The Company leases its headquarters building which is located at 1740 Broadway, New York, New York and consists of approximately 225,000 square feet. The Company also leases facilities in Syracuse, New York, for use in its insurance operations, which consist of approximately 600,000 square feet in the aggregate. The Company also leases all 108 of its agency and subsidiary offices, which consist of approximately 663,000 square feet in the aggregate. The Company believes that such properties are suitable and adequate for its current and anticipated business operations.
The following table sets forth selected consolidated financial information for the Company. The selected consolidated financial information for each of the years in the three-year period ended December 31, 1998 and at December 31, 1998 and 1997 has been derived from the Company's audited consolidated financial statements included elsewhere herein. The consolidated financial information as of December 31, 1996 and for the year ended December 31, 1995 has been derived from audited financial statements not included elsewhere herein. The financial information set forth below for all other periods has been derived from unaudited consolidated financial information not included elsewhere herein which, in the opinion of management, presents fairly such consolidated financial information in conformity with GAAP. The selected consolidated financial information should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations", the Company's consolidated financial statements and the notes thereto and the other financial information included elsewhere herein.
(6) On February 23, 1999, the MONY Group declared its first quarterly dividend of $0.10 per share of common stock payable March 26, 1999 to shareholders of record on March 8, 1999.
(7) Includes assets transferred in the Group Pension Transaction of $5,751.8 million, $5,714.9 million, $5,627.6 million, $5,992.8 million, and $5,660.1 million at December 31, 1998, 1997, 1996, 1995, and 1994, respectively. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- The Group Pension Transaction" and Note 10 to the Consolidated Financial Statements.
(8) Includes Closed Block assets of $6,161.2 million at December 31, 1998. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note 3 and Note 20 to the Consolidated Financial Statements.
(11) Shareholders' equity at December 31, 1998 includes approximately $248.7 million which represents the remaining net proceeds from MONY Group's initial public offering after deducting cash used to pay cash to certain eligible policyholders and cash used to fund policy credits given to certain eligible policyholders in connection with the Demutualization. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note 1 to the Consolidated Financial Statements.
- SFAS No. 114, Accounting by Creditors for Impairment of a Loan, was adopted on a retroactive basis for the year ended December 31, 1993 and subsequent years. For periods prior to the adoption of SFAS No. 114, MONY established a policy to record impairment losses for troubled loans based on discounted cash flows. The policy was substantially consistent with SFAS No. 114 except that impairment losses were reflected as permanent reductions in the cost basis of such loans. There was no material effect on MONY's financial statements as a result of the adoption of SFAS No. 114.
- SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, was adopted for the year ended December 31, 1994 and subsequent years. For periods prior to the adoption of SFAS No. 121, MONY had no material real estate that it intended to dispose of, and writedowns on impaired real estate were established if the undiscounted cash flows were less than the carrying value. In such cases, the asset was written down to the discounted cash flow amount. Accordingly, there was no material effect on MONY's financial statements as a result of the adoption of SFAS No. 121.
(13) The comparability of the Company's results of operations for the year ended December 31, 1998 with prior years is affected by the sale of the Company's disability income business pursuant to the DI Transaction. See "Management's Discussion and Analysis of Financial Condition and Results of Operations".
The MONY Group was incorporated on June 24, 1997, under the laws of Delaware, as a wholly owned subsidiary of MONY. The MONY Group was formed for the purpose of becoming the parent holding company of MONY pursuant to the Plan. On November 16, 1998, the Plan was approved by the New York Superintendent of Insurance and MONY converted from a mutual life insurance company to a stock life insurance company and became a wholly owned subsidiary of the MONY Group. In connection with the Plan, MONY established the Closed Block to fund the guaranteed benefits and dividends of certain participating insurance policies (see Note 3 to the Consolidated Financial Statements) and eligible policyholders of MONY received either cash, policy credits, or shares of common stock in the MONY Group in exchange for their membership interests in MONY. Also, on November 16, 1998, the MONY Group consummated an initial public offering (the "Offerings") of approximately 12.9 million shares of its common stock (see "Liquidity and Capital Resources") and MONY changed its name to MONY Life. The shares of common stock issued in the Offerings are in addition to approximately 34.3 million shares of common stock of the MONY Group distributed to the aforementioned eligible policyholders. The MONY Group has no other operations or subsidiaries.
MONY's conversion to a stock life insurance company and the establishment of the Closed Block have significantly affected the presentation of the consolidated financial statements of the Company. The most significant affects are as follows:
The Company derives its revenues principally from: (i) premiums on participating individual life insurance, (ii) insurance, administrative and surrender charges on universal life and annuity products, (iii) asset management fees from separate account and mutual fund products, (iv) net investment income on general account assets, (v) the Group Pension Profits, See "-- The Group Pension Transaction" and (vi) commissions from securities and insurance brokerage operations. The Company's expenses consist of insurance benefits provided to policyholders, interest credited on policyholders' account balances, dividends to policyholders, the cost of selling and servicing the various products sold by the Company, including commissions to sales representatives (net of any deferrals), and general business expenses.
Premium revenue was $721.8 million for 1998, a decrease of $116.8 million, or 13.9%, from $838.6 million reported for 1997. Approximately $74.4 million of the decrease resulted from lower premiums due to the transfer of the Company's disability income insurance business in December of 1997 pursuant to the DI Transaction, as hereafter defined. See "DI Transaction". The balance of the decrease resulted primarily from lower new and renewal premiums of approximately $6.1 million and $26.1 million, respectively, as well as lower single premiums of approximately $8.1 million due to a reduction in the Company's dividend scales (substantially all single premiums result from policyholders electing to buy additional insurance coverage with dividends received on existing policies).
Net realized gains on investments were $171.1 million for 1998, an increase of $99.0 million, or 137.3%, from $72.1 million reported for 1997. The increase is primarily due to higher gains on sales of real estate and real estate partnership equities, lower provisions for valuation allowances on real estate to be disposed of, lower impairment writedowns on real estate held for investment, and higher gains on prepayments and sales of fixed maturities, partially offset with lower gains from sales of equity securities, higher other than temporary impairment losses on fixed maturities, and an increase in the provision for mortgage loan valuation allowances. Realized gains on sales of real estate and real estate partnership equities totaled $157.4 million for 1998, as compared to $88.1 million for 1997. See "Real Estate Sales". Provisions for valuation allowances on real estate to be disposed of and impairment writedowns on real estate held for investment aggregated $11.7 million in 1998, as compared to $64.2 million in 1997. Net realized gains from prepayments and sales of fixed maturities were $23.6 million in 1998, as compared to $13.3 million in 1997. Realized gains on sales of equity securities were $7.5 million in 1998, as compared to $39.9 million in gains in 1997. Other than temporary impairment losses on fixed maturities were $15.1 million in 1998, as compared to $6.1 million in 1997. Provisions for mortgage loan valuation allowances were $0.6 million in 1998, as compared to recoveries of $4.7 million in 1997.
