The Company’s profitability depends in large part upon: (i) price movements and trends in the securities markets, (ii) the amount of its assets under management, (iii) the adequacy of its product pricing (which is primarily a function of competitive conditions, management’s ability to assess and manage trends in mortality and morbidity experience as compared to the level of benefit payments, and its ability to maintain expenses within pricing assumptions), (iv) supply and demand for the kinds of products offered by the Company, (v) the maintenance of the Company’s target spreads between credited rates on policyholders’ account balances and the rate of earnings on its investments, (vi) the amount of time purchasers of the Company’s insurance and annuity products hold and renew their contracts with the Company (referred to as “persistency”), which affects its ability to recover the costs incurred to sell such policies and contracts, (vii) the ability to manage the market and credit risks associated with its invested assets, and (viii) the investment performance of its variable product offerings. External factors, such as general economic conditions and the securities markets, as well as legislation and regulation of the insurance marketplace and products, may also affect the Company’s profitability. In addition, downgrades of the Company’s claims paying ability ratings by Nationally Recognized Statistical Rating Organizations may affect the Company’s ability to compete in the marketplace for its products and services.
At December 31, 2002 the carrying value of the Company’s DPAC was $617.4 million. Approximately $115.1 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 its annuity DPAC, the accounting policy followed by the Company, 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
During 2002 the Company revised its estimate of the ultimate amount of gross profits to be earned from its annuity in force block of business. This revision reflects the decline in annuity in force account values during the year due primarily to the deterioration of the equity securities markets. As a result of this revised estimate, the Company recorded a charge of $14.5 million during 2002 to reflect the amount of DPAC amortization that should have been recorded through December 31, 2002 based on the Company’s best estimate of the ultimate gross profits from the annuity in force business. In addition, the Company recorded a charge of $1.6 million representing its best estimate of the amount of annuity in force DPAC that is not recoverable based on the estimated present value of future gross profits expected to emerge from this business.
the consideration of other factors, including: any actions by rating agencies affecting the issuer, the period of time the fair value of a security has been at less than its cost, the Company’s expectations regarding the period of time required for a recovery of any current unrealized loss, and other relevant facts regarding the issuer.
Certain of the Company’s annuity products have contractual provisions which guarantee minimum death benefits. These provisions require the Company to pay the beneficiary any excess of the guaranteed minimum benefit over the fund value of the annuity contract in addition to payment of the fund value. It is the Company’s practice to establish reserves for the payment of any guaranteed minimum death benefit claims on the basis of the Company’s outlook for mortality experience and the amount at risk on the annuity contracts. At December 31, 2002, the Company’s net amount at risk (or the aggregate amount by which the
Further Declines in Securities Market Prices Could Decrease the Company’s Revenues
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.
Although the Company has no employees, under a service agreement with MONY Life, the Company pays for services provided by MONY Life employees. Pension costs for such employees are based in part, on the rate of return assumption and the discount rate used to determine pension liabilities. Due to deteriorating economic conditions, the decline in the securities market valuations and interest rates, MONY Life lowered its assumed rate of return and discount rate, which will increase the net periodic pension expense in 2003 and thereafter and result in lower pre-tax earnings in 2003 for the Company.
The following is a discussion of the critical accounting policies that, in the Company’s view, require significant use of judgment. See Note 2 of the Financial Statements for a complete description of the Company’s significant accounting policies.
The Company records investments in fixed maturity securities and equity securities available for sale, and certain investments in venture capital partnerships at fair value in the balance sheet. In most cases, the Company determines fair values using quoted market prices. However, valuation of certain investments, such as private placement fixed maturity securities, requires use of assumptions and estimates related to interest rates, default rates, collection of principal, and the timing of cash flows because quoted market prices are not available.
