
(In Millions)
Due in one year or less.......... $ 539.6 $ 542.5
Due in years two through five.... 2,776.2 2,804.0
Due in years six through ten..... 6,044.7 6,158.1
Due after ten years.............. 6,203.7 6,430.3
Mortgage-backed securities....... 2,015.9 2,006.8
---------------- --------------
Total............................ $ 17,580.1 $ 17,941.7
================ ==============
Bonds not due at a single maturity date have been included in the above
table in the year of final maturity. Actual maturities will differ from
contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
The Insurance Group's fixed maturity investment portfolio includes
corporate high yield securities consisting of public high yield bonds,
redeemable preferred stocks and directly negotiated debt in leveraged
buyout transactions. The Insurance Group seeks to minimize the higher
than normal credit risks associated with such securities by monitoring
the total investments in any single issuer or total investment in a
particular industry group. Certain of these corporate high yield
securities are classified as other than investment grade by the various
rating agencies, i.e., a rating below Baa or National Association of
Insurance Commissioners ("NAIC") designation of 3 (medium grade), 4 or 5
(below investment grade) or 6 (in or near default). At December 31,
1996, approximately 14.20% of the $17,563.7 million aggregate amortized
cost of bonds held by the Insurance Group were considered to be other
than investment grade.
In addition to its holdings of corporate high yield securities, the
Insurance Group is an equity investor in limited partnership interests
which primarily invest in securities considered to be other than
investment grade.
The Company has restructured or modified the terms of certain fixed
maturity investments. The fixed maturity portfolio includes amortized
costs of $5.5 million and $15.9 million at December 31, 1996 and 1995,
respectively, of such restructured securities. These amounts include
fixed maturities which are in default as to principal and/or interest
payments, are to be restructured pursuant to commenced negotiations or
where the borrowers went into bankruptcy subsequent to acquisition
(collectively, "problem fixed maturities") of $2.2 million and $1.6
million as of December 31, 1996 and 1995, respectively. Gross interest
income that would have been recorded in accordance with the original
terms of restructured fixed maturities amounted to $1.4 million, $3.0
million and $7.5 million in 1996, 1995 and 1994, respectively. Gross
interest income on these fixed maturities included in net investment
income aggregated $1.3 million, $2.9 million and $6.8 million in 1996,
1995 and 1994, respectively.
F-15
Investment valuation allowances and changes thereto are shown below:
1996 1995 1994
------------ ----------- ---------
(In Millions)
Balances, beginning of year.......... $ 325.3 $ 284.9 $ 355.6
SFAS No. 121 release................. (152.4) - -
Additions charged to income.......... 125.0 136.0 51.0
Deductions for writedowns and
asset dispositions................. (160.8) (95.6) (121.7)
------------ ----------- ---------
Balances, End of Year................ $ 137.1 $ 325.3 $ 284.9
============ =========== ==========
Balances, end of year comprise:
Mortgage loans on real estate...... $ 50.4 $ 65.5 $ 64.2
Equity real estate................. 86.7 259.8 220.7
------------ ----------- ---------
Total................................ $ 137.1 $ 325.3 $ 284.9
============ =========== ==========
At December 31, 1996, the carrying values of investments held for the
production of income which were non-income producing for the twelve
months preceding the consolidated balance sheet date were $25.0 million
of fixed maturities and $2.6 million of mortgage loans on real estate.
At December 31, 1996 and 1995, mortgage loans on real estate with
scheduled payments 60 days (90 days for agricultural mortgages) or more
past due or in foreclosure (collectively, "problem mortgage loans on
real estate") had an amortized cost of $12.4 million (0.4% of total
mortgage loans on real estate) and $87.7 million (2.4% of total mortgage
loans on real estate), respectively.
The payment terms of mortgage loans on real estate may from time to time
be restructured or modified. The investment in restructured mortgage
loans on real estate, based on amortized cost, amounted to $388.3
million and $531.5 million at December 31, 1996 and 1995, respectively.
These amounts include $1.0 million and $3.8 million of problem mortgage
loans on real estate at December 31, 1996 and 1995, respectively. Gross
interest income on restructured mortgage loans on real estate that would
have been recorded in accordance with the original terms of such loans
amounted to $35.5 million, $52.1 million and $44.9 million in 1996, 1995
and 1994, respectively. Gross interest income on these loans included in
net investment income aggregated $28.2 million, $37.4 million and $32.8
million in 1996, 1995 and 1994, respectively.
Impaired mortgage loans (as defined under SFAS No. 114) along with the
related provision for losses were as follows:
December 31,
------------------------
1996 1995
----------- -----------
(In Millions)
Impaired mortgage loans with provision for losses....... $ 340.0 $ 310.1
Impaired mortgage loans with no provision for losses.... 122.3 160.8
----------- -----------
Recorded investment in impaired mortgage loans.......... 462.3 470.9
Provision for losses.................................... 46.4 62.7
----------- -----------
Net Impaired Mortgage Loans............................. $ 415.9 $ 408.2
=========== ===========
Impaired mortgage loans with no provision for losses are loans where the
fair value of the collateral or the net present value of the expected
future cash flows related to the loan equals or exceeds the recorded
investment. Interest income earned on loans where the collateral value
is used to measure impairment is recorded on a cash basis. Interest
F-16
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 1996 and 1995, respectively, the Company's average recorded
investment in impaired mortgage loans was $552.1 million and $429.0
million. Interest income recognized on these impaired mortgage loans
totaled $38.8 million and $27.9 million for 1996 and 1995, respectively,
including $17.9 million and $13.4 million recognized on a cash basis.
The Insurance Group's investment in equity real estate is through direct
ownership and through investments in real estate joint ventures. At
December 31, 1996 and 1995, the carrying value of equity real estate
available for sale amounted to $345.6 million and $255.5 million,
respectively. For 1996, 1995 and 1994, respectively, real estate of
$58.7 million, $35.3 million and $189.8 million was acquired in
satisfaction of debt. At December 31, 1996 and 1995, the Company owned
$771.7 million and $862.7 million, respectively, of real estate acquired
in satisfaction of debt.
Depreciation of real estate is computed using the straight-line method
over the estimated useful lives of the properties, which generally range
from 40 to 50 years. Accumulated depreciation on real estate was $587.5
million and $662.4 million at December 31, 1996 and 1995, respectively.
Depreciation expense on real estate totaled $91.8 million, $121.7
million and $117.0 million for 1996, 1995 and 1994, respectively. As a
result of the implementation of SFAS No. 121, during 1996 no
depreciation expense has been recorded on real estate available for
sale.
F-17
4) JOINT VENTURES AND PARTNERSHIPS
Summarized combined financial information of real estate joint ventures
(34 and 38 individual ventures as of December 31, 1996 and 1995,
respectively) and of limited partnership interests accounted for under
the equity method, in which the Company has an investment of $10.0
million or greater and an equity interest of 10% or greater is as
follows:
December 31,
-------------------------
1996 1995
----------- -----------
(In Millions)
FINANCIAL POSITION
Investments in real estate, at depreciated cost................. $ 1,883.7 $ 2,684.1
Investments in securities, generally at estimated fair value.... 2,430.6 2,459.8
Cash and cash equivalents....................................... 98.0 489.1
Other assets.................................................... 427.0 270.8
----------- -----------
Total assets.................................................... 4,839.3 5,903.8
----------- -----------
Borrowed funds - third party.................................... 1,574.3 1,782.3
Borrowed funds - the Company.................................... 137.9 220.5
Other liabilities............................................... 415.8 593.9
----------- -----------
Total liabilities............................................... 2,128.0 2,596.7
----------- -----------
Partners' Capital............................................... $ 2,711.3 $ 3,307.1
=========== ===========
Equity in partners' capital included above...................... $ 806.8 $ 902.2
Equity in limited partnership interests not included above...... 201.8 212.8
Other........................................................... 9.8 8.9
----------- -----------
Carrying Value.................................................. $ 1,018.4 $ 1,123.9
=========== ===========
1996 1995 1994
------------ ----------- ----------
(In Millions)
STATEMENTS OF EARNINGS
Revenues of real estate joint ventures............. $ 348.9 $ 463.5 $ 537.7
Revenues of other limited partnership interests.... 386.1 242.3 103.4
Interest expense - third party..................... (111.0) (135.3) (114.9)
Interest expense - the Company..................... (30.0) (41.0) (36.9)
Other expenses..................................... (282.5) (397.7) (430.9)
------------ ----------- ----------
Net Earnings....................................... $ 311.5 $ 131.8 $ 58.4
============ =========== ==========
Equity in net earnings included above.............. $ 73.9 $ 49.1 $ 18.9
Equity in net earnings of limited partnerships
interests not included above..................... 35.8 44.8 25.3
Other.............................................. .9 1.0 1.8
------------ ----------- ----------
Total Equity in Net Earnings....................... $ 110.6 $ 94.9 $ 46.0
============ =========== ==========
F-18
5) NET INVESTMENT INCOME AND INVESTMENT GAINS (LOSSES)
The sources of net investment income are summarized as follows:
1996 1995 1994
------------ ------------ -----------
(In Millions)
Fixed maturities........................ $ 1,307.4 $ 1,151.1 $ 1,036.5
Mortgage loans on real estate........... 303.0 329.0 385.7
Equity real estate...................... 442.4 560.4 561.8
Other equity investments................ 94.3 76.9 36.1
Policy loans............................ 160.3 144.4 122.7
Other investment income................. 217.4 273.0 322.4
------------ ------------ -----------
Gross investment income............... 2,524.8 2,534.8 2,465.2
------------ ------------ -----------
Investment expenses................... 348.9 446.6 466.6
------------ ------------ -----------
Net Investment Income................... $ 2,175.9 $ 2,088.2 $ 1,998.6
============ ============ ===========
Investment gains (losses), net, including changes in the valuation
allowances, are summarized as follows:
1996 1995 1994
----------- ---------- -----------
(In Millions)
Fixed maturities............................ $ 60.5 $ 119.9 $ (14.3)
Mortgage loans on real estate............... (27.3) (40.2) (43.1)
Equity real estate.......................... (79.7) (86.6) 20.6
Other equity investments.................... 18.9 12.8 75.9
Issuance and sales of Alliance Units........ 20.6 - 52.4
Other....................................... (2.8) (.6) .3
----------- ---------- -----------
Investment (Losses) Gains, Net.............. $ (9.8) $ 5.3 $ 91.8
=========== ========= ===========
Writedowns of fixed maturities amounted to $29.9 million, $46.7 million
and $30.8 million for 1996, 1995 and 1994, respectively, and writedowns
of equity real estate subsequent to the adoption of SFAS No. 121
amounted to $23.7 million for the year ended December 31, 1996.
For 1996, 1995 and 1994, respectively, proceeds received on sales of
fixed maturities classified as available for sale amounted to $8,353.5
million, $8,206.0 million and $5,253.9 million. Gross gains of $154.2
million, $211.4 million and $65.2 million and gross losses of $92.7
million, $64.2 million and $50.8 million, respectively, were realized on
these sales. The change in unrealized investment (losses) gains related
to fixed maturities classified as available for sale for 1996, 1995 and
1994 amounted to $(258.0) million, $1,077.2 million and $(742.2)
million, respectively.
During each of 1995 and 1994, one security classified as held to
maturity was sold. During the eleven months ended November 30, 1995 and
the year ended December 31, 1994, respectively, twelve and six
securities so classified were transferred to the available for sale
portfolio. All actions were taken as a result of a significant
deterioration in creditworthiness. The aggregate amortized costs of the
securities sold were $1.0 million and $19.9 million with a related
investment gain of $-0- million and $.8 million recognized in 1995 and
1994, respectively; the aggregate amortized cost of the securities
transferred was $116.0 million and $42.8 million with gross unrealized
investment losses of $3.2 million and $3.1 million charged to
F-19
consolidated shareholder's equity for the eleven months ended November
30, 1995 and the year ended December 31, 1994, respectively. On December
1, 1995, the Company transferred $4,794.9 million of securities
classified as held to maturity to the available for sale portfolio. As a
result, unrealized gains on fixed maturities increased $395.6 million,
offset by DAC of $126.5 million, amounts attributable to participating
group annuity contracts of $39.2 million and deferred Federal income
taxes of $80.5 million.
For 1996, 1995 and 1994, investment results passed through to certain
participating group annuity contracts as interest credited to
policyholders' account balances amounted to $136.7 million, $131.2
million and $175.8 million, respectively.
In 1996, Alliance acquired the business of Cursitor-Eaton Asset
Management Company and Cursitor Holdings Limited (collectively,
"Cursitor") for approximately $159.0 million. The purchase price
consisted of $94.3 million in cash, 1.8 million of Alliance's publicly
traded units ("Alliance Units"), 6% notes aggregating $21.5 million
payable ratably over four years, and substantial additional
consideration which will be determined at a later date. The excess of
the purchase price, including acquisition costs and minority interest,
over the fair value of Cursitor's net assets acquired resulted in the
recognition of intangible assets consisting of costs assigned to
contracts acquired and goodwill of approximately $122.8 million and
$38.3 million, respectively, which are being amortized over the
estimated useful lives of 20 years. The Company recognized an investment
gain of $20.6 million as a result of the issuance of Alliance Units in
this transaction. At December 31, 1996, the Company's ownership of
Alliance Units was approximately 57.3%.
In 1994, Alliance sold 4.96 million newly issued Alliance Units to third
parties at prevailing market prices. The Company continues to hold its
1% general partnership interest in Alliance. The Company recognized an
investment gain of $52.4 million as a result of these transactions.