Group Pension Profits (see "The Group Pension Transaction" and Note 10 to the Consolidated Financial Statements) were $56.8 million for 1998, a decrease of $3.2 million, or 5.3%, from $60.0 million reported for 1997. Group Pension Profits in 1998 consisted of $49.8 million of Group Pension Payments and $7.0 million relating to adjustments required to reflect the earnings from such payments in accordance with GAAP. Such adjustments primarily relate to changes in the valuation allowances established to recognize impairment of assets supporting the business transferred in the Group Pension Transaction. In 1997, Group Pension Profits consisted of $55.7 million of Group Pension Payments and a $4.3 million reduction in the valuation allowances established to recognize impairment of assets supporting the business transferred in the Group Pension Transaction. Group Pension Payments in 1998 decreased from that recorded in 1997 primarily because of the continuing run-off of the Existing Deposits. The decrease in valuation allowances in 1998 resulted primarily from the decrease in mortgage loan assets supporting the transferred business due to prepayments of such loans.
from advisory, underwriting and distribution services, as compared to $42.3 million reported in 1997, as assets under management increased to approximately $6.9 billion from $5.4 billion at December 31, 1998 and 1997, respectively.
Amortization of deferred policy acquisition costs ("DAC") was $131.0 million for 1998, a decrease of $50.2 million, or 27.7%, from $181.2 million reported for 1997. The decrease primarily resulted from: (i) a non-recurring charge of $33.6 million recorded in 1997 relating to the transfer of the Company's disability income insurance business pursuant to the DI Transaction, as hereafter defined (See "DI Transaction"), (ii) lower amortization of approximately $5.1 million resulting from a revision during 1997 of mortality assumptions on the Company universal life business, (iii) lower amortization of approximately $6.7 million resulting from higher death claims in 1998 as compared to 1997, and (iv) lower amortization of approximately $2.9 million relating to the Company's single premium deferred annuity business as a result of lower profit margins caused by declining fund balances and a narrowing of interest spreads.
Other operating costs and expenses were $453.3 million for 1998, an increase of $36.1 million, or 8.7%, from $417.2 million reported for 1997. The increase primarily consisted of (i) $7.4 million of higher costs associated with addressing the Year 2000 issue, (ii) $17.0 million of higher cost associated with restructuring the Company's career agency sales force and other strategic initiatives, (iii) $15.7 million of higher sub-advisory fees and other expenses incurred by the Company's mutual fund management operations, (iv) $13.9 million of higher commissions and other expenses incurred by the Company's broker-dealer operations, and (v) $9.5 million of higher interest expense primarily relating to the MONY Notes issued on December 30, 1997, offset by (vi) approximately $6.4 million relating to a reduction in the fair value of the Company's liability under its non-qualified pension plan, (vii) $3.7 million, $4.0 million and $2.7 million of non-recurring costs incurred in 1997 relating to the issuance of the MONY Notes, the cancellation of an information technology service agreement, and severance charges relating to the DI Transaction, respectively, and (viii) other miscellaneous items.
traditional protection products to asset accumulation and retirement income products. Management also believes that the decrease was reflective of the then current interest rate environment wherein declining long-term rates have caused traditional protection products to be comparatively less competitive with variable products.
Universal life and investment-type product policy fees were $127.3 million for 1997, an increase of $26.4 million, or 26.2%, from $100.9 million reported for 1996. This increase was primarily the result of higher fees relating to the Company's FPVA and VUL business of $14.8 million and $8.9 million, respectively, as a result of an increase in the aggregate account values of such products. For the year ended December 31, 1997, the Company reported total fees from its FPVA and VUL business of $50.0 million and $17.8 million, respectively, as compared to $35.2 million and $8.9 million reported for the year ended December 31, 1996. FPVA account value increased $1,167.5 million during 1997 to $4,314.1 million as compared to $3,146.6 million in 1996. The increase in account value in 1997 resulted from new sales and other deposits of $712.7 million and market appreciation of $738.9 million, offset by approximately $284.1 million in withdrawals and surrenders. VUL account value increased $65.1 million during 1997 to $106.4 million as compared to $41.3 million in 1996. The increase in account value in 1997 resulted from new sales and other deposits of $68.3 million and market appreciation of $14.2 million, offset by approximately $17.4 million in withdrawals and surrenders.
Benefits to policyholders were $840.1 million for 1997, a decrease of $32.1 million, or 3.7%, from $872.2 million reported for 1996. The decrease primarily resulted from favorable mortality in almost all product lines and the DI Transaction (see the "DI Transaction"). Favorable mortality contributed approximately $15.6 million of the decrease, while the DI Transaction caused a decrease in benefits of approximately $21.6 million. The decrease in benefits caused by the DI Transaction resulted from the difference between the amount of reserves ceded (which approximated $367.5 million) and the cost of such reinsurance (which approximated $345.9 million). However, after the writeoff of associated deferred policy acquisition costs of approximately $30.7 million, the DI Transaction resulted in a pre-tax loss of approximately $9.1 million.
Other operating costs and expenses were $417.2 million for 1997, a decrease of $38.6 million, or 8.5%, from $455.8 million reported for 1996. The decrease consists primarily of: (i) lower interest expense in 1997, as compared to 1996, of approximately $16.2 million as a result of the maturity of the Company's Eurobond debt (see Note 17 to the Consolidated Financial Statements), (ii) lower costs incurred of approximately $27.6 million in 1997, as compared to 1996, in connection with settlements of, and reserves for, various legal disputes, including lawsuits against the Company alleging market conduct improprieties (see Note 19 to the Consolidated Financial Statements), (iii) nonrecurring charges in 1996 of approximately $14.0 million relating to special termination benefits granted to certain employees under an early retirement program offered by the Company in April 1996 (see Note 8 to the Consolidated Financial Statements), (iv) costs incurred of approximately $2.7 million for severance benefits granted to certain employees in connection with the DI Transaction and (v) higher commissions and sub-advisor fees of approximately $7.0 million and higher operating expenses of approximately $8.5 million incurred by the Company's broker-dealer and mutual fund management operations.
