The Company leases its headquarters building which is located at 1740 Broadway, New York, New York and consists of approximately 234,903 square feet. The Company also leases facilities in Syracuse, New York, for use in its insurance operations, which consist of approximately 635,158 square feet in the aggregate. The Company also leases all 111 of its agency and its subsidiary offices, which consist of approximately 669,020 square feet in the aggregate. The Company believes that such properties are suitable and adequate for its current and anticipated business operations.
The following table sets forth Selected Consolidated Financial Information for the Company. The Selected Consolidated Financial Information as of and for the years ended December 31, 1999 and 1998 is different, as discussed in Note 1 below, from that presented in the Company's audited consolidated financial statements contained elsewhere herein. The Selected Consolidated Financial Information as of and for the years ended December 31, 1997 and 1996 and the Selected Consolidated Income Statement Data for the year ended December 31, 1995 has been derived from audited financial statements. The consolidated balance sheet data presented as of December 31, 1995 was derived from unaudited consolidated financial information not included elsewhere herein which, in the opinion of management, presents fairly such consolidated financial information in conformity with GAAP. The selected consolidated financial information should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations", the Company's consolidated financial statements and the notes thereto and the other financial information included elsewhere herein.
(2) Includes writedowns for impairment and net changes in valuation allowances on real estate, mortgage loans and investment securities aggregating $23.5 million, $24.4 million, $76.0 million, $20.1 million and $54.3 million for the years ended December 31, 1999, 1998, 1997, 1996, and 1995, respectively.
(6) Includes assets transferred in the Group Pension Transaction of $5,109.8 million, $5,751.8 million, $5,714.9 million, $5,627.6 million and $5,992.8 million at December 31, 1999, 1998, 1997, 1996, and 1995, respectively. See Note 10 to the Consolidated Financial Statements.
(7) Includes Closed Block assets of $6,182.1 million and $6,161.2 million at December 31, 1999 and 1998, respectively. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note 3 and Note 20 to the Consolidated Financial Statements.
(8) Includes liabilities transferred in the Group Pension Transaction of $5,099.1 million, $5,678.5 million, $5,638.7 million, $5,544.1 million and $5,855.7 million at December 31, 1999, 1998, 1997, 1996, and 1995, respectively. See Note 10 to the Consolidated Financial Statements.
(9) Includes Closed Block liabilities of $7,303.3 million and $7,290.7 million at December 31, 1999 and 1998, respectively. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note 3 and Note 20 to the Consolidated Financial Statements.
(12) The comparability of the Company's results of operations for the years ended December 31, 1999 and 1998 with prior years is affected by the sale of the Company's disability income business pursuant to the DI Transaction. See "Management's Discussion and Analysis of Financial Condition and Results of Operations".
The following discussion addresses the financial condition and results of operations of the Company for the periods indicated. The discussion of the Company's financial results of operations is based on the results of the Closed Block for the year ended December 31, 1999 and the period from November 16, 1998 through December 31, 1998 combined on a line by line basis with the results of operations outside the Closed Block, for such respective periods as further discussed below. The discussion and analysis of the Company's financial condition and results of operations presented below should be read in conjunction with the "Selected Consolidated Financial Information" and the Consolidated Financial Statements and related footnotes and other financial information included elsewhere herein.
(iii) revenues and expenses reported in the income statement for the year ended December 31, 1998 represent all revenues and associated expenses earned or incurred during such period, however, in accordance with generally accepted accounting principles, actual "basic" and "diluted" per share amounts are presented only for periods subsequent to the effective date of the Plan (see Notes 4 and 21 to the Consolidated Financial Statements).
The pre-tax Contribution from the Closed Block for the year ended December 31, 1999, the first full year operation for the Closed Block, was $44.8 million. The pre-tax Contribution from the Closed Block for period from November 16, 1998 (the date of MONY's reorganization) through December 31, 1998 was $5.7 million. The proforma basis pre-tax Contribution from the Closed Block for the year ended December 31, 1998, assuming the Closed Block had been established on January 1, 1998 is $52.2 million. The Closed Block includes only those revenues, benefit payments, dividends and premium taxes considered in funding the Closed Block and excludes many costs and expenses associated with operating the Closed Block and administering the policies included therein. Since many expenses related to the Closed Block were excluded from the calculation of the Closed Block contribution, the contribution from the Closed Block does not represent the actual profitability of the business in the Closed Block. As a result, operating costs and expenses outside the Closed Block are disproportionate to the business outside the Closed Block.
