We were formed as a downstream, wholly-owned, holding company of MONY Group on February 27, 2002 for the purpose of issuing debt tied to the performance of the Closed Block Business within MONY Life (see Note 8 of the GAAP Interim Condensed Consolidated Financial Statements of MONY Holdings, LLC and Subsidiary for an explanation of the Closed Block Business), a wholly-owned and principal operating subsidiary of MONY Group. On April 30, 2002, concurrent with the commencement of our operations, we, in a structured financing tied to the performance of the Closed Block Business within MONY Life, issued $300.0 million of floating rate insured debt securities (which we refer to as the old notes) in a private placement and MONY Group, pursuant to the terms of the structured financing, transferred all of its ownership interest in MONY Life to us. Other than activities related to servicing the old notes in accordance with the indenture and our ownership interest in MONY Life, we have no operations and engage in no other activities. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations of MONY Holdings (Generally Accepted Accounting Principles) - Liquidity” for further information.
MONY Life provides life insurance, annuities, corporate-owned and bank-owned life insurance, mutual funds, securities brokerage, asset management, business and estate planning, and trust products and services. MONY Life 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 (which we refer to as Proprietary Distribution). In addition, MONY Life distributes its products and services through complementary distribution channels (which we refer to as Complementary Distribution), which principally consist of independent third-party insurance brokerage general agencies and securities broker-dealers, as well as its corporate marketing team. MONY Life 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.
MONY Life’s principal wholly-owned direct and indirect operating subsidiaries include: (i) MONY Life Insurance Company of America, an Arizona domiciled life insurance company, (ii) Enterprise Capital Management, a distributor of both proprietary and non-proprietary mutual funds, (iii) U.S. Financial Life Insurance Company, an Ohio domiciled insurer underwriting specialty risk life insurance business, (iv) MONY Securities Corporation, a registered securities broker-dealer and investment advisor whose products and services are distributed through MONY Life’s career agency sales force, (v) Trusted Securities Advisors Corp., which distributes investment products and services through a network of accounting professionals, (vi) MONY Brokerage, Inc., a licensed insurance broker, which principally provides MONY Life’s career agency sales force with access to life, annuity, small group health, and specialty insurance products written by other insurance companies so they can meet the insurance and investment needs of their customers, and (vii) MONY Life Insurance Company of the Americas, Ltd., which provides life insurance, annuity and investment products to nationals of certain Latin American countries.
Refer to Note 7 of the Generally Accepted Accounting Principles Consolidated Financial Statements of MONY Holdings LLC and Subsidiary and Note 3 of the Generally Accepted Accounting Principles Interim Condensed Consolidated Financial Statements of MONY Holdings LLC and Subsidiary included herein for information regarding our business and reportable segments.
· asset management fees from separate account and mutual fund products,
· the cost of selling and servicing the various products sold by MONY Life, including commissions to sales representatives (net of any deferrals), and
· the amount of our assets and our third-party assets under management,
· the adequacy of our product pricing (which is primarily a function of competitive conditions, our ability to assess and manage trends in mortality and morbidity experience as compared to the level of benefit payments, and our ability to maintain expenses within pricing assumptions),
· the persistency of our policies (which affects our ability to recover the costs incurred to sell a policy),
· commission and fee revenue from securities brokerage and investment banking operations.
The results of operations of our businesses, particularly the businesses comprising our Accumulation Products segment, are highly sensitive to general economic and securities market conditions. These conditions include the level of valuations in the securities markets, the level of interest rates, consumer sentiment, the levels of retail securities trading volume, and the consensus economic and securities market outlook. Set forth below is a discussion of certain matters that may adversely impact our results of operations in the event of a continuation or worsening of current economic and securities market conditions, as well as other matters that could adversely affect our future earnings:
production of business, such as commissions paid to financial professionals and brokers) are amortized on a basis consistent with how earnings emerge from the underlying products that gave rise to such DPAC. Such amortization is calculated based on the actual amount of earnings that have emerged to date relative to management’s best estimate of the total amount of such earnings expected to emerge over the life of such business. This calculation requires the Company to make assumptions about future investment yields, contract charges, interest crediting rates, mortality rates, lapse rates, expense levels, policyholder dividends and policy duration. In addition, to the extent that the present value of estimated future earnings expected to emerge over the remaining life of the business is not sufficient to recover the remaining DPAC balance, GAAP requires that such excess DPAC amount be immediately charged to earnings. Accordingly, changes in the Company’s assumptions underlying DPAC or actual results that differ significantly from management’s prior estimates may materially affect the rate at which the Company amortizes or writes-off DPAC, which may materially affect its financial position and results of operations. Also, to the extent that circumstances lead management to conclude that the business, after writing off all DPAC, will not ultimately be profitable, the Company would be required to record its best estimate of the loss in the period such determination was made. While management believes such a scenario is unlikely, a sustained deterioration in the securities markets will significantly impact such determination and may require the Company to recognize a loss that could materially affect its financial position and results of operations.
At December 31, 2002 the carrying value of DPAC was $1.2 billion. Approximately $133.8 million of this amount pertains to the Company’s annuity in force business. The profit margins from this business, over which the related DPAC is amortized, are particularly sensitive to changes in assumed investment returns and asset valuations. With respect to the investment return assumptions which underlie the amortization of the Company’s annuity DPAC, the accounting policy applied, which is referred to as the “reversion to the mean” method, assumes a rate of return over the life of the business of 8.0%. In applying this method, the future assumed rate of return assumption is adjusted based on actual returns to date so that the ultimate rate of return over the expected life of the business is always 8.0%. However, the Company’s policy is to never exceed a future rate of return assumption in excess of 10.0%. Accordingly, the ultimate rate of return over the life of such business may be less than 8.0%. In addition, in applying the “reversion to the mean” method the Company’s policy does not provide for a floor on the assumed future rate of return. Accordingly, actual returns to date sufficiently in excess of the ultimate assumed rate of return of 8.0% may result in a future rate of return assumption that could actually be negative.
While the Company’s current best estimate for the ultimate investment return underlying this business is 8.0%, a continuing deterioration in the securities markets (whether with regard to investment returns or asset valuations) could require the Company to revise it’s estimate of the ultimate profitability of this business. This could result in accelerated amortization and/or a charge to earnings to reflect the amount of DPAC which may not be recoverable from the estimated present value of future profits expected to emerge from this business. Such an event, should it occur, may materially affect the Company’s financial position and results of operations.
The Company’s calculation of annuity product DPAC asset balances as of December 31, 2002 incorporates an assumption of 10% returns in 2003 and later for all funds underlying variable annuity products. This assumption is consistent with the “reversion to the mean” method described above. The assumption of future returns impacts the Company’s expectation of both future fee income and future expenses, including the cost of the death benefit guarantees. The Company’s anticipated earnings for 2003, which were disclosed at its Investment Community meeting on January 16, 2003 were predicated on a 7% return, which built in $3.0 million of variable annuity DPAC unlocking. Within a narrow range, any deviation from 7% will change earnings by approximately $1.0 million per 1% change in return. For example, a return of 8% would lead to a $1 million gain relative to plan, and a return of 6% would lead to a $1 million loss. However, if returns fall substantially below 3 or 4%, we may need to take additional “loss recognition” writeoffs. These writeoffs have a larger immediate impact than DPAC unlocking, in that the entire amount of DPAC deemed non-recoverable must be written off at once, rather than over the life of the product. Every additional drop of 1% in this range would decrease earnings by approximately $2 million. For example, 2003 returns of 0% would decrease earnings by $9.0 million to $11.0 million.
The Company makes investments in partnerships specializing in venture capital investing. The Company’s investments are in the form of limited partnership interests. The Company generally limits these investments to no more than 2% to 3% of its total invested assets. In accordance with GAAP, certain of the Company’s investments in these partnerships are accounted for under the equity method of accounting, while the balance of the portfolio is accounted for at estimated fair value with changes in fair value recorded in other comprehensive income. Generally, substantially all the Company’s partnership investments acquired before May 1995 are accounted for at fair value, while those acquired after May 1995 are accounted for under the equity method of accounting. Because the underlying partnerships are required under GAAP to mark their investment portfolios to market and report changes in such market value through their earnings, the Company’s earnings will reflect the pro rata share of such mark to market adjustment if the Company accounts for the partnership investment under the equity method. With respect to partnerships accounted for at fair value, there will be no impact on the Company’s earnings until: (i) the underlying investments held by the partnership are distributed to the Company by the partnership, or (ii) the underlying investments held by the partnership are sold by the partnership and the proceeds distributed to the Company, or (iii) an impairment of the Company’s investment in the partnership is determined to exist. Historically, venture capital investments have had a significant impact on the Company’s earnings. The Company’s future earnings from venture capital investments could be adversely affected when market valuations deteriorate, which could materially affect the Company’s results of operations and financial position. At December 31, 2002, the carrying value of the Company’s venture capital investments was $186.2 million, of which $92.0 million is accounted for under the equity method and $94.2 million is accounted for at fair value.
established for such claims. Accordingly, upon the adoption of any new guidance issued by the AICPA, the Company might then have to establish additional reserves.
· As discussed above under the caption General Discussion of Factors Affecting Profitability, revenues from the Company’s separate account and mutual fund products depend, in large part, upon the amount of assets it has under management. Accordingly, a continuing or sustained deterioration in the securities markets can adversely affect the Company’s revenues which could be material to its results of operations and financial position.
· While the market value of assets exceeded the Company’s pension liabilities at December 31, 2002, any unfunded liability at December 31, 2003 will either cause the Company to contribute assets to the pension plan in an amount sufficient to eliminate any unfunded position or, as required by GAAP, the Company will be required to charge to comprehensive income the full amount of any prepaid benefit cost at such date. At December 31, 2002, prepaid benefit costs aggregated $151.0 million. While management expects that, in the event of an underfunded position, it would make a contribution to the Company’s pension to avoid such a charge to comprehensive income, this will ultimately depend upon the total amount of any such underfunding, which largely is dependent upon the market values of assets backing the pension plan, and the amount of pension plan liabilities, at December 31, 2003. It should be noted that, in the event a company is required to charge its prepaid benefit cost asset to comprehensive due to an underfunded position, in accordance with GAAP, a company may reestablish that asset if the market value of assets supporting the pension plan increase, the plan liabilities decrease, and/or subsequent contributions to the pension plan cause the plan be in a funded position.
Preparation of the Company’s financial statements in accordance with Generally Accepted Accounting Principles (“GAAP”) requires the application of accounting policies that often involve significant use of judgment. Differences between estimated and actual results and changes in facts and circumstances that cause management to revise its estimates may materially affect the Company’s results of operations and financial position.
The Company records mortgage loans on real estate at their unpaid principal balances, net of valuation allowances. Valuation allowances established for the excess of the carrying value of a mortgage loan over its estimated fair value when the loan is considered to be impaired. Mortgage loans are considered to be impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Estimated fair value is based on either the present value of expected future cash flows discounted a the loan’s original effective interest rate, or the loan’s observable market price (if considered to be a practical expedient), or the fair value of the collateral if the loan is collateral dependent and if forecolosure of the loan is considered probable. In addition, the Company records an estimate for incurred but not reported defaults. 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 from mortgages, (ii) the value of the collateral, and (iii) changes in the economic environment in general. At December 31, 2002 and 2001, the valuation allowance on these mortgage loans was $22.7 million and $28.4 million, respectively.
Accounting for litigation, contingencies and restructuring charges requires the Company to estimate the expected costs of events which have already occurred but which the Company has not completely resolved. As discussed in Note 16 to the Consolidated Financial Statements, the Company is party to various legal actions and proceedings in connection with its business. To the extent the losses are probable and reasonably estimable, the Company records liabilities related to these matters in accordance with the provisions of SFAS 5 and SFAS Interpretation 14. Judgments or settlements exceeding established loss reserves or changes in the circumstances requiring management to update its loss estimate may materially affect the Company’s financial position and results of operations.
The following tables present the Company’s consolidated and segment results of operations for the years ended December 31, 2002, 2001 and 2000. The financial information herein is presented in accordance with GAAP unless otherwise noted.
Universal life and investment-type product policy fees were $200.5 million for 2002, a decrease of $6.7 million, or 3.2%, from $207.2 million reported for 2001. The decrease was primarily a result of lower fees in the Accumulation Products segment of $7.9 million, partially offset by higher fees in the Protection Products and Other Products segments of $0.5 million and $0.7 million, respectively. The decrease in the Accumulation Products segment is primarily due to lower Flexible Premium Variable Annuity (“FPVA”) mortality and expense charges of $7.5 million due to lower separate account fund balances. Annuity assets under management were $4.0 billion as of December 31, 2002 compared to $4.6 billion at December 31, 2001. The increase in the Protection Products segment is primarily due to an increase of $9.8 million in Variable Universal Life (“VUL”) relating to an increase in that block of business and a decrease of $1.5 million relating to certain reinsurance attributable to Protection Products. This was partially offset by decreases in Universal Life (“UL”) and Corporate Sponsored Variable Universal Life (“CSVUL”) fees of $5.2 million and $5.1 million, respectively. The decrease in UL fees is due to lower Cost of Insurance (“COI”) charges attributable to the overall decline in UL business, and the decrease in CSVUL fees is primarily due to lower renewal premiums.
Net investment income was $727.1 million for the year ended December 31, 2002, an increase of $50.2 million, or 7.4%, from $676.9 million reported in the prior year. The increase in net investment income primarily consisted of: (i) a $41.9 million increase in income from investments in venture capital partnerships to $6.5 million for the year ended December 31, 2002, from a loss of $35.4 million reported for the year ended December 31, 2001 (See “Investments - Limited Partnership Interests”) (ii) a $6.5 million increase in income from real estate investments, and (iii) additional earnings from the increase in invested assets which was substantially offset by a decline in interest rates. The annualized yield on the Company’s invested assets, including limited partnership interests, before and after realized gains/(losses) on investments was 6.6% and 5.2%, respectively, for the year ended December 31, 2002, as compared to 6.2% and 6.1%, respectively, for the year ended December 31, 2001. See “- Investments - Investment Yields by Asset Category.”
Net realized losses were $151.0 million for the year ended December 31, 2002, an increase of $138.7 million, from losses of $12.3 million reported in the prior year. The increase in realized losses primarily consisted of other than temporary impairment charges on fixed maturity and equity securities of $115.5 million and $38.5 million, respectively, valuation allowance taken on real estate properties of $26.7 and a $6.8 million litigation loss related to a specific joint venture real estate partnership, offset by gains from sales of investments and prepayments on fixed maturity securities of $38.2 million. See “- Investments - Other Than Temporary Impairment Charges on Investments in Fixed Maturity Securities and Common Stocks and See Note 16 to the Consolidated Financial Statements.