Dividends to policyholders of $224.3 million in 1997 decreased $7.1 million, or 3.1%, from $231.4 million reported in 1996. The decrease primarily resulted from a reduction in the interest component of the dividend scales on all policies during 1997 by amounts ranging from 15 to 50 basis points, which was partially offset by an increase in life insurance reserves.
Effective December 31, 1997, the Company ceased writing new disability insurance business and transferred all of its existing in force disability income insurance business to a third party reinsurer, Centre Life Reinsurance, Ltd. ("Centre Re"), under an indemnity reinsurance contract (the "DI Transaction"). MONY Life Insurance Company remains contingently liable for all benefits payable with respect to such business if Centre Re fails to meet its obligations under the reinsurance agreement. As a result of this transaction, the Company recorded a pre-tax loss for the year ended December 31, 1997 of approximately $9.1 million which represented the excess of the amount paid for the indemnity reinsurance and deferred acquisition costs relating to such business (which were reflected on the Company's books at the date of the transaction) over the carrying value of the liabilities transferred. In addition, the indemnity reinsurance purchased pursuant to the DI Transaction replaced a previously existing reinsurance contract, which had been accounted for as a financing rather than reinsurance. The assets held on deposit under the replaced contract, which had a fair value in excess of the carrying value of the deposit on MONY's books at the date of the transaction, were used to partially fund the cost of the aforementioned indemnity agreement. As a result thereof, the Company recorded a gain of $19.4 million in 1997, which is separate from the DI Transaction and reported in "Other Income". The impact on the Company's
historical consolidated operating results for the years ended December 31, 1997 and 1996 from the Company's disability income insurance business was not material.
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"), to AEGON's wholly-owned subsidiary, AUSA Life Insurance Company, Inc. ("AUSA"). The transferred group pension business consisted of approximately $6.4 billion in group pension assets and liabilities, which was comprised of approximately $2.8 billion of general account assets and liabilities, and $3.6 billion of separate account assets and liabilities. The transfer was initially structured in the form of indemnity reinsurance, however, the Agreement contemplated that the transfer would be restructured in the form of assumption reinsurance as soon as practicable following the consent of contractholders to assumption of their contracts. Substantially all of the contractholders consented to the assumption of their contracts by AUSA.
With respect to the Group Pension Payments, the annual results from the Existing Deposits are measured on a basis in accordance with the Agreement (such basis hereafter referred to as the "Earnings Formula"), which is substantially the same as GAAP, except that: (i) asset impairments on fixed maturity securities are only recognized when such securities are designated with an NAIC rating of "6" and (ii) no impairment losses are recognized on mortgage loans until such loans are disposed of or at the time, and in the calculation, of the Final Value Payment.
Management expects that Group Pension Profits will decline in future periods consistent with the continuing run-off of the underlying business until they terminate as of December 31, 2002.
The following sets forth certain summarized financial information relating to the Group Pension Transaction as of and for the periods indicated, including information regarding: (i) the general account assets transferred to support the Existing Deposits in the Group Pension Transaction, (ii) the transferred separate account assets and liabilities and (iii) the components of revenue and expense comprising the Group Pension Profits:
- --------------- (1) Includes general account liabilities transferred in connection with the Group Pension Transaction pursuant to indemnity reinsurance of $121.7 million and $142.8 million as of December 31, 1998 and 1997, respectively.
(3) Does not include a non-asset specific estimate of expected losses on all other mortgages based on historical loss experience for such investments of $4.6 million, $7.8 million and $12.5 million as of December 31, 1998, 1997 and 1996 respectively.
provides customers of the Company's protection and accumulation products access to other non-proprietary investment products (including stocks, bonds, limited partnership interests, tax-exempt unit investment trusts and other investment securities). The insurance brokerage operation provides the Company's career agency sales force with access to life, annuity, small group health and specialty insurance products written by other carriers to meet the insurance and investment needs of its customers. The Run-Off Businesses primarily consist of group life and health insurance as well as the group pension business that was not included in the Group Pension Transaction. For a reconciliation of the amounts reported in the segments with the amounts reported in the consolidated financial statements, see Note 5 to the Consolidated Financial Statements.
- --------------- (1) Excluded from the Company's operating segments are revenues, benefits and expenses, assets and liabilities relating to contracts issued by the Company with respect to its employee benefit plans, as well as any nonrecurring or unusual items. Such amounts constitute reconciling items in accordance with SFAS No. 131. Accordingly, see Note 5 to the Consolidated Financial Statements and Notes to the Unaudited Interim Condensed Consolidated Financial
Statements for a reconciliation of amounts reported for the Company's operating segments to such amounts reported in the Company's consolidated financial statements.
Assets have been allocated to the segments in amounts sufficient to support the associated liabilities of each segment. In addition, capital is allocated to each segment in amounts sufficient to maintain a targeted Risk Based Capital ("RBC") level for each segment. Allocations of net investment income and net realized gains on investments were based on the amount of assets allocated to each segment. Other costs and operating expenses were allocated to each of the segments based on; (i) a review of the nature of such costs, (ii) cost allocations utilizing time studies and (iii) cost estimates included in the Company's product pricing. Substantially all non-cash transactions and impaired real estate (including real estate acquired in satisfaction of debt) have been allocated to the Protection Products segment.
The following table presents certain summary financial data relating to the Company's Protection Products segment for the periods indicated.
Premium revenue was $702.3 million for 1998, a decrease of $114.7 million, or 14.0%, from $817.0 million reported for 1997. Approximately $74.4 million of the decrease resulted from lower premiums due to the transfer of the Company's disability income insurance business in December of 1997 pursuant to the DI Transaction. The balance of the decrease resulted primarily from lower new and renewal premiums of approximately $6.1 million and $26.1 million, respectively, as well as lower single premiums of approximately $8.1 million due to a reduction in the Company's dividend scales (substantially all single premiums result from policyholders electing to buy additional insurance coverage with dividends received on existing policies).
Other income was $23.6 million for 1998, a decrease of $11.3 million, or 32.4%, from $34.9 million reported in 1997. The decrease was primarily the result of a non-recurring gain of $19.4 million recognized in 1997 relating to certain assets which had appreciated in value and were transferred to partially fund the cost of the indemnity reinsurance purchased in connection with the DI Transaction, offset by an increase in reinsurance allowances and officer life insurance premiums of $5.9 million and $2.2 million, respectively.