For management and reporting purposes, the Company's business is organized in two principal operating segments, the "Protection Products" segment and the "Accumulation Products" segment. Substantially all of the Company's other business activities are combined and reported in the "Other Products" segment. In its Protection Products segment, the Company currently offers a wide range of individual life insurance products, including; whole life, universal life, term life,
variable universal life, last survivor variable universal life, and group universal life. The Protection Products segment also includes the in-force business from sales of last survivor universal life and last survivor whole life, which are not currently being offered by the Company. Also included in the Protection Products segment are the: (i) assets and liabilities transferred pursuant to the Group Pension Transaction, as well as the related profits therefrom, as hereafter defined (see The Group Pension Transaction), (ii) the Closed Block assets and liabilities, as well as the Contribution from the Closed Block, and (iii) the Company's disability income insurance business which was transferred in the DI Transaction (see DI Transaction). In its Accumulation Products segment, the Company primarily offers flexible payment variable annuities and proprietary retail mutual funds. The Accumulation Products segment also includes the in-force business from single premium deferred annuities and immediate annuities which are not currently being offered by the Company. The Company's Other Products segment primarily consists of a securities broker-dealer operation, an insurance brokerage operation and the Run-Off Businesses. In addition to selling the Company's proprietary investment products, the securities broker-dealer operation provides customers of the Company's protection and accumulation products access to other non-proprietary investment products (including stocks, bonds, limited partnership interests, tax-exempt unit investment trusts and other investment securities). The insurance brokerage operation provides the Company's career agency sales force with access to life, annuity, small group health and specialty insurance products written by other carriers to meet the insurance and investment needs of its customers. The Run-Off Businesses primarily consist of group life and health insurance as well as the group pension business that was not included in the Group Pension Transaction.
Assets have been allocated to the segments in amounts sufficient to support the associated liabilities of each segment. Capital is allocated to each segment in amounts sufficient to maintain a targeted regulatory risk-based capital ("RBC") level for each segment. Allocations of net investment income and net realized gains on investments were primarily based on the amount of assets allocated to each segment. Other costs and operating expenses were allocated to each of the segments based on: (i) a review of the nature of such costs, (ii) time studies analyzing the amount of employee compensation costs incurred by each segment, and (iii) cost estimates included in the Company's product pricing. Substantially all non-cash transactions and impaired real estate (including real estate acquired in satisfaction of debt) have been allocated to the Protection Products segment.
Universal life and investment-type product policy fees were $196.3 million for 1999, an increase of $44.7 million, or 29.5%, from $151.6 million reported for 1998. The increase in fees during 1999, as compared to 1998, consisted of higher Protection Products segment fees of $36.1 million and higher Accumulation Product segment fees of $9.2 million. The increase in fees in the Protection Products segment was primarily due to higher fees from the Company's variable universal life ("VUL") and corporate sponsored variable universal life ("CSVUL") business of approximately $13.9 million and $3.3 million, respectively. For 1999, the Company reported total fees from its VUL business of $33.7 million, as compared to $19.8 million reported for 1998. The increase in VUL fees is primarily due to higher charges for the cost of insurance, loading, administration, and surrender charges. The increase in fees in the Accumulation Products segment was primarily due to an increase in surrender charges of $7.8 million on the Company's FPVA business. Surrenders were $872.6 million, as compared to $537.8 million in 1998. The increase in surrenders were primarily due to the aging of the block of business and consequent decrease in surrender charges and increased competition. During 1999,
FPVA account values increased by approximately $114.3 million. For 1999, the Company reported total fees from its FPVA business of $72.8 million, as compared to $63.4 million reported for 1998. See "New Business Information".
Net investment income and net realized gains on investments are allocated to the Company's segments based on the assets allocated to such segments to support the associated liabilities of each segment and to maintain a targeted regulatory risk-based capital level for each segment. See "Segments".
Other income (which consists primarily of fees earned by the Company's mutual fund management, broker-dealer, and insurance brokerage operations, as well as revenues from interest on deposits held under financial reinsurance arrangements, certain other asset management fees, and other miscellaneous revenues) was $197.2 million for 1999, an increase of $34.0 million, or 20.8%, from $163.2 million reported for 1998. The increase was primarily due to higher income of $22.3 million and $19.6 million in the Accumulation Products and Other Products segments, respectively, offset in part by lower income of $7.0 million in the Protection Products segment. The increase in income recorded in the Accumulation Products segment was primarily attributable to higher fees earned by the Company's mutual fund management operations. The Company's mutual fund management operations reported $84.9 million in fees from advisory, underwriting and distribution services in 1999, as compared to $61.8 million reported in 1998, as assets under management increased to approximately $8.8 billion at December 31, 1999 from $6.9 billion at December 31, 1998. The increase in income recorded in the Other Products segment was primarily due to higher commissions earned by the Company's broker-dealer operations of $19.9 million. During 1999, the Company's broker-dealer operations reported commission earnings of $63.4 million, as compared to $43.5 million reported in 1998. The decrease in other income recorded in the Protection Products segment of $7.0 million was primarily due to reinsurance allowances of $5.9 million.
