The withdrawal ratio for the company's annuity products is calculated by dividing aggregate surrenders and withdrawals by beginning of period account balances. The company's annual lapse ratio for life insurance is measured in terms of face amount and uses A.M. Best's formula.
In response to this opportunity, the company reclassified 100% of the securities in its "held to maturity" category to "available for sale" on December 1, 1995 to maximize investment flexibility. As a result of this reclassification, the net unrealized investment gain component of shareholders' equity increased by $138,795,000 on December 1, 1995 (net of deferred taxes of $74,735,000 and an adjustment of $96,068,000 to deferred policy acquisition costs) to reflect the net unrealized investment gains on securities classified as available for sale that were previously classified as held to maturity. The company is not, however, precluded from classifying securities as held to maturity in the future. While it is not the company's current practice to engage in active management of the fixed maturities securities portfolio such that significant sales would occur, the inability to respond to prudent financial management decisions necessitated this change.
The company determines counterparty credit quality by reference to ratings from independent rating agencies. As of December 31, 1996, the ratings assigned by Standard & Poor's Corporation by instrument with respect to the net replacement value (fair value) of the company's instruments was as follows:
Fixed maturities: Effective January 1, 1994, the company adopted Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities". Pursuant to SFAS No. 115, fixed maturity securities are designated as either "available for sale", "held for investment" or "trading". Sales of fixed maturities designated as "available for sale" are not restricted by SFAS No. 115. Available for sale securities are reported at fair value and unrealized gains and losses on these securities are included directly in stockholders' equity, after adjustment for related changes in deferred policy acquisition costs, present value of in force acquired, policy reserves and deferred income taxes. At December 31, 1996 and 1995, all of the company's fixed maturity securities are designated as available for sale although the company is not precluded from designating fixed maturity securities as held for investment or trading at some future date. Securities that the company has the positive intent and ability to hold to maturity are designated as "held for investment". Held for investment securities are reported at cost adjusted for amortization of premiums and discounts. Changes in the fair value of these securities, except for declines that are other than temporary, are not reflected in the company's financial statements. Sales of securities designated as held for investment are severely restricted by SFAS No. 115. Securities that are bought and held principally for the purpose of selling them in the near term are designated as trading securities. Unrealized gains and losses on trading securities are included in current earnings. Transfers of securities between categories are restricted and are recorded at fair value at the time of the transfer. Securities that are determined to have a decline in value that is other than temporary are written down to estimated fair value which becomes the security's new cost basis by a charge to realized losses in the company's Statement of Income. Premiums and discounts are amortized/accrued utilizing the scientific interest method which results in a constant yield over the security's expected life. Amortization/accrual of premiums and discounts on mortgage-backed securities incorporates a prepayment assumption to estimate the securities' expected lives.
Net Income per Share of Common Stock Net income per share is based on the weighted average number of shares of common stock outstanding during each year (1996 - 31,904,734; 1995 - 31,709,032 and 1994 - 31,612,675). Employee stock options have not been included in the net income per share computations because their effect is not material.
An analysis of the PVIF asset for the year ended December 31, 1996 is as follows:
Shares of restricted common stock awarded (see table) to certain key employees and directors are subject to forfeiture to the company should the individuals terminate their relationship with the company for reasons other than death, permanent disability or change in company control prior to full vesting. Shares granted generally vest over three to five years from the date of grant. The company amortizes as compensation expense the market value on date of grant ($4,247,000 in 1996, $831,000 in 1995 and $1,661,000 in 1994) of the restricted stock using the straight-line method over the vesting periods. The weighted average grant date fair value was $35.97, $35.38 and $34.78 for 1996, 1995 and 1994, respectively. Compensation expense recognized during the years ended December 31, 1996, 1995 and 1994 aggregated $1,224,000, $861,000 and $1,161,000, respectively. The company has a discretionary stock award plan under which employees, agents and other representatives of the company are awarded shares of stock for superior performance. During the years ended December 31, 1996, 1995 and 1994, awards of shares of the company's common stock under this plan (see table) resulted in charges to income of $59,000, $52,000 and $19,000, respectively. The weighted average grant date fair value was $35.68, $31.24 and $33.25 for 1996, 1995 and 1994, respectively. Equitable Life sponsors a long-term incentive compensation plan which allows certain agents to earn units equal to shares of the company's common stock based on personal production and the maintenance of specific levels of assets under management. This program resulted in expense/(income) of $1,195,000, $736,000 and $(129,000) in the years ended December 31, 1996, 1995 and 1994, respectively.