General expenses increased 33.1% to $54,358,000 in 1996 compared to a decrease of 5.7% to $40,855,000 in 1995 from $43,328,000 in 1994. The decrease in general expenses from 1994 to 1995 resulted from the restructuring of the company's career agent contracts and compensation which eliminated certain fixed costs that were included in general expenses in 1994. As a result of this change, agent compensation related to most of the company's fixed annuity and life insurance sales is in the form of commissions which vary directly with sales production levels. The increase in 1996 is primarily attributable to the acquisition of Golden American. Excluding Golden American, general expenses increased 18.6% in 1996. Golden American uses a network of wholesalers to distribute its products and the salaries of these wholesalers are included in general expenses. The portion of these salaries and related expenses which vary with sales production levels are deferred, thus having little impact on current earnings. Management expects general expenses to increase substantially in 1997 as a result of the inclusion of Golden American operations for the full year and the emphasis on expanding the salaried wholesaler distribution network.
Accrued investment income increased $12,457,000 during 1996 due to an increase in new fixed income investments and in the overall size of the portfolio. Deferred policy acquisition costs increased $178,979,000 over year-end 1995 levels. Excluding the adjustment to reflect the impact of SFAS No. 115, deferred policy acquisition costs increased $88,203,000 as the deferral of current period costs, primarily commissions incurred to generate insurance and annuity sales, totaled $167,753,000. Amortization of costs deferred totaled $79,550,000.
Writing and supporting increased volumes of annuity and insurance business requires increased amounts of capital and surplus for the company's insurance operations. Historically, the company has funded growth in its insurance operations internally through the retention of earnings. Increased levels of growth in recent years have required capital contributions in excess of amounts generated by operating activities. In February 1995, the company issued $100,000,000 of 8.5% notes, maturing on February 15, 2005, receiving net proceeds totaling $98,812,000, after expenses. The company contributed $50,000,000 of the proceeds to its insurance subsidiaries to support the internal growth of these subsidiaries and applied the remaining net proceeds to the repayment of outstanding commercial paper notes.
In order to provide the flexibility to respond promptly to capital needs as opportunities or needs arise, the company has available an effective universal shelf registration on Form S-3 with the Securities and Exchange Commission with respect to $300,000,000 of securities, including any combination of debt securities, common stock and preferred stock, of which $175,000,000 remains to be issued. Securities may be issued and sold upon such terms and conditions and at such time or times as may be later determined. Any such offering will be made only by means of a prospectus.
In the ordinary course of business, the company and its subsidiaries are also engaged in certain other litigation, none of which management believes is material.
Other investments: Policy loans are reported at unpaid principal. Short-term investments are reported at cost adjusted for amortization of premiums and accrual of discounts. Investments accounted for by the equity method include investments in, and advances to, various joint ventures and partnerships.
Investments on Deposit: At December 31, 1996, affidavits of deposits covering bonds with a par value of $1,787,087,000 (1995 - $1,693,573,000), mortgage loans with an unpaid principal balance of $402,911,000 (1995 - $304,729,000) and policy loans with an unpaid balance of $164,659,000 (1995 - $167,844,000) were on deposit with state agencies to meet regulatory requirements. In addition, at December 31, 1996, pursuant to a reinsurance agreement, the company had investments with a carrying value of $56,314,000 (1995 - $63,664,000) and estimated market values of $53,833,000 (1995 - $64,350,000) deposited in a trust for the benefit of the ceding company.
Commercial Paper Notes: The company issues commercial paper notes to provide for working capital needs and to provide short term liquidity. This commercial paper program is supported by the company's line of credit discussed below. Commercial paper notes are issued for periods not exceeding 270 days. At December 31, 1996 and 1995, commercial paper notes of $104,600,000 and $58,100,000, respectively, were outstanding under this arrangement at a weighted average interest rate of 5.7% and 6.0%, respectively. At December 31, 1996, the company's commercial paper was rated A-1 by Standard and Poor's Corporation, D-1 by Duff & Phelps Credit Rating Company and P-2 by Moody's Investors Service.
The company and all of its subsidiaries except Golden American and its wholly-owned subsidiary First Golden American Life Insurance Company of New York ("First Golden") file a consolidated federal income tax return. The parent company and its subsidiaries (except Golden American and First Golden) each report current income tax expense as allocated under a consolidated tax allocation agreement. Generally, this allocation results in profitable companies recognizing a tax provision as if the individual company filed a separate return and loss companies recognizing benefits to the extent their losses contribute to reduce consolidated taxes. Deferred income taxes have been established by each member of the consolidated group based upon the temporary differences, the reversal of which will result in taxable or deductible amounts in future years when the related asset or liability is recovered or settled, within each entity. Golden American and First Golden each file a separate federal income tax return. Deferred income taxes are also established based upon the temporary differences. At December 31, 1996, Golden American and the non-life companies had net operating loss ("NOL") carryforwards for federal income tax purposes of approximately $4,725,000 and $2,667,000, respectively. Approximately $2,549,000, $118,000, and $4,725,000 of these NOL's can be used to offset future taxable income of Golden American and the company through the years 2008, 2010, and 2011, respectively.
Prior to 1984, a portion of Equitable Life's current income was not subject to current income taxation, but was accumulated, for tax purposes, in a memorandum account designated as "policyholders' surplus account". The aggregate accumulation in this account at December 31, 1996, was $14,388,000. Should the policyholders' surplus account of Equitable Life exceed the limitation prescribed by federal income tax law, or should distributions be made by Equitable Life to the parent company in excess of $385,006,000, such excess would be subject to federal income taxes at rates then effective. Deferred income taxes of $5,036,000 have not been provided on amounts included in this memorandum account since the company contemplates no action and can foresee no events that would create such a tax. Deferred income taxes (credits) were also reported on equity income during these periods. These taxes arise from the recognition of income and losses differently for purposes of filing federal income tax returns than for financial reporting purposes.