Net unrealized investment gains (losses), included in the consolidated
balance sheets as a component of equity and the changes for the
corresponding years, are summarized as follows:
1996 1995 1994
----------- ----------- -----------
(In Millions)
Balance, beginning of year as restated............. $ 396.5 $ (220.5) $ 144.6
Changes in unrealized investment (losses) gains.... (297.6) 1,198.9 (856.7)
Changes in unrealized investment losses
(gains) attributable to:
Participating group annuity contracts.......... - (78.1) 40.8
DAC............................................ 42.3 (216.8) 273.6
Deferred Federal income taxes.................. 48.7 (287.0) 177.2
----------- ---------- -----------
Balance, End of Year............................... $ 189.9 $ 396.5 $ (220.5)
=========== ========== ============
Balance, end of year comprises:
Unrealized investment gains (losses) on:
Fixed maturities............................... $ 357.8 $ 615.9 $ (461.3)
Other equity investments....................... 31.6 31.1 7.7
Other, principally Closed Block................ 53.1 93.1 (5.1)
----------- ---------- ------------
Total........................................ 442.5 740.1 (458.7)
Amounts of unrealized investment (gains)
losses attributable to:
Participating group annuity contracts........ (72.2) (72.2) 5.9
DAC.......................................... (52.0) (94.3) 122.4
Deferred Federal income taxes................ (128.4) (177.1) 109.9
----------- ---------- ------------
Total.............................................. $ 189.9 $ 396.5 $ (220.5)
=========== ========== ============
F-20
6) CLOSED BLOCK
Summarized financial information of the Closed Block follows:
December 31,
-------------------------
1996 1995
----------- -----------
(In Millions)
Assets
Fixed Maturities:
Available for sale, at estimated fair value
(amortized cost, $3,820.7 and $3,662.8)................. $ 3,889.5 $ 3,896.2
Mortgage loans on real estate............................... 1,380.7 1,368.8
Policy loans................................................ 1,765.9 1,797.2
Cash and other invested assets.............................. 336.1 440.9
DAC......................................................... 876.5 792.6
Other assets................................................ 246.3 286.4
----------- -----------
Total Assets................................................ $ 8,495.0 $ 8,582.1
=========== ==========
Liabilities
Future policy benefits and policyholders' account balances.. $ 8,999.7 $ 8,923.5
Other liabilities........................................... 91.6 297.9
----------- -----------
Total Liabilities........................................... $ 9,091.3 $ 9,221.4
=========== ==========
1996 1995 1994
----------- ----------- ----------
(In Millions)
Revenues
Premiums and other revenue......................... $ 724.8 $ 753.4 $ 798.1
Investment income (net of investment
expenses of $27.3, $26.7 and $19.0).............. 546.6 538.9 523.0
Investment losses, net............................. (5.5) (20.2) (24.0)
----------- ----------- ----------
Total revenues............................... 1,265.9 1,272.1 1,297.1
----------- ----------- ----------
Benefits and Other Deductions
Policyholders' benefits and dividends.............. 1,106.3 1,077.6 1,121.6
Other operating costs and expenses................. 34.6 51.3 38.5
----------- ----------- ----------
Total benefits and other deductions.......... 1,140.9 1,128.9 1,160.1
----------- ----------- ----------
Contribution from the Closed Block................. $ 125.0 $ 143.2 $ 137.0
=========== =========== ==========
In the fourth quarter of 1996, the Company adopted SFAS No. 120, which
prescribes the accounting for individual participating life insurance
contracts, most of which are included in the Closed Block. The
implementation of SFAS No. 120 resulted in an increase (decrease) in the
contribution from the Closed Block of $27.5 million, $18.8 million and
$(14.0) million in 1996, 1995 and 1994, respectively.
The fixed maturity portfolio, based on amortized cost, includes $.4
million and $4.3 million at December 31, 1996 and 1995, respectively, of
restructured securities which includes problem fixed maturities of $.3
million and $1.9 million, respectively.
F-21
During the eleven months ended November 30, 1995, one security
classified as held to maturity was sold and ten securities classified as
held to maturity were transferred to the available for sale portfolio.
All actions resulted from significant deterioration in creditworthiness.
The amortized cost of the security sold was $4.2 million. The aggregate
amortized cost of the securities transferred was $81.3 million with
gross unrealized investment losses of $.1 million transferred to equity.
At December 1, 1995, $1,750.7 million of securities classified as held
to maturity were transferred to the available for sale portfolio. As a
result, unrealized gains of $88.5 million on fixed maturities were
recognized, offset by DAC amortization of $52.6 million.
At December 31, 1996 and 1995, problem mortgage loans on real estate had
an amortized cost of $4.3 million and $36.5 million, respectively, and
mortgage loans on real estate for which the payment terms have been
restructured had an amortized cost of $114.2 million and $137.7 million,
respectively. At December 31, 1996 and 1995, the restructured mortgage
loans on real estate amount included $.7 million and $8.8 million,
respectively, of problem mortgage loans on real estate.
Impaired mortgage loans (as defined under SFAS No. 114) along with the
related provision for losses were as follows:
December 31,
-------------------------
1996 1995
------------ ----------
(In Millions)
Impaired mortgage loans with provision for losses....... $ 128.1 $ 106.8
Impaired mortgage loans with no provision for losses.... .6 10.1
------------ ----------
Recorded investment in impaired mortgages............... 128.7 116.9
Provision for losses.................................... 12.9 17.9
------------ ----------
Net Impaired Mortgage Loans............................. $ 115.8 $ 99.0
============ ==========
During 1996 and 1995, respectively, the Closed Block's average recorded
investment in impaired mortgage loans was $153.8 million and $146.9
million, respectively. Interest income recognized on these impaired
mortgage loans totaled $10.9 million and $5.9 million for 1996 and 1995,
respectively, including $4.7 million and $1.3 million recognized on a
cash basis.
Valuation allowances amounted to $13.8 million and $18.4 million on
mortgage loans on real estate and $3.7 million and $4.3 million on
equity real estate at December 31, 1996 and 1995, respectively.
Writedowns of fixed maturities amounted to $12.8 million, $16.8 million
and $15.9 million for 1996, 1995 and 1994, 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.
Many expenses related to Closed Block operations are charged to
operations outside of the Closed Block; accordingly, the contribution
from the Closed Block does not represent the actual profitability of the
Closed Block operations. Operating costs and expenses outside of the
Closed Block are, therefore, disproportionate to the business outside of
the Closed Block.
F-22
7) DISCONTINUED OPERATIONS
Summarized financial information of the GIC Segment follows:
December 31,
--------------------------
1996 1995
----------- -----------
(In Millions)
Assets
Mortgage loans on real estate................. $ 1,111.1 $ 1,485.8
Equity real estate............................ 925.6 1,122.1
Other invested assets......................... 474.0 665.2
Other assets.................................. 226.1 579.3
----------- -----------
Total Assets.................................. $ 2,736.8 $ 3,852.4
============ ===========
Liabilities
Policyholders' liabilities.................... $ 1,335.9 $ 1,399.8
Allowance for future losses................... 262.0 164.2
Amounts due to continuing operations.......... 996.2 2,097.1
Other liabilities............................. 142.7 191.3
----------- -----------
Total Liabilities............................. $ 2,736.8 $ 3,852.4
============ ===========
1996 1995 1994
----------- ---------- -----------
(In Millions)
Revenues
Investment income (net of investment expenses
of $127.5, $153.1 and $183.3).................... $ 245.4 $ 323.6 $ 394.3
Investment (losses) gains, net..................... (18.9) (22.9) 26.8
Policy fees, premiums and other income............. .2 .7 .4
----------- ---------- -----------
Total revenues..................................... 226.7 301.4 421.5
Benefits and other deductions...................... 250.4 326.5 443.2
Losses charged to allowance for future losses...... (23.7) (25.1) (21.7)
----------- ---------- -----------
Pre-tax loss from operations....................... - - -
Pre-tax loss from strengthening of the
allowance for future losses...................... (129.0) - -
Federal income tax benefit......................... 45.2 - -
----------- ---------- -----------
Loss from Discontinued Operations.................. $ (83.8) $ - $ -
=========== ========== ===========
In 1991, management adopted a plan to discontinue the business
operations of the GIC Segment consisting of group non-participating
Wind-Up Annuities and the GIC lines of business. The loss allowance and
premium deficiency reserve of $569.6 million provided for in 1991 were
based on management's best judgment at that time.
The Company's quarterly process for evaluating the loss provisions
applies the current period's results of the discontinued operations
against the allowance, re-estimates future losses, and adjusts the
provisions, if appropriate. Additionally, as part of the Company's
annual planning process which takes place in the fourth quarter of each
year, investment and benefit cash flow projections are prepared. These
updated assumptions and estimates resulted in the need to strengthen the
loss provisions by $129.0 million, resulting in a post-tax charge of
$83.8 million to discontinued operations' results in the fourth quarter
of 1996.
F-23
Management believes the loss provisions for Wind-Up Annuities and GIC
contracts at December 31, 1996 are adequate to provide for all future
losses; however, the determination of loss provisions continues to
involve 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 the discontinued operations differ from management's
current best estimates and assumptions underlying the loss provisions,
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
provisions are likely to result.
In January 1995, continuing operations transferred $1,215.4 million in
cash to the GIC Segment in settlement of its obligation to provide
assets to fund the accumulated deficit of the GIC Segment. Subsequently,
the GIC Segment remitted $1,155.4 million in cash to continuing
operations in partial repayment of borrowings by the GIC Segment. No
gains or losses were recognized on these transactions. Amounts due to
continuing operations at December 31, 1996, consisted of $1,080.0
million borrowed by the discontinued GIC Segment offset by $83.8 million
representing an obligation of continuing operations to provide assets to
fund the accumulated deficit of the GIC Segment.
Investment income included $88.2 million of interest income for 1994 on
amounts due from continuing operations. Benefits and other deductions
includes $114.3 million, $154.6 million and $219.7 million of interest
expense related to amounts borrowed from continuing operations in 1996,
1995 and 1994, respectively.
Valuation allowances amounted to $9.0 million and $19.2 million on
mortgage loans on real estate and $20.4 million and $77.9 million on
equity real estate at December 31, 1996 and 1995, respectively. 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. Writedowns of fixed maturities amounted to $1.6 million, $8.1
million and $17.8 million for 1996, 1995 and 1994, respectively and
writedowns of equity real estate subsequent to the adoption of SFAS No.
121 amounted to $12.3 million for 1996.
The fixed maturity portfolio, based on amortized cost, includes $6.2
million and $15.1 million at December 31, 1996 and 1995, respectively,
of restructured securities. These amounts include problem fixed
maturities of $.5 million and $6.1 million at December 31, 1996 and
1995, respectively.
At December 31, 1996 and 1995, problem mortgage loans on real estate had
amortized costs of $7.9 million and $35.4 million, respectively, and
mortgage loans on real estate for which the payment terms have been
restructured had amortized costs of $208.1 million and $289.3 million,
respectively.
Impaired mortgage loans (as defined under SFAS No. 114) along with the
related provision for losses were as follows:
December 31,
----------------------
1996 1995
---------- ---------
(In Millions)
Impaired mortgage loans with provision for losses......... $ 83.5 $ 105.1
Impaired mortgage loans with no provision for losses...... 15.0 18.2
---------- ---------
Recorded investment in impaired mortgages................. 98.5 123.3
Provision for losses...................................... 8.8 17.7
---------- ---------
Net Impaired Mortgage Loans............................... $ 89.7 $ 105.6
========== =========
F-24
During 1996 and 1995, the GIC Segment's average recorded investment in
impaired mortgage loans was $134.8 million and $177.4 million,
respectively. Interest income recognized on these impaired mortgage
loans totaled $10.1 million and $4.5 million for 1996 and 1995,
respectively, including $7.5 million and $.4 million recognized on a
cash basis.
At December 31, 1996 and 1995, the GIC Segment had $263.0 million and
$310.9 million, respectively, of real estate acquired in satisfaction of
debt.
8) SHORT-TERM AND LONG-TERM DEBT
Short-term and long-term debt consists of the following:
December 31,
--------------------------------
1996 1995
-------------- --------------
(In Millions)
Short-term debt...................................... $ 174.1 $ -
-------------- --------------
Long-term debt:
Equitable Life:
6.95% surplus notes scheduled to mature 2005....... 399.4 399.3
7.70% surplus notes scheduled to mature 2015....... 199.6 199.6
Eurodollar notes, 10.5% due 1997................... - 76.2
Zero coupon note, 11.25% due 1997.................. - 120.1
Other.............................................. .5 16.3
-------------- --------------
Total Equitable Life........................... 599.5 811.5
-------------- --------------
Wholly Owned and Joint Venture Real Estate:
Mortgage notes, 4.92% - 12.50% due through 2006.... 968.6 1,084.4
-------------- --------------
Alliance:
Other.............................................. 24.7 3.4
-------------- --------------
Total long-term debt................................. 1,592.8 1,899.3
-------------- --------------
Total Short-term and Long-term Debt.................. $ 1,766.9 $ 1,899.3
============== ==============
Short-term Debt
Equitable Life has a $350.0 million bank credit facility available to
fund short-term working capital needs and to facilitate the securities
settlement process. The credit facility consists of two types of
borrowing options with varying interest rates. The interest rates are
based on external indices dependent on the type of borrowing and at
December 31, 1996 range from 5.73% (the London Interbank Offered Rate
("LIBOR") plus 22.5 basis points) to 8.25% (the prime rate). There were
no borrowings outstanding under this bank credit facility at December
31, 1996.
F-25
Equitable Life has a commercial paper program with an issue limit of
$500.0 million. This program is available for general corporate purposes
used to support Equitable Life's liquidity needs and is supported by
Equitable Life's existing $350.0 million five-year bank credit facility.