The Company values DPAC and insurance reserves in accordance with the relevant GAAP pronouncements: generally, Financial Accounting Standards Board (“FASB”) 60 for term and whole life insurance products, FASB 97 for universal life and investment-type contracts. The valuation of DPAC and insurance reserves requires management to assume future investment yields, mortality rates, lapse rates, expense levels, policyholder dividends and policy duration. For many of the Company’s products, amortization of DPAC varies with profit margins of the policies and contracts supporting the DPAC balances. The Company must periodically evaluate the recoverability of DPAC and the adequacy of its reserves based on historical and projected future results. Changes in management’s assumptions or actual results that differ significantly from management’s estimates may materially affect the Company’s financial position and results of operations. See Management’s Discussion and Analysis of Financial Condition and Results of Operations - Potential Forward Looking Risks Affecting Profitability.
During 2002 the Company recorded charges aggregating approximately $1.6 million representing “Reorganization Charges” taken in connection with the Company’s reorganization of certain of its lines of business. These charges consisted of severance for terminated employees and losses relating to the abandonment of leased office space. All of these reorganization charges met the definition of “restructuring charges” as defined by Emerging Issues Task Force Consensus 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)”. See Note 14 to the Financial Statements.
The following table presents the Company’s results of operations for the years ended December 31, 2002 and 2001. The financial information herein is presented in accordance with GAAP unless otherwise noted.
Net investment income was $107.5 million for 2002, an increase of $16.3 million, or 17.9%, from $91.2 million reported in 2001. The increase was primarily due to an increase in the average balance of invested assets of $282.1 million, partially offset by a decline in interest rates.
Other income was $16.8 million for 2002, a decrease of $1.1 million, or 6.1%, compared to $17.9 million in 2001. The decrease was primarily due to a decrease in subadvisory fee income received from MONY Series Fund.
Benefits to policyholders were $127.8 million for 2002, an increase of $29.9 million, or 30.5%, from $97.9 million reported in 2001. The increase was primarily due to a $15.6 million increase in assumed benefits under the MODCO treaty with USFL, increased benefits on the UL product line of $8.9 million, and higher supplementary contract and individual annuity reserves of $6.0 million. The increased reserves on supplementary contracts and individual annuities were attributable to higher sales of these products, while the increased benefits on the life insurance products, including benefits assumed under the MODCO treaty, were attributable to poor mortality.
Interest credited to policyholders’ account balances was $75.8 million for 2002, an increase of $9.9 million, or 15.0%, from $65.9 million reported in 2001. The increase was primarily due to higher FPVA general account fund values and new general account deposits on Corporate Sponsored Variable Universal Life (“CSVUL”) of $6.4 million and $3.0 million, respectively.
Amortization of DPAC was $81.8 million for 2002, an increase of $19.7 million, or 31.7%, from $62.1 million reported in 2001. The increase was primarily attributable to higher amortization of $17.2 million on the FPVA product due to an acceleration of amortization subsequent to a decline in variable annuity assets under management, resulting in lower expected future profit margins. See “ - Potential Forward Looking Risks Affecting Profitability - Company Might Have to Write-Off Deferred Policy Acquisition Costs Sooner Than We Had Planned”. The remainder of the year over year increase was primarily attributable to the increase in DPAC amortization in the VUL and level term product lines, as these product lines continue to grow. The increase on variable and level term products was partially offset by a decrease in the UL product line due to unfavorable mortality and a decrease in the GUL product line due to a charge taken in 2001 as part of the Company’s reorganization. See Note 14 to the Financial Statements.
Other operating costs and expenses were $97.1 million for 2002, a decrease of $4.2 million, or 4.1%, from $101.3 million reported in 2001. The decrease was primarily due to a net decrease in general overhead expenses and lower commission expenses, partially offset by an increase in reinsurance expense allowances and commissions related to assumed business from USFL. The net decrease in general overhead expenses are primarily attributable to an increase in the deferral of expenses, which is directly related to the increase in new business. See Note 2 to the Financial Statements for a discussion of DPAC.