Benefits to policyholders were $787.1 million for 1999, a decrease of $2.7 million, or 0.3%, from $789.8 million reported for 1998. The decrease consisted primarily of; (i) lower benefits of approximately $0.6 million and $8.6 million recorded in the Accumulation Products and Other Products segment, respectively, (ii) lower benefits of approximately $3.4 million incurred by the Company's benefit plans (which are reflected as a reconciling item in the table above), offset in part by, (iii) higher benefits of $9.9 million in the Protection Products segment. The decrease of $0.6 million in the Accumulation Products segment was primarily due to lower reserves on immediate annuities resulting from lower sales offset by an increase in the issuance of supplementary contracts during 1999. The decrease of $8.6 million in the Other Products segment was primarily due to lower benefits of $4.3 million relating to the Company's retained group pension business and lower aviation losses of $2.0 million resulting from the Company's reduced participation in an aviation pool. The increase in the Protection Products segment of $9.9 million was primarily due to; (i) $26.7 million of benefits related to Sagamore and, (ii) a $60.6 million increase in surrenders on traditional business to $383.0 million for 1999, as compared to $322.4 million for 1998, offset in part by, (iii) a decrease in reserves on traditional business of approximately $74.1 million at December 31, 1999, from $165.6 million at December 31, 1998.
Interest credited to policyholders' account balances was $115.5 million for 1999, an increase of $1.8 million, or 1.6%, from $113.7 million reported for 1998. The increase consisted primarily of; (i) higher interest crediting of $4.3 million in the Protection Products segment resulting from the consolidation of Sagamore, offset primarily by, (ii) lower interest crediting of approximately $5.3 million in the Accumulation Products segment relating to the Company's single premium deferred annuity ("SPDA") business. During 1999, SPDA account value decreased approximately $77.8 million to $379.4 million, as compared to $457.2 million at the end of 1998. The decrease in account value in 1999 was primarily due to continuing withdrawals, which management believes partially reflects consumer preferences for separate account products. Average interest crediting rates on the Company SPDA's were approximately 5.3% and 5.5% in 1999 and 1998, respectively.
Amortization of deferred policy acquisition costs ("DAC") was $137.8 million for 1999, an increase of $6.8 million, or 5.2%, from $131.0 million reported for 1998. The increase primarily resulted from higher amortization in both the Protection Products and Accumulation Products segments of approximately $5.7 million and $1.1 million, respectively. The increase in DAC amortization in the Protection Products segment primarily consisted of: (i) $1.1 million related to the consolidation of Sagamore, (ii) $6.6 million of higher amortization related to the Company's VUL business as a result of better mortality and rapid growth in this product, (iii) $5.9 million of higher amortization related to the Company's international business as a result of poor persistency, offset in part by, (iv) a decrease in amortization of approximately $8.3 million related to traditional life products. The increase in DAC amortization of $1.1 million in the Accumulation Products segment was primarily due to the aging block of FPVA business.
Dividends to policyholders were $230.7 million for 1999, an increase of $12.5 million, or 5.7%, from $218.2 million reported for 1998. The increase, substantially all of which occurred in the Protection Products segment, resulted primarily the accrual of an additional dividend liability in the Closed Block of approximately $9.5 million reflecting results that were more favorable than assumed in the funding of the Closed Block. As further discussed in Note 3 to the Consolidated Financial Statements included elsewhere herein, all the assets in the Closed Block inure solely to the benefit of the Closed Block policyholders, and to the extent that the results of the Closed Block are more favorable than assumed in
establishing the Closed Block, total dividends paid to Closed Block policyholders will be increased and are, accordingly, accrued as an additional dividend liability. Only the excess of the Closed Block liabilities over the Closed Block assets at the date of the establishment of the Closed Block (November 16, 1998) will be recognized in the Company's income over the period the policies and contracts in the Closed Block remain in force.
The increase of $27.1 million in costs directly attributable to the Protection Products segment consisted of $16.3 million from the consolidation of Sagamore and an increase of $10.8 million in costs related to the company's international operations, which was primarily due to increased compensation costs associated with the recruitment of additional international sales representatives and costs incurred to develop and administer new products. During 1999, the number of international field representatives increased 139 to 318 at December 31, 1999, as compared to 179 at December 31, 1998. The increase of $19.1 million in costs directly attributable to the Accumulation Products segment primarily consisted of higher sub-advisory fees and other expenses incurred by the Company's mutual fund management operations, which directly corresponded with an increase in revenues from such operations (see discussion and analysis of other income above). The increase of $19.7 million in costs directly attributable to the Other Products segment primarily consisted of higher commissions and other expenses incurred by the Company's broker-dealer operations, which directly corresponded with an increase in revenues from such operations (see discussion and analysis of other income above). The net increase in other allocable operating costs and expenses primarily consisted of (i) a one-time restructuring charge of $59.7 million relating to the Company's voluntary early retirement program -- see Early Retirement Program discussion below, (ii) $3.3 million of transfer agent fees, (iii) $7.1 million related to and increase in company benefit plan expenses, offset by (iv) $10.8 million of lower costs associated with addressing the Year 2000 issue, and (v) $25.8 million of lower cost associated with restructuring the Company's career agency sales force, savings resulting from the early retirement program and other strategic initiatives.