Group Pension Profits (which ceased as of December 31, 2002 - see Note 11 to the Consolidated Financial Statements), of $82.3 million for the year ended December 31, 2002 include earnings of $54.1 million from the final payment due from Aegon USA, Inc. (“AEGON”)( “Final Value Payment”) in connection with the expiration of the Group Pension Transaction at December 31, 2002. Excluding the Final Value Payment, Group Pension Profits for the year ended December 31, 2002 were $28.2 million, a decrease of $2.5 million, as compared to $30.7 million recorded in the prior year. The decrease primarily resulted from the continuing runoff of the group pension in force business transferred by the Company pursuant to the Group Pension Transaction.
Other income (which consists primarily of fees earned by the Company’s mutual fund management and insurance brokerage operations, as well as certain asset management fees, and other miscellaneous revenues) was $169.3 million for 2002, a decrease of $19.8 million from $189.1 million reported in the prior comparable year. The following table summarizes the components of other income recorded in the Protection Products segment for the years ended December 31, 2002 and 2001, respectively:
The decrease in the Accumulation Products segment is due primarily to an $11.1 million decrease in commission revenue earned by Enterprise and a $1.4 million decrease in the change in the cash surrender value of the COLI contract allocated to the Accumulation Product segment, partially offset by a $2.1 million increase in other miscellaneous revenues. For reporting purposes, the results of the COLI contract are allocated among the segments. The increase in the Other Products segment is primarily due to increased revenues from the Company’s insurance brokerage subsidiary. The increase in reconciling amounts is primarily due to higher revenue attributable to the Company’s employee benefit plans.
Benefits to policyholders were $803.1 million for 2002, a decrease of $11.6 million, or 1.4%, from $814.7 million reported for 2001. The decrease consisted primarily of lower benefits of $24.8 million in the Protection Products segment offset by higher benefits in the Accumulation Products segment, Other Products segment and reconciling amounts of $7.8 million, $1.0 million and $4.4 million, respectively. The decrease of $24.8 million in the Protection Products segment was due primarily to lower benefits of $35.3 million and $2.7 million on individual life and VUL business, respectively, partially offset by an increase in benefits related to UL business of $13.3 million. The decrease in individual life is due to lower death benefits, surrenders, and reserves, primarily in the Closed Block, as a result of better mortality and improved persistency, while the decrease in VUL is primarily attributable to lower death benefits, net of reinsurance. The increase in UL business in primarily attributable to poor mortality. The increase in the Accumulation Products segment is primarily due to higher supplementary contract and individual annuity reserves of $1.2 million and $5.1 million, respectively, coupled with higher benefit reserves of $0.8 million on the Company’s FPVA products as compared to the prior year. The increased reserves are attributable to higher sales of accumulation products and higher provisions for guaranteed minimum death benefits on the Company’s FPVA products
Amortization of deferred policy acquisition costs (“DPAC”) was $156.1 million for 2002, a decrease of $2.7 million, or 1.7%, from $158.8 million reported for 2001. The decrease was primarily due to lower amortization of $5.4 million in the Protection Products segment and $17.0 million in reconciling amounts, partially offset by an increase of $19.7 million in the Accumulation products segment. The decrease in the Protection Products segment was primarily due to lower amortization in the Closed Block of $10.4 million due to the run-off of this block of business and the implementation of SOP 00-3 in 2001. In addition the UL product line had lower amortization line of $3.5 million due to unfavorable mortality. The GUL product line had lower amortization of $1.5 million. This was partially offset by increased amortization in the VUL and term product lines of $4.4 million and $2.0 million, respectively as these blocks of business continue to grow. The decrease of $17.0 million in reconciling amounts relates to reorganization and other charges recorded during the fourth quarter of 2001. See Note 23 to the Consolidated Financial Statements. Of the $17.0 million, approximately $13.0 million represented a write-off of DPAC in the Company’s international insurance subsidiary to reflect reduced expectations of future profitability due primarily to revised business strategies, and approximately $4.0 million represented the write-off of DPAC on the Company’s GUL business. The increase in the Accumulation Products segment is due to higher amortization in the FPVA product caused by an acceleration of amortization. Amortization in the FPVA product line was lower primarily due to a decline in variable annuity assets under management and lower expected future profit margins.
Dividends to policyholders (all but a deminimus amount of which are recorded in the Protection Products segment) were $188.0 million for the year ended December 31, 2002, a decrease of $48.6 million, or 20.5%, from $236.6 million reported in the comparable prior year. Dividends to policyholders can be broken down into two components, namely policyholder dividends payable in the current year and the change in the deferred dividend liability. The $48.6 million decrease in dividends to policyholders was due to a year over year decrease of $35.8 million in the deferred dividend liability, and a year over year decrease of $12.8 million in dividends paid to policyholders.
As required under accounting principles generally accepted in the United States of America (“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 2 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” changes on invested assets during the fourth quarter, the actual experience of the Closed Block earnings was less than expected. The deferred dividend liability was $33.2 million at December 31, 2002.
The Company recorded a federal income tax benefit in 2002 of $7.8 million, compared to a federal income tax benefit $19.1 million recorded in 2001. The Company’s effective tax rate was approximately 35.0% in 2002 and 2001.
Net investment income was $396.5 million for the year ended December 31, 2002, a decrease of $1.1 million, from $397.6 million reported in the prior year. The decrease in net investment income reflects the declines in the interest rate environment for fixed income assets.
Benefits to policyholders were $566.8 million for the year ended December 31, 2002, a decrease of $40.1 million, from $606.9 million reported in the comparable prior year. The decrease principally resulted from: (i) lower death benefits of $14.7 million, as compared to the prior year as a result of improvements in mortality experience (death benefits were $173.1 million and $187.8 million for the years ended December 31, 2002 and 2001, respectively), and (ii) a decrease in surrender benefits of $10.6 million, as compared to the prior year as a result of an improvement in persistency experience (surrender benefits were $345.2 million and $355.8 million for the years ended December 31, 2002 and 2001, respectively) and (iii) a $14.6 million decrease in the change in reserves, compared to the comparable prior year results (changes in reserves were $39.1 million and $53.7 million for the years ended December 31, 2002 and 2001, respectively).
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 Closed Block earnings 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 2 to the Consolidated Financial Statements. The expected emergence of earnings from such cash flows is referred to as the “slide path earnings.” The aforementioned additional liability (which represents the actual Closed Block earnings in excess of the 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, the actual experience of the Closed Block earnings was less than expected. See “- Net Investment Income and Realized Gains/(Losses) above.” The deferred dividend liability was $33.2 million at December 31, 2002.
The information presented should not be viewed as a substitute for revenues determined in accordance with GAAP. Revenues in accordance with GAAP related to product sales are generated from both current and prior period sales that are in-force during the reporting period. For protection products, GAAP recognizes premium revenue when due from a policyholder. For accumulation products, GAAP revenues are a function of fee based charges applied to a contractholder’s accountant balance. Because of how revenues are recognized in accordance with GAAPmanagement not believe GAAP revenues are meaningful in assessing the periodic sales production of a life insurance company and, accordingly, reconciliation to GAAP revenues would not be meaningful.
The following tables set forth assets under management at December 31, 2002 and 2001 as well as the changes in the primary components of assets under management during the years then ended:
Amounts presented are net of approximately $71.0 million, $208.0 million and $998.0 million for 2002, 2001 and 2000, respectively, of exchanges to new product series.
Accumulation sales were $1,743.0 million for the year ended December 31, 2002 compared to $1,691.0 million in the comparable prior year. Enterprise had sales of $1,200.0 million, $969.0 million of which were sold through third-party broker-dealers and $231.0 million of which were sold through the Company’s career network. For the year ended December 31, 2001, Enterprise sales were $1,298.0 million, $939.0 million of which were from third-party broker dealers and $359.0 million of which were from the career network. Due to a decline in the equity markets and a 15.0% decline in the Dow Jones Industrial average during 2002, accumulation assets under management decreased 14.4% to $7.7 billion as of December 31, 2002 from $9.0 billion as of December 31, 2001.
Separate account assets for which we do not bear investment risk are managed in accordance with the prescribed investment strategy that applies to the specific separate account. Separate accounts are established in conformity with applicable insurance laws and are generally not chargeable with liabilities that arise from any other business of MONY Life. Separate account assets are subject to general account claims only to the extent that the value of those assets exceeds the separate account liabilities. Investments held in separate accounts and liabilities of the separate accounts are reported separately as assets and liabilities. We report substantially all separate account assets at estimated fair value. Investment income and gains or losses on the investments of separate accounts accrue directly to contractholders and, accordingly, are not reflected in our consolidated statements of income and cash flows. Fees that we charge to the separate accounts (including mortality charges, policy administration fees and surrender charges) are reflected in our revenues.
The following table presents a summary of our consolidated General Account invested assets at December 31, 2002, 2001 and 2000:
The yield on General Account invested assets (including net realized gains and losses on investments) was 5.2% for the year ended December 31, 2002 and 6.1%, 9.1% and 9.4% for the years ended December 31, 2001, 2000 and 1999, respectively.
Fixed maturities consist of publicly traded debt securities, privately placed debt and small amounts of redeemable preferred stock. They represented 67.1% of total invested assets at December 31, 2002 and 63.6% and 61.7% of total invested assets at December 31, 2001 and 2000, respectively.
The following table presents our fixed maturities by National Association of Insurance Commissioners Designation and the equivalent ratings of the Nationally Recognized Statistical Rating Organizations as of December 31, 2002, 2001 and 2000, as well as the percentage, based on fair value, that each designation comprises.
At December 31, 2002, the percentage, based on estimated fair value, of total public fixed maturities that were investment grade (National Association of Insurance Commissioners Designation 1 or 2) was 93.8% compared to 94.4% and 95.6% at December 31, 2001 and 2000. At December 31, 2002, the percentage, based on estimated fair value, of total private placement fixed maturities that were investment grade (National Association of Insurance Commissioners Designation 1 or 2) was 84.5% compared to 87.4% and 88.2% at December 31, 2001 and 2000.
MONY Life has what it believes is a well-diversified portfolio of fixed maturities. The portfolio at December 31, 2002 included 18.5% in consumer goods and services, 12.9% in asset and mortgage backed securities, other manufacturing 10.7% and the remaining 57.9% in other sectors, none of which exceeded 10.0% of total fixed maturities. The portfolio at December 31, 2001 included 17.6% in consumer goods and services, 15.6% in asset and mortgage backed securities, 10.6% in public utilities, and the remaining 56.2% in other sectors, none of which exceeded 10.0% of total fixed maturities. The portfolio at December 31, 2000 included 15.6% in consumer goods and services, 16.5% in asset and mortgage backed securities, 11.4% in public utilities, 10.1% in other manufacturing and the remaining 46.4% in other sectors, none of which exceeded 10.0% of total fixed maturities.
The following table presents the types of mortgage-backed securities, as well as other asset-backed securities, that we held as of the dates indicated.
We purchase collateralized mortgage obligations to diversify the risk characteristics of our portfolio of invested assets primarily from credit risk to cash flow risk. We believe that the majority of the collateralized mortgage obligations in our investment portfolio have relatively low cash flow variability. In addition, we believe that 62.1% of the collateralized mortgage obligations 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 collateralized mortgage obligations offer greater liquidity and higher yields than corporate debt securities of similar credit quality and expected average lives.
We manage this prepayment and extension risk by investing in collateralized mortgage obligations tranches that provide for greater stability of cash flows. The following table presents the mix of collateralized mortgage obligations tranches as of the dates indicated.
The amortized cost and estimated fair value of fixed maturities, by contractual maturity dates, (excluding scheduled sinking funds) as of December 31, 2002, 2001 and 2000 are as follows:
Mortgage loans, consisting of commercial, agricultural and residential loans, comprised 16.0%, 16.5% and 16.2% of our total invested assets at December 31, 2002, 2001 and 2000, respectively. As of December 31, 2002, 2001 and 2000, commercial mortgage loans comprised $1,570.5 million, $1,507.8 million and $1,443.3 million, or 83.7%, 83.3% and 82.2% of our total mortgage loan investments, respectively. Agricultural loans comprised $306.2 million, $301.1 million and $310.3 million, or 16.3%, 16.6 % and 17.7% of our total mortgage loans, and residential mortgages comprised $0.7 million, $0.8 million and $1.1 million, representing less than 1% of our total mortgage loan investments at the dates indicated.
The underlying properties supporting the commercial mortgage loans at December 31, 2002, 2001 and 2000, respectively, consisted of 56.0%, 54.4% and 56.6% in office buildings, 12.0%, 10.4% and 9.3% in industrial buildings, 8.6%, 9.7% and 10.2% in hotels, and 23.4%, 25.5% and 23.9% in other categories, none of which exceeded 10.0% of total commercial mortgage loans.
Of the $102.9 million, $118.0 million, and $26.3 million in maturing loans during the years ended December 31, 2002, 2001 and 2000, no loans were refinanced or restructured, 71.5%, 65.0%, and 65.3%, respectively, were paid off and 10.7%, 6.0% and 0.0%, respectively, were foreclosed. Of the $1,570.5 million of outstanding commercial mortgage loans at December 31, 2002, $142.3 million, $218.5 million and $76.0 million are scheduled to mature in 2003, 2004 and 2005, respectively.
Commercial mortgage loans are stated at their unpaid principal balances, net of valuation allowances and writedowns for impairment. We provide valuation allowances for commercial mortgage loans considered to be impaired. We consider mortgage loans to be impaired when, based on current information and events, it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement. When we determine that a loan is impaired, we establish a valuation allowance for loss for the excess of the carrying value of the mortgage loan over its estimated fair value. Estimated fair value is based on the fair value of the collateral. The provision for loss is reported as a realized loss on investment.
As of December 31, 2002, we had no problem commercial mortgage loans. As of December 31, 2001, we had two problem commercial mortgages aggregating $16.3 million, an $11.0 million mortgage on a hotel in Virginia and a $5.3 million mortgage on an office building in New Jersey. As of December 31, 2000, we had two problem commercial mortgages aggregating $14.8 million, $8.0 million with respect to a mortgage on property in Arizona and $6.8 million with respect to a mortgage on property in California, both of which are office buildings.
At December 31, 2002, 2001 and 2000, the underlying properties supporting potential problem commercial mortgages consisted of 89.8%, 85.4% and 85.5% in office properties and 10.2%, 14.6% and 14.5% in apartment and retail properties respectively. At December 31, 2002, December 31, 2001 and 2000, the underlying properties supporting restructured commercial mortgage loans consisted of 100.0%, 100.0% and 74.2% in office buildings, and 0.0%, 0.0% and 25.8% in retail and industrial buildings respectively. The potential problem and restructured commercial mortgages at December 31, 2002, 2001 and 2000 were primarily concentrated in the District of Columbia and Texas.