Excludes approximately $61.9 million, $176.9 million, and $767.1 million in 2002, 2001 and 2000, respectively, relating to surrenders associated with an exchange program offered by the Company wherein contract holders surrendered old FPVA contracts and reinvested the proceeds in a new enhanced FPVA product offered by the Company.
In July 1999, the Company responded to an increasing trend in surrenders by enhancing its variable annuity products by offering new investment fund choices. In addition to the product enhancements, the Company established a special conservation unit and began to offer policyholders the opportunity to exchange their contracts for a newly created more competitive series of products.
million, which were comprised of $824.7 million public and $712.7 million private fixed maturity securities. At that date, approximately 84.1% of the Company’s fixed maturity securities were designated in NAIC rating categories 1 and 2 (considered investment grade, with a rating of “Baa” or higher by Moody’s or “BBB” or higher by S&P). In addition, at December 31, 2002, the Company had cash and cash equivalents of $33.2 million. Management believes that the Company’s sources of liquidity are adequate to meet its anticipated needs.
At December 31, 2002, the Company had commitments to issue $0.8 million fixed and floating rate commercial mortgages ranging from 4.09% to 7.68%, and $5.3 million of fixed rate agricultural loans with periodic interest rate reset dates. The initial interest rates on such loans range from approximately 6.25% to 6.55%. As of December 31, 2002, there were no outstanding commitments to purchase private fixed maturity securities.
Of the $272.2 million in commercial mortgage loans outstanding in the Company’s investment portfolio at December 31, 2002, $8.2 million, $65.9 million and $0.0 million are scheduled to mature in 2003, 2004, 2005, respectively, and $198.1 million thereafter.
At December 31, 2002, aggregate maturities of the Company’s note payable to affiliate based on required remaining principal payments for the next five years are $2.6 million, $2.8 million, $3.0 million, $3.2 million and $3.4 million, respectively, and $27.2 million thereafter. Aggregate contractual debt service payments on this outstanding note payable at December 31, 2002 are $5.4 million each year for the next five years and $33.6 million thereafter.
At December 31, 2002, the adjusted Risk Based Capital (“RBC”) capital ratios of the Company were in excess of minimum capital requirements of the RBC guidelines.
The Company’s investment operations are managed by MONY Life’s investment area pursuant to an agreement between the Company and MONY Life dated January 1, 1982. The investment area reports directly to the Chief Investment Officer of MONY Life. The investment area, in consultation with the product actuaries of MONY Life, is responsible for determining, within specified risk tolerances and investment guidelines, the general asset allocation, duration and other characteristics of the Company’s investment portfolio.
The Company had total assets at December 31, 2002 of approximately $5.7 billion. Of the Company’s total assets at such date, approximately $2.8 billion represented assets held in the Company’s general account and approximately $2.9 billion were held in the Company’s separate accounts.
The following table illustrates the net investment income yields based on average annual asset carrying values, excluding unrealized gains and losses in the fixed maturity category. Equity real estate income is shown net of operating expenses and depreciation. Total investment income includes non-cash income from amortization, payment-in-kind distributions and undistributed equity earnings. Investment expenses include mortgage servicing fees and other miscellaneous fee income.
Fixed maturity securities consist of publicly traded and privately placed debt securities and preferred stock which represented 76.0% and 78.7% of total invested assets at December 31, 2002 and 2001, respectively.
The Securities Valuation Office of the NAIC evaluates the fixed maturity security investments of insurers for regulatory reporting purposes and assigns securities to one of six investment categories (“NAIC Designations”). The NAIC Designations closely mirror the Nationally Recognized Statistical Rating Organizations’ credit ratings for marketable fixed maturity securities. NAIC Designations 1 and 2 include fixed maturity securities considered investment grade (“Baa” or higher by Moody’s, or “BBB” or higher by S&P) by such rating organizations. NAIC Designations 3 through 6 are referred to as below investment grade (“Ba” or lower by Moody’s, or “BB” or lower by S&P).