Benefits to policyholders were $731.9 million for 1998, a decrease of $44.9 million, or 5.8%, from $776.8 million reported for 1997. The decrease primarily resulted from the transfer of the Company's disability income insurance business pursuant to the DI Transaction in 1997, and a decrease in reserves and surrenders on traditional business in 1998, offset by higher death benefits claims in 1998. Benefits to policyholders recorded in 1998 relating to the business transferred pursuant to the DI Transaction decreased by $47.7 million to $0.9 million, as compared to $48.6 million recorded in 1997. The change in reserves on traditional business in 1998 decreased $21.2 million to $168.1 million, as compared to $189.3 million reported in 1997. Surrenders on traditional business in 1998 decreased $5.0 million to $322.4 million, as compared to $327.4 million in 1997 and, death benefits in 1998 increased $28.9 million to $230.5 million, as compared to $201.6 million in 1997.
Interest credited to policyholders' account balances was $42.5 million for 1998, a decrease of $1.8 million, or 4.1%, from $44.3 million reported for 1997. The decrease primarily resulted from lower interest crediting across substantially all product lines.
Net investment income and net realized gains on investments were $611.9 million for the year ended December 31, 1997, a $6.6 million increase from $605.3 million for 1996. The increase was primarily due to higher average invested assets of approximately $300.0 million offset by slightly lower yields (including net realized gains on investments) for 1997 of 7.8%, as compared to 7.9% for 1996.
Group Pension Profits were $60.0 million for 1997, an increase of $0.5 million, or approximately 0.8%, as compared to $59.5 million reported in 1996. Group Pension Profits in 1997 consisted of $55.7 million of Group Pension Payments and $4.3 million relating to adjustments required to reflect the earnings from such payments in accordance with GAAP. Such adjustments primarily related to changes in the valuation allowances established to recognize impairment of assets supporting the business transferred in the Group Pension Transaction. In 1996, Group Pension Profits consisted of $66.7 million of Group Pension Payments, offset by $7.2 million relating to an increase in the aforementioned valuation allowances. Group Pension Payments in 1997 decreased from that recorded in 1996 primarily because of the continuing run-off of the Existing Deposits. The decrease in valuation allowances in 1997 resulted primarily from the decrease in mortgage loan assets supporting the transferred business due to prepayments of such loans.
Other operating costs and expenses were $280.8 million for 1997, an increase of $4.5 million, or 1.6%, from $276.3 million reported for 1996. The increase was primarily related to an increase in the Company's non-qualified pension plan.
Dividends to policyholders of $221.0 million in 1997 decreased $6.3 million, or 2.8%, from $227.3 million reported in 1996. The decrease primarily resulted from a reduction in the interest component of the dividend scales in 1997 on all policies by amounts ranging from 15 to 50 basis points, which was partially offset by an increase in life insurance reserves.
Premium revenue was $2.6 million for 1998, a decrease of $2.4 million, or 48.0% from $5.0 million reported for 1997. The decrease in premiums during 1998 was due to lower sales of immediate annuities.
Interest credited to policyholders' account balances was $60.6 million for 1998, a decrease of $10.8 million, or 15.1%, from $71.4 million reported for 1997. The decrease was primarily due to lower interest crediting of approximately $7.1 million relating to the Company's SPDA business in conjunction with lower interest crediting on all other accumulation products. During 1998, SPDA account value decreased approximately $100.9 million to $457.2 million, as compared to $558.1 million at the end of 1997. The decrease in account value in 1998 was primarily due to continuing withdrawals, as compared to 1997, which management believes partially reflects consumer preferences for separate account products. Average interest crediting rates on the Company SPDA's were approximately 5.5% in both 1998 and 1997, respectively.
Amortization of DAC was $29.6 million for 1998, a decrease of $4.8 million, or 14.0%, from $34.4 million reported for 1997. The decrease was primarily caused by lower amortization of approximately $2.9 million relating to the Company's single premium deferred annuity business as a result of lower profit margins caused by declining fund balances and a narrowing of interest spreads.
Dividends to policyholders were $1.7 million for 1998, a decrease of $0.3 million, or 15.0%, from $2.0 million reported for 1997.
Other operating costs and expenses were $84.4 million for 1998, an increase of $18.1 million, or 27.3%, from $66.3 million reported for 1997. The increase primarily consists of higher sub-advisory fees, and other expenses incurred by the Company's mutual fund management operations of approximately $15.7 million. Revenue from the Company's mutual fund management operations is recorded in Other Income. See discussion above regarding the corresponding increase in Other Income.
Net investment income and net realized gains on investments aggregated $131.4 million for 1997, a decrease of $12.6 million, or 8.8%, from $144.0 million reported for 1996. The decrease is primarily related to lower average invested assets during 1997 of approximately $180.0 million, as compared to 1996. Average total invested assets in 1997 decreased, as compared to 1996, primarily as a result of a decline in SPDA's in force. During 1997, SPDA account value decreased $156.8 million to $558.1 million, as compared to $714.9 million in 1996. The decrease in account value in 1997 resulted from new sales and other deposits of $4.0 million and interest on the account value of $34.1 million, offset by approximately $194.9 million in withdrawals and surrenders.
Other income was $52.1 million for 1997, an increase of $19.9 million, or 61.8%, as compared to $32.2 million reported in 1996. The increase was primarily the result of higher fees earned by the Company's mutual fund management operations of $16.1 million. During 1997, the Company's mutual fund management operations reported $40.2 million in fees from advisory, underwriting and distribution services as compared to $24.1 million reported in 1996 as assets under management increased to approximately $5.4 billion from $3.5 billion at December 31, 1997 and 1996, respectively.
Investment-type product policy fees were $1.3 million for 1998, a decrease of $0.2 million, or 13.3%, from $1.5 million reported for 1997.
Net investment income and net realized gains on investments were $63.8 million for 1998, an increase of $3.9 million, or 6.5%, from $59.9 million reported for 1997. The increase was due to higher gains from the sale of real estate which was partially offset by a decrease in yield on investment of new money.
Benefits to policyholders were $31.0 million for 1998, a decrease of $4.0 million, or 11.4%, from $35.0 million reported for 1997. The decrease primarily relates to the runoff of the Company's retained group pension business.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996 -- Other Products Segment
Premium revenue was $16.6 million for 1997, a decrease of $1.6 million, or 8.8%, from $18.2 million reported for 1996. The decrease was primarily due to lower assumed premiums resulting from the termination of the Company's participation in a reinsurance pool covering group health business.