In addition to valuation allowances and impairment writedowns recorded on specific commercial mortgage loans classified as problem, potential problem, and restructured mortgage loans, we record a non-specific estimate of expected losses on all other mortgage loans based on our historical loss experience for those investments. As of December 31, 2002, 2001 and 2000, these reserves were $17.6 million, $18.3 million and $17.7 million, respectively.
The carrying value of our agricultural mortgage loans was $306.2 million, $301.1 million and $310.3 million at December 31, 2002, 2001 and 2000, respectively, representing 17.6%, 16.6% and 17.7% of our total mortgage assets and 2.6%, 2.7% and 2.8% of our General Account invested assets at these 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 what we believe are strong agricultural markets and advantageous yields, we expect to continue to invest in agricultural mortgage investments. Less than 4.2%, 4.4% and 3.3% of our total agricultural loans outstanding at December 31, 2002, 2001 and 2000, respectively, were delinquent or in process of foreclosure.
The states with the highest concentration of agricultural mortgages at December 31, 2001 were California (16.6%), Washington (14.7%), Idaho (12.3%) and Oregon (10.5%). No other state had a concentration of more than 10.0%. The states with the highest concentration of agricultural mortgages at December 31, 2000 were Washington (15.7%), California (13.5%), Idaho (13.2%), and Oregon (11.7%). No other state had a concentration of more than 10.0%.
We define problem, potential problem and restructured agricultural mortgages in the same manner as we do for commercial mortgages. Our total problem, potential problem and restructured agricultural mortgages as of December 31, 2002, 2001 and 2000 were $17.3 million, $21.6 million and $20.3 million, respectively.
We have, from time to time, pooled certain of our 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 these arrangements, we retain a specified equity interest in the loans in the pools and sell the remaining participation interest. We are responsible for servicing the individual agricultural mortgage loans in each pool, for which we receive a servicing fee from the third party participants. As of December 31, 2002, the aggregate amount of agricultural mortgage loans in the pools that we service was approximately $348.6 million.
Our equity real estate is evenly distributed across geographic regions of the country with a concentration in the mountain region of the United States at December 31, 2002. By property type, there is a concentration in hotels which represented approximately 67.6% of the current equity real estate portfolio. Our largest equity real estate holding at December 31, 2002 consisted of a hotel property located in Arizona with a carrying value of approximately $123.3 million and representing approximately 1.0% of our General Account invested assets. Our ten largest real estate properties as of December 31, 2002 comprised 91.2% of our total real estate assets and less than 1.6% of our total invested assets.
Our investments in common stocks are classified as available-for-sale and are reported at estimated fair value. Unrealized gains and losses on our common stocks are reported as a separate component of other comprehensive income, net of deferred income taxes and an adjustment for the effect on deferred policy acquisition costs that would have occurred if the gains and losses had been realized. Substantially all the common stocks that we own are publicly traded on national securities exchanges. Our investments in common stocks represented 0.5% of our invested assets at December 31, 2002 and 0.6% and 0.5% at December 31, 2001 and 2000, respectively. For the year ended December 31, 2002, proceeds on the sale of equity securities totaled $8.5 million which resulted in a net realized loss of $2.0 million. For the years ended December 31, 2001, 2000 and 1999, proceeds on the sale of equity securities totaled $37.0 million, $499.2 million and $302.7 million, which resulted in net realized gains/(losses) of $(6.4) million, $23.4 million, and $77.6 million for the years ended December 31, 2001, 2000 and 1999, respectively.
The following table presents our investments in equity limited partnership interests by industry sector:
The following table presents certain information with respect to realized investment losses from “other than temporary impairment” charges for the years ended December 31, 2002 and 2001. These impairment charges were determined based on the Company’s assessment of the factors referred to above, as they pertain to the individual securities determined to be other than temporarily impaired. Excluded are amounts relating to certain invested assets held pursuant to a reinsurance arrangement whereby all the experience from such assets is passed to the reinsurer.
The Company’s portfolio of fixed maturity securities is comprised of public and private securities. The Company’s portfolio of common stocks is comprised of all public securities. Public securities are those that are registered with the Securities and Exchange Commission (“SEC”). Private securities are issued under an exemption from registration under the Securities Act of 1933. It is generally recognized that publicly traded securities are more liquid than privately traded securities. The Company classifies all of its investments in fixed maturity securities and common stocks as “available for sale”. Accordingly, the carrying value of such securities reflects their fair value at the balance sheet date. Fair value for public securities is based on sales prices or bid-and-asked quotations currently available on a securities exchange registered with the Commisssion or in the over-the-counter market, provided that those prices or quotations for the over-the-counter market are publicly reported by the National Association of Securities Dealers Automated Quotations system “NASDAQ”. Fair value for private securities is generally determined by discounting their prospective cash flows at a discount rate. The discount rate for each issue is the sum of two rates. The first component is the yield to maturity of a U.S.T security with a maturity comparable to the average life of the issue being priced. The second component is a credit spread assigned from a matrix based on credit rating and average life. This matrix is created monthly based on data from two major broker dealers. The quality ratings on the issues being priced are reviewed and updated quarterly.
At December 31, 2002, the carrying values of the public and private fixed maturity securities comprising the Company’s fixed maturity security portfolio were $4,716.9 million and $3,173.1 million, respectively, and the carrying value of the Company’s common stock portfolio was $62.8 million. At December 31, 2001, the carrying values of the public and private fixed maturity securities comprising the Company’s fixed maturity security portfolio were $3,805.2 million and $3,170.9 million, respectively, and the carrying value of the Company’s common stock portfolio was $67.8 million.
In determining that the securities giving rise to the aforementioned unrealized losses were not “other than temporarily impaired”, the Company evaluated the factors cited above, which it considers when assessing whether a security is other than temporarily impaired. In making these evaluations, the Company must exercise considerable judgment. Accordingly, there can be no assurance that actual results will not differ from the Company’s judgments and that such differences may require the future recognition of “other than temporary impairment charges” that could have a material affect on its financial position and results of operations. In addition, the value of, and the realization of any loss on, a fixed maturity security or common stock is subject to numerous risks, including interest rate risk, market risk, credit risk and liquidity risk. The magnitude of any loss incurred by the Company may be affected by the relative concentration of its investments in any one issuer or industry. The Company has established specific policies limiting the concentration of its investments in any single issuer and industry and believes its investment portfolio is prudently diversified. At December 31, 2002 and 2001, no single issuer constituted more than $5.0 million and $6.5 million of the company’s gross unrealized losses, respectively. See “- Investments - Fixed Maturity Securities - Total Fixed Maturities by Credit Quality” for information regarding the ratings by Nationally Recognized Statistical Rating Organizations of securities comprising the Company’s fixed maturity security portfolio. Also, see “- Investments - Fixed Maturity Securities - Total Fixed Maturities by Credit Quality” for information concerning the industry concentration of the Company’s fixed maturity securities.
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, 2002 and 2001, 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 2 to the Consolidated Financial Statements. Excluded are amounts relating to certain invested assets held pursuant to a reinsurance arrangement whereby all the experience from such assets is passed to the reinsurer.
Total Gross Unrealized Losses on Fixed Maturity Securities As of December 31, 2001 Outside the Closed Block
Total Gross Unrealized Losses on Fixed Maturity Securities As of December 31, 2001 Closed Block
The following tables present certain information by type of investment with respect to securities sold which resulted in a loss for the year ended December 31, 2002 and the year ended December 31, 2001, including: (i) the number of positions sold that comprise the aggregate gross realized loss for the period; (ii) the aggregate fair value of such securities at the date of their sale, (iii) the aggregate carrying value of such securities at the date of sale; (iv) the aggregate gross amount of the realized loss recorded from the sale of such securities during the period;, and (v) the gross realized losses reported for each period sorted in descending order by percentage of sales price to carrying value at date of sale. Excludes amounts relating to certain invested assets held pursuant to a reinsurance arrangement whereby all the experience from such assets is passed to the reinsurer.
All sales of common stocks at losses during 2002 and 2001 were made to offset gains from sales of common stock in order to minimize the Company’s tax liability and were in keeping with management’s decision to reduce the Company’s exposure to common stock investments. Specific common stocks sold at losses were not identified as of periods prior to their sale. Decisions on specific securities to be sold at losses were made during the periods in which they were sold after consideration of the amount of common stock gains realized during the period. The table above presents the amount of other than temporary impairment charges taken during the years
The cumulative asset specific impairment adjustments and provisions for valuation allowances that we recorded as of December 31, 2002, 2001 and 2000 are shown in the table below.
Includes $0.0 million, $5.9 million and $22.5 million at December 31, 2002, 2001, and 2000, respectively, relating to impairments taken upon foreclosure of mortgage loans.
All of our fixed maturity and equity investments are classified as available for sale and, accordingly, are marked to market. Unrealized gains and losses are excluded from earnings and reported as a separate component of accumulated other comprehensive income. Investments whose value we deem to be other than temporarily impaired are written down to fair value. We record the writedowns as realized losses and include them in earnings. The cost basis of these investments is adjusted to fair value. The new cost basis is not changed for subsequent recoveries in value. For the years ended December 31, 2002 , 2001, 2000 and 1999, these writedowns aggregated $115.5 million, $31.2 million, $16.0 million and $8.3 million, respectively.
At December 31, 2002, the percentage, based on carrying value, of total public bonds that were investment grade (National Association of Insurance Commissioners Designation 1 or 2) was 93.2%, as compared to 95.0% and 96.4% at December 31, 2001 and
At December 31, 2002, the carrying value of the Closed Block’s problem and potential problem fixed maturities was $136.9 million and $3.6 million respectively, which, in the aggregate, represented approximately 3.5% of the total fixed maturity portfolio. As of December 31, 2001, the carrying value of the Closed Block’s problem and potential problem fixed maturities was $8.1 million and $3.9 million, respectively, which, in the aggregate, represented approximately 0.3% of the total fixed maturity portfolio. As of December 31, 2000, the carrying value of the Closed Block’s problem and potential problem fixed maturities was $11.7 million and $4.4 million, respectively, which, in the aggregate, represented approximately 0.5% of the total fixed maturity portfolio. At December 31, 2002, 2001 and December 31, 2000, the Company had no fixed maturity securities which had been restructured.
MONY Life has what it believes is a well-diversified portfolio of fixed maturities. The portfolio at December 31, 2002 included 18.8% in consumer goods and services, 10.0% in financial services and the remaining 71.2% in other sectors, none of which exceeded 10.0% of total fixed maturities. The portfolio at December 31, 2001 included 15.7% in consumer goods and services, 13.5% in asset and mortgage backed securities, 12.0% in financial services, 10.2% in public utilities, and the remaining 48.6% in other sectors, none of which exceeded 10.0% of total fixed maturities. The portfolio at December 31, 2000 included 14.0% in consumer goods and services, 13.0% in financial services, 12.9% in asset and mortgage backed securities, 11.7% in public utilities, 10.8% in other manufacturing and the remaining 37.6% in other sectors, none of which exceeded 10.0% of total fixed maturities.
Mortgage loans, consisting of commercial, agricultural and residential loans, comprised 11.1%, 11.1% and 10.7% of total invested Closed Block invested assets at December 31, 2002, 2001 and 2000, respectively. As of December 31, 2002, 2001 and 2000, commercial mortgage loans comprised $593.1 million, $582.0 million and $535.5 million, or 93.3%, 93.6% and 91.3% of total mortgage loan investments, respectively. Agricultural loans comprised $42.5 million, $39.7 million and $51.1 million, or 6.7%, 6.4% and 8.7% of total mortgage loans, and residential mortgages comprised $0.2 million, $0.2 million and $0.4 million, or 0.0%, 0.0% and 0.1% of total mortgage loan investments at the dates indicated, respectively.
The following table presents the Closed Block’s commercial mortgage loan maturity profile for the periods indicated.
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 that we recorded relative to commercial mortgages defined as problem, potential problem and restructured as of each of the dates above.
Problem commercial mortgages included mortgage loans in foreclosure of $0.0 million, $8.0 million and $0.0 million at December 31, 2002, 2001 and 2000, respectively.
Includes impairment writedowns recorded in accordance with Statements of Standard Accounting Practice No. 37, Mortgage Loans.
In addition to valuation allowances and impairment writedowns recorded on specific commercial mortgage loans classified as problem, potential problem, and restructured mortgage loans, we record a non-specific estimate of expected losses on all other mortgage loans so classified based on our historical loss experience for those investments. As of December 31, 2002, 2001 and 2000, these reserves were $5.9 million, $6.7 million and $0.0 million, respectively.
The principal source of payment of principal and interest on the Notes is interest income on the Surplus and Related Assets and release of those assets as Closed Block liabilities are met over time. The Surplus and Related Assets were initially selected by MONY Life prior to the effective date of the offering of the Notes. The selection and the investment management of the Surplus and Related Assets is required under the Indenture conform to the investment policy set forth in the Indenture.
On December 31, 1993 (the “Group Pension Transaction Date”), the Company entered into an agreement (the “Agreement”) with AEGON USA, Inc. (“AEGON”) under which the Company transferred a substantial portion of its group pension business (hereafter referred to as the “Group Pension Transaction”), including its full service group pension contracts, consisting primarily of tax-deferred annuity, 401(k) and managed funds lines of business, to AEGON’s wholly-owned subsidiary, AUSA Life Insurance Company, Inc. (“AUSA”). The Company also transferred to AUSA the corporate infrastructure supporting the group pension business, including data processing systems, facilities and regional offices. AUSA was newly formed by AEGON solely for the purpose of facilitating this transaction. In connection with the transaction, the Company and AEGON have entered into certain service agreements. These agreements, among other things, provide that the
Company will continue to manage the transferred assets, and that AUSA will continue to provide certain administrative services to the Company’s remaining group pension contracts not included in the transfer.
For the years ended December 31, 2002, 2001 and 2000, AUSA reported earnings to the Company pursuant to the application of the Earnings Formula of $19.1 million, $27.4 million, and $26.9 million, respectively, and the Company recorded Group Pension Profits of $28.2 million, $30.7 million and $37.1 million, respectively. In addition, the Company earned $12.8 million of interest income on the Notes in each of the aforementioned years. In addition, the Company recorded earnings from the Final Value Payment of $54.1 million (before expenses of approximately $6.0 million relating thereto, which are recorded in “Other operating costs and expenses” in the consolidated statement of income and comprehensive income), on December 31, 2002.
As explained in Note 11, in accordance with GAAP, the Group Pension Transaction did not constitute a sale because the Company retained substantially all the risks and rewards associated with the business transferred to Aegon. Accordingly, over the life of the transaction the Company was required to reflect the transferred assets and liabilities on its balance sheet under separate captions entitled “Assets transferred in Group Pension Transaction” and “Liabilities transferred in Group Pension Transaction”. As a result of the expiration of the transaction at December 31, 2002 and the recognition of earnings from the Final Value Payment from Aegon, the Company has no further interest in the transferred assets and liabilities and, accordingly, such assets and liabilities are no longer reflected on the Company’s balance sheet.
