Prior to its Demutualization on November 16, 1998, MONY Life, as a mutual insurance company, was subject to the surplus tax imposed on mutual life insurance companies under the Internal Revenue Code. Income tax expense for 1998 and 1997 includes $0.0 million and $5.8 million of surplus tax, respectively.
The MONY Group, through its subsidiaries, provides life insurance, annuities, COLI/BOLI products, mutual funds, securities brokerage, asset management, business and estate planning, trust and investment banking products and services. The Company distributes its products and services to individuals and institutional clients through a career agency sales force operated by its principal life insurance subsidiary and financial advisors and brokers of its securities broker-dealer and mutual fund subsidiaries (“Proprietary Distribution”). In addition, the Company distributes its products and services through what it defines as complementary distribution channels (“Complementary Distribution”), which principally consist of independent third-party insurance brokerage general agencies and securities broker-dealers, as well as its corporate marketing team. The Company principally sells its products in all 50 of the United States, the District of Columbia, the U.S. Virgin Islands, Guam and the Commonwealth of Puerto Rico and currently insures or provides other financial services to more than one million people.
The Company records mortgage loans on real estate at their unpaid principal balances. The Company records valuation allowances on mortgage loans based on specific identification of troubled mortgages and an estimate for incurred but not reported defaults. The Company derives its valuation allowance for troubled mortgages based on expected future cash flows or, if the mortgage is in foreclosure, based on the value of the underlying collateral. The Company bases its estimate for incurred but not reported defaults on historical default rates and the current mortgage portfolio composition. The Company’s financial position and operating results are therefore sensitive to changes in the estimated cash flows of troubled mortgages, the value of related collateral and changes in the economic environment in general.
Amortization of deferred policy acquisition costs (“DAC”) was $139.1 million for 2000, an increase of $1.3 million, from $137.8 million reported for 1999. The increase primarily resulted from higher amortization in the Protection Products segment of approximately $3.7 million. The increase in DAC amortization in the Protection Products segment resulted primarily from a $2.6 million increase in USFL, $3.9 million of higher amortization related to the Company’s VUL business as a result of better mortality and rapid growth in this product, offset by lower amortization in traditional and UL products of $2.8 million. This was offset in part by lower DAC amortization of $2.4 million in the Accumulation Products segment primarily due to the growing levels of exchange activity to the new variable annuity product, where better persistency is anticipated.
The carrying value of commercial mortgage loans at December 31, 2001 was $1,507.8 million, which amount is net of valuation allowances aggregating $36.0 million, representing management’s best estimate of cumulative impairments at such date. However, there can be no assurance that increases in valuation allowances will not be necessary. Any such increases may have a material adverse effect on the Company’s financial position and results of operations.