Net investment income and net realized gains on investments were $59.9 million for 1997, a decrease of $14.7 million, or 19.7%, from $74.6 million reported for 1996. The decrease primarily consisted of $6.9 million relating to a decline in the segment's assets due to the runoff of the Company's Group Pension business, as well as approximately $14.2 million relating to the retirement of the Company's Eurobond debt issuances at their scheduled maturity dates (see
Note 17 to the Consolidated Financial Statements), offset by higher realized gains of approximately $6.3 million recorded by the Company's non-life subsidiaries. The Company issued the Eurobonds and invested the proceeds therefrom through its wholly owned subsidiary, MONY Funding, Inc., which is reported in the Other Products Segment.
Other income was $53.1 million for 1997, an increase of $0.9 million, or 1.7%, as compared to $52.2 million reported in 1996. The increase primarily related to higher commission revenue reported by the Company's broker-dealer operations of approximately $3.5 million, offset by lower revenues of approximately $2.7 million relating to an aviation reinsurance pool in which the Company participates. During 1997, the Company's broker-dealer operations reported commission revenue of $32.2 million, as compared to $28.7 million in 1996.
Benefits to policyholders were $35.0 million for 1997, an increase of $3.3 million, or 10.4%, from $31.7 million reported for 1996. The increase primarily resulted from $6.0 million of reserve strengthening on the Company's retained Group Pension business, offset by lower claims of approximately $2.3 million reported by the aforementioned aviation reinsurance pool.
Other operating costs and expenses were $66.2 million for 1997, a decrease of $15.7 million, or 19.2%, from $81.9 million reported for 1996. The decrease primarily relates to lower interest expense of approximately $16.2 million as a result of the maturity of the Company's Eurobond debt (see Note 17 to the Consolidated Financial Statements), offset by higher commission expense of approximately $2.1 million incurred by the Company's broker-dealer operations.
Dividends to policyholders of $1.2 million in 1997 decreased $0.6 million, or 33.3%, from $1.8 million reported in 1996. The decrease reflects lower interest rates and a decrease in the number of policies that pay dividends.
MONY Group's cash flow consists of investment income from its invested assets, as well as dividends from MONY Life, if declared and paid, offset by expenses incurred in connection with the administration of MONY Group's affairs, including salaries and other expenses. As a holding company, the MONY Group's ability to meet its cash requirements and pay dividends on its Common Stock substantially depends upon the receipt of dividends and other payments from MONY Life. The payment of dividends by MONY Life to MONY Group is regulated under state insurance law. Under the New York Insurance Law, MONY Life will be permitted to pay shareholder dividends to the MONY Group only if it files notice of its intention to declare such a dividend and the amount thereof with the New York Superintendent and the New York Superintendent does not disapprove the distribution. Under the New York Insurance Law, the New York Superintendent has broad discretion in determining whether the financial condition of a stock life insurance company would support the payment of dividends to its shareholders. The New York Insurance Department has established informal guidelines for the New York Superintendent's determinations that focus on, among other things, overall financial condition and profitability under statutory accounting practices. Management believes these guidelines may limit the ability of MONY Life to pay dividends to the MONY Group. There can be no assurance that MONY Life will have statutory earnings to support the payment of dividends to the MONY Group in an amount sufficient to fund its cash requirements and pay cash dividends. In addition, state insurance laws contain similar restrictions on the ability of the life insurance subsidiaries to pay dividends to MONY Life. There can be no assurance that state insurance laws will in the future permit the payment of dividends by the life insurance subsidiaries to MONY Life in an amount sufficient to support the ability of MONY Life to pay dividends to the MONY Group.
On December 30, 1997, the Investors entered into the Investment Agreement with MONY, pursuant to which among other things the Investors purchased, for $115.0 million (the "Consideration"), MONY Notes with an aggregate principal amount equal to the Consideration. See Note 2 to the Consolidated Financial Statements. Pursuant to the terms of the Investment Agreement, the Investors may elect to exchange the MONY Notes for Holding Company Subordinated Notes. If such exchange occurs, the MONY Group will hold one or more Intercompany Surplus Notes in an aggregate principal amount equal to the principal amount of the Holding Company Subordinated Notes.
If the Holding Company Subordinated Notes are issued, the MONY Group will receive payments of principal and interest from MONY Life on the Intercompany Surplus Notes. The Intercompany Surplus Notes will be in an aggregate principal amount equal to the aggregate principal amount of the Holding Company Subordinated Notes and bear interest at 9.50% per annum, which is payable semiannually. Principal is payable at maturity. However, payments of principal and interest on the Intercompany Surplus Notes can only be made with the prior approval of the New York Superintendent "whenever, in his judgment, the financial condition of such insurer warrants". Such payments further may be made only out of surplus funds which are available for such payments under the New York Insurance Law. There can be no assurance that MONY Life will obtain the requisite approval for payments with respect to the Intercompany Surplus Notes, or that surplus funds will be available for such payments.
On February 23, 1999, the MONY Group's Board of Directors approved a quarterly dividend of $0.10 per share. The dividend will be payable on March 26, 1999 to shareholders of record as of March 8, 1999. The MONY Group expects to continue paying quarterly dividends on its common stock of $0.10 per share throughout 1999. See "Regulation".
On November 16, 1998, the MONY Group consummated the Offerings. In conjunction therewith, approximately 12.9 million shares of its common stock were issued at an initial public offering price of $23.50 per share. Net proceeds from the Offerings totalled $282.5 million. Approximately $60.6 million of the net proceeds were retained by the MONY Group and the balance of approximately $221.9 million was contributed to MONY Life.
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, operating expenses, income taxes and principal and interest on its outstanding debt obligations. 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 of 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 initial annual 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 Company is formulating its cash flow projections it considers, among other things, its expectations about sales of the Company's products, its expectations concerning customer behavior in light of current and expected economic conditions, its expectations concerning competitors and the general outlook for the economy and interest rates. See "Investments -- General".
The following table sets forth the withdrawal characteristics and the surrender and withdrawal experience of the Company's total annuity reserves and deposit liabilities at December 31, 1998 and 1997.