We were formed as a downstream, wholly-owned, holding company of MONY Group on February 27, 2002 for the purpose of issuing debt tied to the performance of the Closed Block Business within MONY Life (see Note 8 of the Generally Accepted Accounting Principles Interim Condensed Consolidated Financial Statements of MONY Holdings LLC and Subsidiary for an explanation of the Closed Block Business), a wholly-owned and principal operating subsidiary of MONY Group. On April 30, 2002, concurrent with the commencement of our operations, we, in a structured financing tied to the performance of the Closed Block Business within MONY Life,
issued $300.0 million of floating rate insured debt securities (which we refer to as the old notes) in a private placement and MONY Group, pursuant to the terms of the structured financing, transferred all of its ownership interest in MONY Life to us.
Proceeds to us from the issuance of the old notes, after all offering and other related expenses, were approximately $292.3 million. Of this amount, $60 million was deposited in a debt service coverage account, pursuant to the terms of the note indenture, to provide collateral for the payment of interest and principal on the old notes. These funds will ultimately revert back to us, provided that the cash flows from the Closed Block Business are sufficient to satisfy our obligations under the old notes. The balance of the proceeds we received of approximately $232.3 million was distributed to MONY Group in the form of a dividend.
Pursuant to the terms of this structured financing, we can, subject to certain conditions, issue an additional $150.0 million of this floating rate insured debt in the future. This transaction effectively securitized a portion of the future profits from MONY Life’s Closed Block Business. The source of cash flows and the collateral for the payment of principal and interest on the old notes is limited to: (i) the amount of dividends that can be paid by MONY Life which are attributable to the Closed Block business, (ii) net tax payments paid to us pursuant to certain tax sharing agreements, (iii) net payments made to us under the aforementioned interest rate swap, and (iv) amounts on deposit in the debt service coverage account (and the earnings thereon).
In addition to the aforementioned cash flows and collateral, investors in the notes have limited recourse to us in the event of any default under the old notes. The amount of dividends attributable to the Closed Block business is determined by applying the New York dividend regulation to the surplus and net gain from operations of MONY Life which is attributable to the Closed Block business, subject to certain adjustments described in the indenture.
MONY Life’s cash inflows are provided mainly from life insurance premiums, annuity considerations and deposit funds, investment income, and maturities and dispositions of invested assets. Cash outflows primarily relate to the liabilities associated with its various life insurance and annuity products, dividends to policyholders, dividends to MONY Holdings (if declared and paid), operating expenses, income taxes, and principal and interest payments on its inter-company surplus notes and demand notes outstanding. The life insurance and annuity liabilities relate to the Company’s obligation to make benefit payments under its insurance and annuity contracts, as well as the need to make payments in connection with policy surrenders, withdrawals and loans. The Company develops an annual cash flow projection which shows expected asset and liability cash flows on a monthly basis. At the end of each quarter actual cash flows are compared to projections, projections for the balance of the year are adjusted in light of the actual results, if appropriate, and investment strategies are also changed, if appropriate. The quarterly cash flow reports contain relevant information on all the following: new product sales and deposits versus projections, existing liability cash flow versus projections and asset portfolio cash flow versus projections. An interest rate projection is a part of the internal cash flow projections for both assets and liabilities. Actual changes in interest rates during the year and, to a lesser extent, changes in rate expectations will impact the changes in projected asset and liability cash flows during the course of the year. When the
Includes reclassification of $230.6 million and $121.3 million for the years ended December 31, 2002 and 2001, respectively, for Separate Account Deposit Type contract withdrawals.
The Company does not believe that inflation has had a material effect on its consolidated results of operations insofar as inflation affects interest rates.
MONY Life Insurance Company (formerly, The Mutual Life Insurance Company of New York), is the principal subsidiary of MONY Holdings LLC (MONY Holdings). MONY Holdings is a subsidiary of The MONY Group, Inc. (MONY Group). On November 16, 1998, pursuant to the Plan of Reorganization (the “Plan”) approved by the New York Superintendent of Insurance, The Mutual Life Insurance Company of New York (“MONY”) converted from a mutual life insurance company to a stock life insurance company and became a wholly owned subsidiary of MONY Group which was organized on June 24, 1997 for the purpose of becoming the parent holding company of MONY. Also, on November 16, 1998, MONY Group consummated an initial public offering (the “Offerings”) of approximately 12.9 million shares of common stock. The shares of common stock issued in the Offerings are in addition to approximately 34.3 million shares of common stock of MONY Group distributed to certain eligible policyholders of MONY in exchange for their ownership interests in MONY.
Proceeds to MONY Holdings from the issuance of the aforementioned debt securities, after all offering and other related expenses, were approximately $292.6 million. Of this amount, $60 million was deposited in a debt service coverage account, pursuant to the terms of the note indenture, to provide liquidity and collateral for the payment of interest and principal on the notes. These funds will ultimately revert back to the Company, provided that the cash flows from the Closed Block Business are sufficient to satisfy MONY Holdings’ obligations under the notes. The remaining balance of the proceeds from the debt issuance of approximately $232.6 million, were distributed to MONY Group in the form of a dividend.
In connection with this financing, MONY Holdings purchased insurance from Ambac Assurance Corporation which guarantees the timely payment of interest and principal to investors in the event of a default on the notes. As a result of this insurance, the notes were rated triple-A by all the major rating organizations, allowing MONY Holdings to minimize the cost of such debt. Interest on the notes accrue at an annual rate equal to three-month LIBOR plus 0.55%. Concurrent with the issuance of the notes, MONY Holdings entered into an interest rate swap contract, which locked in a fixed rate of interest on the debt of 7.19%. Including all costs associated with the offering, the effective yield on the debt is 7.36%.
Pursuant to the terms of the structured financing, MONY Holdings can, subject to certain conditions, issue an additional $150 million of this floating rate insured debt in the future. This transaction effectively securitized a portion of the future profits from MONY Life’s Closed Block Business. The source of cash flows and the collateral for the payment of principal and interest on the debt is limited to: (i) the amount of dividends that can be paid by MONY Life which are attributable to the Closed Block Business, (ii) net tax payments paid to MONY Holdings pursuant to certain tax sharing agreements, (iii) net payments made to MONY Holdings under the aforementioned interest rate swap, and (iv) amounts on deposit in (and the earnings thereon) the debt service coverage account. In addition to the aforementioned cash flows and collateral, investors in the notes have limited recourse to MONY Holdings in the event of any default under the notes. The amount of dividends attributable to the Closed Block Business is determined by applying the New York dividend regulation to the surplus and net gain from operations of MONY Life which is attributable to the Closed Block Business, subject to certain adjustments described in the indenture.
In 2001, the Insurance Department of the State of New York, MONY Life’s state of domicile, adopted the NAIC Accounting Practices and Procedures manual, version effective January 1, 2001, (which we refer to as NAIC SAP) as a component of prescribed or permitted accounting practices accepted by the state. NAIC SAP represents a new statutory accounting framework adopted by the NAIC, which is substantively different from statutory accounting practices followed prior to 2001. As a result of MONY Life’s adoption of Codified SAP as prescribed or permitted by the State of New York, MONY Life recorded a charge to surplus of approximately $36.9 million on January 1, 2001, the mandatory effective date of the adoption of Codified SAP by insurers. The State of New York has adopted specified prescribed accounting practices that differ from Codified SAP. The principal differences at December 31, 2001 were:
· goodwill arising from the purchase of a subsidiary or controlled or affiliated entity is written off by New York domiciled companies directly to surplus in the year it originates, whereas, under Codified SAP, goodwill in amounts not exceeding 10% of an insurer’s capital and surplus may be recognized as an admitted asset, and
· deferred tax assets and deferred tax liabilities representing the expected future tax consequences of temporary differences generated by differences between statutory and tax accounting are not recorded by New York domiciled companies, whereas, under Codified SAP, those deferred tax assets and liabilities are recognized as admitted assets or liabilities, respectively.
Certain reclassifications have been made in amounts presented on the statutory results of operations for the prior year to conform such year to the current year’s presentation. These reclassifications principally relate to certain separate account group annuity contracts and had no effect on previously reported net income, surplus, total assets or liabilities. Such contracts are required to be accounted for as life insurance contracts, whereas in the prior year these contracts were accounted for as deposit-type contracts.
Results of Operations For the Years Ended December 31, 2002 and 2001
The following table presents a summary of MONY Life’s statutory basis results of operations for the years ended December 31, 2002 and 2001:
The decrease of $24.4 million in Individual Operations premiums and deposits for the year ended December 31, 2002 as compared to the comparable prior year period is primarily attributable to lower individual life insurance premiums of $41.0 million, partially offset by an increase in individual annuity considerations of $16.7 million.
The decrease in individual life premiums of $41.0 million, from $635.6 million for the year ended December 31, 2001 to $594.6 million for the same period in 2002, was primarily due to the declining in force business of the Closed Block. Premium income for the Closed Block decreased by $26.7 million excluding reinvested dividends for the year ended December 31, 2002 compared to the same period 2001. Premium from reinvested dividends in the Closed Block decreased by $ 14.1 million from the prior year primarily due to a reduction in the dividend scale effective January 1, 2002. Reinvested dividends represent dividends paid to policyholders of participating insurance contracts that, pursuant to the policyholders’ election under the contract, are generally reinvested to purchase additional insurance coverage. The amount of the dividends paid to policyholders is determined based upon the profitability of such policies. Dividends to policy holders are recorded as an expense, and if reinvestment is elected by the policyholder, the reinvestment of the dividend to purchase additional coverage is concurrently recorded as premium revenue.
· record, as investment income, any excess of the fair value of the common stock distributed over the carrying value of the limited partnership investment.
It is MONY Life’s policy to seek to liquidate these investments as soon as possible after receipt of the distribution.
Other income (net) and its related increase of approximately $73.4 million, to $80.3 million for the year ended December 31, 2002 from $6.9 million for the year ended December 31, 2001, primarily consisted of the following:
Includes $91.0 million and $27.4 million in connection with the Group Pension Transaction for the year ended December 31, 2002 and 2001, respectively.
For the year ended December 31, 2002 commissions and expense allowances on reinsurance ceded were $100.1 million, an increase of $62.0 million from $38.1 million reported for the year ended December 31, 2001. The increase is primarily due to an increase of $63.6 million in profits on the transferred group pension business (see Group Pension Transaction).
For the year ended December 31, 2002, MONY Life reported policyholder and contractholder benefits of $961.5 million, a decrease of $15.1 million from $976.6 million reported for the year ended December 31, 2001. The decrease is primarily attributable to a decrease in death benefits of $25.6 million, and a decrease in interest on policy and contract funds of $5.2 million, partially offset by an increase in surrenders and withdrawals of $18.9 million.
The increase in surrenders and withdrawals of $18.9 million is primarily comprised of an increases of $53.8 million related to group annuity contracts, offset by decreases of $23.1 million related to individual annuity contracts and $11.5 related to individual life contracts. The increase in withdrawals on retained group annuity contracts from $224.1 million in 2001 to $277.9 million during 2002, is primarily attributable to large withdrawals of separate account group pension assets during 2002. The decrease in individual annuity contracts is primarily from the impact of the flexible premium variable annuity exchange program discussed above. This exchange program accounted for annuity withdrawals of $8.7 million for the year ended December 31, 2002 and $29.2 million for the same period in 2002, a decrease of $20.5 million.
For the year ended December 31, 2002, MONY Life reported a change in policy and contract reserves of $112.7 million, an increase of $85.5 million from $27.2 million reported for the year ended December 31, 2001. The increase is primarily attributable to:
· the reserve change in individual life contracts of $63.6 million and $72.3 million for the years ended December 31, 2002 and 2001 respectively a change of $(8.7) million. The decrease in the change in reserves was due to lower reserve increases on closed block business due to its declining in force business.
· the change in reserves on group annuity contracts for the year ended December 31, 2002 of $1.1 million compared with $(29.4) million for the same period in 2001, a change of $30.5 million. The increase in the change in reserves was due to lower surrenders on group pension contracts in 2002 when compared to the same period in the prior year.
For the year ended December 31, 2002, MONY Life reported commissions of $25.7 million, a decrease of $2.7 million from $28.4 million reported for the year ended December 31, 2001. The decrease is primarily due to decreases in direct commissions of $1.4 million and commissions and allowances on reinsurance assumed of $1.3 million. The decrease in direct commissions from $25.2 million for the year ended December 31, 2001 to $23.8 million for the same period ended December 31, 2002 was primarily due to a decrease in first year premium. The decrease in commissions and allowances on reinsurance assumed is attributable to a decrease in premiums and corresponding reinsurance allowances received on a modco reinsurance treaty with MLICA, MONY Life’s indirect wholly owned international life insurance company.
For the year ended December 31, 2002, MONY Life reported net transfers from separate accounts of $185.6 million, an increase of $116.5 million from $69.1 million reported for the year ended December 31, 2001. The increase is primarily due to increases in net transfers from the separate accounts on group pension business of $97.5 million and from individual annuity business of $19.7 million.
The increase in group pension transfers from the separate accounts during 2002 is primarily attributable to the increase in surrenders and withdrawals on this business. The increase in net transfers from separate accounts on individual annuity business is primarily due to larger amounts of variable annuity deposits and fund balances being allocated to and transferred into general account investment options during 2002.
The decrease in general insurance expenses of $25.2 million from $206.0 million for year ended December 31, 2001 to $180.8 million for the comparable period in 2002, was primarily due to decreases in compensation of $24.8 million and other fees and services of $6.7 million, partially offset by an increase in expenses for benefit plans for employees and agents of $11.2 million. The decrease in compensation during 2002 is primarily attributable to decreases in incentive compensation expense and in salaries related to staff reductions implemented during 2001.
For the year ended December 31, 2002, dividends to policyholders were $202.2 million, a decrease of $1.5 million from $203.7 million for the year ended December 31, 2001. Dividend scales were not changed during this period and the decrease reflects the normal year-to-year progression of dividends as well as true-up of liability estimates to actual payments made in the following year.
On a pre-tax, pre-IMR basis, realized capital gains/(losses) were ($133.0) million in 2002 compared to ($51.0) million in 2001, an increased loss of $82.0 million. The increased loss was primarily due to an increase in impairment write-downs of $54.3 million on bonds and preferred stocks, $11.4 million on mortgage loans and $26.3 real estate and real estate joint ventures. Partially offsetting these losses were net gains from sales of investments of $10.0 million. On an after-tax, after transfers to IMR basis, realized capital losses were $141.5 million in 2002 versus $69.1 million in 2001, an increased loss of $72.4 million. Lower capital gains tax of $16.6 million is due to an increase in realized losses offset by an increase in the deductible statutory tax adjustment for realized losses on various equity investments.