The Company's provision for federal income taxes in 1999 was $132.0 million, compared to $103.0 million in 1998. The Company's effective tax rate before extraordinary item was approximately 34.5% in 1999, as compared to approximately 35.0% in 1998.
Premium revenue was $721.8 million for 1998, a decrease of $116.8 million, or 13.9%, from $838.6 million reported for 1997. The decrease, substantially all of which (approximately $114.7 million) occurred in the Company's Protection Products segment, was primarily due to: (i) lower premiums of approximately $74.4 million due to the transfer of the Company's disability income insurance business in December of 1997 pursuant to the DI Transaction, as hereafter defined (see "DI Transaction"), (ii) lower new and renewal premiums of approximately $6.1 million and $26.1 million, respectively, and (iii) lower single premiums of approximately $8.1 million due to a reduction in the Company's dividend scales (substantially all single premiums result from policyholders electing to buy additional insurance coverage with dividends received on existing policies).
business resulting primarily from an increase in the account value of such products. During 1998, FPVA account values increased by approximately $460.0 million. The average FPVA account value during 1998 was approximately $4.5 billion, as compared to $3.7 billion in 1997. For 1998, the Company reported total fees from its FPVA business of $63.4 million, as compared to $50.0 million reported for 1997. See "New Business Information".
Net investment income was $735.7 million for 1998, an increase of $2.7 million, or 0.4%, from $733.0 million reported for 1997. Lower interest rates in 1998 resulted in lower investment income of approximately $22.0 million, while an increase in the Company's average total invested assets during 1998 of approximately $179.9 million, as compared to 1997, and changes in the mix of invested assets from lower yielding real estate to higher yielding fixed maturity securities resulted in an increase in investment income of approximately $24.7 million. The effect of investing new money of approximately $2.4 billion (including the proceeds from prepayments, sales and maturities of its invested assets, as well as net cash flow from operating activities), reduced the total yield on invested assets by approximately 10 basis points in 1998 compared to 1997. Average total invested assets in 1998 increased, as compared to 1997; primarily as a result of proceeds received in the Offerings and positive cash flow from operations and investing activities. During 1998, the Company's average investment in fixed maturity securities (before unrealized gains or losses) increased by approximately $539.8 million, while its average investment in mortgage loans and real estate decreased by approximately $81.1 million and $435.5 million, respectively. At December 31, 1998, fixed maturity securities, mortgage loans and real estate represented approximately 61.0%, 12.9% and 5.7%, respectively, of total invested assets, as compared to 56.9%, 13.7% and 10.6%, respectively, at December 31, 1997. The annualized yield on the Company's invested assets before and after realized gains/(losses) on investments was 7.0% and 8.6%, respectively, for the year ended December 31, 1998, as compared to 7.1% and 7.8%, respectively, for 1997. See "Investments".
For a description of the Group Pension Transaction, the Group Pension Profits and certain summary financial information relating thereto, refer to Note 10 of the Consolidated Financial Statements included herein. Management believes that Group Pension Profits will decline in future periods consistent with the continuing run-off of the underlying business until they terminate as of December 31, 2002.
Interest credited to policyholders' account balances was $113.7 million for 1998, a decrease of $12.2 million, or 9.7%, from $125.9 million reported for 1997. The decrease primarily resulted from lower interest crediting across all product lines in both the Protection and Accumulation segments of approximately $1.8 million and $10.8 million, respectively. The decrease in interest crediting in the Accumulation Products segment was primarily due to lower interest crediting of approximately $7.1 million relating to the Company's SPDA business. During 1998, SPDA account value decreased approximately $100.9 million to $457.2 million, as compared to $558.1 million at the end of 1997. The decrease in account value in 1998 was primarily due to continuing withdrawals, which management believes partially reflects consumer preferences for separate account products. Average interest crediting rates on the Company SPDA's were approximately 5.5% in both 1998 and 1997, respectively.
Other operating costs and expenses were $453.3 million for 1998, an increase of $36.1 million, or 8.7%, from $417.2 million reported for 1997. The increase consisted of approximately $15.7 million and $13.9 million of costs directly attributable to the Accumulation Products and Other Products segment, respectively, as well as higher allocable and other miscellaneous direct costs of approximately $6.5 million. To the extent that costs are not directly identifiable with an operating segment, other costs and operating expenses are allocated to the Company's operating segments based on cost allocations utilizing time studies, and cost estimates included in the Company's product pricing (see "Segments"). Following sets forth additional information with respect to the increase in operating costs in 1998, as compared to 1997:
New annualized life insurance premiums for 1998 were $170.8 million compared with $105.7 million in the prior year. The increase is due to sales of corporate sponsored variable universal life business, which the Company began marketing towards the end of 1997. This increase in sales was partially offset by declines in premiums produced by the company's career agency system. Career agency sales were lower due to delays in receiving product approval by regulators in the key states of New York, New Jersey and Texas. The Company's sales force grew 10% to 2,447 at year-end 1998 (career and international) from 2,216 at year-end 1997.
