• The Company Might Have to Write-Off Goodwill. The carrying value of goodwill in the Company’s Retail Brokerage and Investment Banking segment was $190.1 million at December 31, 2003. Such goodwill was tested for impairment in the fourth quarter of 2003 in accordance with FASB Statement No. 142 Goodwill and Other Intangible Assets (“SFAS 142”). As a result of the testing, a $4.0 million charge related to the impairment of goodwill in the Company’s Matrix subsidiary was recorded. If securities market conditions worsen or if there is a prolonged downturn in retail securities trading volumes, the Company might conclude, in the future, that all or a portion of the remaining carrying value of goodwill is impaired and must be written off.
Interest credited to policyholders’ account balances was $119.3 million for 2002, an increase of $8.8 million, or 8.0%, from $110.5 million reported for 2001. The increase was primarily attributable to higher interest crediting of $3.9 million in the Protection Products segment, $4.7 million in the Accumulation Products segment and $0.2 million in the Other Products segment. The increase in the Protection Products segment was primarily related to higher interest crediting on CSVUL of $3.0 million primarily due to higher general account fund values. The increase in the Accumulation Products segment was primarily attributable to higher interest crediting of $7.3 million on FPVA business and $2.0 million on the new FPDA product, partially offset by decreased interest crediting on supplementary contracts, SPDA business, and other annuity contract business of $2.0 million, $1.9 million and $0.5 million, respectively. The increase in interest crediting on FPVA business was related to higher general account fund balances. The decrease in interest crediting on supplementary contracts was attributable to lower interest rates, while the decrease on SPDA and other annuity contract business was due to the continued run-off of these products.
As required under GAAP, actual Closed Block earnings in excess of expected Closed Block earnings inure solely to the benefit of policyholders in the Closed Block and, accordingly, are recorded as an additional liability to Closed Block policyholders. Expected cash flows from the in force policies in the Closed Block were forecasted for each year over the estimated life of the policies in the Closed Block in order to determine the amount of assets to allocate to the Closed Block in order to provide sufficient funding for payment of policyholder liabilities and dividends in the Closed Block, as well as certain expenses, as more fully discussed in Note 3 to the Consolidated Financial Statements. The expected emergence of earnings from such cash flows is referred to as the “glide path earnings”. The aforementioned additional liability (which represents the actual Closed Block earnings in excess of expected Closed Block glide path earnings) is referred to as the “deferred dividend liability”. Due to the recognition of realized losses from “other than temporary impairment” charges on invested assets during the fourth quarter of 2002, the actual experience of the Closed Block earnings was less than expected. The deferred dividend liability was $33.2 million at December 31, 2002.
Total new annualized recurring and single life insurance premiums were $279.0 million for the year ended December 31, 2002, compared with $214.7 million for the year ended December 31, 2001. The increase was primarily due to increased sales of COLI and BOLI from the Company’s Wholesale distribution channel, which were $147.6 million for the year ended December 31, 2002, compared to $74.3 million for the comparable prior year. The increase was primarily due to an overall increase in new cases and policies issued in 2002 compared to 2001. There were 43 new cases and 2,061 new policies issued for the year ended December 31, 2002 compared to 29 new cases and 1,074 new policies for the year ended December 31, 2001. Corporate sales, approximately 99% of which are from the Company’s Wholesale distribution channel, are large premium cases, which typically generate revenues that can fluctuate considerably from quarter to quarter.
through the Company’s career network. Accumulation assets under management increased 24.7% to $9.6 billion as of December 31, 2003 from $7.7 billion as of December 31, 2002, attributable primarily to an improvement in the equity markets during 2003, and net cash inflows of $275.0 million for the year. The improvement in the equity markets during 2003 was also reflected in higher sales of the Company’s variable annuities, the sales of which were $412.0 million for the year ended December 31, 2003 compared to $405.0 million in the prior year.
The Insured Notes mature on January 21, 2017. The Insured Notes pay interest only through January 21, 2008 at which time principal payments will begin to be made pursuant to an amortization schedule. Interest on the Insured Notes is payable quarterly at an annual rate equal to three month LIBOR plus 0.55%. Concurrent with the issuance of the Insured Notes, MONY Holdings entered into an interest rate swap contract, which effectively locked in a fixed rate of interest on the Insured Notes at 6.44%. Including debt issuance costs of $7.4 million and the cost of the insurance policy (75 basis points per annum) (the “Insurance Policy”), which guarantees the payment of scheduled principal and interest on the Insured Notes, the annual cost of the Insured Notes is 7.36%. Pursuant to the terms of this structured financing, MONY Holdings can, subject to certain conditions, issue an additional $150.0 million of this floating rate insured debt through December 31, 2004. During 2002 MONY Holdings commenced activities to register the Insured Notes with the SEC as provided for under the note indenture. On February 14, 2003, the SEC declared such registration effective.