Within its fixed maturity securities portfolio, the Company identifies “problem fixed maturity securities”, “potential problem fixed maturity securities” and “restructured fixed maturity securities”. See Note 5 to the Financial Statements for a discussion of the criteria used in these identifications.
The amortized cost and estimated fair value of fixed maturity securities, by contractual maturity dates (excluding scheduled sinking funds), as of December 31, 2002 and 2001 are as follows:
The Company held approximately $175.2 million and $212.9 million of mortgage-backed and asset-backed securities as of December 31, 2002 and 2001, respectively. Of such amounts, $17.6 million and $39.9 million, or 10.0% and 18.7%, respectively, represented agency-issued pass-through and collateralized mortgage obligations (“CMOs”) secured by the Federal National Mortgage Association (“FNMA”), the FHLMC and the Government National Mortgage Association (“GNMA”). The balance of such amounts was comprised of other types of mortgage-backed and asset-backed securities. The Company believes that its active monitoring of its portfolio of mortgage-backed securities and the limited extent of its holdings of more volatile types of mortgage-backed securities mitigate the Company’s exposure to losses from prepayment risk associated with interest rate fluctuations for this portfolio. At December 31, 2002 and 2001, 66.3% and 76.5%, respectively, of the Company’s mortgage-backed and asset-backed securities were assigned an NAIC Designation 1.
CMOs are purchased to diversify the portfolio risk characteristics from primarily corporate credit risk to a mix of credit and cash flow risk. The majority of the CMOs in the Company’s investment portfolio have relatively low cash flow variability. In addition, approximately 53.5% of the CMOs in the portfolio have low credit risk because the underlying collateral is backed by the FNMA, the FHLMC, or the GNMA. These CMOs offer greater liquidity and higher yields than corporate debt securities of similar credit quality and expected average lives.
The principal risks inherent in holding CMOs (as well as pass-through securities) are prepayment and extension risks arising from changes in market interest rates. In declining interest rate environments, the mortgages underlying the CMOs are prepaid more rapidly than anticipated, causing early repayment of the CMOs. In rising interest rate environments, the underlying mortgages are prepaid at a slower rate than anticipated, causing CMO principal repayments to be extended. Although early CMO repayments may result in acceleration of income from recognition of any unamortized discount, the proceeds typically are reinvested at lower current yields, resulting in a net reduction of future investment income. The Company manages this
prepayment and extension risk by investing in CMO tranches that provide for greater stability of cash flows. The following table presents the mix of CMO tranches as of the dates indicated.
The underlying properties supporting the commercial mortgage loans at December 31, 2002 and 2001, respectively, consisted of 63.6% and 47.8% in office buildings, 6.4% and 29.3% in hotels, 13.6% and 15.9% in industrial buildings, 13.3% and 4.8% in office warehouse and 3.1% and 2.2% in other categories.
The Company’s commercial mortgage loan portfolio is geographically diversified throughout the United States. At December 31, 2002 and 2001, the highest concentration was in the northeast and southeast regions, respectively. The northeast region comprised 26.8% and 9.5% of the total at December 31, 2002 and 2001, respectively, while the southeast region comprised 17.2% and 39.5% of the total at December 31, 2002 and 2001, respectively.
There were no problem, potential problem or restructured commercial mortgage loans at December 31, 2002.
In addition to valuation allowances and impairment writedowns recorded on specific commercial mortgage loans classified as problem and restructured mortgage loans, the Company records a non-specific estimate of expected losses on all other such mortgage loans based on its historical loss experience for such investments. As of December 31, 2002 and 2001, such reserves were $3.2 million and $0.7 million, respectively.
Gross interest income on restructured commercial mortgage loan balances that would have been recorded in accordance with the loans’ original terms was approximately $0.0 million and $0.6 million at December 31, 2002 and 2001. As a result of the restructurings, the gross interest income recognized in net income at December 31, 2002 and 2001 was $0.0 million and $0.5 million, respectively.