New Business Information for the year ended December 31, 1999 compared to the year ended December 31, 1998
New sales of variable annuities during 1999 were $423 million, a decrease of $189 million, or 14%, from $612 million reported for 1998. The decline in annuity sales was primarily due to; (i) increased competition in the marketplace, (ii) the introduction by some companies of bonus annuities, which the Company elected not to offer, and (iii) delays in obtaining approval of the Company's new annuity products in certain key states, primarily New York and New Jersey. During 1999, the Company took actions to reverse this trend, including changes in agent compensation plans, product improvements (including the addition of new fund options offered through the Company's annuities), and increased education and training of the Company's career agency sales force to emphasize the value of our annuity line compared to the competition. The Company recently received approval to market its new annuity products in the state of New York and New Jersey. Management expects an improvement in annuity sales in 2000 as a result of the aforementioned approval and a broader selection of fund choices introduced in 1999, as further discussed below.
New sales of variable annuities during 1998 were $612 million, a decrease of $101 million or 14%, from $713 million reported for 1997. The introduction of new products and delays in regulatory approvals in key states adversely affected variable annuity sales. Sales of its proprietary retail mutual funds offered by the Company's Enterprise Group of Funds subsidiary increased by $543 million, or 72% to $1.3 billion from $752 million at December 31, 1997. Proprietary mutual fund sales through the Company's career agency system increased approximately $184 million or 51% to $546 million at December 31, 1998 from $362 million at December 31, 1997. Proprietary mutual fund sales through third party broker dealers increased approximately $359 million or 92% to $749 million at December 31, 1998 from $389 million at December 31, 1997.
On June 30, 1999, the Company announced a voluntary retirement program for approximately 500 eligible employees of which 300 employees elected to participate. The program is part of a company wide realignment of staff and resources, which may also include the elimination and/or shifting of certain job functions and the addition of employees with new skill sets. The Company recorded a one-time pre-tax restructuring charge of $59.7 million in 1999 related to this program which is reflected in other operating costs and expenses.
For the years ended December 31, 1999, 1998 and 1997, the Company reported extraordinary charges of $2.0 million, $27.2 million and $13.3 million, respectively, which were incurred in connection with the Plan. The costs incurred in 1998 and 1997 primarily included the fees of financial, legal, actuarial and accounting advisors to the Company and to the New York Insurance Department, as well as printing and postage for communication with policyholders. The charge reflected in 1999 represented expenses incurred in connection with the Company's commission-free sale and purchase program (the "Program") offered to shareholders pursuant to the Plan. The Program commenced August 17, 1999 and ended on November 17, 1999. Pursuant to the Program, shareholders who owned fewer than 100 shares could sell all of their shares or purchase additional shares to round up to 100 shares without incurring commissions.
As a result of the repurchase of the 9.5% Notes and the 11.25% Notes, the Company will record an after-tax loss of approximately $36.1 million during the 1st quarter of 2000. The loss resulted from the premium paid by MONY Life to the holders of the 9.5% Notes and the 11.25% Notes reflecting the excess of their fair value over their carrying value on the Company's books at the date of the transaction of approximately $7.0 million and $48.5 million, respectively. This loss will be reported, net of tax, as an extraordinary item on the Company's income statement in 2000.
Of the net proceeds contributed by the MONY Group to MONY Life, approximately $168.2 million is for use by MONY Life in its general operations, approximately $13.2 million was used to fund policy credits required to be credited to Eligible Policyholders pursuant to the Plan, and $40.5 million represents a reimbursement for the estimated after-tax cost of expenses incurred by MONY Life to effect the Demutualization, as required by the New York Insurance Law.
- --------------- (1) Prior years' amounts have been restated primarily to include surrenders and withdrawals related to the retained group pension business. (2) Includes $19.7 million in 1999 of surrenders in the Closed Block, the proceeds from which remained with the Company to fund premiums on newly issued traditional life policies outside the Closed Block. (3) Excludes approximately $727.0 million in 1999 relating to surrenders associated with an exchange program offered by the Company wherein contract holders surrendered old FPVA contracts and reinvested the proceeds in a new enhanced FPVA product offered by the Company.
On January 12, 2000, the Company announced a plan to repurchase up to 5% or approximately 2.4 million shares, of the outstanding common shares of the Company. Under the repurchase plan, the Company may repurchase from time to time, as market conditions and other factors warrant. The repurchase program may be discontinued at any time.