The Company's principal sources of liquidity to meet cash outflows are its portfolio of liquid assets and its net operating cash flow. During 1998, the Company reported net cash flow from operations of $76.7 million, as compared to $69.1 million in 1997. In 1998, cash flow from operations excluded $87.3 million of cash flow relating to the Closed Block. Total combined cash flow from operations for 1998, including the Closed Block was $164.0 million, an increase of $94.9 million. The increase from the prior year is primarily due to a non-recurring payment of $149.5 million made in 1997 in connection with the DI Transaction, offset by other miscellaneous items in 1998 principally, extraordinary expenses, Year 2000 costs and costs incurred in connection with certain strategic initiatives. During 1997, the Company reported net cash flow from operations of $69.1 million, as compared to $334.8 million in 1996. The decrease in net cash flow from operations of $265.7 million in 1997, as compared to that reported for 1996, resulted primarily from a $149.5 million payment made in 1997 representing a portion of the assets transferred in the DI Transaction and higher federal income tax payments in 1997 of approximately $101.0 million, as compared to 1996. The Company's liquid assets include substantial U.S. Treasury holdings, short-term money market investments and marketable long-term fixed maturity securities. Management believes that the Company's sources of liquidity are adequate to meet its anticipated needs. As of December 31, 1998, the Company had readily marketable fixed maturity securities with a carrying value of $6,706.0 million (including fixed maturities in the Closed Block), which were comprised of $3,690.2 million public and $3,015.8 million private fixed maturity securities. At that date, approximately 94.1% 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, 1998 the Company had cash and cash equivalents of $463.5 million.
In addition, the Company has two bank line of credit facilities with domestic banks aggregating $150.0 million, with scheduled renewal dates in September 1999 and September 2003. Under these lines of credit, the Company is required to maintain a certain statutory tangible net worth and debt to capitalization ratio. The purpose of these facilities is to provide additional liquidity for any unanticipated short-term cash needs the Company might experience. The Company has not borrowed against these lines of credit since their inception.
To the extent that the MONY Notes are not exchanged for Holding Company Subordinated Notes, they will remain as surplus notes of MONY Life having an interest rate of 9.50%, payable semiannually in arrears on June 30 and December 31 in each year.
In 1988, the Company financed one of its real estate properties under a sale/leaseback arrangement. The facility was sold for $66.0 million, $56.0 million of which was in the form of an interest bearing note receivable and $10.0 million in cash. The note is due January 1, 2009. The transaction is accounted for as a financing. Accordingly, the facility remains on the Company's books and continues to be depreciated. An obligation representing the total proceeds on the sale was recorded by the Company at the effective date of the transaction, and is reduced based on payments under the lease. The lease has a term of 20 years beginning December 21, 1988 and requires minimum annual rental payments of $7.1 million in 1999, $7.3 million in 2000, $7.4 million in 2001, $7.6 million in 2002, $7.7 million in 2003 and $41.0 million thereafter. The Company has the option to renew the lease at the end of the lease term.
Aggregate contractual debt service payments on the Company's debt at December 31, 1998, for 1999 and the succeeding four years are $30.4 million, $117.1 million, $63.5 million, $25.6 million and $25.7 million, respectively, and $640.8 million thereafter.
In accordance with its ongoing strategy to strengthen the Company's financial position, management expects to continue to selectively sell equity real estate. Once management identifies a real estate property to be sold and commences a plan for marketing the property, the property is classified as to be disposed of and a valuation allowance is established and periodically revised, if necessary, to adjust the carrying value of the property to reflect the lower of its current carrying value or its fair value, less associated selling costs (see Note 4 to the Consolidated Financial Statements). Increases in such valuation allowances are recorded as realized investment losses and, accordingly, are reflected in the Company's results of operations. Real estate classified as to be disposed of may also be net of impairment adjustments recorded prior to the time such real estate was designated for sale or at the time of foreclosure, if acquired in satisfaction of debt. At December 31, 1998, 1997 and 1996, the carrying value of real estate to be disposed of was $312.9 million, $621.2 million and $434.8 million, respectively, or 2.8%, 5.9% and 4.2% of invested assets at such dates, respectively. The aforementioned carrying values are net of valuation allowances of $30.6 million, $82.7 million and $46.0 million, respectively. In addition, the carrying value of real estate to be disposed of at such dates is net of $79.1 million, $182.3 million and $120.1 million of impairment adjustments, respectively. For the years ended December 31, 1998, 1997, and 1996, such increases in valuation allowances aggregated $6.7 million, $63.8 million and $16.8 million, respectively. Because the carrying value of real estate to be disposed of is adjusted to reflect the aforementioned valuation allowances, management expects that the net proceeds from sales of real estate will not be materially different from the carrying value of such real estate on a GAAP basis. However, there can be no assurance that increases in valuation allowances will not be required in the future or that future sales of real estate will not be made at amounts below recorded GAAP carrying value which may have a material effect on the Company's financial position and results of operations.
In addition, as a result of differences between SAP and GAAP, the carrying value of real estate on a SAP basis exceeds the carrying value of such investments on a GAAP basis. Accordingly, management expects to incur losses on a SAP basis as a result of anticipated real estate sales, which losses could materially affect the Company's statutory-basis surplus and net income. Although there can be no assurance, the Company believes that any such impact on statutory surplus will be partially offset by the release of the statutory investment reserves established by the Company and expected future statutory net income. The Company will monitor the results of its real estate sales strategy and its ongoing effect on statutory surplus. The GAAP carrying value of real estate to be disposed of was $312.9 million at December 31, 1998 (or 2.8% of invested assets), which amount is net of impairment adjustments and valuation allowances aggregating approximately $79.1 million and $30.6 million, respectively. There can be no assurance as to whether, when or for what amounts any real estate that is classified to be disposed of will actually be disposed of. For the years ended December 31, 1998, 1997 and 1996 the GAAP carrying value of real estate sold was approximately $424.7 million, $346.3 million and $414.1 million, respectively. For the years ended December 31, 1998, 1997 and 1996, the SAP carrying value of real estate sold was approximately $593.8 million, $395.0 million and $449.1 million, respectively (see "Investments -- Equity Real Estate", "-- Investment Impairments and Valuation Allowances" and Note 19 to the Consolidated Financial Statements.)
The following table sets forth certain data concerning the Company's real estate sales during the periods indicated.
Most of the proceeds from real estate sales have been invested in investment grade public bonds. This has served to make the overall asset portfolio somewhat more sensitive to changes in interest rates. It has also served to reduce exposure to an illiquid asset class, real estate, and increase exposure to a more liquid asset class, investment grade public bonds.