The Company defines problem, potential problem and restructured agricultural mortgages in the same manner as it does for commercial mortgages. Total problem, potential problem and restructured agricultural mortgages as at December 31, 2002 and
In addition to valuation allowances and impairment writedowns recorded on specific agricultural mortgage loans classified as problem, potential problem, and restructured mortgages, the Company records a non-specific estimate of expected losses on all other agricultural mortgage loans based on its historical loss experience for such investments. As of December 31, 2002 and 2001, such reserves were $0.5 million and $0.7 million, respectively.
Other than Temporary Impairment Charges on Investments in Fixed Maturity Securities
At December 31, 2002, the carrying values of the public and private fixed maturity securities comprising the Company’s fixed maturity security portfolio were $824.7 million and $712.7 million, respectively. At December 31, 2001, the carrying values of the
public and private fixed maturity securities comprising the Company’s fixed maturity security portfolio were $541.0 million and $654.9 million, respectively.
At December 31, 2002, gross unrealized losses on the Company’s fixed maturity security portfolio aggregated $7.9 million, of which $4.3 million and $3.6 million related to private and public fixed maturity securities, respectively. At December 31, 2001, gross unrealized losses on the Company’s fixed maturity security portfolio aggregated $12.5 million, of which $3.9 million and $8.6 million related to public and private fixed maturity securities, respectively.
As indicated in the above tables, there was one investment grade security position that had been in an unrealized loss position for more than 12 months as of December 31, 2002. The investment was not considered “other than temporarily impaired” because management believes that the unrealized loss position was primarily attributable to temporary market conditions affecting the related industry sectors, as well as the fact that management’s analysis of the issuer’s financial strength supported the conclusion that the security was not “other than temporarily impaired.”
For the year ended December 31, 2002 two fixed maturity securities were sold which resulted in a loss of $1.0 million. Proceeds from the sales of these securities were approximately $2.1 million. There were no fixed maturity securities sold during 2001.
The cumulative asset specific impairment adjustments and provisions for valuation allowances recorded as of December 31, 2002 and 2001 are shown in the table below.
All of the Company’s fixed maturity securities are classified as available for sale and, accordingly, are marked to market, with unrealized gains and losses excluded from earnings and reported as a separate component of accumulated other comprehensive income. Securities whose value is deemed other than temporarily impaired are written down to fair value at the date the determination of impairment is made. The writedowns are recorded as realized losses and included in earnings. The cost basis of such securities is adjusted to fair value and the new cost basis is not changed for subsequent recoveries in value. For the years ended December 31, 2002, 2001 and 2000 such writedowns aggregated $12.5 million, $3.0 million and $2.6 million, respectively.
Mortgage loans are stated at their unpaid principal balances, net of valuation allowances for impairment. The Company provides valuation allowances for mortgage loans when it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Increases in such valuation allowances are recorded as realized investment losses and, accordingly, are reflected in the Company’s results of operations. For the years ended December 31, 2002, 2001 and 2000, increases (decreases) in valuation allowances aggregated $2.3 million, $0.0 million, and $(0.9) million, respectively. The carrying value of mortgage loans at December 31, 2002 was $357.9 million, which is net of $3.7 million
The carrying value of real estate held for investment is generally adjusted for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. Such impairment adjustments are recorded as realized investment losses and, accordingly, are reflected in the Company’s results of operations. There were no impairment adjustments for the years ended December 31, 2002, 2001 and 2000. At December 31, 2002 and 2001, the carrying value of real estate held for investment was $2.3 million and $3.7 million, or 0.1% and 0.2%, respectively, of invested assets at such dates. The aforementioned carrying values are net of cumulative impairments of $0.1 million and $1.0 million, respectively, and net of accumulated depreciation of $1.7 million and $1.2 million, respectively, as of December 31, 2002 and 2001. There can be no assurance that additional provisions for impairment adjustments with respect to real estate held for investment will not need to be made.
As discussed in Note 2 to the financial statements, the Company changed its method of accounting for long-lived assets in 2002.