- --------------- (1) Excludes sales of unconsolidated real estate joint venture interests. Real estate joint venture interests are reported in Other Invested Assets. Gains from the sales of such interests in 1999, 1998 and 1997 were $0.0 million, $19.6 million and $1.1 million, respectively. See Note 4 to the Consolidated Financial Statements.
The Company has not experienced any significant Year 2000 related problems post-December 31, 1999 with its operations or with any external parties with which business is conducted. Based on this experience and the amount of work and testing previously performed, the Company believes the likelihood of a Year 2000 issue that would have a material effect on the Company's consolidated financial position and results of its operations continues to be remote as the Company performs month-end, leap year, quarter-end, and year-end processing. However, there is still the possibility that future Year 2000 related failures in the Company's systems or equipment and/or failure of external parties to achieve Year 2000 compliance could have a material adverse effect on the Company's consolidated financial position and results of its operations.
On the effective date of the Plan, the Company's invested assets were allocated between the Closed Block and operations outside the Closed Block. In view of the similar asset quality characteristics of the major asset categories in the two portfolios, the invested assets in the Closed Block have been combined with the Company's invested assets outside the Closed Block for purposes of the following discussion and analysis. In addition, the following discussion excludes invested assets transferred in the Group Pension Transaction. Accordingly, this discussion should be read in conjunction with the summary financial information regarding assets transferred in the Group Pension Transaction presented in Note 10 to the Consolidated Financial Statements.
The primary investment objective of the Company is to maximize after-tax returns consistent with acceptable risk parameters (including the management of the interest rate sensitivity of invested assets to that of policyholder obligations). The Company is exposed to two primary sources of investment risk: credit risk, relating to the uncertainty associated with the continued ability of a given obligor to make timely payments of principal and interest, and interest rate risk, relating to the market price and/or cash flow variability associated with changes in market yield curves. The Company manages credit risk through industry and issuer diversification and asset allocation. The Company manages interest rate risk as part of its asset/liability management strategies, product design, such as the use of market value adjustment features and surrender charges and proactive monitoring and management of certain non-guaranteed elements of the Company's products (such as the resetting of credited interest rates for policies that permit such adjustments). A key aspect in managing interest rate exposure are the analyses performed by the Company to assess the adequacy of its projected asset cash flows relative to its projected liability cash flows. These analyses, many of which are required pursuant to the standard valuation laws of virtually all states, involve evaluating the potential gain or loss for over 95% of the Company's in force business under various increasing and decreasing interest rate environments, including inverted yield curves. For purposes of these analyses the Company has developed models of its in force business which reflect product characteristics such as cost of insurance rates, surrender charges, market value adjustments, dividends, cash values, etc. The models include assumptions, based on current and anticipated experience, regarding lapse and mortality rates and interest crediting strategies. In addition, these models include asset cash flow projections reflecting coupon payments, sinking fund payments, principal payments, defaults, bond calls, and mortgage prepayments.
The yield on general account invested assets (including net realized gains and losses on investments) was 9.4%, 8.6% and 7.8% for the years ended December 31, 1999, 1998 and 1997, respectively.
Fixed maturities consist of publicly traded debt securities, privately placed debt securities and small amounts of redeemable preferred stock, and represented 60.4% and 61.0% of total invested assets at December 31, 1999 and 1998, respectively.
The Company defines potential problem securities in the fixed maturity category as securities that are deemed to be experiencing significant operating problems or difficult industry conditions. Typically these securities are experiencing or anticipating liquidity constraints, having difficulty meeting projections/budgets and would most likely be considered a below investment grade risk. The fair value of potential problem fixed maturities was $32.8 million and $82.9 million at December 31, 1999 and 1998, respectively.
As of December 31, 1999 the fair value of the Company's problem, potential problem and restructured fixed maturities were $45.9 million, $32.8 million and $0.0 million, respectively, which, in the aggregate, represented approximately 1.2% of total fixed maturities. As of December 31, 1998 the fair value of the Company's problem, potential problem and restructured fixed maturities were $33.9 million, $82.9 million and $8.6 million, respectively, which, in the aggregate, represented approximately 1.9% of total fixed maturities.
- --------------- (1) Mortgage-Backed -- Government & Agency industry are bonds collateralized by mortgages backed by the Federal National Mortgage Association, Government National Mortgage Association, Federal Home Loan Mortgage Corp., or Canadian Housing Authority.
At December 31, 1999, the Company's largest unaffiliated single concentration of fixed maturities consists of $230.2 million of carrying value of Federal Home Loan Mortgage Corporation (FHLMC) fixed maturities which represent approximately 2.1% of total invested assets at December 31, 1999. The largest non-government issuer consists of $194.4 of AEGON notes purchased in connection with the Group Pension Transaction. These notes represent approximately 1.8%
The Company held approximately $1,138.5 million and $1,161.3 million of mortgage-backed and asset-backed securities as of December 31, 1999 and 1998, respectively. Of such amounts, $391.5 million and $471.5 million or 34.4% and 40.6%, 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 were 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, 1999 and 1998, 85.7%, and 88.6%, respectively, of the Company's mortgage-backed and asset-backed securities were assigned an NAIC Designation 1. In addition, the Company believes that it holds a relatively low percentage of CMOs compared to other life insurance companies.