MONY Life recorded net unrealized capital losses of $135.3 million for the year ended December 31, 2002, a decrease of $61.3 million from $196.6 million recorded for the year ended December 31, 2001. The decrease was primarily due to:
· and unrealized losses on investments in subsidiaries of approximately $92.8 million compared to $103.7 million in 2001.
MONY Life’s wholly owned life insurance subsidiary, MLOA, reported a statutory net losses of approximately $91.9 million and $63.0 million during 2002 and 2001, respectively, which was primarily attributable to new business strain and substantial declines in equity markets. In addition during 2001, MLICA reported a net loss of approximately $39.0 million, which was primarily due to restructuring charges taken in connection with exiting certain lines of business in Latin America.
MONY Holdings, the parent holding company, contributed $125.0 million in additional paid in surplus to MONY Life during 2002 to support MONY Life’s surplus and RBC.
During 2002 and 2001, MONY Life paid dividends of $90.0 million and $115.0 million, respectively, to MONY Holdings and MONY Group, respectively.
On December 31, 2002, MONY Life recorded a credit to surplus of $90.2 million as a result of the adoption of certain changes to Codified SAP for New York domiciled companies related to the admissibility of deferred tax assets and deferred tax liabilities (see New Statutory Accounting Practices).
The major components of other changes to surplus are presented in the table below:
The changes in non-admitted assets in 2002 are primarily related to increases in prepaid pension assets of $6.1 million and capitalized software of $5.7 million. The changes in non-admitted assets in 2001 are primarily related to prepaid pension assets.
During 2001, MONY Life recorded an increase to surplus of $10.9 million related to a change in valuation basis on certain policy reserves.
MONY Life’s cash inflows are provided mainly from life insurance premiums, annuity considerations and deposit funds, investment income and maturities and sales of invested assets. Cash outflows primarily relate to the liabilities associated with its various life insurance and annuity products, dividends to policyholders and its sole member, operating expenses, income taxes and principal and interest on its outstanding debt obligations. The life insurance and annuity liabilities relate to MONY Life’s obligation to make benefit payments under its insurance and annuity contracts, as well as the need to make payments in connection with policy surrenders, withdrawals and loans. MONY Life develops an annual cash flow projection which shows expected asset and liability cash flows on a monthly basis. Actual cash flows are compared to projections, projections for the balance of the year are adjusted in light of the actual results, if appropriate, and investment strategies are also changed, if appropriate. The periodic cash flow reports contain relevant information on all the following: new product sales and deposits versus projections, existing liability cash flow versus projections and asset portfolio cash flow versus projections. An interest rate projection is a part of the internal cash flow projections for both assets and liabilities. Actual changes in interest rates during the year and, to a lesser extent, changes in rate expectations will impact the changes in projected asset and liability cash flows during the course of the year. When MONY Life is formulating its cash flow projections, it considers, among other things, its expectations about sales of MONY Life’s products, its expectations concerning client behavior in light of current and expected economic conditions, its expectations concerning competitors and the general outlook for the economy and interest rates.
The following table sets forth the withdrawal characteristics of MONY’s total annuity reserves and deposit liabilities at December 31, 2002 and 2001:
At December 31, 2002 the Company had commitments to contribute capital to its equity partnership investments of $76.3 million.
MONY Group maintains a syndicated credit facility with banks aggregating $150.0 million, with a scheduled renewal date in July 2003. The purpose of this facility is to provide additional liquidity for any unanticipated short-term cash needs that MONY Group might experience and also to serve as support for MONY Group’s $150 million commercial paper program which was activated in the third
The financial statements and other information required by this Item are contained in the financial statements and footnotes thereto in and following the “Index to Consolidated Financial Statements” on page.
On February 27, 2002, MONY Group formed MONY Holdings, LLC (“MONY Holdings”) as a downstream, wholly owned, holding company of the MONY Group (the “MONY Group”). MONY Group formed MONY Holdings for the purpose of issuing debt tied to the performance of the Closed Block Business within MONY Life (see Note 19). On April 30, 2002, the date MONY Holdings commenced its operations, MONY Holdings, through a structured financing tied to the performance of the Closed Block Business within MONY Life, issued $300.0 million of floating rate insured debt securities (the “Insured Notes”) in a private placement and MONY Group, pursuant to the terms of the structured financing, transferred all of its ownership interest in MONY Life to MONY Holdings. Other than activities related to servicing the Insured Notes in accordance with the Insured Notes indenture and its ownership interest in MONY Life, MONY Holdings has no operations and engages in no other activities.
MONY Holdings through its subsidiaries (MONY Holdings and its subsidiaries are collectively referred to herein as the “Company”), provides life insurance, annuities, corporate-owned and bank-owned life insurance (“COLI and BOLI”), mutual funds, securities brokerage, business and estate planning. The Company distributes its products and services through Retail and Wholesale distribution channels. The Company’s Retail distribution channels are comprised of (i) the career agency sales force operated by its principal life insurance operating subsidiary, and (ii) financial advisors and account executives of its securities broker dealer subsidiaries. The Company’s Wholesale channel is comprised of (i) MONY Partners, a division of MONY Life, (ii) independent third party insurance brokerage general agencies and securities broker dealers and (iii) its corporate marketing team which markets COLI and BOLI products. For the year ended December 31, 2002, Retail distribution accounted for approximately 22.8%, and 43.5% of sales of protection and accumulation products, respectively, while Wholesale distribution accounted for 77.2% and 56.5% of sales of protection and accumulation products, respectively. 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 individuals.
MONY Life’s principal wholly owned direct and indirect operating subsidiaries include: (i) MONY Life Insurance Company of America (“MLOA”), an Arizona domiciled life insurance company, (ii) Enterprise Capital Management (“Enterprise”), a distributor of both proprietary and non-proprietary mutual funds, (iii) U.S. Financial Life Insurance Company (“USFL”), an Ohio domiciled insurer underwriting specialty risk life insurance business, (iv) MONY Securities Corporation (“MSC”), a registered securities broker-dealer and investment advisor whose products and services are distributed through MONY Life’s career agency sales force, (v) Trusted Securities Advisors Corp. (“Trusted Advisors”), which distributes investment products and services through a network of accounting professionals, (vi) MONY Brokerage, Inc. (“MBI”), a licensed insurance broker, which principally provides MONY Life’s career agency sales force with access to life, annuity, small group health, and specialty insurance products written by other insurance companies so they can meet the insurance and investment needs of their customers, and (vii) MONY International Holdings (“MIH”), which through its Brazilian domiciled insurance brokerage subsidiary, principally provides insurance brokerage services to unaffiliated third party insurance companies in Brazil and, to a lesser extent since its reorganization in 2001, provides life insurance, annuity and investment products, as well as trust services, to nationals of certain Latin American countries through its Cayman Island based insurance and banking subsidiaries (MONY Life Insurance Company of the Americas, Ltd. and MONY Bank & Trust Company of the Americas, Ltd., respectively).
On November 16, 1998, pursuant to a plan of reorganization (the “Plan”), which was approved by the New York Insurance Department, The Mutual Life Insurance Company of New York (“MONY”) converted from a mutual insurance company to a stock life insurance company (the “Demutualization”) and became MONY Life. In connection with the Plan, MONY established a closed block, as more fully discussed in Note 2, to fund the guaranteed benefits and dividends of certain participating insurance policies and eligible policyholders received cash, policy credits, or shares of MONY Group common stock in exchange for their membership interests in MONY.
Expenses incurred by MONY Holdings and Subsidiary, as reflected in the consolidated statements of income, reflect all costs associated with conducting the business of MONY Holdings and its Subsidiary. MONY Life incurs all costs associated with its operations, except asset management services. Asset management fees are charged directly to MONY Life by an affiliate of MONY Group for negotiated market based fees based on asset type, and are periodically accrued based on average invested assets. MONY Life directly incurs interest expense on inter-company debt with its ultimate parent company, MONY Group, based on contractual terms, which management believes reflect terms materially similar to an arm’s-length transaction. Income taxes are determined based on MONY Holdings operating as a separate entity. Costs incurred by MONY Holdings’ parent, MONY Group, represent incremental expenses (primarily transfer agent fees, stock option expenses, and printing costs) incurred by MONY Group that MONY Holdings would not incur as a stand-alone entity.
The accompanying consolidated financial statements include the accounts of MONY Holdings LLC and its subsidiaries. All significant intercompany accounts and transactions have been eliminated.
· The property is available for immediate sale in its present condition subject only to terms that are usual and customary for sales of such assets;
· An active program to locate a buyer and other actions required to complete the plan to sell the asset have been initiated and are continuing;
· The sale of the asset is probable, and transfer of the asset is expected to qualify for recognition as a completed sale, within one year;
· Actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn.
The Company earns commissions from clients for execution of securities, mutual funds, and insurance transactions. Commission income and related expenses are recorded on a trade-date basis and are reflected in other income and other operating costs and expenses, respectively, in the consolidated statements of income and comprehensive income.
The costs of acquiring new business, principally commissions, underwriting, agency, and policy issue expenses, all of which vary with and are primarily related to the production of new business, are deferred.
Dividends to policyholders reflected on the consolidated statement of income and comprehensive income is comprised of policyholder dividends payable in the current year and the change in the deferred dividend liability. Dividends payable to policyholders are determined annually by the board of directors of the Company. All but a deminimus amount of dividends paid to policyholders are on policies in the Closed Block. Refer to Note 2 for a more detailed explanation of policyholder dividends, as well as the deferred dividend liability. The change on the deferred dividend liability recognized in the consolidated statement of income was $(14.6) million, $21.2 million, and $2.5 million for the years ended December 31.2002, 2001 and 2000, respectively.
In determining whether a reinsurance contract qualifies for reinsurance accounting, Statement of Financial Accounting Standards (“SFAS”) No. 113 “Accounting and reporting for reinsurance of short-duration and long-duration contracts” requires that there be a “reasonable possibility” that the reinsurer may realize a “significant loss” from assuming insurance risk under the contract. In making this assessment, the Company projects the results of the policies reinsured under the contract under various scenarios and assesses the probability of such results actually occurring. The projected results represent the present value of all the cash flows under the reinsurance contract. The Company generally defines a “reasonable possibility” as having a probability of at least 10%. In assessing whether the projected results of the reinsured business constitute a “significant loss”, the Company considers: (i) the ratio of the aggregate projected loss, discounted at an appropriate rate of interest (the “aggregate projected loss”), to an estimate of the reinsurer’s investment in the contract, as hereafter defined, and (ii) the ratio of the aggregate projected loss to an estimate of the total premiums to be received by the reinsurer under the contract discounted at an appropriate rate of interest.
For the years ended December 31, 2002, 2001, and 2000, respectively, real estate of $12.0 million, $18.0 million, and $0.5 million was acquired in satisfaction of debt. At December 31, 2002 and 2001, the Company owned real estate acquired in satisfaction of debt of $24.0 million and $44.3 million, respectively. Other non-cash transactions, which are reflected in the statement of cash flows as a reconciling item from net income to net cash provided by operating activities, consisted primarily of stock distributions from the Company’s partnership investments and payment-in-kind for interest due on certain fixed maturity securities.
In June 2001, the FASB issued SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”). SFAS 142 provides that goodwill and intangible assets that have indefinite useful lives will not be amortized but rather will be tested at least annually for impairment. This Statement provides specific guidance for testing the impairment of goodwill and intangible assets. This statement is effective for fiscal years beginning after December 15, 2001. As a result of adopting this statement, the Company no longer recognizes goodwill amortization of approximately $1.3 million on an annualized basis. In addition, since the adoption of this standard, based on the Company’s estimate of its reporting units, the Company has determined that none of its goodwill is impaired.
In January 2003, the FASB issued FASB Interpretation No. 46, “Consolidation of Variable Interest Entities” (“Interpretation 46”), which represents an interpretation of Accounting Research Bulletin No. 51 (“ARB 51”), “Consolidated Financial Statements”. ARB 51 requires that a Company’s consolidated financial statements include subsidiaries in which the Company has a controlling financial interest. That requirement usually has been applied to subsidiaries in which the Company has a majority voting interest. However, the voting interest approach is not effective in identifying controlling financial interests in entities (referred to as “variable interest entities”) that are not controllable through voting interests or in which the equity investors do not bear the residual economic risks. Interpretation 46 provides guidance on identifying variable interest entities and on assessing whether a Company’s investment in a variable interest entity requires consolidation thereof. Interpretation 46 is effective immediately for investments made in variable interest entities after January 31, 2003 and it is effective in the first fiscal year or interim period beginning after June 15, 2003 for investments in variable interest entities made prior to February 1, 2003. The adoption of Interpretation 46 is not expected to have a material impact on the Company’s earnings or financial position.
Amounts in 2002 include $3.5 million of changes in unrealized gains related to fixed maturity securities, which are on deposit in the Debt Service Coverage Account sub-account OB - see Note 20.
The Company classifies fixed maturity securities available-for-sale which: (i) are in default as to principal or interest payments; (ii) are to be restructured pursuant to commenced negotiations; (iii) went into bankruptcy subsequent to acquisition; or (iv) are deemed to have other than temporary impairments to value as “problem fixed maturity securities.” At December 31, 2002 and 2001, the carrying value of problem fixed maturity securities held by the Company was $274.7 million and $66.7 million, 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. At December 31, 2002 and 2001, the carrying value of potential problem fixed maturity securities held by the Company was $8.5 million and $16.1 million, respectively. In addition, at December 31, 2002 and 2001, the Company had no fixed maturity securities which had been restructured.
Management considers the Company’s mutual fund operations to be an integral part of the products offered by the Company’s Accumulation Products segment. Accordingly, for management purposes (including, performance assessment and making decisions regarding the allocation of resources), the Company aggregates its mutual fund operations with its accumulation products segment.
Each segment includes separate account assets in an amount not less than the corresponding liability reported.
Reconciling amounts include interest expense related to the Inter-company Surplus Notes (see Note 14).
Amounts reported as “reconciling” in 2001 primarily relate to: (i) contracts issued by MONY Life relating to its employee benefit plans, (ii) interest expense associated with the surplus and intercompany surplus notes and (iii) charges totaling $56.8 million pretax relating to the Company’s reorganization.