There were no borrowings outstanding under this program at December 31,
1996.
In February 1996, Alliance entered into a new $250.0 million five-year
revolving credit facility with a group of banks which replaced its
$100.0 million revolving credit facility and its $100.0 million
commercial paper back-up revolving credit facility. Under the new
revolving credit facility, the interest rate, at the option of Alliance,
is a floating rate generally based upon a defined prime rate, a rate
related to the LIBOR or the Federal Funds rate. A facility fee is
payable on the total facility. The revolving credit facility will be
used to provide back-up liquidity for commercial paper to be used under
Alliance's $100.0 million commercial paper program, to fund commission
payments to financial intermediaries for the sale of Class B and C
shares under Alliance's mutual fund distribution system, and for general
working capital purposes. As of December 31, 1996, Alliance had not
issued any commercial paper under its $100.0 million commercial paper
program and there were no borrowings outstanding under Alliance's
revolving credit facility.
At December 31, 1996, long-term debt expected to mature in 1997 totaling
$174.1 million was reclassified as short-term debt.
Long-term Debt
Several of the long-term debt agreements have restrictive covenants
related to the total amount of debt, net tangible assets and other
matters. The Company is in compliance with all debt covenants.
On December 18, 1995, Equitable Life issued, in accordance with Section
1307 of the New York Insurance Law, $400.0 million of surplus notes
having an interest rate of 6.95% scheduled to mature in 2005 and $200.0
million of surplus notes having an interest rate of 7.70% scheduled to
mature in 2015 (together, the "Surplus Notes"). Proceeds from the
issuance of the Surplus Notes were $596.6 million, net of related
issuance costs. The unamortized discount on the Surplus Notes was $1.0
million at December 31, 1996. Payments of interest on or principal of
the Surplus Notes are subject to prior approval by the Superintendent.
The Company has pledged real estate, mortgage loans, cash and securities
amounting to $1,406.4 million and $1,629.7 million at December 31, 1996
and 1995, respectively, as collateral for certain long-term debt.
At December 31, 1996, aggregate maturities of the long-term debt based
on required principal payments at maturity for 1997 and the succeeding
four years are $494.9 million, $316.7 million, $19.7 million, $5.4
million, $0 million, respectively, and $946.7 million thereafter.
9) FEDERAL INCOME TAXES
A summary of the Federal income tax expense (benefit) in the
consolidated statements of earnings is shown below:
1996 1995 1994
----------- ---------- ----------
(In Millions)
Federal income tax expense (benefit):
Current.................................. $ 97.9 $ (11.7) $ 4.0
Deferred................................. (88.2) 132.2 96.2
----------- ---------- ----------
Total...................................... $ 9.7 $ 120.5 $ 100.2
=========== ========== ==========
F-26
The Federal income taxes attributable to consolidated operations are
different from the amounts determined by multiplying the earnings before
Federal income taxes and minority interest by the expected Federal
income tax rate of 35%. The sources of the difference and the tax
effects of each are as follows:
1996 1995 1994
------------ ---------- ----------
(In Millions)
Expected Federal income tax expense........ $ 73.0 $ 173.7 $ 154.5
Non-taxable minority interest.............. (28.6) (22.0) (17.6)
Differential earnings amount............... - - (16.8)
Adjustment of tax audit reserves........... 6.9 4.1 (4.6)
Equity in unconsolidated subsidiaries...... (32.3) (19.4) (12.5)
Other...................................... (9.3) (15.9) (2.8)
------------ ---------- ----------
Federal Income Tax Expense................. $ 9.7 $ 120.5 $ 100.2
============ =========== ===========
Prior to the date of demutualization, Equitable Life reduced its
deduction for policyholder dividends by the differential earnings
amount. This amount was computed, for each tax year, by multiplying
Equitable Life's average equity base, as determined for tax purposes, by
an estimate of the excess of an imputed earnings rate for stock life
insurance companies over the average mutual life insurance companies'
earnings rate. The differential earnings amount for each tax year was
subsequently recomputed when actual earnings rates were published by the
Internal Revenue Service. As a stock life insurance company, Equitable
Life no longer is required to reduce its policyholder dividend deduction
by the differential earnings amount, but differential earnings amounts
for pre-demutualization years were still being recomputed in 1994.
The components of the net deferred Federal income tax account are as
follows:
December 31, 1996 December 31, 1995
------------------------- -------------------------
Assets Liabilities Assets Liabilities
----------- ------------- ---------- ------------
(In Millions)
DAC, reserves and reinsurance.......... $ - $ 166.0 $ - $ 304.4
Investments............................ - 328.6 - 326.9
Compensation and related benefits...... 259.2 - 293.0 -
Other.................................. - 1.8 - 32.3
----------- ------------- ---------- ------------
Total.................................. $ 259.2 $ 496.4 $ 293.0 $ 663.6
=========== ============= ========== ============
The deferred Federal income taxes impacting operations reflect the net
tax effects of temporary differences between the carrying amounts of
assets and liabilities for financial reporting purposes and the amounts
used for income tax purposes. The sources of these temporary differences
and the tax effects of each are as follows:
1996 1995 1994
--------- ---------- ---------
(In Millions)
DAC, reserves and reinsurance......... $(156.2) $ 63.3 $ 12.0
Investments........................... 78.6 13.0 89.3
Compensation and related benefits..... 22.3 30.8 10.0
Other................................. (32.9) 25.1 (15.1)
--------- ---------- ---------
Deferred Federal Income Tax
(Benefit) Expense................... $ (88.2) $ 132.2 $ 96.2
========= ========== =========
F-27
The Internal Revenue Service is in the process of examining the Holding
Company's consolidated Federal income tax returns for the years 1989
through 1991. Management believes these audits will have no material
adverse effect on the Company's results of operations.
10) REINSURANCE AGREEMENTS
The Insurance Group assumes and cedes reinsurance with other insurance
companies. The Insurance Group evaluates the financial condition of its
reinsurers to minimize its exposure to significant losses from reinsurer
insolvencies. The effect of reinsurance (excluding group life and
health) is summarized as follows:
1996 1995 1994
----------- ----------- -----------
(In Millions)
Direct premiums............................... $ 461.4 $ 474.2 $ 476.7
Reinsurance assumed........................... 177.5 171.3 180.5
Reinsurance ceded............................. (41.3) (38.7) (31.6)
----------- ----------- -----------
Premiums...................................... $ 597.6 $ 606.8 $ 625.6
=========== ========== ===========
Universal Life and Investment-type Product
Policy Fee Income Ceded..................... $ 48.2 $ 44.0 $ 27.5
=========== ========== ===========
Policyholders' Benefits Ceded................. $ 54.1 $ 48.9 $ 20.7
=========== ========== ===========
Interest Credited to Policyholders' Account
Balances Ceded.............................. $ 32.3 $ 28.5 $ 25.4
=========== ========== ===========
Effective January 1, 1994, all in force business above $5.0 million was
reinsured. During 1996, the Company's retention limit on joint
survivorship policies was increased to $15.0 million. The Insurance
Group also reinsures the entire risk on certain substandard underwriting
risks as well as in certain other cases.
The Insurance Group cedes 100% of its group life and health business to
a third party insurance company. Premiums ceded totaled $2.4 million,
$260.6 million and $241.0 million for 1996, 1995 and 1994, respectively.
Ceded death and disability benefits totaled $21.2 million, $188.1
million and $235.5 million for 1996, 1995 and 1994, respectively.
Insurance liabilities ceded totaled $652.4 million and $724.2 million at
December 31, 1996 and 1995, respectively.
11) EMPLOYEE BENEFIT PLANS
The Company sponsors qualified and non-qualified defined benefit plans
covering substantially all employees (including certain qualified
part-time employees), managers and certain agents. The pension plans are
non-contributory. Equitable Life's and EREIM's benefits are based on a
cash balance formula or years of service and final average earnings, if
greater, under certain grandfathering rules in the plans. Alliance's
benefits are based on years of credited service, average final base
salary and primary social security benefits. The Company's funding
policy is to make the minimum contribution required by the Employee
Retirement Income Security Act of 1974.
Components of net periodic pension cost (credit) for the qualified and
non-qualified plans are as follows:
1996 1995 1994
----------- ---------- ---------
(In Millions)
Service cost....................................... $ 33.8 $ 30.0 $ 30.3
Interest cost on projected benefit obligations..... 120.8 122.0 111.0
Actual return on assets............................ (181.4) (309.2) 24.4
Net amortization and deferrals..................... 43.4 155.6 (142.5)
----------- ---------- ---------
Net Periodic Pension Cost (Credit)................. $ 16.6 $ (1.6) $ 23.2
=========== ========= ==========
F-28
The funded status of the qualified and non-qualified pension plans is as
follows:
December 31,
--------------------------
1996 1995
------------ -----------
(In Millions)
Actuarial present value of obligations:
Vested.............................................. $1,672.2 $ 1,642.4
Non-vested.......................................... 10.1 10.9
------------ -----------
Accumulated Benefit Obligation........................ $1,682.3 $ 1,653.3
=========== ============
Plan assets at fair value............................. $1,626.0 $ 1,503.8
Projected benefit obligation.......................... 1,765.5 1,743.0
----------- ------------
Projected benefit obligation in excess of plan assets. (139.5) (239.2)
Unrecognized prior service cost....................... (17.9) (25.5)
Unrecognized net loss from past experience different
from that assumed................................... 280.0 368.2
Unrecognized net asset at transition.................. 4.7 (7.3)
Additional minimum liability.......................... (19.3) (51.9)
------------ -----------
Prepaid Pension Cost.................................. $ 108.0 $ 44.3
=========== ============
The discount rate and rate of increase in future compensation levels
used in determining the actuarial present value of projected benefit
obligations were 7.5% and 4.25%, respectively, at December 31, 1996 and
7.25% and 4.50%, respectively, at December 31, 1995. As of January 1,
1996 and 1995, the expected long-term rate of return on assets for the
retirement plan was 10.25% and 11%, respectively.
The Company recorded, as a reduction of shareholder's equity, an
additional minimum pension liability of $12.9 million and $35.1 million,
net of Federal income taxes, at December 31, 1996 and 1995,
respectively, representing the excess of the accumulated benefit
obligation over the fair value of plan assets and accrued pension
liability.
The pension plan's assets include corporate and government debt
securities, equity securities, equity real estate and shares of Group
Trusts managed by Alliance.
Prior to 1987, the qualified plan funded participants' benefits through
the purchase of non-participating annuity contracts from Equitable Life.
Benefit payments under these contracts were approximately $34.7 million,
$36.4 million and $38.1 million for 1996, 1995 and 1994, respectively.
The Company provides certain medical and life insurance benefits
(collectively, "postretirement benefits") for qualifying employees,
managers and agents retiring from the Company on or after attaining age
55 who have at least 10 years of service. The life insurance benefits
are related to age and salary at retirement. The costs of postretirement
benefits are recognized in accordance with the provisions of SFAS No.
106. The Company continues to fund postretirement benefits costs on a
pay-as-you-go basis and, for 1996, 1995 and 1994, the Company made
estimated postretirement benefits payments of $18.9 million, $31.1
million and $29.8 million, respectively.
F-29
The following table sets forth the postretirement benefits plan's
status, reconciled to amounts recognized in the Company's consolidated
financial statements:
1996 1995 1994
---------- ----------- ---------
(In Millions)
Service cost....................................... $ 5.3 $ 4.0 $ 3.9
Interest cost on accumulated postretirement
benefits obligation.............................. 34.6 34.7 28.6
Net amortization and deferrals..................... 2.4 (2.3) (3.9)
---------- ----------- ---------
Net Periodic Postretirement Benefits Costs......... $ 42.3 $ 36.4 $ 28.6
========== =========== =========
December 31,
-------------------------
1996 1995
----------- -----------
(In Millions)
Accumulated postretirement benefits obligation:
Retirees............................................. $ 381.8 $ 391.8
Fully eligible active plan participants.............. 50.7 50.4
Other active plan participants....................... 60.7 64.2
----------- -----------
493.2 506.4
Unrecognized prior service cost........................ 50.5 56.3
Unrecognized net loss from past experience different
from that assumed and from changes in assumptions.... (150.5) (181.3)
----------- -----------
Accrued Postretirement Benefits Cost................... $ 393.2 $ 381.4
=========== ===========
At January 1, 1994, medical benefits available to retirees under age 65
are the same as those offered to active employees and medical benefits
will be limited to 200% of 1993 costs for all participants.
The assumed health care cost trend rate used in measuring the
accumulated postretirement benefits obligation was 9.5% in 1996,
gradually declining to 3.5% in the year 2009 and in 1995 was 10%,
gradually declining to 3.5% in the year 2008. The discount rate used in
determining the accumulated postretirement benefits obligation was 7.50%
and 7.25% at December 31, 1996 and 1995, respectively.
If the health care cost trend rate assumptions were increased by 1%, the
accumulated postretirement benefits obligation as of December 31, 1996
would be increased 7%. The effect of this change on the sum of the
service cost and interest cost would be an increase of 8%.
12) DERIVATIVES AND FAIR VALUE OF FINANCIAL INSTRUMENTS
Derivatives
The Insurance Group primarily uses derivatives for asset/liability risk
management and for hedging individual securities. Derivatives mainly are
utilized to reduce the Insurance Group's exposure to interest rate
fluctuations. Accounting for interest rate swap transactions is on an
accrual basis. Gains and losses related to interest rate swap
transactions are amortized as yield adjustments over the remaining life
of the underlying hedged security. Income and expense resulting from
interest rate swap activities are reflected in net investment income.