CMOs are purchased to diversify the portfolio risk characteristics from primarily corporate credit risk to a mix of credit and cash flow risk. The majority of the CMOs in the Company's investment portfolio have relatively low cash flow variability. In addition, approximately 72% of the CMOs in the portfolio have minimal credit risk because the underlying collateral is backed by the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation, or the Government National Mortgage Association. These CMOs offer greater liquidity and higher yields than corporate debt securities of similar credit quality and expected average lives.
The Planned Amortization Class ("PAC") tranche is structured to provide more certain cash flows to the investor and therefore is subject to less prepayment and extension risk than other CMO tranches. In general, the Company's PACs are structured to provide average life stability for increases and decreases in interest rates of 100 to 200 basis points. PACs derive their stability from two factors: (i) early repayments are applied first to other tranches to preserve the PACs' originally scheduled cash flows as much as possible and (ii) cash flows applicable to other tranches are applied first to the PAC if the PACs' actual cash flows are received later than originally anticipated.
The majority of the securities contained in the Company's CMO portfolio are traded in the open market. As such, the Company obtains market prices from outside vendors. Any security price not received from such vendors is obtained from the originating broker or internally calculated.
Asset-backed securities ("ABS") are purchased both to diversify the overall credit risks of the fixed maturity portfolio and to provide attractive returns. The ABS portfolio is diversified both by type of asset and by issuer. The largest asset class exposure in the ABS portfolio is to credit card receivables. These are comprised of pools of both general purpose credit card receivables such as Visa and Mastercard and private label credit card receivable pools. Excluding the exposures to home equity loans (which represented 2.0% and 2.9% of the ABS portfolio as of December 31, 1999 and 1998, respectively), the ABS portfolio is in general insensitive to changes in interest rates. As of December 31, 1999 and 1998, respectively, the ABS portfolio did not contain any pools of assets outside of the United States.
Following is a summary of the Company's commercial mortgage loans by geographic area and property type as of December 31, 1999, and 1998, respectively.
Of the $124.0 million, $220.1 million and $195.5 million, respectively, in maturing loans during the years ended December 31, 1999, 1998 and 1997, 33.9%, 7.6% and 13.9%, respectively, were refinanced, 38.9%, 58.2% and 48.1%, respectively, were paid off, 0.0%, 2.2% and 6.9%, respectively, were foreclosed, and 15.3%, 0.0% and 5.1%, respectively, were restructured. Of the $1,141.4 million of outstanding commercial mortgage loans in the Company's investment portfolio at December 31, 1999, $26.6 million, $89.3 million and $161.7 million are scheduled to mature in 2000, 2001 and 2002, respectively.
- --------------- (1) Consists of loans which have had their maturity date extended for a period of less than one year. (2) Consists of loans which have had their maturity date extended pursuant to the borrower's option as provided by the loan documents.
The following table presents the Company's commercial mortgage loan maturity profile for the periods indicated.
loans. Loans with valuation allowances, but which are not currently delinquent, and loans which are on watchlist are categorized by the Company as "potential problem" loans. Loans for which the original terms of the mortgages have been modified or for which interest or principal payments have been deferred are categorized by the Company as "restructured" loans.
The carrying value of commercial mortgage loans at December 31, 1999 was $1,141.4 million, which amount is net of valuation allowances aggregating $57.1 million which represents 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.
At December 31, 1999, the carrying value of problem, potential problem and restructured loans was $0.0 million, $72.1 million and $134.8 million, respectively, net of valuation allowances of $0.0 million, $16.2 million and $26.0 million, respectively.
The following table presents the carrying amounts of problem, potential problem and restructured commercial mortgages relative to the carrying value of all commercial mortgages as of the dates indicated. The table also presents the valuation allowances and writedowns recorded by the Company relative to commercial mortgages defined as problem, potential problem and restructured as of each of the aforementioned dates.
- --------------- (1) Problem commercial mortgages included mortgage loans in foreclosure of $0.0 million and $11.6 million at December 31, 1999 and 1998, respectively. (2) Includes impairment writedowns recorded prior to the adoption of SFAS No. 114, Accounting by Creditors for Impairment of a Loan, of $26.3 million at both December 31, 1999 and 1998.