On January 12, 2000, the MONY Group filed a registration statement with the SEC to register certain securities. This registration, known as a “Shelf Registration,” provides the MONY Group with a vehicle to offer various securities to the public, when it deems appropriate, to raise proceeds up to an amount not to exceed $1.0
Advest’s assets are highly liquid in nature. At December 31, 2003, liquid assets which include cash and cash equivalents, receivables from brokers, dealers and clearing firms, and available-for-sale and trading securities, comprised 73.0% of Advest’s total assets. At December 31, 2002, liquid assets which include cash and cash equivalents, receivables from brokerage customers, securities borrowed, receivables from brokers and dealers, and available for sale and trading securities, comprised 71.0% of Advest’s total assets.
(4) Primarily commitments to fund private fixed maturity securities, agricultural loans and floating rate commercial mortgages (see Note 18 to the Consolidated Financial Statements). The unfunded commitments for the commercial mortgage loans are presented in the current period, as the timing of the fulfillment of the obligation cannot be predicted.
The Company utilizes its investments in privately placed fixed maturity securities to enhance the overall value of the portfolio, increase diversification and obtain higher yields than are possible with comparable quality public market securities. These privately placed securities are also used to enhance cash flow as a result of sinking fund payments. Generally, private placements provide the Company with broader access to management information, strengthened negotiated protective covenants, call protection features and, where applicable, a higher level of collateral. They are, however, generally not freely tradable because of restrictions imposed by federal and state securities laws and illiquid trading markets.
The Company held approximately $1,028.7 million and $1,016.1 million of mortgage-backed and asset-backed securities as of December 31, 2003 and 2002, respectively. Of such amounts, $435.3 million and $307.8 million or 42.3% and 30.3%, respectively, represented agency-issued pass-through and collateralized mortgage obligations (“CMOs”) secured by the Federal National Mortgage Association, Federal Home Loan Mortgage Corporation, Government National Mortgage Association and Canadian Housing Authority collateral. The balance of such amounts was comprised of other types of mortgage-backed and asset-backed securities. The Company believes that its active monitoring of its portfolio of mortgage-backed securities and the limited extent of its holdings of more volatile types of mortgage-backed securities mitigate the Company’s exposure to losses from prepayment risk associated with interest rate fluctuations for this portfolio. At December 31, 2003 and 2002, 86.5%, and 87.1%, respectively, of the Company’s mortgage-backed and asset-backed securities were assigned an NAIC Designation 1.
The following table sets forth the components of other invested assets as at December 31, 2003 and 2002.
The following tables present certain information by type of investment with respect to the Company’s gross unrealized losses on fixed maturity securities outside of the Closed Block, in the Closed Block, and in total, at December 31, 2003 and 2002, including the number of individual security positions comprising such unrealized losses, the aggregate carrying value and market value of such positions, the amount of such unrealized losses, information as to the amount of time securities have been in an unrealized loss position, and the respective credit quality of such securities. Management segregated the information in the following tables between that applicable to the Closed Block and that applicable to outside the Closed Block because, other than a difference in classification within the Company’s income statement, management believes it is unlikely that there could be any impact to the net income reported by the Company for any period presented due to the sufficiency of the deferred dividend liability in the Closed Block as of the end of all periods presented. See Note 3 to the Consolidated Financial Statements. All of the following tables exclude amounts relating to certain invested assets held pursuant to a reinsurance arrangement whereby all the experience from such assets is passed to the reinsurer.
“Trading account securities” and “Securities sold, not yet purchased”, are carried at fair value with realized and unrealized gains and losses reflected in current period revenues. “Trading account securities” are generally held for resale within a relatively short time frame. “Securities sold, not yet purchased” represent an obligation of the Company to acquire the securities at prevailing market prices in the future. The Company uses closing exchange prices or dealer quotes in active markets to value “Trading account securities”, and “Securities sold, but not yet purchased”. Periodically, the Company receives stock warrants in connection with its investment banking activities. Warrants are carried at their fair value which is determined using a Black-Scholes model, or another standard option valuation technique. The fair value of such warrants and the changes therein are reported in income.
Advest currently introduces all of its customer transactions, which are now not reflected in these financial statements, to the clearing broker, which executes, clears, and carries such transactions on a “fully disclosed” basis. Advest’s proprietary transactions are also executed and cleared through the clearing broker.