The notional amount of matched interest rate swaps outstanding at
December 31, 1996 was $649.9 million. The average unexpired terms at
December 31, 1996 range from 2.2 to 2.7 years. At December 31, 1996, the
cost of terminating outstanding matched swaps in a loss position was
$8.3 million and the unrealized gain on outstanding matched swaps in a
gain position was $11.4 million. The Company has no intention of
terminating these contracts prior to maturity. During 1996, 1995 and
1994, net gains (losses) of $.2 million, $1.4 million and $(.2) million,
respectively, were recorded in connection with interest rate swap
F-30
activity. Equitable Life has implemented an interest rate cap program
designed to hedge crediting rates on interest-sensitive individual
annuities contracts. The outstanding notional amounts at December 31,
1996 of contracts purchased and sold were $5,050.0 million and $500.0
million, respectively. The net premium paid by Equitable Life on these
contracts was $22.5 million and is being amortized ratably over the
contract periods ranging from 3 to 5 years. Income and expense resulting
from this program are reflected as an adjustment to interest credited to
policyholders' account balances.
Substantially all of DLJ's business related to derivatives is by its
nature trading activities which are primarily for the purpose of
customer accommodations. DLJ's derivative activities consist primarily
of option writing and trading in forward and futures contracts.
Derivative financial instruments have both on-and-off balance sheet
implications depending on the nature of the contracts. DLJ's involvement
in swap contracts is not significant.
Fair Value of Financial Instruments
The Company defines fair value as the quoted market prices for those
instruments that are actively traded in financial markets. In cases
where quoted market prices are not available, fair values are estimated
using present value or other valuation techniques. The fair value
estimates are made at a specific point in time, based on available
market information and judgments about the financial instrument,
including estimates of timing, amount of expected future cash flows and
the credit standing of counterparties. Such estimates do not reflect any
premium or discount that could result from offering for sale at one time
the Company's entire holdings of a particular financial instrument, nor
do they consider the tax impact of the realization of unrealized gains
or losses. In many cases, the fair value estimates cannot be
substantiated by comparison to independent markets, nor can the
disclosed value be realized in immediate settlement of the instrument.
Certain financial instruments are excluded, particularly insurance
liabilities other than financial guarantees and investment contracts.
Fair market value of off-balance-sheet financial instruments of the
Insurance Group was not material at December 31, 1996 and 1995.
Fair value for mortgage loans on real estate are estimated by
discounting future contractual cash flows using interest rates at which
loans with similar characteristics and credit quality would be made.
Fair values for foreclosed mortgage loans and problem mortgage loans are
limited to the estimated fair value of the underlying collateral if
lower.
The estimated fair values for the Company's liabilities under GIC and
association plan contracts are estimated using contractual cash flows
discounted based on the T. Rowe Price GIC Index Rate for the appropriate
duration. For durations in excess of the published index rate, the
appropriate Treasury rate is used plus a spread equal to the longest
duration GIC rate spread published.
The estimated fair values for those group annuity contracts which are
classified as universal life type contracts are measured at the
estimated fair value of the underlying assets. The estimated fair values
for single premium deferred annuities ("SPDA") are estimated using
projected cash flows discounted at current offering rates. The estimated
fair values for supplementary contracts not involving life contingencies
("SCNILC") and annuities certain are derived using discounted cash flows
based upon the estimated current offering rate.
Fair value for long-term debt is determined using published market
values, where available, or contractual cash flows discounted at market
interest rates. The estimated fair values for non-recourse mortgage debt
are determined by discounting contractual cash flows at a rate which
takes into account the level of current market interest rates and
collateral risk. The estimated fair values for recourse mortgage debt
are determined by discounting contractual cash flows at a rate based
upon current interest rates of other companies with credit ratings
similar to the Company. The Company's fair value of short-term
borrowings approximates their carrying value.
F-31
The following table discloses carrying value and estimated fair value
for financial instruments not otherwise disclosed in Notes 3, 6 and 7:
December 31,
-------------------------------------------------------
1996 1995
------------------------ ----------------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
------------ ----------- ------------ ------------
(In Millions)
Consolidated Financial Instruments:
Mortgage loans on real estate.......... $ 3,133.0 $ 3,394.6 $ 3,638.3 $ 3,973.6
Other joint ventures................... 467.0 467.0 492.7 492.7
Policy loans........................... 2,196.1 2,221.6 1,976.4 2,057.5
Policyholders' account balances:
Association plans.................... 78.1 77.3 101.0 100.0
Group annuity contracts.............. 2,141.0 1,954.0 2,335.0 2,395.0
SPDA................................. 1,062.7 1,065.7 1,265.8 1,272.0
Annuities certain and SCNILC......... 654.9 736.2 646.4 716.7
Long-term debt......................... 1,592.8 1,557.7 1,899.3 1,962.9
Closed Block Financial Instruments:
Mortgage loans on real estate.......... 1,380.7 1,425.6 1,368.8 1,461.4
Other equity investments............... 105.0 105.0 151.6 151.6
Policy loans........................... 1,765.9 1,798.0 1,797.2 1,891.4
SCNILC liability....................... 30.6 34.9 34.8 39.6
GIC Segment Financial Instruments:
Mortgage loans on real estate.......... 1,111.1 1,220.3 1,485.8 1,666.1
Fixed maturities....................... 42.5 42.5 107.4 107.4
Other equity investments............... 300.5 300.5 455.9 455.9
Guaranteed interest contracts.......... 290.7 300.5 329.0 352.0
Long-term debt......................... 102.1 102.2 135.1 136.0
13) COMMITMENTS AND CONTINGENT LIABILITIES
The Company has provided, from time to time, certain guarantees or
commitments to affiliates, investors and others. These arrangements
include commitments by the Company, under certain conditions: to make
capital contributions of up to $244.9 million to affiliated real estate
joint ventures; to provide equity financing to certain limited
partnerships of $205.8 million at December 31, 1996, under existing loan
or loan commitment agreements; and to provide short-term financing loans
which at December 31, 1996 totaled $14.6 million. Management believes
the Company will not incur any material losses as a result of these
commitments.
Equitable Life is the obligor under certain structured settlement
agreements which it had entered into with unaffiliated insurance
companies and beneficiaries. To satisfy its obligations under these
agreements, Equitable Life owns single premium annuities issued by
previously wholly owned life insurance subsidiaries. Equitable Life has
directed payment under these annuities to be made directly to the
beneficiaries under the structured settlement agreements. A contingent
liability exists with respect to these agreements should the previously
wholly owned subsidiaries be unable to meet their obligations.
Management believes the satisfaction of those obligations by Equitable
Life is remote.
At December 31, 1996, the Insurance Group had $51.6 million of letters
of credit outstanding.
F-32
14) LITIGATION
A number of lawsuits has been filed against life and health insurers in
the jurisdictions in which Equitable Life and its subsidiaries do
business involving insurers' sales practices, alleged agent misconduct,
failure to properly supervise agents, and other matters. Some of the
lawsuits have resulted in the award of substantial judgments against
other insurers, including material amounts of punitive damages, or in
substantial settlements. In some states, juries have substantial
discretion in awarding punitive damages. Equitable Life, EVLICO and The
Equitable of Colorado, Inc. ("EOC"), like other life and health
insurers, from time to time are involved in such litigation. To date, no
such lawsuit has resulted in an award or settlement of any material
amount against the Company. Among litigations pending against Equitable
Life, EVLICO and EOC of the type referred to in this paragraph are the
litigations described in the following eight paragraphs.
An action entitled Golomb et al. v. The Equitable Life Assurance Society
of the United States was filed on January 20, 1995 in New York County
Supreme Court. The action purports to be brought on behalf of a class of
persons insured after 1983 under Lifetime Guaranteed Renewable Major
Medical Insurance Policies issued by Equitable Life (the "policies").
The complaint alleges that premium increases for these policies after
1983, all of which were filed with and approved by the New York State
Insurance Department and certain other state insurance departments,
breached the terms of the policies, and that statements in the policies
and elsewhere concerning premium increases constituted fraudulent
concealment, misrepresentations in violation of New York Insurance Law
Section 4226 and deceptive practices under New York General Business Law
Section 349. The complaint seeks a declaratory judgment, injunctive
relief restricting the methods by which Equitable Life increases
premiums on the policies in the future, a refund of premiums, and
punitive damages. Plaintiffs also have indicated that they will seek
damages in an unspecified amount. Equitable Life moved to dismiss the
complaint in its entirety on the grounds that it fails to state a claim
and that uncontroverted documentary evidence establishes a complete
defense to the claims. On May 29, 1996, the New York County Supreme
Court entered a judgment dismissing the complaint with prejudice.
Plaintiffs have filed a notice of appeal of that judgment.
In January 1996, separate actions were filed in Pennsylvania and Texas
state courts (entitled, respectively, Malvin et al. v. The Equitable
Life Assurance Society of the United States and Bowler et al. v. The
Equitable Life Assurance Society of the United States), making claims
similar to those in the New York action described above. The Texas
action also claims that Equitable Life misrepresented to Texas
policyholders that the Texas Insurance Department had approved Equitable
Life's rate increases. These actions are asserted on behalf of proposed
classes of Pennsylvania issued or renewed policyholders and Texas issued
or renewed policyholders, insured under the policies. The Pennsylvania
and Texas actions seek compensatory and punitive damages and injunctive
relief restricting the methods by which Equitable Life increases
premiums in the future based on the common law and statutes of those
states. On February 9, 1996, Equitable Life removed the Pennsylvania
action, Malvin, 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, to the United States
District Court for the Northern District of Texas. On May 20, 1996, the
plaintiffs in Bowler amended their complaint by adding allegations of
misrepresentation regarding premium increases on other types of
guaranteed renewable major medical insurance policies issued by
Equitable Life up to and including 1983. On July 1, 1996, Equitable Life
filed a motion for summary judgment dismissing the first amended
complaint in its entirety. In August, 1996, the court granted plaintiffs
leave to file a supplemental complaint on behalf of a proposed class of
Texas policyholders claiming unfair discrimination, breach of contract
and other claims arising out of alleged differences between premiums
charged to Texas policyholders and premiums charged to similarly
situated policyholders in New York and certain other states. Plaintiffs
seek refunds of alleged overcharges, exemplary or additional damages
citing Texas statutory provisions which among other things, permit two
F-33
times the amount of actual damage plus additional penalties if the acts
complained of are found to be knowingly committed, and injunctive
relief. Equitable Life has also filed a motion for summary judgment
dismissing the supplemental complaint in its entirety. Plaintiffs also
obtained permission to add another plaintiff to the first amended and
supplemental complaints. Plaintiffs have opposed both motions for
summary judgment and requested that certain issues be found in their
favor. Equitable Life is in the process of replying.
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. Equitable Life has answered the complaint, denying the
material allegations and asserting certain affirmative defenses. On
December 6, 1996, Equitable Life filed a motion for summary judgment and
plaintiff is expected to file its response to that motion shortly.
On November 6, 1996, a proposed class action entitled Fletcher, et al.
v. The Equitable Life Assurance Society of the United States, was filed
in California Superior Court for Fresno County, making substantially the
same allegations concerning premium rates and premium rate increases on
guaranteed renewable policies made in the Bowler action. The complaint
alleges, among other things, that differentials between rates charged
California policyholders and policyholders in New York and certain other
states, and the methods used by Equitable Life to calculate premium
increases, breached the terms of its policies, that Equitable Life
misrepresented and concealed the facts pertaining to such differentials
and methods in violation of California law, and that Equitable Life also
misrepresented that its rate increases were approved by the California
Insurance Department. Plaintiffs seek compensatory damages in an
unspecified amount, rescission, injunctive relief and attorneys' fees.
Equitable Life removed the action to Federal court; plaintiff has moved
to remand the case to state 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 the Golomb, Malvin, Bowler, Bachman and Fletcher
litigations should not have a material adverse effect on the financial
position of the Company. Due to the early stage of such litigations, the
Company's management cannot make an estimate of loss, if any, or predict
whether or not such litigations will have a material adverse effect on
the Company's results of operations in any particular period.
An action was instituted on April 6, 1995 against Equitable Life and its
wholly owned subsidiary, EOC, in New York state court, entitled Sidney
C. Cole et al. v. The Equitable Life Assurance Society of the United
States and The Equitable of Colorado, Inc., No. 95/108611 (N. Y.
County). The action is brought by the holders of a joint survivorship
whole life policy issued by EOC. The action purports to be on behalf of
a class consisting of all persons who from January 1, 1984 purchased
life insurance policies sold by Equitable Life and EOC based upon their
allegedly uniform sales presentations and policy illustrations. The
complaint puts in issue various alleged sales practices that plaintiffs
assert, among other things, misrepresented the stated number of years
that the annual premium would need to be paid. Plaintiffs seek damages
in an unspecified amount, imposition of a constructive trust, and seek
to enjoin Equitable Life and EOC from engaging in the challenged sales
practices. 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 made a motion for reargument with respect
to this order, which was submitted to the court in October 1996. This
motion was denied by the court on December 16, 1996.
F-34
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 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. On September 21, 1996 Equitable Life, EVLICO and EOC made a motion
to have this proceeding moved from Kings County Supreme Court to New
York County for joint trial or consolidation with the Cole action. The
motion was denied by the court on January 9, 1997. On January 10, 1997,
plaintiffs moved for certification of a nationwide class consisting of
all persons or entities who were sold one or more life insurance
products on a "vanishing premium" basis and/or were allegedly induced to
purchase additional policies from EVLICO, using the cash value
accumulated in existing policies, from January 1, 1980 through and
including December 31, 1996. Plaintiffs further moved to have Michael
Bradley designated as the class representative. Discovery regarding
class certification is underway.