The carrying value of the Company's agricultural mortgage loans was $570.7 million and $531.2 million at December 31, 1999 and 1998, respectively, representing 33.3% and 37.4% of total mortgage assets and 5.3% and 4.8% of general account invested assets at such dates, respectively. The agricultural mortgage portfolio is diversified both geographically and by type of product. The security for these loans includes row crops, permanent plantings, dairies, ranches and timber tracts. Due to strong agricultural markets and advantageous yields, the Company expects to continue to invest in agricultural mortgage investments. Less than 1.3% and 0.9% of total agricultural loans outstanding at December 31, 1999 and 1998, respectively, were delinquent or in process of foreclosure. Following is a summary of agricultural mortgage loans by state which were held by the Company at the dates indicated.
MONY Life has, from time to time, pooled certain of its agricultural mortgage loans and sold beneficial interests in each of the individual agricultural mortgage loans in such pools (referred to as "participation interests") to third parties. Under such arrangements, MONY Life retains a specified equity interest in the loans in such pools and sells the remaining participation interest. MONY Life is responsible for servicing the individual agricultural mortgage loans in each pool, for which it receives a servicing fee from the third party participants. As of December 31, 1999, the aggregate amount of agricultural mortgage loans in such pools being serviced by MONY Life was approximately $252.1 million.
The Company holds real estate as part of its general account investment portfolio. The Company has adopted a policy of not investing new funds in equity real estate except to safeguard values in existing investments or to honor outstanding commitments. As of December 31, 1999 and 1998 the carrying value of the Company's equity real estate investments was $369.1 million and $634.2 million, respectively, or 3.4% and 5.7%, respectively, of general account invested assets. The Company owns real estate, interests in real estate joint ventures (both majority owned and minority owned), and real estate acquired upon foreclosure of commercial and agricultural mortgage loans. The following table presents the carrying value of the Company's equity real estate investments by such classifications as of the dates indicated.
The following tables present information concerning the geographic and property type breakdown of the equity real estate portfolio as of December 31, 1999 and 1998.
The Company accounts for its investments in the limited partnership interests of investment partnerships in accordance with the Equity Method of accounting or the Cost Method of accounting depending upon the Company's percentage of ownership of the partnership and the date it was acquired. In general, partnership interests acquired after May 18, 1995 are accounted for in accordance with the Equity Method of accounting if the Company's ownership interest exceeds 3 percent, whereas, if the partnership was acquired prior to May 18, 1995, the Equity Method would be applied only if the Company's ownership interest exceeded 20 percent. In all other circumstances the Company accounts for its investments in limited partnership interests in accordance with the Cost Method.
Under the Equity Method of accounting for investments, an investor is required to record in its income its share of the income or loss reported by an investee and, correspondingly, increase or decrease the carrying of such investment in its balance sheet. Distributions of income or dividends from the investor are recorded as a reduction in the carrying value of the investment. In applying the Equity Method, an investor is not permitted to adjust the income reported by an investee to conform the investee's accounting policies to that followed by the investor.
In accordance with GAAP, investment partnerships report their investments at fair value and changes in the fair value of such investments are reflected in the income of such partnerships. Accordingly, a significant portion of the income reported by the Company from partnerships accounted for under the equity method results from unrealized appreciation in the investments of the partnerships. See discussion regarding "Equity Price Risk" on page 60.
- --------------- (1) Includes $48.0 million and $55.8 million at December 31, 1999, and 1998, respectively, relating to impairments taken upon foreclosure of mortgage loans.
At December 31, 1999 and 1998, 10.5% ($1,141.4 million) and 8.1% ($886.9 million), respectively, of the Company's general account invested assets consisted of commercial mortgage loans. Commercial mortgage loans are stated at their unpaid principal balances, net of valuation allowances for impairment. The Company provides valuation allowances for commercial mortgage loans when it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Increases in such valuation allowances are recorded as realized investment losses and, accordingly, are reflected in the Company's results of operations. For the years ended December 31, 1999, 1998 and 1997, such increases (decreases) in valuation allowances aggregated $2.7 million, $11.7 million and $0.4 million, respectively. The carrying value of commercial mortgage loans at December 31, 1999 was $1,141.4 million, which amount is net of $57.2 million representing management's best estimate of cumulative impairment losses at such date. However, there can be no assurance that additional provisions for impairment adjustments with respect to the real estate held for investment will not need to be made. Any such adjustments may have a material adverse effect on the Company's financial position and results of operations.
The carrying value of real estate held for investment is generally adjusted for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. Such impairment adjustments are recorded as realized investment losses and, accordingly, are reflected in the Company's results of operations. For the years ended December 31, 1999, 1998 and 1997, such impairment adjustments aggregated $0.0 million, $5.9 million, and $0.0 million, respectively. At December 31, 1999 and 1998, the carrying value of real estate held for investment was $46.2 million and $321.3 million, or 0.4% and 2.9% of invested assets at such dates, respectively. The aforementioned carrying values are net of cumulative impairments of $10.8 million and $87.4 million, respectively, and net of accumulated depreciation of $22.8 million and $153.9 million, respectively. However, there can be no assurance that additional provisions for impairment adjustments with respect to real estate held for investment will not need to be made.