As part of the Project, significant service and information providers, external vendors, suppliers, and other third parties (including telecommunication, electrical, security, and HVAC systems), that are believed to be critical to business operations after January 1, 2000, have been identified and contacted. Procedures are being undertaken in an attempt to reasonably ascertain their stage of Year 2000 readiness through questionnaires, compliance letters, interviews, on-site visits, and other available means.
The estimated total cost of the Year 2000 Project is approximately $26.0 million. Costs incurred on the Project during 1998, 1997 and 1996 were $17.0 million, $5.0 million, and $1.0 million, respectively, aggregating $23.0 million through December 31, 1998, which includes $16.0 million for external vendor costs and $7.0 million for internal costs. The future cost of completing the Year 2000 Project is estimated to be approximately $3.0 million, which includes $1.0 million for external vendor costs, and $2.0 million for internal costs, which is being funded through operating cash flows. These amounts include costs associated with the current development of contingency plans.
However, failure by the Company and/or external parties to complete Year 2000 readiness work in a timely manner could have a material adverse effect on the Company's consolidated financial position and results of its operations.
The yield on general account invested assets (including net realized gains and losses on investments) was 8.6%, 7.8% and 7.9% for the years ended December 31, 1998, 1997 and 1996, respectively.
(2) Including net unrealized gains and losses in the determination of the total yield on equity securities for the years ended December 31, 1998, 1997 and 1996 would have resulted in a total yield of 21.3%, 28.0% and 34.4%, respectively, which would have resulted in a total return on invested assets of 8.8%, 7.8% and 8.0% for such years, respectively.
(5) Total investment income includes non-cash income from amortization, payment-in-kind distributions and undistributed equity earnings of $52.3 million, $49.6 million and $83.0 million for the years ended December 31, 1998, 1997 and 1996, respectively. In addition, real estate investment income is shown net of depreciation of $26.6 million, $45.1 million and $48.3 million for such years, respectively.
(6) Includes mortgage servicing fee and other miscellaneous fee income of approximately $4.8 million, $3.3 million and $3.5 million for the years ended December 31, 1998, 1997 and 1996, respectively.
At December 31, 1998, the percentage, based on estimated fair value, of total public and private placement fixed maturities that were investment grade (NAIC Designation 1 or 2) was 94.1% compared to 94.4% for December 31, 1997. The fixed maturities portfolio was comprised, based on estimated fair value, of 55.0% in public fixed maturities and 45.0% in private fixed maturities at December 31, 1998 and 53.9% in public fixed maturities and 46.1% in private fixed maturities at December 31, 1997.
The Company believes that its long-term fixed maturities portfolio is well diversified among industry types. The following tables set forth the fair value of the Company's fixed maturities by industry category, as well as the percentage of the total portfolio that each industry category comprises as of December 31, 1998 and 1997, respectively. The tables also show by industry category the relative amounts of publicly traded and privately placed securities.
The Company held approximately $1,161.3 million and $1,082.7 million of mortgage-backed and asset-backed securities as of December 31, 1998 and 1997, respectively. Of such amounts, $471.5 million and $474.3 million or 40.6% and 43.8%, respectively, represented agency-issued pass-through and collateralized mortgage obligations ("CMOs") secured by the Federal National Mortgage Association, Federal Home Loan Mortgage Corporation, Government National Mortgage Association and Canadian Housing Authority collateral. The balance of such amounts were comprised of other types of mortgage-backed and asset-backed securities. The Company believes that its active monitoring of its portfolio of mortgage-backed securities and the limited extent of its holdings of more volatile types of mortgage-backed securities mitigate the Company's exposure to losses from prepayment risk associated with interest rate fluctuations for this portfolio. At December 31, 1998 and 1997, 88.6%, and 93.2%, respectively, of the Company's mortgage-backed and asset-backed securities were assigned an NAIC Designation 1. In addition, the Company believes that it holds a relatively low percentage of CMOs compared to other life insurance companies.
CMOs are purchased to diversify the portfolio risk characteristics from primarily corporate credit risk to a mix of credit and cash flow risk. The majority of the CMOs in the Company's investment portfolio have relatively low cash flow variability. In addition, approximately 76% of the CMOs in the portfolio have minimal credit risk because the underlying collateral is backed by the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation, or the Government National Mortgage Association. These CMOs offer greater liquidity and higher yields than corporate debt securities of similar credit quality and expected average lives.
Asset-backed securities ("ABS") are purchased both to diversify the overall credit risks of the fixed maturity portfolio and to provide attractive returns. The ABS portfolio is diversified both by type of asset and by issuer. The largest asset class exposure in the ABS portfolio is to credit card receivables. These are comprised of pools of both general purpose credit card receivables such as Visa and Mastercard and private label credit card receivable pools. Excluding the exposures to home equity loans (which represented 2.9% and 6.9% of the ABS portfolio as of December 31, 1998 and 1997, respectively), the ABS portfolio is in general insensitive to changes in interest rates. As of December 31, 1998 and 1997, respectively, the ABS portfolio did not contain any pools of assets outside of the United States.
Below is a summary of the changes in the commercial mortgage portfolio for the years ended December 31, 1998, 1997 and 1996, respectively.
The total number of commercial mortgage loans outstanding at December 31, 1998 and 1997 was 125 and 132, respectively, with an average loan size of $7.1 million and $6.9 million, respectively. The largest amount loaned on any single property at such dates aggregated $46.7 million and $46.2 million, respectively, and represented less than 0.5% and 0.5% of general account invested assets, respectively. At such dates, amounts loaned on seven and five properties were $20 million or greater, representing in the aggregate 24.9% and 22.4% respectively, of the total carrying value of the commercial mortgage loan portfolio at such dates. Total mortgage loans to the five largest borrowers accounted in the aggregate for approximately 26.7% and 32.4% of the total carrying value of the commercial mortgage loan portfolio at
December 31, 1998 and 1997, respectively, and less than 2.2% and 2.9%, respectively, of total invested assets at such dates. All such loans were performing.
Of the $220.1 million, $195.5 million and $276.3 million, respectively, in maturing loans during the years ended December 31, 1998, 1997 and 1996, 7.6%, 13.9% and 12.9%, respectively, were refinanced, 58.2%, 48.1% and 40.4%, respectively, were paid off, 2.2%, 6.9% and 7.4%, respectively, were foreclosed, and 0.0%, 5.1% and 7.3%, respectively, were restructured. Of the $886.9 million of outstanding commercial mortgage loans in the Company's investment portfolio at December 31, 1998, $124.0 million, $50.7 million and $56.9 million are scheduled to mature in 1999, 2000 and 2001, respectively.