Amounts reported as “reconciling” in 2000 primarily relate to (i) contracts issued by MONY Life relating to its employee benefit plans and (ii) interest expense associated with the surplus and intercompany surplus notes,
As explained in note 11, in accordance with GAAP, the Group Pension Transaction did not constitute a sale because the Company retained substantially all the risks and rewards associated with the business transferred to Aegon. Accordingly, over the life of the transaction the Company was required to reflect the transferred assets and liabilities on its balance sheet under separate captions entitled “Assets transferred in Group Pension Transaction” and “Liabilities transferred in Group Pension Transaction”. As a result of the expiration of the transaction at December 31, 2002 and the recognition of earnings from the Final Value Payment from Aegon the Company has no further interest in the transferred assets and liabilities and, accordingly, such assets and liabilities are no longer reflected on its balance sheet.
Includes Group Pension Profits of $82.3 million, $30.7 million and $37.1 million for 2002, 2001 and 2000, respectively.
Following is a summary of revenues by product for the years ended December 31, 2002, 2001 and 2000:
During 2002, the Company amended its Qualified Pension plan which increased certain benefit liabilities payable thereunder. The amendment resulted in an increase of $3.7 million in the plan’s projected benefit obligation.
The Company also sponsors a non-qualified employee excess benefit plan, which provides both defined benefits and defined contribution accruals in excess of Internal Revenue Service limits to certain employees. The benefits are based on years of service and the employee’s compensation. Pension benefits are paid from the Company’s general account.
The Company provides certain health care and life insurance benefits for retired employees and field underwriters. The Company amortizes its postretirement transition obligation over a period of twenty years.
For pension benefits, no benefits bearing incentive compensation is assumed for 2002. Otherwise benefits bearing compensation is assumed to increase by 4% for all participants eligible for incentive compensation and by 5% for all others. Benefits bearing incentive compensation for the top four officers is assumed to be 50% of base salary after 2002. Since postretirement life insurance benefits are subject to a cap of either $50,000 or salary in 1995, if greater, the rate of compensation increase has no significant impact on the values noted above.
The Company is required to establish a valuation allowance for any portion of the deferred tax asset that management believes will not be realized. In the opinion of management, it is more likely than not that it will realize the benefit of the deferred tax assets and, therefore, no such valuation allowance has been established.
Operating losses reported in any annual period pursuant to the Earnings Formula are carried forward to reduce any earnings in subsequent years reported pursuant to the Earnings Formula. Any resultant deficit remaining at December 31, 2002 will be deducted from the Final Value Payment and New Business Growth Payment, if any, due to the Company. If a deficit still remains, it will be applied (as provided for in the Agreement) as an offset against the principal payment due to the Company upon maturity of the Series A Notes. As of December 31, 2002, there were no operating losses reported in any annual period during the term of the agreement, nor was the Company eligible for any New Business Growth payment.
In accordance with GAAP, the Group Pension Transaction did not constitute a sale because the Company retained substantially all the risks and rewards associated with the business transferred to Aegon. Accordingly, over the life of the transaction the Company was required to reflect the transferred assets and liabilities on its balance sheet under separate captions entitled “Assets transferred in Group Pension Transaction” and “Liabilities transferred in Group Pension Transaction”. As a result of the expiration of the transaction at December 31, 2002 and the recognition of earnings from the Final Value Payment from Aegon the Company has no further interest in the transferred assets and liabilities and, accordingly, such assets and liabilities are no longer reflected on its balance sheet.
Includes $2.5 million of pretax realized losses ($1.6 million after-tax) relating to the impairment of certain investments, which were included in the 4th quarter 2001 Other Charges (see Note 23).
The estimated fair values of the Company’s financial instruments approximate their carrying amounts, except for mortgage loans, long-term debt and investment-type contracts. The methods and assumptions utilized in estimating the fair values of the Company’s financial instruments are summarized as follows:
The fair value of mortgage loans is estimated by discounting expected future cash flows, using current interest rates for similar loans to borrowers with similar credit risk. Loans with similar characteristics are aggregated for purposes of the calculations. The fair value of mortgages in process of foreclosure is the estimated fair value of the underlying collateral. At December 31, 2002 and 2001, the fair value of mortgage loans was $2,065.5 million and $1,880.8 million, respectively.
The fair values of annuities are based on estimates of the value of payments available upon full surrender. The carrying value and fair value of annuities at December 31, 2002 were $1,459.2 million and $1,439.4 million, respectively. The carrying value and fair value of annuities at December 31, 2001 were $1,196.8 million and $1,187.6 million, respectively.
The Company is primarily liable with respect to ceded insurance should any reinsurer be unable to meet its obligations under these agreements. To limit the possibility of such losses, the Company evaluates the financial condition of its reinsurers and monitors concentration of credit risk.
The Company’s debt at December 31, 2002 and 2001 consists of the following:
As a result of the repurchase of the 9.5% Notes and substantially all of the 11.25% Notes, the Company recorded a pre-tax tax loss of $58.1 million ($37.7 million after tax) during 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 $51.1 million, respectively. This loss is reported, net of tax, as an extraordinary item on the Company’s income statement for the year ended December 31, 2000.
Pursuant to a securities lending agreement with a major financial institution, the Company from time to time lends securities to approved borrowers. At December 31, 2002 and 2001, securities loaned by the Company under this agreement had a fair value of approximately $351.8 million and $161.5 million, respectively. The minimum collateral on securities loaned is 102 percent of the market value of the loaned securities. Such securities are marked to market on a daily basis; the collateral is increased or decreased in accordance with the Company’s agent agreement.
The industries (excluding U.S. Treasury securities and obligations of U.S. government agencies) that comprised 10.0% or more of the carrying value of the fixed maturity securities at December 31, 2001 were Consumer Goods of $1,225.1 million (17.6%), Non-Government Asset/Mortgage Backed securities of $793.1 million (11.4%), and Public Utilities of $739.8 million (10.6%).
On June 7, 1996, the New York State Supreme Court certified one of those cases, Goshen v. The Mutual Life Insurance Company of New York and MONY Life Insurance Company of America (now known as DeFilippo, et al v. The Mutual Life Insurance Company of New York and MONY Life Insurance Company of America), the first of the class
Second, the new complaint contains claims for breach of contract and fiduciary duty, as well as new allegations regarding the adequacy of the disclosures contained in the Policyholder Information Booklet distributed to policyholders soliciting their approval of the plan of demutualization (which plaintiffs claimed violated both the Insurance Law and MONY Life’s fiduciary duties).
The MONY Group, MONY Life and the New York Superintendent moved to dismiss the state court complaint in its entirety on a variety of grounds. On April 20, 2001, the New York Supreme Court granted both motions and dismissed all claims against the MONY Group, MONY Life and the New York Superintendent. On October 29, 2002, the New York State Appellate Division, First Department affirmed the dismissal of all claims against the MONY Group, MONY Life and the New York Superintendent. On November 8, 2002 plaintiffs filed a Motion with the New York Court of Appeals seeking
permission to file an appeal from the Appellate Division’s decision. On January 9, 2003, the Court of Appeals denied plaintiffs’ motion, thereby concluding the litigation.
(iii) In December 2002 federal securities regulators (SEC) and self-regulatory organizations (NASD) directed all broker-dealers, including the Company, to evaluate their procedures with respect to mutual fund sales charge breakpoints. Management does not believe that the outcome of its evaluation, including any determination it may make with respect to sales charges paid by its customers, will have a material adverse effect on the Company’s results of operation, cash flows, or financial position.
In 1988, the Company financed one of its real estate properties under a sale/leaseback arrangement with the proceeds received from the sale, amortized into income over the life of the lease. The lease has a term of 20 years beginning December 21, 1988 and requires minimum annual rental payments of $7.7 million in 2003, $7.9 million in 2004, $8.0 million in 2005, $8.2 million in 2006, $8.4 million for 2007 and $8.5 million for 2007. The Company has the option to renew the lease at the end of the lease term.
Summarized financial information of the Closed Block as of and for the years ended December 31, 2002 and 2001 is presented below.
The carrying value of the Closed Block fixed maturity securities at December 31, 2002 and 2001 is net of adjustments for impairment of $60.5 million and $10.9 million, respectively.
At December 31, 2002 and 2001, there were $0.6 million and $0.0 million of fixed maturity securities which have been non-income producing for the twelve months preceding such dates.
At December 31, 2002 and 2001, there were $0.1 million and no mortgage loans in the Closed Block which were non-income producing for the twelve months preceding such dates.
At December 31, 2002 and 2001, the Closed Block had restructured mortgage loans of $8.5 million and $12.2 million, respectively. Interest income of $0.6 million and $0.9 million was recognized on such loans for the year ended December 31, 2002 and 2001, respectively. Gross interest income on these loans that would have been recorded in accordance with the original terms of such loans amounted to approximately $1.0 million and $1.3 million for the respective periods.
The pre-tax Contribution from the Closed Block includes only those revenues, benefit payments, dividends, premium taxes, state guaranty fund assessments, and investment expenses considered in funding the Closed Block. However, many expenses associated with operating the Closed Block and administering the policies included therein were excluded from and, accordingly, are not funded in the Closed Block. These expenses are reported in the Company’s statement of income and comprehensive income, outside of the Contribution from the Closed Block, consistent with how they are funded. Such expenses are reported in the separate line items to which they apply based on the nature of such expenses. Federal income taxes applicable to the Closed Block, which are funded in the Closed Block, are reflected as a component of federal income tax expense in the Company’s statement of income and comprehensive income. Since many expenses related to the Closed Block are funded outside the Closed Block, operating costs and expenses outside the Closed Block are disproportionate to the level of business outside the Closed Block.
The Closed Block Business (“CBB”) is comprised of certain amounts within MONY Holdings and MONY Life. Within MONY Holdings, the Closed Block Business includes: (i) the Insured Notes, (ii) the capitalized costs of issuing the Insured Notes, (iii) the DSCA Sub-account CBB (see Note 20), (iv) the Swap, and (v) the Insurance Policy (see Note 1). Within MONY Life, the Closed Block Business includes: (i) the Closed Block discussed in Notes 2 and 18, and (ii) an amount of capital (hereafter referred to as “Surplus and Related Assets”) outside the Closed Block, but within MONY Life, that when aggregated with the assets and liabilities in the Closed Block results in an aggregate carrying value of assets in the Closed Block Business within MONY Life in excess of the carrying value of the liabilities in the Closed Block Business within MONY Life. The amount by which the assets in the Closed Block Business within MONY Life exceed the liabilities in the Closed Block Business within MONY Life represents a sufficient amount of capital based on regulatory standards to support the Closed Block Business within MONY Life. All business of MONY Holdings and subsidiary, consolidated, other than the Closed Block Business is defined in the note indenture as the Ongoing Business (“OB”). The determination of the amount of Surplus and Related Assets was based on Statutory Accounting Practices as required by the note indenture. As the Closed Block’s results of operations emerge an equal amount of the Surplus and Related Assets is intended to become available to the Ongoing Business. The investment of the Surplus and Related Assets is restricted to permitted investments and subject to certain concentration limitations as outlined in the Insured Note indenture (see Note 1).
In addition, pursuant to the Note indenture, dividends to MONY Holdings from MONY Life are required to be allocated between the Ongoing Business and the Closed Block Business. This allocation, while principally based on separately applying the NY Dividend Statute to the “policyholders’ surplus” and “net gain from operations” attributable to the Ongoing Business and the Closed Block Business, is subject to certain adjustments described in the Note indenture. The amount of the dividend attributable to the Closed Block Business is required to be deposited in the Debt Service Coverage Account - Subaccount CBB. As described in the Note indenture, the amount of the dividend deposited in the Debt Service Coverage Account - Subaccount CBB will not generally be available for dividend to the MONY Group until all the obligations to pay principal, interest and other amounts on the Insured Notes are fully extinguished. Under limited circumstances, if the fair value of the Debt Service Coverage Account exceeds amounts set forth in the Note indenture, such excess can become available earlier for dividend to the MONY Group. The amount of such dividend attributable to the Ongoing Business will generally be available to MONY Holdings to pay dividends to the MONY Group. See Note 1 for additional information regarding the Insured Notes.
The following table presents the condensed balance sheet of MONY Holdings as of December 31, 2002 and 2001:
22. Goodwill and Other Intangible Assets - Adoption of Statement 142
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 for years ended December 31, 2002, 2001 and 2000. In addition, as required by SFAS 142, management tested the carrying value of the Company’s goodwill at December 31, 2002 and determined that no impairment exists.
The following tables summarize the components of the aforementioned charges recorded during 2002 and 2001, respectively. None of the charges referred to below as “Reorganization Charges” have been allocated to the Company’s operating segments, however, the charges in 2001 referred to as “Other Charges” have been allocated to the Company’s operating segments. All Reorganization Charges incurred in 2002 and 2001 are reported as reconciling items.
All of the reorganization charges recorded in 2002 meet the definition of “restructuring charges” as defined by EITF 94-3.
All charges referred to as Reorganization Charges included in the table above, except $17.0 million related to deferred policy acquisition costs in 2001 and $5.3 million related to investment expenses in 2001, are included in “Other operating costs and expenses” in the Company’s 2001 consolidated income statement.
The following table indicates the line items in the Company’s consolidated and segmented income statements for the year ended December 31, 2001 that the Other Charges in the table above are reflected in. In addition, all of the reorganization charges are reflected in reconciling in the table as discussed above.
Set forth below is certain information regarding the liability recorded in connection with the Company’s restructuring actions during 2002 and 2001, as well as the changes therein. Such liability is reflected in accounts payable and other liabilities on the Company’s consolidated balance sheet.
In March 2003, litigation relating to the disposition of a real estate asset as discussed in Note 16 (ii) was settled for approximately $4.0 million less than the provision previously recorded. Accordingly, during the first quarter of 2003 the Company will reverse such over-accrual to income.
We have audited the accompanying statutory statements of admitted assets, and liabilities, capital and surplus of MONY Life Insurance Company (the “Company”) as of December 31, 2002 and 2001, and the related statutory statements of operations, capital and surplus, and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
As described in Notes 2 and 3 to the financial statements, the Company prepared these financial statements using accounting practices prescribed or permitted by the Insurance Department of the State of New York, which practices differ from accounting principles generally accepted in the United States of America. The effects on the financial statements of the variances between such practices and accounting principles generally accepted in the United States of America are material; they are described in Note 2.
From the proceeds of the dividend MONY Holdings made to MONY Group, MONY Group loaned MONY Life $67.7 million. This loan was in the form of a demand loan, which allows MONY Group the ability to require repayment at its discretion. The loan was made to effectively enable MONY Group to invest the funds from the issuance of the Notes in higher yielding longer duration investments until such time the funds could be permanently invested by MONY Group. The ability of MONY Life to invest the funds in longer duration securities is possible because MONY Life has other sources of cash flow that enables the company to fund the aforementioned demand when it occurs. The interest rate on the loan was at a floating rate equal to the Federal Funds Rate plus 0.15% per annum. MONY Life paid off $55.0 million of the loan on September 24, 2002 and $12.7 million of the loan on November 26, 2002. MONY Life paid $ 0.3 million in interest on these loans to MONY Group during 2002.