The Company’s primary business is to provide life insurance, annuities, and corporate-owned and bank-owned life insurance (“COLI/BOLI”) to business owners, growing families, and pre-retirees. 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 MONY Life and (ii) Trusted Securities Advisors Corp. (“Trusted Advisors”). The Company’s Wholesale channel is comprised of: (i) MONY Partners, a division of MONY Life, and (ii) MONY Life’s corporate marketing team which markets COLI/BOLI products. These products are sold in 49 states (not including New York), the District of Columbia and Puerto Rico.
Mortgage loans on real estate are stated at their unpaid principal balances, net of valuation allowances. Valuation allowances are 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 at 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 foreclosure of the loan is considered probable. The provision for loss is reported as a realized loss on investment. Loans in foreclosure and loans considered to be impaired, other than restructured loans, are placed on non-accrual status. Interest
received on non-accrual status mortgage loans is included in investment income in the period received. Interest income on restructured mortgage loans is accrued at the restructured loans’ interest rate.
Real estate investments meeting the following criteria are classified as “real estate to be disposed of” in the Company’s balance sheet and the results therefrom are reported as “Discontinued Operations” in the Company’s statement of income and comprehensive income as a result of the Company’s adoption in 2002 of SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”):
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.
Policyholders’ account balances for universal life and investment-type contracts represent an annuity of gross premium payments plus credited interest less expense and mortality charges and withdrawals. The weighted average interest crediting rate for universal life products was approximately 5.6%, 5.9% and 5.9% for the years ended December 31, 2002, 2001 and 2000, respectively. The weighted average interest crediting rate for investment-type products was approximately 4.9%, 5.0%, and 5.2% for each of the years ended December 31, 2002, 2001 and 2000, respectively.
The Company files a consolidated federal income tax return with its parent, MONY Life, and with MONY Life’s other life and non-life subsidiaries. Deferred income tax assets and liabilities are recognized based on the difference between financial statement carrying amounts and income tax bases of assets and liabilities using enacted income tax rates and laws.
Separate accounts are established in conformity with insurance laws and are generally not chargeable with liabilities that arise from any other business of the Company. Separate account assets are subject to general account claims only to the extent that the value of such assets exceeds the separate account liabilities. Investments held in separate accounts and liabilities of the separate accounts are reported separately as assets and liabilities. Substantially all separate account assets and liabilities are reported 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 the Company’s statements of income and cash flows. Fees charged to the separate accounts by the Company (including mortality charges, policy administration fees and surrender charges) are reflected in the Company’s revenues.
On January 1, 2001 the Company adopted FASB SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, a replacement of SFAS No. 125” (“SFAS 140”). SFAS No. 140 specifies the accounting and reporting requirements for securitizations and other transfers of financial assets and collateral, recognition and measurement of servicing assets and liabilities, and the extinguishment of liabilities. Adoption of the new requirements did not have a material effect on the Company’s financial position or results of operations.
Recent Accounting Pronouncements Not Yet Adopted as of December 31, 2002
MONY Life has a guarantee outstanding to one state that the statutory surplus of the Company will be maintained at amounts at least equal to the minimum surplus for admission to that state.
In 1997, the Company entered into a 17-year lease with the New York City Industrial Development Agency (“NY IDA”). NY IDA issued bonds to the Company, for the benefit of MONY Life’s consolidation of site locations to New York City. Debt service under the bonds is funded by lease payments by MONY Life to the bond trustee for the benefit of the bondholder. At December 31,2002, IDA bonds outstanding were $1.3 million. Lease payments for NY IDA were $0.2 million for each of the years ended, December 31, 2002 and 2001.
The Company recorded capital contributions from MONY Life of $150.0 million, $100.0 million and $50.0 million for the years ended December 31, 2002, 2001 and 2000, respectively.