- --------------- (1) Consists of loans which have had their maturity date extended for a period of less than one year.
(2) Consists of loans which have had their maturity date extended pursuant to the borrower's option as provided by the loan documents.
The carrying value of commercial mortgage loans at December 31, 1998 was $886.9 million, which amount is net of valuation allowances aggregating $67.5 million which represents management's best estimate of cumulative impairments at such date. However, there can be no assurance that increases in valuation allowances will not be necessary. Any such increases may have a material adverse effect on the Company's financial position and results of operations.
At December 31, 1998, the carrying value of problem, potential problem and restructured loans was $11.6 million, $86.1 million and $153.6 million, respectively, net of valuation allowances of $1.8 million, $26.7 million and $25.8 million, respectively.
- --------------- (1) Problem commercial mortgages included mortgage loans in foreclosure of $11.6 million, and $11.3 million at December 31, 1998 and 1997, respectively.
In addition to valuation allowances and impairment writedowns recorded on specific commercial mortgage loans classified as problem, potential 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, 1998 and 1997, such reserves were $13.2 million and $17.2 million, respectively.
PROBLEM, POTENTIAL PROBLEM AND RESTRUCTURED AGRICULTURAL MORTGAGES. The Company defines problem, potential problem and restructured agricultural mortgages in the same manner as it does for commercial mortgages. The following table presents the carrying amounts of problem, potential problem and restructured agricultural mortgages relative to the carrying value of all agricultural mortgages as of the dates indicated. The table also presents the valuation allowances established by the Company relative to agricultural mortgages defined as problem, potential problem and restructured as of each of the aforementioned dates indicated.
- --------------- (1) Problem agricultural mortgages included delinquent mortgage loans of $2.1 million, and $1.2 million at December 31, 1998 and 1997, respectively, and mortgage loans in the process of foreclosure of $0.0 million and $0.9 million, at such dates, respectively.
In addition to valuation allowances and impairment writedowns recorded on specific agricultural mortgage loans classified as problem, potential problem, and restructured mortgage loans, 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, 1998 and 1997, such reserves were $5.2 million, $5.0 million, respectively.
The Company holds real estate as part of its general account investment portfolio. The Company has adopted a policy of not investing new funds in equity real estate except to safeguard values in existing investments or to honor outstanding commitments. As of December 31, 1998 and 1997 the carrying value of the Company's equity real estate investments was $634.2 million and $1,117.1 million, respectively, or 5.7% and 10.6%, respectively, of general account invested assets. The Company owns real estate, interests in real estate joint ventures (both majority owned and minority owned), and real estate acquired upon foreclosure of commercial and agricultural mortgage loans. The following table presents the carrying value of the Company's equity real estate investments by such classifications as of the dates indicated.
The following tables present information concerning the geographic and property type breakdown of the equity real estate portfolio as of December 31, 1998 and 1997.
Equity real estate is evenly distributed across geographic regions of the country with a slightly larger concentration in the mountain region of the United States at December 31, 1998. By property type, there is a concentration in office buildings which represented approximately 43.8% of the equity real estate portfolio at December 31, 1998. The Company's largest equity real estate holding at December 31, 1998 consisted of two related hotel properties located in Arizona with an aggregate carrying value of approximately $189.3 million and representing less than approximately 1.7%
of general account invested assets. The ten largest real estate properties as of December 31, 1998 comprise 51.2% of total real estate assets and less than 3.0% of total invested assets.
The Company closely monitors property net operating income on a cash basis, along with occupancy levels of the Company's commercial real estate properties owned for more than one year, which comprise a significant portion (86.4% at December 31, 1998) of the Company's equity real estate portfolio. During 1998, the net operating income for these properties increased for the eighth consecutive year.
The Company's equity securities primarily consist of investments in common stocks and limited partnership interests. The Company's investments in common stocks are classified as available for sale and are reported at estimated fair value. Unrealized gains and losses on 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 acquisition costs that would have occurred if such gains and losses had been realized.
Substantially all the common stocks owned by the Company are publicly traded on national securities exchanges. The Company's investments in equity securities represented 4.2% and 3.2% of invested assets at December 31, 1998 and 1997, respectively. The Company achieved a total return on its investments in equity securities of 21.3%, 28.0% and 34.4% for the years ended December 31, 1998, 1997 and 1996, respectively. The Company defines total return as the percentage obtained by dividing the summation of realized and unrealized gains and losses and dividends by the average market value of the portfolio during the period. Proceeds on the sale of common stocks totaled $165.0 million, $234.1 million and $164.7 million which resulted in net realized gains of $7.2 million, $39.7 million, and $31.4 million for the years ended December 31, 1998, 1997 and 1996, respectively.
The following table presents the Company's total return on its investment in equity securities for the years ended December 31, 1998, 1997 and 1996.
At December 31, 1998 and 1997, the Company had investments in approximately 43 and 36 different limited partnerships which represented 1.5% ($162.6 million) and 1.4% ($146.4 million), respectively, of the Company's general account invested assets. Investment results for the portfolio are dependent upon, among other things, general market conditions for initial and secondary offerings of common stock. For the years ended December 31, 1998, 1997, and 1996, investment income from investments in limited partnership interests was approximately $49.5 million, $49.0 million and $50.5 million, respectively, representing 6.7%, 6.7% and 6.7%, respectively, of the net investment income for such periods. For the same periods, the Company achieved total returns on its investments in limited partnership interests of 28.4%, 37.5% and 51.1%, respectively. There can be no assurance that the recent level of investment returns achieved on limited partnership investments can be sustained in the future, and the failure to do so could have a material adverse effect on the Company's financial position and results of operations.
TOTAL CUMULATIVE IMPAIRMENT ADJUSTMENTS AND PROVISIONS FOR VALUATION ALLOWANCES ON INVESTMENTS
amount is net of $67.5 million representing management's best estimate of cumulative impairment losses at such date. However, there can be no assurance that additional provisions for impairment adjustments with respect to the real estate held for investment will not need to be made. Any such adjustments may have a material adverse effect on the Company's financial position and results of operations.
See the Consolidated Financial Statements and Supplementary Data beginning at page.