The Company and its subsidiaries provide life insurance, annuities, corporate-owned and bank-owned life insurance (“COLI/BOLI”) products, mutual funds, securities brokerage, asset management, and business and estate planning. The Company distributes its products and services to individuals and institutional clients through a career agency sales force and financial advisors and brokers of its mutual fund and broker-dealer subsidiaries. In addition, the Company distributes it products and services through what it defines as complementary distribution channels, 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.
MONY Life’s principal wholly owned direct and indirect operating subsidiaries include: (i) MONY Life Insurance Company of America (“MLOA”), an Arizona domiciled life insurance company, (ii) Enterprise Capital Management (“Enterprise”), a distributor of both proprietary and non-proprietary mutual funds, (iii) U.S. Financial Life Insurance Company (“USFL”), an Ohio domiciled insurer underwriting specialty risk life insurance business, (iv) MONY Securities Corporation (“MSC”), a registered securities broker-dealer and investment advisor whose products and services are distributed through MONY Life’s career agency sales force, (v) Trusted Securities Advisors Corporation (“Trusted Advisors”), which distributes investment products and services through a network of independent certified public accountants, (vi) MONY Brokerage, Inc. (“MBI”), a licensed insurance broker,
which principally provides MONY Life’s career agency sales force with access to life, annuity, small group health, and specialty insurance products written by other insurance companies so they can meet the insurance and investment needs of their customers, and (vii) MONY Life Insurance Company of the Americas, Ltd. (“MLICA”), which provides life insurance, annuity and investment products to nationals of certain Latin American countries.
Effective December 31, 2002, the State of New York adopted certain provisions of NAIC SAP contained in SSAP No. 10 -Income Taxes, which requires New York domiciled companies to record net deferred tax assets and deferred tax liabilities. Prior to December 31, 2002, New York prescribed practices prohibited New York domiciled companies from reporting DTA’s and DTL’s in a reporting entity’s Statement of Assets, Liabilities, Surplus and Other Funds.
The Commissioner of Insurance of the State of New York has the right to permit other specific practices that deviate from prescribed practices.
As a result of the initial implementation of NAIC SAP at January 1, 2001, the Company recorded a change in accounting principle that decreased unassigned funds (surplus) by $36.9 million. Included in the total adjustment were reductions in unassigned funds of approximately $11.6 million related to valuation of invested assets, $12.1 million related to contingent liabilities, and $3.7 million related to compensated absences.
Certain reclassifications have been made in amounts presented on the Statements of Operations and Statements of Cash Flows for the prior year to conform such year to the current year’s presentation. These reclassifications principally relate to certain separate account group annuity contracts and had no effect on previously reported net income, surplus, total assets or liabilities. Such contracts are required to be accounted for as life insurance contracts, whereas in the prior year these contracts were accounted for as deposit-type contracts.
Premium and annuity considerations, surrenders benefits and withdrawals, and net transfers to or from separate accounts on these contracts were $78.0 million, $230.6 million, and $(152.6) million for the year ended December 31, 2002, respectively, and $73.9 million, $121.2 million and $(47.3) million for the year ended December 31, 2001, respectively.
In financial statements prepared in conformity with SAP, the accounting treatment of certain items is different than for financial statements prepared in conformity with GAAP.
GAAP net income (loss) reported by the Company for the years ending December 31, 2002 and 2001 was $(5.6) million and $(34.0) million, respectively. GAAP shareholder’s equity of the Company as of December 31, 2002 and 2001 was $1,973.9 million and $1,902.6 million, respectively.
· Policy acquisition costs, such as commissions and other costs incurred in connection with acquiring new and renewal business, are expensed when incurred under SAP; whereas under GAAP, such costs are deferred and amortized over the expected life of the business.
· Premiums for universal life and investment-type products, except those classified as “deposit type contracts” under SAP, are recognized as revenue when due under SAP; whereas under GAAP, they are reported as deposits to policyholders’ account balances. Revenues from these contracts under GAAP consist of amounts assessed during the period against policyholders’ account balances for mortality, policy administration and surrender charges.
· Under SAP, recognition of deferred income tax assets (DTAs) is limited to the sum of (a) federal income taxes paid in prior years that can be recovered through loss carrybacks for existing temporary differences that reverse by the end of the subsequent calendar year and (b) the lesser of the amount of gross DTAs, after considering item (a), expected to be realized within one year of the balance sheet date; or ten percent of statutory capital and surplus, excluding DTAs and nonadmitted assets; whereas under GAAP, deferred income tax assets are recorded based on the difference between the book and tax basis of assets and liabilities with a valuation allowance recorded if necessary based on management’s estimates.
· An interest maintenance reserve (“IMR”) is established as a liability to capture realized investment gains and losses, net of tax, on the sale of fixed maturities and mortgage loans resulting from changes in the
general level of interest rates, and is amortized into income over the remaining years to expected maturity of the assets sold under SAP; whereas under GAAP, no such reserve is required.
Life premiums are recognized as income over the premium paying period of the related policies. On annuities with life contingencies, considerations are recognized as revenue when received. Payments on deposit type contracts are recorded to the policy reserve. Health premiums are earned ratably over the terms of the related insurance and reinsurance contracts or policies.
Expenses incurred in connection with acquiring new insurance business, including acquisition costs such as sales commissions, are charged to operations as incurred.
Realized investment gains and losses (net of tax) from the sale of bonds and mortgage loans resulting from changes in interest rates are deferred, and credited or charged to the IMR. These amounts are amortized into net income over the years remaining to expected maturity of the assets sold.
The aggregate amount of divisible surplus to be distributed as dividends to policyholders during the year is determined by Company’s Board of Directors with due recognition to factors including solvency of the Company, its ability to meet all contractual obligations, and the existence of the Closed Block which was established as part of MONY’s Plan of Reorganization effective November 16, 1998. The aggregate divisible surplus is then divided among policyholders in the proportion that their policies are considered to have contributed to divisible surplus. In addition, as specified in MONY’s Plan of Reorganization, dividend scales for Closed Block policies are based on changes in the specific experience for this business relative to the experience underlying the 1998 dividend scale. The change in the liability for dividends payable in the following year is charged or credited to current year operations.
The Company amortizes furniture, fixtures and equipment (FF&E) on a straight-line basis over a seven year period. The Company recorded FF&E depreciation expense of $2.5 million and $3.6 million for the years ended December 31, 2002 and 2001.
Special surplus funds consist primarily of amounts required by the Insurance Department of the State of New York to be assigned as surplus funds for group insurance and aviation reinsurance.
The amortized cost and estimated fair value (see Note 9) of fixed maturity securities which include short-term investments, bonds and redeemable preferred stocks as of December 31, 2002 and 2001 are as follows:
Amortized cost represents the principal amount of fixed maturity securities adjusted by unamortized premium or discount and reduced by cumulative writedowns of $81.7 million and $39.1 million for bonds at December 31, 2002 and 2001, respectively, as required by the NAIC for securities which are in or near default. There were cumulative writedowns for redeemable preferred stocks of $5.3 million and $3.8 million at December 31, 2002 and 2001, respectively.
As of December 31, 2002 and 2001 the carrying value of non-income producing bonds and redeemable preferred stock was $6.9 and $2.6 million, respectively.
Common stocks include marketable equity securities carried at market values of $34.8 million and $36.7 million at December 31, 2002 and 2001, respectively, and non-marketable equity investments carried at estimated fair value of $0.6 million and $1.2 million at December 31, 2002 and 2001, respectively. The cost of the marketable equity securities was $32.9 million and $34.7 million at December 31, 2002 and 2001, respectively. At December 31, 2002 and 2001, gross unrealized gains were $3.9 million and $6.9 million, respectively, and gross unrealized losses were $1.6 million and $4.2 million, respectively, for equity securities.
At December 31, 2002 and 2001, the Company’s investments in subsidiaries, all of which are wholly owned, consisted of the following (in millions):
At December 31, 2002, MLOA had assets of $4,993.6 million; including bonds ($1,432.1 million), mortgage loans ($357.9 million) and separate account assets ($2,911.3 million); and liabilities of $4,747.5 million, primarily life insurance and annuity reserves ($1,827.9 million) and separate account liabilities ($2,911.3 million). Capital and surplus of MLOA was $246.1 million as of December 31, 2002. In 2002 and 2001, total revenues of MLOA were $1,154.4 million and $1,075.4 million, benefits and expenses were $1,297.6 million and $1,172.3 million and net income (loss), including realized capital gains (losses), was $(91.9) million and $(64.9) million, respectively.
The Company made aggregate capital contributions of $150.0 million and $100.0 million to MLOA during the years ended December 31, 2002 and 2001, respectively. These capital contributions consisted of $150 million in cash in 2002, and $94.1 million in bonds and $5.9 million in cash during 2001. The statement value of the bonds transferred during 2001 was $94.7 and the fair market value was $94.1 (including accrued interest). The Company recorded the transaction at fair market value and recorded a realized capital loss of $0.6 million, representing the difference between fair market value and statement value.
On August 30, 2002, the Company sold 11 commercial loans with a statement value of $146.8 million to MLOA. The sale was recorded at fair value for $148.6 million and included $1.8 million in deferred gains, representing the difference between fair market value and statement value.
In 1997 the New York City Industrial Development Agency (“the NY IDA”) issued bonds for the benefit of the Company in the total amount of $16.0 million related to the Company’s consolidation of site locations to New York
The Company also has investment advisory agreements with four subsidiaries of MONY Group with respect to the investment and management of its invested assets. These agreements, effective in 2002, provide for scheduled fees or actual cost reimbursements. Expenses related to these agreements were $16.0 million in 2002. In addition, the Company carried an intercompany payable of $2.5 million at December 31, 2002 related to these agreements.
The Company invests in mortgage loans collateralized by commercial and agricultural real estate. Such mortgage loans consist primarily of first mortgage liens on completed income-producing properties. As of December 31, 2002, $246.6 million of mortgage loans have terms that require amortization, and $1,312.3 million of mortgage loans require partial amortization or are non-amortizing. Mortgage loans delinquent over 90 days or in process of foreclosure were $7.0 million at December 31, 2002 and $25.6 million at December 31, 2001. Properties acquired through foreclosure during the year amounted to $12.0 million and $17.5 million in 2002 and 2001, respectively.
The Company has performing restructured mortgage loans of $27.4 million as of December 31, 2002 and $59.8 million as of December 31, 2001. The new terms typically defer a portion of contract interest payments to future periods. Interest is recognized in income based on the modified rate of the loan. Deferred interest, which is the difference between the original contractual rate and the modified rate, is excluded from income. Gross interest income on restructured loans that would have been recorded in accordance with the loans’ original terms was approximately $3.8 million in 2002 and $6.5 million in 2001. Gross interest income recognized in net income for the period from these loans was approximately $1.3 million in 2002 and $3.8 million in 2001. There are no commitments to lend additional funds to any debtor involved in a restructuring.
At December 31, 2002 and 2001, the carrying value of real estate which was non-income producing for the twelve months preceding such dates was $7.5 million and $10.2 million, respectively.
The minimum and maximum lending rates for mortgage loans during 2002 were 4.19% and 10.0% for urban commercial loans, 6.25% and 7.65% for agricultural mortgage loans, and 9.0% and 10.0% for mezzanine loans.
During 2002, the Company reduced interest rates on outstanding agricultural mortgage loans as follows: 2% to 3%, 4 loans, $0.8 million: less than 1%, 1 loan, $0.7 million.
The average investment in impaired mortgage loans was $3.0 million at December 31, 2002, and interest income recognized on impaired mortgage loans during the year ended December 31, 2002 was $11.0 million. On a cash basis method of accounting, $10.3 million in investment income was recognized on impaired mortgage loans during the year ended December 31, 2002.
The following presents the change in the allowance for credit losses on restructured mortgage loans for the year ended December 31, 2002 (in millions):
The estimated fair values of mortgage loans, unaffiliated equity securities, cash, short-term investments, separate account assets and liabilities and investment-type contracts approximate their carrying amounts. The carrying values of bonds and redeemable preferred stocks were $5,652.0 million and $5,445.6 million at December 31, 2002 and 2001, respectively. The estimated fair values of bonds and redeemable preferred stocks were $6,034.2 million and $5,570.5 million at December 31, 2002 and 2001, respectively.
The calculations of estimated fair values involve considerable judgment. Accordingly, these estimates of fair value are not necessarily indicative of the values that could be negotiated in an actual sale.
and other non-publicly traded securities are estimated using values obtained from independent pricing services or, in the case of private placements, by discounting expected future cash flows using a current market interest rate commensurate with the credit quality and term of the investments.
The Company has an agreement with a bank to lend securities to approved borrowers. At December 31, 2002 and 2001, securities loaned by the Company under this agreement had a fair value of $164.9 million and $83.1 million, respectively. The minimum collateral at the time securities are loaned is 102 percent of the market value of loaned securities. Such securities are marked to market on a daily basis. In the event that the value of collateral ever drops to 100% of the market value of the security on loan, such collateral is adjusted back to 102% of the market value of the security on loan.
At December 31, 2002 and 2001, the Company had no single investment or series of investments with a single issuer (excluding U.S. Government and Government Agency securities) exceeding 1.6% and 2.1% respectively of total cash and invested assets.
The states with the largest concentrations of mortgage loans and real estate investments at December 31, 2002 are: Arizona, $199.7 million (11.3%); California, $199.2 million (11.2%); Texas, $178.8 million (10.1%); Georgia, $127.7 million (7.2%); District of Columbia, $117.0 million (6.6%); and New York, $100.2 million (5.7%).
The Company is exposed to market risk in the event that: (i) the market price of a given derivative financial instrument varies significantly from what is expected or from its theoretical value, or (ii) that there is no secondary
market for a particular derivative instrument. The Company plans to hold most derivatives to their expiration. Accordingly, illiquid markets do not expose the Company to significant risk.
Covered call options may be utilized from time to time to generate current income on the Company’s equity portfolios with the ultimate goal of enhancing the portfolios’ overall returns. By writing call options the Company only limits its potential gain from investing in equities.
At December 31, 2002 the Company had no positions in derivative financial instruments, except for a $100 million notional amount interest rate swap contract. The interest swap is designated as a hedge of floating rate notes and is accounted for in accordance with SSAP No. 31.
Substandard policies are valued from basic actuarial principals using the policy’s substandard rating.
The Company is contingently liable with respect to ceded reinsurance should any reinsurer be unable to meet its obligations under these agreements. To limit the possibility of such losses, the Company evaluates the financial condition of its reinsurers and monitors concentration of credit risk.