On December 12, 1996, an action entitled Robert E. Dillon v. The
Equitable Life Assurance Society of the United States and The Equitable
of Colorado, was commenced in the United States District Court for the
Southern District of Florida. The action is brought by an individual who
purchased a joint whole life policy from EOC. The complaint puts at
issue various alleged sales practices and alleges misrepresentations
concerning the alleged impropriety of replacement policies issued by
Equitable Life and EOC and alleged misrepresentations regarding the
number of years premiums would have to be paid on the defendants'
policies. Plaintiff brings claims for breach of contract, fraud,
negligent misrepresentation, money had and received, unjust enrichment
and imposition of a constructive trust. Plaintiff purports to represent
two classes of persons. The first is a "contract class," consisting of
all persons who purchased whole or universal life insurance policies
from Equitable Life and EOC and from whom Equitable Life and EOC have
sought additional payments beyond the number of years allegedly promised
by Equitable Life and EOC. The second is a "fraud class," consisting of
all persons with an interest in policies issued by Equitable Life and
EOC at any time since October 1, 1986. Plaintiff seeks damages in an
unspecified amount, and also seeks injunctive relief attaching Equitable
Life's and EOC's profits from their alleged sales practices. Equitable
Life's and EOC's time to answer or move with respect to the complaint
has been extended until February 24, 1997. Although the outcome of
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 Cole, Duncan, Bradley and Dillon litigations should
not have a material adverse effect on the financial position of the
Company. Due to the early stages of such litigations, the Company's
management cannot make an estimate of loss, if any, or predict whether
or not any such litigation will have a material adverse effect on the
Company's results of operations in any particular period.
On January 3, 1996, an amended complaint was filed in an action entitled
Frank Franze Jr. and George Busher, individually and on behalf of all
others similarly situated v. The Equitable Life Assurance Society of the
United States, and Equitable Variable Life Insurance Company, No.
94-2036 in the United States District Court for the Southern District of
Florida. The action was brought by two individuals who purchased
variable life insurance policies. The plaintiffs purport to represent a
nationwide class consisting of all persons who purchased variable life
insurance policies from Equitable Life and EVLICO since September 30,
1991. The basic allegation of the amended complaint is that Equitable
Life's and EVLICO's agents were trained not to disclose fully that the
F-35
product being sold was life insurance. Plaintiffs allege violations of
the Federal securities laws and seek rescission of the contracts or
compensatory damages and attorneys' fees and expenses. The court denied
Equitable Life and EVLICO's motion to dismiss the amended complaint on
September 24, 1996. Equitable Life and EVLICO have answered the amended
complaint, denying the material allegations and asserting certain
affirmative defenses. Currently, the parties are conducting discovery in
connection with plaintiffs' attempt to certify a class. On January 9,
1997, an action entitled Rosemarie Chaviano, individually and on behalf
of all others similarly situated v. The Equitable Life Assurance Society
of the United States, and Equitable Variable Life Insurance Company, was
filed in Massachusetts state court making claims similar to those in the
Franze action and alleging violations of the Massachusetts securities
laws. The plaintiff purports to represent all persons in Massachusetts
who purchased variable life insurance contracts from Equitable Life and
EVLICO from January 9, 1993 to the present. The Massachusetts action
seeks rescission of the contracts or compensatory damages, attorneys'
fees, expenses and injunctive relief. 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 any
such litigation will have a material adverse effect on the Company's
results of operations in any particular period.
Equitable Life recently responded to a subpoena from the U.S. Department
of Labor ("DOL") requesting copies of any third-party appraisals in
Equitable Life's possession relating to the ten largest properties (by
value) in the Prime Property Fund ("PPF"). PPF is an open-end,
commingled real estate separate account of Equitable Life for pension
clients. Equitable Life serves as investment manager in PPF and has
retained EREIM as advisor. In early 1995, the DOL commenced a national
investigation of commingled real estate funds with pension investors,
including PPF. The investigation now appears to be focused principally
on appraisal and valuation procedures in respect of fund properties. The
most recent request from the DOL seems to reflect, at least in part, an
interest in the relationship between the valuations for those properties
reflected in appraisals prepared for local property tax proceedings and
the valuations used by PPF for other purposes. At no time has the DOL
made any specific allegation that Equitable Life or EREIM has acted
improperly and Equitable Life and EREIM believe that any such allegation
would be without foundation. While the outcome of this investigation
cannot be predicted with certainty, in the opinion of management, the
ultimate resolution of this matter should not have a material adverse
effect on the Company's consolidated financial position or results of
operations in any particular period.
Equitable Casualty Insurance Company ("Casualty"), an indirect wholly
owned subsidiary of Equitable Life, is party to an arbitration
proceeding that commenced in August 1995. The proceeding relates to a
dispute among Casualty, Houston General Insurance Company ("Houston
General") and GEICO General Insurance Company ("GEICO General")
regarding the interpretation of a reinsurance agreement. The arbitration
panel issued a final award in favor of Casualty and GEICO General on
June 17, 1996. Casualty and GEICO General moved in the pending Texas
state court action, with Houston General's consent, for an order
confirming the arbitration award and entering judgment dismissing the
action. The motion was granted on January 29, 1997. The parties have
also stipulated to the dismissal without prejudice of a related Texas
Federal court action brought by Houston General against GEICO General
and Equitable Life. In connection with confirmation of the arbitration
award, Houston General paid to Casualty approximately $839,600 in
settlement of certain reimbursement claims by Casualty against Houston
General.
On July 25, 1995, a Consolidated and Supplemental Class Action Complaint
("Complaint") was filed against the Alliance North American Government
Income Trust, Inc. (the "Fund"), Alliance and certain other defendants
affiliated with Alliance, including the Holding Company, alleging
violations of Federal securities laws, fraud and breach of fiduciary
duty in connection with the Fund's investments in Mexican and Argentine
securities. The Complaint, which seeks certification of a plaintiff
class of persons who purchased or owned Class A, B or C shares of the
Fund from March 27, 1992 through December 23, 1994, seeks an unspecified
amount of damages, costs, attorneys' fees and punitive damages. The
principal allegations of the Complaint are that the Fund purchased debt
securities issued by the Mexican and Argentine governments in amounts
F-36
that were not permitted by the Fund's investment objective, and that
there was no shareholder vote to change the investment objective to
permit purchases in such amounts. The Complaint further alleges that the
decline in the value of the Mexican and Argentine securities held by the
Fund caused the Fund's net asset value to decline to the detriment of
the Fund's shareholders. On September 26, 1996, the United States
District Court for the Southern District of New York granted the
defendants' motion to dismiss all counts of the complaint. On October
11, 1996, plaintiffs filed a motion for reconsideration of the court's
decision granting defendants' motion to dismiss the Complaint. On
November 25, 1996, the court denied plaintiffs' motion for
reconsideration. On October 29, 1996, plaintiffs filed a motion for
leave to file an amended complaint. The principal allegations of the
proposed amended complaint are that the Fund did not properly disclose
that it planned to invest in mortgage-backed derivative securities and
that two advertisements used by the Fund misrepresented the risks of
investing in the Fund. Plaintiffs also reiterated allegations in the
Complaint that the Fund failed to hedge against the risks of investing
in foreign securities despite representations that it would do so.
Alliance believes that the allegations in the Complaint are without
merit and intends to vigorously defend against these claims. While the
ultimate outcome of this matter cannot be determined at this time,
management of Alliance does not expect that it will have a material
adverse effect on Alliance's results of operations or financial
condition.
On January 26, 1996, a purported purchaser of certain notes and warrants
to purchase shares of common stock of Rickel Home Centers, Inc.
("Rickel") filed a class action complaint against Donaldson, Lufkin &
Jenrette Securities Corporation ("DLJSC") and certain other defendants
for unspecified compensatory and punitive damages in the United States
District Court for the Southern District of New York. The suit was
brought on behalf of the purchasers of 126,457 units consisting of
$126,457,000 aggregate principal amount of 13 1/2% senior notes due 2001
and 126,457 warrants to purchase shares of common stock of Rickel issued
by Rickel in October 1994. The complaint alleges violations of Federal
securities laws and common law fraud against DLJSC, as the underwriter
of the units and as an owner of 7.3% of the common stock of Rickel, Eos
Partners, L.P., and General Electric Capital Corporation, each as owners
of 44.2% of the common stock of Rickel, and members of the Board of
Directors of Rickel, including a DLJSC Managing Director. The complaint
seeks to hold DLJSC liable for alleged misstatements and omissions
contained in the prospectus and registration statement filed in
connection with the offering of the units, alleging that the defendants
knew of financial losses and a decline in value of Rickel in the months
prior to the offering and did not disclose such information. The
complaint also alleges that Rickel failed to pay its semi-annual
interest payment due on the units on December 15, 1995 and that Rickel
filed a voluntary petition for reorganization pursuant to Chapter 11 of
the United States Bankruptcy Code on January 10, 1996. DLJSC intends to
defend itself vigorously against all of the allegations contained in the
complaint. Although there can be no assurance, DLJ does not believe the
outcome of this litigation will have a material adverse effect on its
financial condition. Due to the early stage of this litigation, based on
the information currently available to it, DLJ's management cannot make
an estimate of loss, if any, or predict whether or not such litigation
will have a material adverse effect on DLJ's results of operations in
any particular period.
In October 1995, DLJSC was named as a defendant in a purported class
action filed in a Texas State Court on behalf of the holders of $550.0
million principal amount of subordinated redeemable discount debentures
of National Gypsum Corporation ("NGC") canceled in connection with a
Chapter 11 plan of reorganization for NGC consummated in July 1993. The
named plaintiff in the State Court action also filed an adversary
proceeding in the Bankruptcy Court for the Northern District of Texas
seeking a declaratory judgment that the confirmed NGC plan of
reorganization does not bar the class action claims. Subsequent to the
consummation of NGC's plan of reorganization, NGC's shares traded for
values substantially in excess of, and in 1995 NGC was acquired for a
value substantially in excess of, the values upon which NGC's plan of
reorganization was based. The two actions arise out of DLJSC's
activities as financial advisor to NGC in the course of NGC's Chapter 11
reorganization proceedings. The class action complaint alleges that the
plan of reorganization submitted by NGC was based upon projections by
NGC and DLJSC which intentionally understated forecasts, and provided
F-37
misleading and incorrect information in order to hide NGC's true value
and that defendants breached their fiduciary duties by, among other
things, providing false, misleading or incomplete information to
deliberately understate the value of NGC. The class action complaint
seeks compensatory and punitive damages purportedly sustained by the
class. The Texas State Court action, which had been removed to the
Bankruptcy Court, has been remanded back to the state court, which
remand is being opposed by DLJSC. DLJSC intends to defend itself
vigorously against all of the allegations contained in the complaint.
Although there can be no assurance, DLJ does not believe that the
ultimate outcome of this litigation will have a material adverse effect
on its financial condition. Due to the early stage of such litigation,
based upon the information currently available to it, DLJ's management
cannot make an estimate of loss, if any, or predict whether or not such
litigation will have a material adverse effect on DLJ's results of
operations in any particular period.
In November and December 1995, DLJSC, along with various other parties,
was named as a defendant in a number of purported class actions filed in
the U.S. District Court for the Eastern District of Louisiana. The
complaints allege violations of the Federal securities laws arising out
of a public offering in 1994 of $435.0 million of first mortgage notes
of Harrah's Jazz Company and Harrah's Jazz Finance Corp. The complaints
seek to hold DLJSC liable for various alleged misstatements and
omissions contained in the prospectus dated November 9, 1994. DLJSC
intends to defend itself vigorously against all of the allegations
contained in the complaints. Although there can be no assurance, DLJ
does not believe that the ultimate outcome of this litigation will have
a material adverse effect on its financial condition. Due to the early
stage of this litigation, based upon the information currently available
to it, DLJ's management cannot make an estimate of loss, if any, or
predict whether or not such litigation will have a material adverse
effect on DLJ's results of operations in any particular period.
In addition to the matters described above, Equitable Life and its
subsidiaries and DLJ and its subsidiaries are involved in various legal
actions and proceedings in connection with their businesses. Some of the
actions and proceedings have been brought on behalf of various alleged
classes of claimants and certain of these claimants seek damages of
unspecified amounts. While the ultimate outcome of such matters cannot
be predicted with certainty, in the opinion of management no such matter
is likely to have a material adverse effect on the Company's
consolidated financial position or results of operations.
15) LEASES
The Company has entered into operating leases for office space and
certain other assets, principally data processing equipment and office
furniture and equipment. Future minimum payments under noncancelable
leases for 1997 and the succeeding four years are $113.7 million, $110.6
million, $100.3 million, $72.3 million, $59.3 million and $427.3 million
thereafter. Minimum future sublease rental income on these noncancelable
leases for 1997 and the succeeding four years are $9.8 million, $6.0
million, $4.5 million, $2.4 million, $.8 million and $.1 million
thereafter.
At December 31, 1996, the minimum future rental income on noncancelable
operating leases for wholly owned investments in real estate for 1997
and the succeeding four years are $263.0 million, $242.1 million, $219.8
million, $194.3 million, $174.6 million and $847.1 million thereafter.