In April 2003, the FASB issued SFAS 133 Implementation Issue B36, Embedded Derivatives: Modified Coinsurance Arrangements and Debt Instruments That Incorporate Credit Risk Exposures That Are Unrelated or Only Partially Related to the Creditworthiness of the Obligor under Those Instruments (“DIG B36”). DIG B36 addresses the need to separately account for an embedded derivative within a reinsurer’s receivable and ceding company’s payable arising from modified coinsurance or similar arrangements. Paragraph 12(a) of SFAS 133 indicates that an embedded derivative must be separated from the host contract (“bifurcated”) if the economic characteristics and risks of the embedded derivative instrument are not clearly and closely related to the economic characteristics and risks of the host contract. DIG B36 concludes that bifurcation is necessary in a modified coinsurance arrangement because the yield on the receivable and payable is based on a specified proportion of the ceding company’s return on either its general account assets or a specified block of those assets, rather than the overall creditworthiness of the ceding company. The effective date of implementation was the first day of the first fiscal quarter beginning after September 15, 2003, with earlier application as of the beginning of a fiscal quarter permitted. The adoption of DIG B36 did not have a material impact on the Company’s results of operations and financial position.
Net investment income for the years ended December 31, 2003, 2002 and 2001 was derived from the following sources:
As of December 31, 2003 and 2002 the Company’s trading account securities and inventory of securities sold, not yet purchased consisted of the following, at market value:
With respect to the Group Pension Payments, the annual results from the Existing Deposits were measured on a basis in accordance with the Agreement (such basis hereafter referred to as the “Earnings Formula”) which was substantially the same as GAAP, except that: (i) asset impairments on fixed maturity securities were only recognized when such securities were designated with an NAIC rating of “6”, and (ii) no impairment losses were recognized on mortgage loans until such loans were disposed of, or at the time and in the calculation, of the Final Value Payment. All mortgage loans had been disposed of prior to the calculation of the Final Payment.
The estimated fair value of assets and liabilities held in separate accounts is based on quoted market prices.
On October 21, 1997, the New York State Supreme Court granted MONY Life’s and MLOA’s motion for summary judgment and dismissed all claims filed in the Goshen case against MONY Life and MLOA. On December 20, 1999, the New York State Court of Appeals affirmed the dismissal of all but one of the claims in the Goshen case (a claim under New York’s General Business Law), which has been remanded back to the New York State Supreme Court for further proceedings consistent with the opinion. The New York State Supreme Court subsequently reaffirmed that, for purposes of the remaining New York General Business Law claim, the class is now limited to New York purchasers only. On July 2, 2002, the New York Court of Appeals affirmed the New York State Supreme Court’s decision limiting the class to New York purchasers. In addition, the New York State Supreme Court has further held that the New York General Business Law claims of all class members whose claims accrued prior to November 29, 1992 are barred by the applicable statute of limitations. On September 25, 2002 in light of the New York Court of Appeals’ decision, MONY Life and MLOA filed a motion to decertify the class with respect to the sole remaining claim in the case. By orders dated April 16, and May 6, 2003, the New York State Supreme Court denied preliminarily the motion for decertification, but held the issue of decertification in obeyance pending appeals by plaintiffs in related cases and a hearing on whether the present class, or a modified class, can satisfy the requirements of the class action statute in New York. MONY Life and MLOA have appealed from the denial of their motion for decertification, which appeal is presently pending in the Appellate Division, First Department. MONY Life and MLOA intend to defend themselves vigorously the sole remaining claim. There can be no assurance, however, that the present litigation relating to sales practices will not have a material adverse effect on them.
(v) In December 2002 the SEC and self-regulatory organizations (National Association of Securities Dealers Inc. (“NASD”)) directed all broker-dealers, including the Company, to evaluate their procedures with respect to mutual fund sales charge breakpoints. The outcome of the Company’s evaluation, including any determination it made with respect to sales charges paid by its customers, did not have a material adverse effect on the Company’s results of operations, cash flows, or financial position.
The combined statutory net loss reported by the Company for the years ended December 31, 2003, 2002, and 2001 was $38.5 million, $83.5 million and $30.2 million, respectively. The combined statutory surplus of the Company as of December 31, 2003 and 2002 was $926.8 million and $906.4 million, respectively. Each of the Company’s insurance subsidiaries exceeds the minimum risk based capital requirements imposed by such subsidiaries’ state of domicile.
At December 31, 2003 and 2002, there were $0.0 million and $0.1 million of mortgage loans in the Closed Block which were non-income producing for the twelve months preceding such dates.
In accordance with the adoption of SFAS No. 142, Goodwill and Other Intangible Assets (“SFAS 142”) goodwill is periodically tested for impairment and is no longer amortized. The following tables set forth the impact of the adoption of SFAS 142 on the Company’s net income and earnings per share amounts for the years ended December 31, 2003, 2002 and 2001. In addition, as required by SFAS 142, management tested the carrying value of the Company’s goodwill at December 31, 2003 and as a result of its testing recorded a $4.0 million charge related to the impairment of goodwill at Matrix.
The following table summarizes the significant components of goodwill, along with additions, impairments and amortization by segment for the periods presented. Goodwill is reflected under the caption “other assets” in the Company’s consolidated balance sheet.