The Company does not hold any stock for the conversion of preferred stock, employee stock options, stock purchase warrants or any other such purpose. However, the ultimate Parent Company sponsors two stock option plans and a restricted stock plan for certain officers, employees, directors and qualifying agents of the Company and its subsidiaries. Pursuant to the 1998 Stock Incentive Plan, the ultimate Parent Company is restricted from issuing options for its common stock in excess of 2,361,908 shares through November 18, 2003. As of December 31,2002, 1,893,033 options were outstanding for potential conversion to shares of the ultimate Parent Company’s common stock under the 1998 Stock Incentive Plan. Pursuant to the 2002 Stock Option Plan, the ultimate Parent Company is restricted from issuing options for its common stock in excess of 5,000,000 shares. No stock option granted under the 2002 Stock Option Plan, even if vested, may be exercised, transferred or otherwise disposed of by the optionee prior to December 24, 2003. As of December 31, 2002, 1,492,350 options were outstanding for potential conversion to shares of the Ultimate Parent Company’s common stock under the 2002 Stock Option Plan. All options issued under the plans are subject to certain vesting requirements and certain other forfeiture provisions. Pursuant to the restricted stock plan the Parent Company is restricted from issuing in excess of 1,000,000 shares of its common stock. As of December 31, 2002, 95,721 restricted shares were outstanding for potential conversion to shares of the Parent Company common stock. All shares issued under the plan are subject to certain vesting and performance requirements, as well as to certain other forfeiture provisions.
The payment of dividends by MONY Life to MONY Group is regulated under state insurance law. Under the New York Insurance Law, MONY Life may distribute a dividend to its shareholder where the aggregate amount of such dividend in any calendar year does not exceed the lesser of: (a) ten percent of its surplus to policyholders as of the immediately preceding calendar year, or (b) its net gain from operations for the immediately preceding calendar year, not including realized capital gains. Based on these criteria the maximum allowable distribution for calendar year 2003 is $90.6 million. The law also states that if MONY Life does not satisfy the criteria mentioned above, it can only distribute dividends to its shareholders upon giving notice of its intentions to the superintendent no less than thirty days in advance of such declaration. The superintendent may disapprove such distribution by giving written notice to MONY Life within thirty days after such filing that the superintendent finds that the financial condition of MONY Life does not warrant such distribution. In addition, Arizona and Ohio insurance laws contain restrictions on the abilities of MLOA and USFL respectively to pay dividends to MONY Life. In 2002 and 2001, MONY Life paid dividends of $90.0 million in 2002 and $115.0 million in 2001 to MONY Holdings and MONY Group, respectively.
The portion of unassigned funds (surplus) represented or reduced for certain items at December 31, 2002 is as follows (in millions):
In connection with the Group Pension Transaction, on December 31, 1993, the Company made a $200 million capital investment in AEGON USA by purchasing $150 million of Series A and $50 million of Series B notes. The Series A notes pay interest at 6.44% and the Series B notes pay interest at 6.24% per annum. The Series A notes mature on April 7, 2003 and the Series B notes matured on December 31, 2002.
In addition to interest payments on the notes, the Company has the right to receive certain payments based on the profits of the transferred business in force on the transaction date, a future payment tied to the determination of the value of the transferred business at the maturity date of the notes, and a potential payment based on new business growth. Net operating losses, if any, on the transferred business for any year will be carried forward to reduce profit payments in subsequent years. Any deficit remaining at the end of the nine year term and any adjustment related to the final value of the transferred business may only be applied to reduce the principal amount of any outstanding Series A notes. During 2002, the Company earned $19.1 million based upon the profits of the transferred group pension business and $71.9 from the final value of the transferred business. The Company recorded these amounts as an expense allowances on ceded reinsurance in the Summary of Operations.
the 11.25% Notes and, in 2001, MONY Life repurchased another $0.1 million face amount of the 11.25% Notes, leaving $1.9 million face amount ($1.1 million carrying value) of the 11.25% Notes outstanding at December 31, 2002.
The components of the net deferred tax asset/(liability) at December 31, 2002 are as follows. The Company did not record deferred income taxes prior to December 31, 2002 (see Note 2 above).
Federal income tax (benefit)/expense for the years ended December 31, 2002 and 2001 is summarized as follows (in millions):
The main components of the 2002 deferred tax amounts are as follows (in millions):
The Company’s federal income tax returns for years through 1993 have been examined by the Internal Revenue Service (IRS). No material adjustments were proposed by the IRS as a result of these examinations. In the opinion of management, adequate provision has been made for any additional taxes which may become due with respect to open years.
The Company has a qualified pension plan covering substantially all of its salaried employees. The provisions of the plan provide both (a) defined benefit accruals based on (i) years of service, (ii) the employee’s final average annual compensation and (iii) wage bases or benefits under Social Security and (b) defined contribution accruals based on a Company matching contribution equal to 100% of the employee’s elective deferrals under the incentive savings plan for employees up to 3% of the employee’s eligible compensation and an additional 2% of eligible compensation for each active participant. Effective June 15, 1999, prospective defined contribution accruals in the defined benefit plan ceased and were redirected to the Investment Plan Supplement for Employees of MONY Life. The Company did not make any contribution in the current year or prior years under Section 404 of the Internal Revenue Code (“IRC”) because the plan was fully funded under Section 412 of IRC.
The assets of the qualified pension plan are primarily invested in MONY Pooled Accounts which include common stock, real estate, private placement debt securities and bonds. At December 31, 2002 and 2001, $304.7 million and $415.3 million, respectively were invested in the MONY Pooled Accounts. Benefits of $30.1 million and $27.9 million were paid by this plan for the years ended December 31, 2002 and 2001, respectively.
The following presents the change in the benefit obligation, change in plan assets and other information with respect to the Company’s qualified defined benefit pension plan and non-qualified Employee Excess Pension Plan, and other benefits which represent the Company’s postretirement benefit obligation determined in accordance with SSAP No 8 and SSAP No 14 (in millions):
A minimum pension liability adjustment is required when the actuarial present value of accumulated benefits exceeds plan assets and accrued pension liabilities. The minimum liability adjustment, less allowable intangible assets, net of tax benefit, is reported as income in the Statements of Operations. At December 31, 2002, the additional minimum liability was $6.6 million.
The Company has multiple non-pension postretirement benefit plans. The health care plans are partially contributory, with participants’ contributions adjusted annually; the life insurance plans are noncontributory. The accounting for the health care plans anticipates the imposition of a cap on employer contribution becoming effective within the next three years based on 2003.
The Company’s qualified plan had assets of $345.7 million and $419.5 million at December 31, 2002 and 2001, respectively. The projected benefits obligation and accumulated benefit obligation for the qualified plan were $365.2 million and $338.9 million at December 31, 2002, and $343.5 million and $310.6 million at December 31, 2001, respectively.
The projected benefit obligation and accumulated benefit obligation for the non-qualified Employee Excess Plan, which is unfunded, were $121.1 million and $119.5 million at December 31, 2002 and $127.5 and $125.1 million at December 31, 2001, respectively.
MONY Group maintains a syndicated credit facility with banks aggregating $150.0 million, with a scheduled renewal date in July 2003. The purpose of this facility is to provide additional liquidity for any unanticipated short-term cash needs that MONY Group might experience and also to serve as support for MONY Group’s $150.0 million commercial paper program which was activated in the third quarter of 2000. In accordance with specified covenants of the facility, MONY Life is required to maintain a tangible net worth determined in accordance with Statutory Accounting Practices of at least $900.0 million and MONY Group is required to maintain a debt to
At December 31, 2002 the Company had commitments to issue $3.5 million of fixed rate agricultural loans with periodic interest rate resets. The initial interest rates on such loans range from approximately 6.25% to 7.37%. In addition, the Company had commitments to issue $146.2 million of fixed and floating rate commercial and mezzanine mortgage loans with pay rates ranging from 4.19% to 10.0%. In addition, the Company had commitments to contribute capital to its equity partnership investments of $76.3 million and $7.5 million for one private placement security with an interest rate of 6.83% at December 31, 2002.
The Company has guaranteed to certain states that the surplus of MLOA and USFL, wholly owned subsidiaries, will be maintained at amounts at least equal to the minimum surplus required for admission to those states.
Since late 1995 a number of purported class actions have been commenced in various state and federal courts against MONY alleging that it engaged in deceptive sales practices in connection with the sale of whole and universal life insurance policies from the early 1980s through the mid 1990s. Although the claims asserted in each case are not identical, they seek substantially the same relief under essentially the same theories of recovery (i.e., breach of contract, fraud, negligent misrepresentation, negligent supervision and training, breach of fiduciary duty, unjust enrichment and violation of state insurance and/or deceptive business practice laws). Plaintiffs in these cases seek primarily equitable relief (e.g., reformation, specific performance, mandatory injunctive relief prohibiting MONY from canceling policies for failure to make required premium payments, imposition of a constructive trust and creation of a claims resolution facility to adjudicate any individual issues remaining after resolution of all class-wide issues) as opposed to compensatory damages, although they also seek compensatory damages in unspecified amounts. MONY has answered the complaints in each action (except for one being voluntarily held in abeyance). MONY has denied any wrongdoing and has asserted numerous affirmative defenses.
On October 21, 1997, the New York State Supreme Court granted MONY’s motion for summary judgment and dismissed all claims filed in the Goshen case against MONY. 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. MONY intends to defend itself vigorously against 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 MONY.
On November 16, 1999, The MONY Group Inc. and MONY Life Insurance Company were served with a complaint in an action entitled Calvin Chatlos, M.D., and Alvin H. Clement, On Behalf of Themselves And All Others Similarly Situated v. The MONY Life Insurance Company, The MONY Group Inc., and Neil D. Levin, Superintendent, New York Department
On March 27, 2000, plaintiffs filed a new action in New York State Supreme Court bearing the same caption and naming the same defendants as the previously filed federal action. The state court complaint differed from the complaint previously filed in federal court in two primary respects. First, it no longer asserted a claim for damages against the Superintendent, nor did its prayer for relief seek entry of an order vacating or modifying the Superintendent’s decision or requiring the Superintendent to direct MONY to place additional assets into the closed block. Rather, it sought an accounting and an order from the Court directing MONY to transfer additional assets to the closed block.
Second, the new complaint contained claims for breach of contract and fiduciary duty, as well as new allegations regarding the adequacy of the disclosures contained in the Policyholder Information Booklet distributed to policyholders soliciting their approval of the plan of demutualization (which plaintiffs claimed violated both the Insurance Law and MONY’s fiduciary duties).
During 1997, the Company entered into a 17-year lease with the New York City Industrial Development Agency (“NY IDA”). NY IDA issued bonds to MONY Life Insurance Company of America on behalf of the Company, related to the Company’s consolidation of site locations to New York City. At December 31, 2002, IDA bonds outstanding were $1.3 million. NY IDA will use the lease payments to make principal and interest payments to the bondholder. Lease payments for NY IDA were $0.2 million for both 2002 and 2001.
Deferred and uncollected life insurance premiums and annuity considerations as of December 31, 2002 and 2001 were as follows (in millions):
The terrorist events of September 11, 2001 had no material effect on the Company’s financial position as December 31, 2001 or it results of operations for the year then ended. The net effect of life insurance claims relating to the incident (after reinsurance and the release of related reserves) aggregated approximately $3.0 million pre tax. In addition, the Company and its subsidiaries incurred damages from property losses and business interruption. These damages principally consist of: (i) lost revenues at MSC and Enterprise resulting from the close of the New York securities markets, (ii) the closing of the Company’s New York corporate offices, and (iii) lost revenues resulting from the volatility of the securities markets and consumer uncertainty with respect to equity based products in the aftermath of September 11, 2001. To date, the Company has recovered $0.3 million relating to the aforementioned damages under its insurance coverage.
The assets, liabilities, income and expenses relating to the Closed Block have been included within the appropriate captions in the statement of admitted assets, liabilities, capital and surplus at December 31, 2002 and 2001, and statement of operations and capital and surplus and statement of cash flows for the years ended December 31, 2002 and 2001. The assets and liabilities allocated to the Closed Block are recorded in the Company’s financial statements at their historical carrying values. The carrying value of the assets allocated to the Closed Block are less than the carrying value of the Closed Block liabilities at the Plan Effective Date. The excess of the Closed Block liabilities over the Closed Block assets at the Plan Effective Date represents the total estimated future post-tax contribution expected to emerge from the operation of the Closed Block, which will be recognized in the Company’s income over the period the policies and the contracts in the Closed Block remain in force.
In addition, MONY Life has undertaken to reimburse the Closed Block from its general account assets outside the Closed Block for any reduction in principal payments due on the Series A Notes (which have been allocated to the Closed Block) pursuant to the terms thereof, as described in Note 16. Since the Closed Block will be funded to provide for payment of guaranteed benefits and the continuation of current payable dividends on the policies included therein, it will not be necessary to use general funds to pay guaranteed benefits unless the Closed Block Business experience very substantial ongoing adverse experience in investment, mortality, persistency or other experience factors. The Company regularly (at least quarterly) monitors the experience from the Closed Block and may make changes to the dividend scale, when appropriate, to ensure that the profits are distributed to the Closed Block policyholders in a fair and equitable manner.
Balance sheet information for the Closed Block as of December 31, 2002 and 2001 is summarized as follows (in millions):
The Company has sold variable annuity contracts containing guaranteed minimum death benefits (“GMBDs”) that reduce on a dollar-for-dollar basis when a partial withdrawal occurs. Currently there is ambiguity as to the correct interpretation and application of Actuarial Guideline XXXIII, “Determining CARVM Reserves for Annuity Contracts with Elective Benefits” (AG XXXIII) and Actuarial Guideline XXXIV, “Variable Annuity Minimum Guaranteed Death Benefit Reserves” (AG XXXIV) in determining statutory reserves for these products. In calculating the GMBD reserves for these variable annuity contracts under AG XXXIV, the Company does not consider the potential benefit stream where all policyholders immediately elect to maximize partial withdrawals under these policies. This is consistent with the method applied in the prior year.
At the time of issuance of these financial statements, neither the NAIC nor the New York State Insurance Department, which is ultimately responsible for determining the appropriate reserving methods for the statutory financial statements of New York domiciled insurance companies, has provided specific guidance as to the correct interpretation of AG XXXIII and AG XXXIV with respect to GMBD reserves required for variable annuity contracts containing dollar-for-dollar withdrawal provisions. However, the New York State Insurance Department has had discussions with the insurance industry by way of conference calls with the Life Insurance Counsil of New York (“LICONY”), a life insurance industry trade association, to discuss their concern with the risk.
Although ambiguity exists, alternative interpretations of AG XXXIII and AG XXXIV, under which contractholders are assumed to immediately maximize partial withdrawals, could result in an increase in reserves that would be significantly in excess of current reserves.