F-38
16) OTHER OPERATING COSTS AND EXPENSES
Other operating costs and expenses consisted of the following:
1996 1995 1994
------------ ----------- ----------
(In Millions)
Compensation costs................................. $ 647.3 $ 595.9 $ 687.5
Commissions........................................ 329.5 314.3 313.0
Short-term debt interest expense................... 8.0 11.4 19.0
Long-term debt interest expense.................... 137.3 108.1 98.3
Amortization of policy acquisition costs........... 405.2 317.8 313.4
Capitalization of policy acquisition costs......... (391.9) (391.0) (410.9)
Rent expense, net of sub-lease income.............. 113.7 109.3 116.0
Other.............................................. 798.9 710.0 721.4
------------ ----------- ----------
Total.............................................. $ 2,048.0 $ 1,775.8 $ 1,857.7
============ =========== ===========
During 1996, 1995 and 1994, the Company restructured certain operations
in connection with cost reduction programs and recorded pre-tax
provisions of $24.4 million, $32.0 million and $20.4 million,
respectively. The amounts paid during 1996, associated with cost
reduction programs, totaled $17.7 million. At December 31, 1996, the
liabilities associated with cost reduction programs amounted to $44.5
million. The 1996 cost reduction program included restructuring costs
related to the consolidation of insurance operations' service centers.
The 1995 cost reduction program included relocation expenses, including
the accelerated amortization of building improvements associated with
the relocation of the home office. The 1994 cost reduction program
included costs associated with the termination of operating leases and
employee severance benefits in connection with the consolidation of 16
insurance agencies. Amortization of DAC included $145.0 million writeoff
of DAC related to DI contracts in the fourth quarter of 1996.
17) INSURANCE GROUP STATUTORY FINANCIAL INFORMATION
Equitable Life is restricted as to the amounts it may pay as dividends
to the Holding Company. Under the New York Insurance Law, the
Superintendent has broad discretion to determine whether the financia1
condition of a stock life insurance company would support the payment of
dividends to its shareholders. For 1996, 1995 and 1994, statutory net
(loss) earnings totaled $(351.1) million, $(352.4) million and $67.5
million, respectively. No amounts are expected to be available for
dividends from Equitable Life to the Holding Company in 1997.
At December 31, 1996, the Insurance Group, in accordance with various
government and state regulations, had $21.9 million of securities
deposited with such government or state agencies.
F-39
Accounting practices used to prepare statutory financial statements for
regulatory filings of stock life insurance companies differ in certain
instances from GAAP. The New York Insurance Department (the
"Department") recognizes only statutory accounting practices for
determining and reporting the financial condition and results of
operations of an insurance company, for determining its solvency under
the New York Insurance Law, and for determining whether its financial
condition warrants the payment of a dividend to its stockholders. No
consideration is given by the Department to financial statements
prepared in accordance with GAAP in making such determinations. The
following reconciles the Company's statutory change in surplus and
capital stock and statutory surplus and capital stock determined in
accordance with accounting practices prescribed by the Department with
net earnings and equity on a GAAP basis.
1996 1995 1994
------------- ----------- ------------
(In Millions)
Net change in statutory surplus and capital stock.. $ 56.0 $ 78.1 $ 292.4
Change in asset valuation reserves................. (48.4) 365.7 (285.2)
------------- ----------- ------------
Net change in statutory surplus, capital stock
and asset valuation reserves..................... 7.6 443.8 7.2
Adjustments:
Future policy benefits and policyholders'
account balances............................... (298.5) (66.0) (5.3)
DAC.............................................. (13.3) 73.2 97.5
Deferred Federal income taxes.................... 108.0 (158.1) (58.7)
Valuation of investments......................... 289.8 189.1 45.2
Valuation of investment subsidiary............... (117.7) (188.6) 396.6
Limited risk reinsurance......................... 92.5 416.9 74.9
Contribution from the Holding Company............ - - (300.0)
Issuance of surplus notes........................ - (538.9) -
Postretirement benefits.......................... 28.9 (26.7) 17.1
Other, net....................................... 12.4 115.1 (44.0)
GAAP adjustments of Closed Block................. (9.8) 15.7 (9.5)
GAAP adjustments of GIC Segment.................. (89.6) 37.3 42.8
------------- ----------- ------------
Net Earnings of the Insurance Group................ $ 10.3 $ 312.8 $ 263.8
============= =========== ============
December 31,
----------------------------------------
1996 1995 1994
------------ ------------ -----------
(In Millions)
Statutory surplus and capital stock................ $ 2,258.9 $ 2,202.9 $ 2,124.8
Asset valuation reserves........................... 1,297.5 1,345.9 980.2
------------ ----------- -----------
Statutory surplus, capital stock and asset
valuation reserves............................... 3,556.4 3,548.8 3,105.0
Adjustments:
Future policy benefits and policyholders'
account balances............................... (1,305.0) (1,006.5) (940.5)
DAC.............................................. 3,104.9 3,075.8 3,219.4
Deferred Federal income taxes.................... (306.1) (452.0) (29.4)
Valuation of investments......................... 286.8 417.7 (794.1)
Valuation of investment subsidiary............... (782.8) (665.1) (476.5)
Limited risk reinsurance......................... (336.5) (429.0) (845.9)
Issuance of surplus notes........................ (539.0) (538.9) -
Postretirement benefits.......................... (314.4) (343.3) (316.6)
Other, net....................................... 126.3 4.4 (79.2)
GAAP adjustments of Closed Block................. 783.7 830.8 740.4
GAAP adjustments of GIC Segment.................. (190.3) (184.6) (221.9)
------------ ----------- -----------
Equity of the Insurance Group...................... $ 4,084.0 $ 4,258.1 $ 3,360.7
============ =========== ===========
F-40
18) BUSINESS SEGMENT INFORMATION
The Company has two major business segments: Insurance Operations and
Investment Services. Interest expense related to debt not specific to
either business segment is presented as Corporate interest expense.
Information for all periods is presented on a comparable basis.
The Insurance Operations segment offers a variety of traditional,
variable and interest-sensitive life insurance products, disability
income, annuity products, mutual fund and other investment products to
individuals and small groups and administers traditional participating
group annuity contracts with conversion features, generally for
corporate qualified pension plans, and association plans which provide
full service retirement programs for individuals affiliated with
professional and trade associations. This segment includes Separate
Accounts for individual insurance and annuity products.
The Investment Services segment provides investment fund management,
primarily to institutional clients. This segment includes the Company's
equity interest in DLJ and Separate Accounts which provide various
investment options for group clients through pooled or single group
accounts.
Intersegment investment advisory and other fees of approximately $127.5
million, $124.1 million and $135.3 million for 1996, 1995 and 1994,
respectively, are included in total revenues of the Investment Services
segment. These fees, excluding amounts related to the discontinued GIC
Segment of $15.7 million, $14.7 million and $27.4 million for 1996, 1995
and 1994, respectively, are eliminated in consolidation.
1996 1995 1994
-------------- ------------- --------------
(In Millions)
Revenues
Insurance operations..................... $ 3,742.9 $ 3,614.6 $ 3,507.4
Investment services...................... 1,126.1 949.1 935.2
Consolidation/elimination................ (24.5) (34.9) (27.2)
-------------- ------------- --------------
Total.................................... $ 4,844.5 $ 4,528.8 $ 4,415.4
============== ============= ==============
Earnings (loss) from continuing
operations before Federal income
taxes, minority interest and
cumulative effect of accounting
change
Insurance operations.................... $ (36.6) $ 303.1 $ 327.5
Investment services..................... 311.9 224.0 227.9
Consolidation/elimination............... .2 (3.1) .3
-------------- ------------- --------------
Subtotal.......................... 275.5 524.0 555.7
Corporate interest expense.............. (66.9) (27.9) (114.2)
-------------- ------------- --------------
Total................................... $ 208.6 $ 496.1 $ 441.5
============== ============= ==============
December 31,
------------------------------------
1996 1995
---------------- -----------------
(In Millions)
Assets
Insurance operations................. $ 60,464.9 $ 56,720.5
Investment services.................. 13,542.5 12,842.9
Consolidation/elimination............ (399.6) (354.4)
---------------- -----------------
Total................................ $ 73,607.8 $ 69,209.0
================ =================
F-41
19) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The quarterly results of operations for 1996 and 1995, are summarized
below:
Three Months Ended
------------------------------------------------------------------------------
March 31 June 30 September 30 December 31
----------------- ----------------- ------------------ ------------------
(In Millions)
1996
Total Revenues................ $ 1,169.7 $ 1,193.6 $ 1,193.6 $ 1,287.6
================= ================= ================== ==================
Earnings (Loss) from
Continuing Operations
before Cumulative Effect
of Accounting Change........ $ 94.8 $ 87.1 $ 93.2 $ (157.9)
================= ================= ================== ==================
Net Earnings (Loss)........... $ 71.7 $ 87.1 $ 93.2 $ (241.7)
================= ================= ================== ==================
1995
Total Revenues................ $ 1,079.1 $ 1,164.0 $ 1,138.8 $ 1,146.9
================= ================= ================== ==================
Net Earnings.................. $ 66.3 $ 101.7 $ 100.2 $ 44.6
================= ================= ================== ==================
The quarterly results of operations for 1996 and 1995 have been restated
to reflect the Company's accounting change adopted in the fourth quarter
of 1996 for long-duration participating life contracts in accordance
with the provisions prescribed by SFAS No. 120. Net earnings for the
three months ended December 31, 1996 includes a charge of $339.3 million
related to writeoffs of DAC on DI contracts of $94.3 million, reserve
strengthening on DI business of $113.7 million, pension par of $47.5
million and the discontinued GIC Segment of $83.8 million.
20) INVESTMENT IN DLJ
On December 15, 1993, the Company sold a 61% interest in DLJ to the
Holding Company for $800.0 million in cash and securities. The excess of
the proceeds over the book value in DLJ at the date of sale of $340.2
million has been reflected as a capital contribution. In 1995, DLJ
completed the initial public offering ("IPO") of 10.58 million shares of
its common stock, which included 7.28 million of the Holding Company's
shares in DLJ, priced at $27 per share. Concurrent with the IPO, the
Company contributed equity securities to DLJ having a market value of
$21.2 million. Upon completion of the IPO, the Company's ownership
percentage was reduced to 36.1%. The Company's ownership interest will
be further reduced upon the issuance of common stock after the vesting
of forfeitable restricted stock units acquired by and/or the exercise of
options granted to certain DLJ employees. DLJ restricted stock units
represents forfeitable rights to receive approximately 5.2 million
shares of DLJ common stock through February 2000.
The results of operations of DLJ are accounted for on the equity basis
and are included in commissions, fees and other income in the
consolidated statements of earnings. The Company's carrying value of DLJ
is included in investment in and loans to affiliates in the consolidated
balance sheets.