4. Investment Income, Realized and Unrealized Investment Gains (Losses), and Other Comprehensive Income:
Unrealized gains (losses) on investments reported in the above table for the years ended December 31, 2002, 2001, and 2000, are net of income tax expense (benefit) of $12.5 million, $3.8 million, and $4.1 million, respectively, and $(40.6) million, $(17.4) million, and $(17.0) million, respectively, relating to the effect of such unrealized gains (losses) on DPAC.
At December 31, 2002 and 2001, there were no fixed maturity securities which were non-income producing for the twelve months preceding such dates.
Proceeds from the sale of fixed maturity securities during 2002, 2001 and 2000 were $82.8 million, $84.5 million, and $40.9 million, respectively. Gains of $4.8 million, $4.1 million, and $0.5 million, and losses of $1.0 million, $0.0 million, and $2.1 million were realized on these sales in 2002, 2001, and 2000, respectively.
At December 31, 2002 and 2001, there were $0.0 million and $0.9 million mortgage loans which were non-income producing for the twelve months preceding such dates.
The Company files a consolidated federal income tax return with MONY Life and MONY Life’s other subsidiaries. Federal income taxes have been calculated in accordance with the provisions of the Internal Revenue Code of 1986, as amended. A summary of the Federal income tax expense (benefit) is presented below:
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 pending the outcome of IRS examinations.
The estimated fair values of fixed maturity securities are based upon quoted market prices, where available. The fair values of fixed maturity securities not actively traded 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 fair values of mortgage loans are 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 $394.8 million and $138.3 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 $769.9 million and $748.3 million, respectively. The carrying value and fair value of annuities at December 31, 2001 were $559.4 million and $549.6 million, respectively.
Life insurance business is primarily ceded on a yearly renewable term basis under various reinsurance contracts except for the level term product, which utilizes a coinsurance agreement. The Company’s general practice is to retain no more than $4.0 million of risk on any one person for individual products and $6.0 million for last survivor products.
The Company’s retention limits on new business is $4.0 million for any one person for individual products, and $6.0 million for last survivor products.
At December 31, 2002 and 2001, the Company had no single investment or series of investments with a single issuer (excluding U.S. Treasury securities and obligations of U.S. government agencies) exceeding 1.1% and 1.3% of total cash and invested assets, respectively.
The Company holds below investment grade fixed maturity securities with a carrying value of $245.1 million at December 31, 2002. These investments consist mostly of privately issued bonds which are monitored by the Company through extensive internal analysis of the financial condition of the issuers and which generally include protective debt covenants. At December 31, 2001, the carrying value of the Company’s investments in below investment grade fixed maturity securities amounted to $155.9 million.
(i) Since late 1995 a number of purported class actions have been commenced in various state and federal courts against MONY Life and MLOA alleging that they 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 (e.g., 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 Life and MLOA 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 Life and MLOA have denied any wrongdoing and asserted numerous affirmative defenses.
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 actions filed, as a nationwide class consisting of all persons or entities who have, or at the time of the policy’s termination had, an ownership interest in a whole or universal life insurance policy issued by MONY Life and MLOA and sold on an alleged “vanishing premium” basis during the period January 1, 1982 to December 31, 1995. On March 27, 1997, MONY Life and MLOA filed a motion to dismiss or, alternatively, for summary judgment on all counts of the complaint. All of the other putative class actions have been
At December 31, 2002, the Company had commitments to issue $0.8 million fixed and floating rate commercial mortgages ranging from 4.09% to 7.68%, and $5.3 million of fixed rate agricultural loans with periodic interest rate reset dates. The initial interest rates on such loans range from approximately 6.25% to 6.55%.
The statutory net loss reported by the Company for the years ended December 31, 2002, 2001 and 2000 was $91.9 million, $64.9 million, and $35.9 million, respectively. The statutory surplus of the Company as of December 31, 2002 and 2001 was $246.1 million and $189.4 million, respectively.
In March 2003, litigation relating to the disposition of a real estate asset discussed in Note 12(ii) was settled for approximately $0.2 million less than the 2002 charge. Accordingly, during the first quarter of 2003 the Company will reverse such over-accrual to income.