F-42
Summarized balance sheets information for DLJ, reconciled to the
Company's carrying value of DLJ, are as follows:
December 31,
------------------------------------
1996 1995
---------------- -----------------
(In Millions)
Assets:
Trading account securities, at market value............................ $ 15,728.1 $ 10,821.3
Securities purchased under resale agreements........................... 20,598.7 18,748.2
Broker-dealer related receivables...................................... 16,525.9 13,023.7
Other assets........................................................... 2,651.0 1,983.3
---------------- -----------------
Total Assets........................................................... $ 55,503.7 $ 44,576.5
================ =================
Liabilities:
Securities sold under repurchase agreements............................ $ 29,378.3 $ 26,744.8
Broker-dealer related payables......................................... 19,409.7 12,915.5
Short-term and long-term debt.......................................... 2,704.5 1,742.0
Other liabilities...................................................... 2,164.0 1,750.5
---------------- -----------------
Total liabilities...................................................... 53,656.5 43,152.8
Cumulative exchangeable preferred stock................................ - 225.0
DLJ's company-obligated mandatorily redeemed preferred
securities of subsidiary trust holding solely debentures of DLJ...... 200.0 -
Total shareholders' equity............................................. 1,647.2 1,198.7
---------------- -----------------
Total Liabilities, Cumulative Exchangeable Preferred Stock and
Shareholders' Equity................................................. $ 55,503.7 $ 44,576.5
================ =================
DLJ's equity as reported............................................... $ 1,647.2 $ 1,198.7
Unamortized cost in excess of net assets acquired in 1985
and other adjustments................................................ 23.9 40.5
The Holding Company's equity ownership in DLJ.......................... (590.2) (499.0)
Minority interest in DLJ............................................... (588.6) (324.3)
---------------- -----------------
The Company's Carrying Value of DLJ.................................... $ 492.3 $ 415.9
================ =================
Summarized statements of earnings information for DLJ reconciled to the
Company's equity in earnings of DLJ is as follows:
1996 1995
---------------- -----------------
(In Millions)
Commission, fees and other income...................................... $ 1,818.2 $ 1,325.9
Net investment income.................................................. 1,074.2 904.1
Dealer, trading and investment gains, net.............................. 598.4 528.6
---------------- -----------------
Total revenues......................................................... 3,490.8 2,758.6
Total expenses including income taxes.................................. 3,199.5 2,579.5
---------------- -----------------
Net earnings........................................................... 291.3 179.1
Dividends on preferred stock........................................... 18.7 19.9
---------------- -----------------
Earnings Applicable to Common Shares................................... $ 272.6 $ 159.2
================ =================
DLJ's earnings applicable to common shares as reported................. $ 272.6 $ 159.2
Amortization of cost in excess of net assets acquired in 1985.......... (3.1) (3.9)
The Holding Company's equity in DLJ's earnings......................... (107.8) (90.4)
Minority interest in DLJ............................................... (73.4) (6.5)
---------------- -----------------
The Company's Equity in DLJ's Earnings................................. $ 88.3 $ 58.4
================ =================
F-43
21) ACCOUNTING FOR STOCK-BASED COMPENSATION
The Holding Company sponsors a stock option plan for employees of
Equitable Life. DLJ and Alliance each sponsor their own stock option
plans for certain employees. The Company elected to continue to account
for stock-based compensation using the intrinsic value method prescribed
in APB Opinion No. 25. Had compensation expense of the Company's stock
option incentive plans for options granted after December 31, 1994 been
determined based on the estimated fair value at the grant dates for
awards under those plans, the Company's pro forma net earnings and
earnings per share for 1996 and 1995 would have been as follows:
1996 1995
--------------- ---------------
(In Millions)
Net Earnings
As Reported.......................... $ 10.3 $ 312.8
Pro Forma............................ $ 3.2 $ 311.3
The fair value of options and units granted after December 31, 1994,
used as a basis for the above pro forma disclosures, was estimated as of
the date of grants using Black-Scholes option pricing models. The option
and unit pricing assumptions for 1996 and 1995 are as follows:
Holding Company DLJ Alliance
------------------------- -------------------------- -----------------------------
1996 1995 1996 1995 1996 1995
----------- ----------- ----------- ------------ ------------- -------------
Dividend yield........... 0.80% 0.96% 1.54% 1.85% 8.0% 8.0%
Expected volatility...... 20.00% 20.00% 25.00% 25.00% 23.00% 23.00%
Risk-free interest rate.. 5.92% 6.83% 6.07% 5.86% 5.80% 6.00%
Expected Life............ 5 years 5 years 5 years 5 years 7.43 years 7.43 years
Weighted fair value
per option granted..... $6.94 $5.90 $9.35 - $2.69 $2.24
F-44
A summary of the Holding Company and DLJ stock option plans and
Alliance's Unit option plans are as follows:
Holding Company DLJ Alliance
--------------------------- --------------------------- ---------------------------
Options Options Options
Outstanding Outstanding Outstanding
Weighted Weighted Weighted
Shares Average Shares Average Units Average
(In Exercise (In Exercise (In Exercise
Millions) Price Millions) Price Millions) Price
------------- ------------- ------------- ------------- ------------- -------------
Balance as of
January 1, 1994........ 6.1 - 3.2
Granted................ .7 - 1.2
Exercised.............. - - (.5)
Forfeited.............. - - (.1)
------------- ------------- -------------
Balance as of
December 31, 1994...... 6.8 - 3.8
Granted................ .4 9.2 1.8
Exercised.............. (.1) - (.5)
Expired................ (.1) - -
Forfeited.............. (.3) - (.3)
------------- ------------- -------------
Balance as of
December 31, 1995...... 6.7 $20.27 9.2 $27.00 4.8 $17.72
Granted................ .7 $24.94 2.1 $32.54 .7 $25.12
Exercised.............. (.1) $19.91 - - (.4) $13.64
Expired................ (.6) $20.21 - - - -
Forfeited.............. - - (.2) $27.00 (.1) $19.32
------------- ------------- -------------
Balance as of
December 31, 1996...... 6.7 $20.79 11.1 $28.06 5.0 $19.07
============= ============= ============= ============= ============= =============
F-45
Information with respect to stock and unit options outstanding and
exercisable at December 31, 1996 is as follows:
Options Outstanding Options Exercisable
------------------------------------------------------------------------- ------------------------------------
Weighted
Average Weighted Weighted
Range of Number Remaining Average Number Average
Exercise Outstanding Contractual Exercise Exercisable Exercise
Prices (In Millions) Life (Years) Price (In Millions) Price
---------------------- ---------------- ---------------- ---------------- -------------------- ---------------
Holding
Company
----------------------
$18.125 -$27.75 6.7 7.00 $20.79 3.4 $20.18
================= ================ ================ ==================== ===============
DLJ
----------------------
$27.00 -$33.50 11.1 9.00 $28.06 - -
================= ================ ================ ==================== ===============
Alliance
----------------------
$ 6.0625 -$15.9375 1.3 4.76 $12.97 1.2 $12.58
$16.3125 -$19.75 1.1 8.19 $19.13 .2 $18.69
$19.875 -$19.875 1.0 7.36 $19.88 .4 $19.88
$20.75 -$24.375 .9 8.46 $22.05 .3 $21.84
$24.375 -$25.125 .7 9.96 $25.13 - -
----------------- -------------------
$ 6.0625 -$25.125 5.0 7.43 $19.07 2.1 $15.84
================= ================= =============== ==================== ===============
F-46
Report of Independent Accountants on
Consolidated Financial Statement Schedules
February 10, 1997
To the Board of Directors of
The Equitable Life Assurance Society of the United States
Ours audits of the consolidated financial statements referred to in our report
dated February 10, 1997 appearing on page F-1 of this Annual Report on Form 10-K
also included an audit of the consolidated financial statement schedules listed
in Item 14 of this Form 10-K. In our opinion, these consolidated financial
statement schedules present fairly, in all material respects, the information
set forth therein when read in conjunction with the related consolidated
financial statements.
/s/Price Waterhouse LLP
- - -------------------------
F-47
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
SCHEDULE I
SUMMARY OF INVESTMENTS - OTHER THAN INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 1996
Estimated Carrying
Type of Investment Cost (A) Fair Value Value
----------------- ---------------- ---------------
(In Millions)
Fixed maturities:
United States Government and government
agencies and authorities................................ $ 1,539.4 $ 1,559.3 $ 1,559.3
State, municipalities and political subdivisions.......... 77.0 81.5 81.5
Foreign governments....................................... 302.6 318.4 318.4
Public utilities.......................................... 1,016.1 1,042.6 1,042.6
Convertibles and bonds with warrants attached............. 191.6 197.6 197.6
All other corporate bonds................................. 14,453.4 14,742.3 14,742.3
Redeemable preferred stocks............................... 139.1 135.3 135.3
----------------- ---------------- ---------------
Total fixed maturities.................................... 17,719.2 18,077.0 18,077.0
----------------- ---------------- ---------------
Equity securities:
Common stocks:
Industrial, miscellaneous and all other............... 98.7 130.3 130.3
Mortgage loans on real estate............................. 3,133.0 3,394.6 3,133.0
Real estate............................................... 1,974.4 xxx 1,974.4
Real estate acquired in satisfaction of debt.............. 771.7 xxx 771.7
Real estate joint ventures................................ 551.4 xxx 551.4
Policy loans.............................................. 2,196.1 2,221.6 2,196.1
Other limited partnership interests....................... 467.0 467.0 467.0
Investment in and loans to affiliates..................... 685.0 685.0 685.0
Other invested assets..................................... 288.7 288.7 288.7
----------------- ---------------- ---------------
Total Investments......................................... $ 27,885.2 $ 25,264.2 $ 28,274.6
================= ================ ===============
(A) Cost for fixed maturities represents original cost, reduced by repayments
and writedowns and adjusted for amortization of premiums or accretion of
discount; for equity securities, cost represents original cost; for other
limited partnership interests, cost represents original cost adjusted for
equity in earnings and distributions.
F-48
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
SCHEDULE III
BALANCE SHEETS (PARENT COMPANY)
DECEMBER 31, 1996 AND 1995
1996 1995
----------------- -----------------
(In Millions)
ASSETS
Investment:
Fixed maturities:
Available for sale, at estimated fair value (amortized cost of
$12,976.2 and $10,812.8, respectively)................................ $ 13,306.8 $ 11,330.7
Mortgage loans on real estate............................................. 2,651.8 3,033.3
Equity real estate........................................................ 2,011.9 2,478.6
Other equity investments.................................................. 433.2 412.0
Investments in and loans to affiliates.................................... 3,205.4 2,856.8
Other invested assets..................................................... 120.9 695.8
----------------- -----------------
Total investments..................................................... 21,730.0 20,807.2
Cash and cash equivalents................................................... 171.9 250.9
Deferred policy acquisition costs........................................... 939.8 993.3
Amounts due from discontinued GIC Segment................................... 996.2 2,097.1
Other assets................................................................ 1,065.7 1,527.3
Closed Block assets......................................................... 8,495.0 8,582.1
Separate Accounts assets.................................................... 23,846.4 19,954.9
----------------- -----------------
Total Assets................................................................ $ 57,245.0 $ 54,212.8
================= =================
LIABILITIES
Policyholders' account balances............................................. $ 14,086.5 $ 14,156.6
Future policy benefits and other policyholders' liabilities................. 3,768.1 3,406.5
Short-term and long-term debt............................................... 1,037.6 1,130.9
Other liabilities........................................................... 1,354.9 2,094.9
Closed Block liabilities.................................................... 9,091.3 9,221.4
Separate Accounts liabilities............................................... 23,822.6 19,944.4
----------------- -----------------
Total liabilities..................................................... 53,161.0 49,954.7
----------------- -----------------
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........................................................... 798.7 788.4
Net unrealized investment gains............................................. 189.9 396.5
Minimum pension liability................................................... (12.9) (35.1)
----------------- -----------------
Total shareholder's equity............................................ 4,084.0 4,258.1
----------------- -----------------
Total Liabilities and Shareholder's Equity.................................. $ 57,245.0 $ 54,212.8
================= =================
The financial information of The Equitable Life Assurance Society of the United
States (Parent Company) should be read in conjunction with the Consolidated
Financial Statements and Notes thereto.
F-49
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
SCHEDULE III
STATEMENTS OF EARNINGS (PARENT COMPANY)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994
----------------- ----------------- ----------------
(In Millions)
REVENUES
Premiums........................................................ $ 564.2 $ 567.7 $ 583.7
Universal life and investment-type product policy fee
income........................................................ 227.3 195.7 142.9
Net investment income........................................... 1,460.8 1,383.9 1,309.6
Investment (losses) gains, net.................................. (22.1) (1.9) 46.7
Equity in earnings of subsidiaries before cumulative
effect of accounting change................................... 230.8 169.9 164.6
Commissions, fees and other income.............................. 17.1 18.6 18.6
Contribution from the Closed Block.............................. 125.0 143.2 137.0
----------------- ----------------- -----------------
Total revenues............................................ 2,603.1 2,477.1 2,403.1
----------------- ----------------- -----------------
BENEFITS AND OTHER DEDUCTIONS
Policyholders' benefits......................................... 999.8 732.3 668.1
Interest credited to policyholders' account balances............ 828.6 816.7 763.9
Other operating costs and expenses.............................. 724.6 554.6 647.5
----------------- ----------------- -----------------
Total benefits and other deductions....................... 2,553.0 2,103.6 2,079.5
----------------- ----------------- -----------------
Earnings from continuing operations before Federal income
taxes and cumulative effect of accounting change.............. 50.1 373.5 323.6
Federal income tax (benefit) expense............................ (67.1) 60.7 32.7
----------------- ----------------- -----------------
Earnings from continuing operations before Federal income
taxes and cumulative effect of accounting change.............. 117.2 312.8 290.9
Discontinued operations, net of Federal income taxes............ (83.8) - -
Cumulative effect of accounting change, net of Federal
income taxes.................................................. (23.1) - (27.1)
----------------- ----------------- -----------------
Net Earnings.................................................... $ 10.3 $ 312.8 $ 263.8
================= ================= =================
F-50
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
SCHEDULE III
STATEMENTS OF CASH FLOWS (PARENT COMPANY)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994
----------------- ----------------- ----------------
(In Millions)
Net earnings.................................................... $ 10.3 $ 312.8 $ 263.8
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Investment losses (gains), net of dealer and trading gains.... 22.1 1.9 (46.7)
General Account policy charges................................ (227.3) (195.7) (142.9)
Interest credited to policyholders' account balances.......... 828.6 816.7 763.9
Equity in net earnings of subsidiaries........................ (230.8) (169.9) (153.0)
Dividends from subsidiaries................................... 104.8 - 95.9
Other, net.................................................... 127.8 184.6 (22.5)
----------------- ----------------- -----------------
Net cash provided by operating activities....................... 635.5 950.4 758.5
----------------- ----------------- -----------------
Cash flows from investing activities:
Maturities and repayments..................................... 1,546.8 1,197.8 1,779.8
Sales......................................................... 6,260.5 6,026.4 3,634.6
Return of capital from joint ventures and limited
partnerships................................................ 53.2 41.3 24.8
Purchases..................................................... (9,279.7) (8,560.9) (5,232.5)
Decrease (increase) in loans to discontinued GIC Segment...... 1,017.0 1,226.9 (40.0)
Decrease (increase) in short-term investments................. 360.1 (75.3) (125.6)
Other, net.................................................... 101.0 (231.0) (121.4)
----------------- ----------------- -----------------
Net cash provided (used) by investing activities................ 58.9 (374.8) (80.3)
----------------- ----------------- -----------------
Cash flows from financing activities:
Policyholders' account balances:
Deposits.................................................... 1,335.0 1,992.5 1,494.6
Withdrawals................................................. (2,000.5) (1,982.6) (2,136.7)
Net (decrease) increase in short-term financings.............. (.3) 3.6 (193.0)
Additions to long-term debt................................... - 599.7 1.8
Repayments of long-term debt.................................. (107.6) (37.4) (42.4)
Payment of obligation to fund accumulated deficit of
discontinued GIC Segment.................................... - (1,215.4) -
Capital contributions from the Holding Company................ - - 300.0
----------------- ----------------- -----------------
Net cash used by financing activities........................... (773.4) (639.6) (575.7)
----------------- ----------------- -----------------
Change in cash and cash equivalents............................. (79.0) (64.0) 102.5
Cash and cash equivalents, beginning of year.................... 250.9 314.9 212.4
----------------- ----------------- -----------------
Cash and Cash Equivalents, End of Year.......................... $ 171.9 $ 250.9 $ 314.9
================= ================= =================
Supplemental cash flow information
Interest Paid................................................. $ 108.8 $ 87.8 $ 27.6
================= ================= =================
Income Taxes (Refunded) Paid.................................. $ (13.9) $ (86.0) $ 49.2
================= ================= =================
F-51
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
SCHEDULE V
SUPPLEMENTARY INSURANCE INFORMATION
AT AND FOR THE YEAR ENDED DECEMBER 31, 1996
Future Policy Policy Amortization
Deferred Benefits Charges (1) Policyholders' of Deferred (2)
Policy Policyholders' and Other and Net Benefits and Policy Other
Acquisition Account Policyholders' Premium Investment Interest Acquisition Operating
Segment Costs Balance Funds Revenue Income Credited Cost Expense
- - --------------------- ------------ -------------- -------------- -------- ----------- ------------- ------------- ------------
(In Millions)
Insurance
Operations....... $ 3,104.9 $ 21,865.6 $ 4,416.6 $ 1,471.6 $ 2,078.0 $ 2,587.9 $ 405.2 $ 786.4
Investment
Services......... - - - - 11.9 - - 814.2
Corporate Interest
Expense.......... - - - - - - - 66.9
Consolidation/
Elimination...... - - - - 86.0 - - (24.7)
------------- ------------- ------------ ----------- ---------- ------------- -------------- -----------
Total.............. $ 3,104.9 $ 21,865.6 $ 4,416.6 $ 1,471.6 $ 2,175.9 $ 2,587.9 $ 405.2 $ 1,642.8
============= ============= ============ =========== ========== ============= ============== ===========
(1) Net investment income is based upon specific identification of portfolios within segments.
(2) Operating expenses are incurred directly by a segment, or allocated based on usage rates maintained by the Company.
F-52
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
SCHEDULE V
SUPPLEMENTARY INSURANCE INFORMATION
AT AND FOR THE YEAR ENDED DECEMBER 31, 1995
Future Policy Policy Amortization
Deferred Benefits Charges (1) Policyholders' of Deferred (2)
Policy Policyholders' and Other and Net Benefits and Policy Other
Acquisition Account Policyholders' Premium Investment Interest Acquisition Operating
Segment Costs Balance Funds Revenue Income Credited Cost Expense
- - ---------------------- -------------- --------------- ------------- ---------- ----------- ------------- ------------- ----------
(In Millions)
Insurance
Operations........ $ 3,075.8 $ 21,911.2 $ 4,007.3 $ 1,395.0 $ 1,995.1 $ 2,256.9 $ 317.8 $ 736.8
Investment
Services.......... - - - - 16.1 - - 725.1
Corporate Interest
Expense........... - - - - - - - 27.9
Consolidation/
Elimination....... - - - - 77.0 - - (31.8)
-------------- --------------- -------------- ---------- ----------- ------------- ------------- -----------
Total............... $ 3,075.8 $ 21,911.2 $ 4,007.3 $ 1,395.0 $ 2,088.2 $ 2,256.9 $ 317.8 $ 1,458.0
============== =============== ============== ========== =========== ============= ============= ===========
(1) Net investment income is based upon specific identification of portfolios within segments.
(2) Operating expenses are incurred directly by a segment, or allocated based on usage rates maintained by the Company.
F-53
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
SCHEDULE V
SUPPLEMENTARY INSURANCE INFORMATION
AT AND FOR THE YEAR ENDED DECEMBER 31, 1994
Policy Amortization
Charges (1) Policyholders' of Deferred (2)
and Net Benefits and Policy Other
Premium Investment Interest Acquisition Operating
Segment Revenue Income Credited Cost Expense
- - -------------------------- --------------- -------------- ----------------- ----------------- ---------------
(In Millions)
Insurance
Operations........... $ 1,340.6 $ 1,909.4 $ 2,116.2 $ 313.4 $ 750.3
Investment
Services............. - 11.5 - - 707.3
Corporate Interest
Expense.............. - - - - 114.2
Consolidation/
Elimination.......... - 77.7 - - (27.5)
--------------- -------------- ----------------- ------------------ --------------
Total.................. $ 1,340.6 $ 1,998.6 $ 2,116.2 $ 313.4 $ 1,544.3
=============== ============== ================= ================== ==============
(1) Net investment income is based upon specific identification of portfolios within segments.
(2) Operating expenses are incurred directly by a segment, or allocated based on usage rates maintained by the Company.
F-54
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
SCHEDULE VI
REINSURANCE (A)
AT AND FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
Assumed Percentage
Ceded to from of Amount
Gross Other Other Net Assumed
Amount Companies Companies Amount to Net
----------------- ---------------- ----------------- ----------------- ---------------
(In Millions)
1996
Life insurance in force(B)... $ 232,704.6 $ 13,696.9 $ 42,046.5 $ 261,054.2 16.10%
================= ================ ================= =================
Premiums:
Life insurance and
annuities.................. $ 249.2 $ 17.1 $ 107.3 $ 339.4 31.61%
Accident and health.......... 214.6 26.6 70.2 258.2 27.19%
----------------- ---------------- ----------------- -----------------
Total Premiums............... $ 463.8 $ 43.7 $ 177.5 $ 597.6 29.70%
================= ================ ================= =================
1995
Life insurance in force(B)... $ 226,530.6 $ 12,348.2 $ 38,382.2 $ 252,564.6 15.20%
================= ================ ================= =================
Premiums:
Life insurance and
annuities.................. $ 244.7 $ 14.3 $ 96.7 $ 327.1 29.56%
Accident and health.......... 490.1 285.0 74.6 279.7 26.67%
----------------- ---------------- ----------------- -----------------
Total Premiums............... $ 734.8 $ 299.3 $ 171.3 $ 606.8 28.23%
================= ================ ================= =================
1994
Life insurance in force(B)... $ 220,780.2 $ 13,937.5 $ 43,200.1 $ 250,042.8 17.27%
================= ================ ================= =================
Premiums:
Life insurance and
annuities.................. $ 247.7 $ 29.8 $ 110.4 $ 328.3 33.62%
Accident and health.......... 470.0 242.8 70.1 297.3 23.58%
----------------- ---------------- ----------------- -----------------
Total Premiums............... $ 717.7 $ 272.6 $ 180.5 $ 625.6 28.85%
================= ================ ================= =================
(A) Includes amounts related to the discontinued group life and health business.
(B) Includes in force business related to the Closed Block.
F-55
Part II, Item 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
9-1
Part III, Item 10.
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Omitted pursuant to General Instruction I to Form 10-K.
10-1
Part III, Item 11.
EXECUTIVE COMPENSATION
Omitted pursuant to General Instruction I to Form 10-K.
11-1
Part III, Item 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of Equitable Life's Common Stock as of March 10, 1997 all of which was
owned by the Holding Company. The Holding Company has sole investment and voting
power with respect to the shares beneficially held.
Amount and Nature
Name and Address of Beneficial Percent
Title of Class of Beneficial Owner Ownership of Class
- - --------------- ------------------------------------ ------------------ ---------
Common Stock The Equitable Companies Incorporated 2,000,000 100%
12-1
Part III, Item 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Omitted pursuant to General Instruction I to Form 10-K.
13-1
Part IV, Item 14.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K
(A) The following documents are filed as part of this report:
1. Financial Statements
2. The financial statements are listed in the Index to Financial Statements
on page FS-1.
3. Consolidated Financial Statement Schedules
4. The consolidated financial statement schedules are listed in the Index
to Financial Statement Schedules on page FS-1.
5. Exhibits: The exhibits are listed in the Index to Exhibits which begins
on page E-1.
(B) Reports on Form 8-K
None
14-1
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, The Equitable Life Assurance Society of the United States has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Date: March 27, 1997 THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE
UNITED STATES
By: /s/Joseph J. Melone
----------------------------------
Name: Joseph J. Melone
Chairman of the Board and
Chief Executive Officer, Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
/s/Joseph J. Melone Chairman of the Board and March 27, 1997
- - --------------------------------------------
Joseph J. Melone Chief Executive Officer, Director
/s/James M. Benson President, Director March 27, 1997
- - --------------------------------------------
James M. Benson
* Senior Executive Vice President and March 27, 1997
- - --------------------------------------------
William T. McCaffrey Chief Operating Officer, Director
/s/Stanley B. Tulin Senior Executive Vice President and March 27, 1997
- - --------------------------------------------
Stanley B. Tulin Chief Financial Officer
/s/Alvin H. Fenichel Senior Vice President and Controller March 27, 1997
- - --------------------------------------------
Alvin H. Fenichel
* Director March 27, 1997
- - --------------------------------------------
Claude Bebear
* Director March 27, 1997
- - --------------------------------------------
Christopher J. Brocksom
* Director March 27, 1997
- - --------------------------------------------
Francoise Colloc'h
* Director March 27, 1997
- - --------------------------------------------
Henri de Castries
* Director March 27, 1997
- - --------------------------------------------
Joseph L. Dionne
* Director March 27, 1997
- - --------------------------------------------
William T. Esrey
* Director March 27, 1997
- - --------------------------------------------
Jean-Rene Fourtou
S-1
* Director March 27, 1997
- - --------------------------------------------
Norman C. Francis
* Director March 27, 1997
- - --------------------------------------------
Donald J. Greene
* Director March 27, 1997
- - --------------------------------------------
John T. Hartley
* Director March 27, 1997
- - --------------------------------------------
John H. F. Haskell, Jr.
* Director March 27, 1997
- - --------------------------------------------
Mary R. (Nina) Henderson
* Director March 27, 1997
- - --------------------------------------------
W. Edwin Jarmain
* Director March 27, 1997
- - --------------------------------------------
G. Donald Johnston, Jr.
* Director March 27, 1997
- - --------------------------------------------
Winthrop Knowlton
* Director March 27, 1997
- - --------------------------------------------
Arthur L. Liman
* Director March 27, 1997
- - --------------------------------------------
George T. Lowy
* Director March 27, 1997
- - --------------------------------------------
Didier Pineau-Valencienne
* Director March 27, 1997
- - --------------------------------------------
George J. Sella, Jr.
* Director March 27, 1997
- - --------------------------------------------
Dave H. Williams
* By: /s/Adam R. Spilka
------------------------
Adam R. Spilka
Attorney-in-fact
S-2
INDEX TO EXHIBITS
Page
Number Description Method of Filing No.
- - ---------- ----------------------------------------- --------------------------------------------- ----------
3.1 Restated Charter of Equitable Life Filed as Exhibit 3.1 to registrant's annual
report on Form 10-K for the year ended
December 31, 1994 and incorporated
herein by reference
3.1(a) Restated Charter of Equitable Life, Filed herewith
as amended January 1, 1997
3.2 By-laws of Equitable Life Filed as Exhibit 3.2 to registrant's annual
report on Form 10-K for the year ended
December 31, 1994 and incorporated
herein by reference
3.2(a) Restated By-laws of Equitable Life, Filed herewith
as amended November 21, 1996
10.1 Standstill and Registration Filed as Exhibit 10(c) to Amendment
Rights Agreement, dated as of July No. 1 to the Holding Company's
18, 1991,as amended, between The Form S-1 Registration Statement
Equitable Companies Incorporated, No.33-48115 dated May 26, 1992 and
The Equitable Life Assurance incorporated herein by reference
Society of the United States
and AXA
10.2 Cooperation Agreement, Filed as Exhibit 10(d) to the Holding
dated as of July 18, 1991, Company's Form S-1 Registration
as amended among The Equitable Statement No. 33-48115 dated May 26,
Life Assurance Society of the 1992 and incorporated herein
United States, The Equitable by reference
Companies Incorporated and AXA
10.3 Letter Agreement, dated May Filed as Exhibit 10(e) to the Holding
12, 1992,among The Equitable Company's Form S-1 Registration
Companies Incorporated, The Statement No. 33-48115 dated May 26,
Equitable Life Assurance Society 1992 and incorporated herein
of the United States and AXA by reference
10.4 Amended and Restated Reinsurance Filed as Exhibit 10(o) to the Holding
Agreement, dated as of March Company's Form S-1 Registration
29, 1990,between The Equitable Life Statement No. 33-48115 dated May 26,
Assurance Society of the United 1992 and incorporated herein
States and First Equicor Life by reference
Insurance Company
10.5 Fiscal Agency Agreement between Filed as Exhibit 10.5 to registrant's
The Equitable Life Assurance Society annual report on Form 10-K for the year
of the United States and The Chase ended December 31, 1995 and
Manhattan Bank, N.A. incorporated herein by reference
E-1
Page
Number Description Method of Filing No.
- - ---------- ----------------------------------------- --------------------------------------------- ----------
10.6(a) Lease, dated as of July 20, 1995, Filed as Exhibit 10.26(a) to the Holding
between 1290 Associates and Company's annual report on Form 10-K
Equitable Life for the year ended December 31, 1996
and incorporated herein by reference
10.6(b) First Amendment of Lease Agree- Filed as Exhibit 10.26(b) to the Holding
ment, dated as of December 28, Company's annual report on Form 10-K
1995, between 1290 Associates, for the year ended December 31, 1996
L.L.C. and Equitable Life and incorporated herein by reference
10.6(c) Amended and Restated Company Filed as Exhibit 10.26(c) to the Holding
Lease Agreement (Facility Realty), Company's annual report on Form 10-K
made as of May 1, 1996, by and for the year ended December 31, 1996
between Equitable Life and the IDA and incorporated herein by reference
10.6(d) Amended and Restated Lease Agree- Filed as Exhibit 10.26(d) to the Holding
ment (Project Property), made and Company's annual report on Form 10-K
entered into as of May 1, 1996, by for the year ended December 31, 1996
and between the IDA, Equitable and incorporated herein by reference
Life and EVLICO
18 Letter re Change in Accounting Filed herewith
Principles
24 Powers of Attorney Filed herewith
27 Financial Data Schedule Filed herewith
E-2