The Company’s principal offices are located in the headquarters building leased by MONY Group at 1740 Broadway, New York, New York. MONY Group’s headquarters building consists of approximately 267,000 square feet. The Company does not directly own any real property. The Company believes that the property is suitable and adequate for its current and anticipated operations.
The information required by this Item is presented in a condensed disclosure format pursuant to General Instructions I to Form 10K.
On February 27, 2002, MONY Group formed MONY Holdings, LLC (“MONY Holdings”) as a downstream, wholly owned, holding company of the MONY Group Inc. (the “MONY Group”). MONY Group formed MONY Holdings for the purpose of issuing debt tied to the performance of the Closed Block Business (“CBB”) within MONY Life (see Note 21 to the MONY Holdings and Subsidiary Consolidated Financial Statements). On April 30, 2002, MONY Holdings commenced its operations and, through a structured financing tied to the performance of the CBB within MONY Life, issued $300.0 million of floating rate insured debt securities (the “Insured Notes”) in a private placement. In addition, MONY Group, pursuant to the terms of the structured financing, transferred all of its ownership interest in MONY Life to MONY Holdings. Other than activities related to servicing the Insured Notes in accordance with the Insured Notes indenture and its ownership interest in MONY Life, MONY Holdings has no operations and engages in no other activities.
MONY Holdings through MONY Life and its subsidiaries (MONY Holdings and its direct and indirect wholly owned subsidiaries are collectively referred to herein as the “Company”), provides life insurance, annuities, corporate-owned and bank-owned life insurance (“COLI and BOLI”), mutual funds, securities brokerage, business and estate planning. The Company distributes its products and services through Retail and
Wholesale distribution channels. The Company’s Retail distribution channels are comprised of (i) the career agency sales force operated by its principal life insurance operating subsidiary, and (ii) financial advisors and account executives of its securities broker dealer subsidiaries. The Company’s Wholesale channel is comprised of (i) MONY Partners, a division of MONY Life, (ii) independent third party insurance brokerage general agencies and securities broker dealers and (iii) its corporate marketing team which markets COLI and BOLI products. For the year ended December 31, 2003, Retail distribution accounted for approximately 17.6% and 42.6% of sales of protection and accumulation products, respectively, while Wholesale distribution accounted for 82.4% and 57.4% of sales of protection and accumulation products, respectively. The Company principally sells its products in all 50 of the United States, the District of Columbia, the U.S. Virgin Islands, Guam and the Commonwealth of Puerto Rico, and currently insures or provides other financial services to more than one million individuals.
MONY Life’s principal wholly owned direct and indirect operating subsidiaries include: (i) MONY Life Insurance Company of America (“MLOA”), an Arizona domiciled life insurance company, (ii) Enterprise Capital Management (“Enterprise”), a distributor of both proprietary and non-proprietary mutual funds, (iii) U.S. Financial Life Insurance Company (“USFL”), an Ohio domiciled insurer underwriting specialty risk life insurance business, (iv) MONY Securities Corporation (“MSC”), a registered securities broker-dealer and investment advisor whose products and services are distributed through MONY Life’s career agency sales force, (v) MONY Brokerage, Inc. (“MBI”), a licensed insurance broker, which principally provides MONY Life’s career agency sales force with access to life, annuity, small group health, and specialty insurance products written by other insurance companies so they can meet the insurance and investment needs of their customers, (vi) MONY Consultoria e Corretagem de Seguros Ltda., a Brazilian domiciled insurance brokerage subsidiary, which principally provides insurance brokerage services to unaffiliated third party insurance companies in Brazil, (vii) MONY Bank & Trust Company of the Americas, Ltd., a Cayman Islands bank and trust company, which provides investment and trust services to nationals of certain Latin American countries, and (viii) MONY Life Insurance Company of the Americas, Ltd., a Cayman Islands based insurance company, which provides life insurance and annuity products to nationals of certain Latin American countries.
The Company derives its revenues principally from: (i) premiums on 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 and (v) 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 results of operations of the Company’s businesses, particularly the businesses comprising its Accumulation Products segment, are highly sensitive to general economic and securities market conditions. Such conditions include the level of valuations in the securities markets, the level of interest rates, the level of retail securities trading volume, consumer sentiment and the consensus economic and securities market outlook. Set forth below is a discussion of certain matters that may adversely impact the Company’s results of operations in the event of worsening of economic and securities market conditions, as well as other matters that could adversely affect its future earnings.
• The Company Might Have to Amortize or Write-Off Deferred Policy Acquisition Costs Sooner Than Planned. In accordance with GAAP, DPAC (policy acquisition costs represent costs that vary with and primarily relate to the production of business, such as commissions paid to financial professionals and brokers) are amortized on a basis consistent with how earnings emerge from the underlying products that gave rise to such DPAC. Such amortization is calculated based on the actual amount of earnings that have emerged to date relative to management’s best estimate of the total amount of such earnings expected to emerge over the life of such business. This calculation requires the Company to make assumptions about future investment yields, contract charges, interest crediting rates, mortality rates, lapse rates, expense levels, policyholder dividends and where flexibility is allowed, policyholder premium payment behavior. In addition, to the extent that the present value of estimated future earnings expected to emerge over the remaining life of the business is not sufficient to recover the remaining DPAC balance, GAAP requires that such excess DPAC amount be immediately charged to earnings. Accordingly, changes in the Company’s assumptions underlying DPAC or actual results that differ significantly from management’s prior estimates may materially affect the rate at which the Company amortizes or writes-off DPAC, which may materially affect its financial position and results of operations. Also, to the extent that circumstances lead management to conclude that the business, after writing off all DPAC, will not ultimately be profitable, the Company would be required to record its best estimate of the loss in the period such determination was made. While management believes such a scenario is unlikely, a sustained deterioration in the securities markets will significantly impact such determination and may require the Company to recognize a loss that could materially affect its financial position and results of operations.
At December 31, 2003 the carrying value of the Company’s DPAC was $1.3 billion. Approximately $172.0 million of this amount pertains to the Company’s annuity in force business. The profit margins from this business, over which the related DPAC is amortized, are particularly sensitive to changes in assumed investment returns and asset valuations. With respect to the investment return assumptions which underlie the amortization of the Company’s variable annuity DPAC, the accounting policy applied, which is referred to as the “reversion to the mean” method, assumes a rate of return over the life of the business of 8.0%. In applying this method, the future assumed rate of return assumption is adjusted based on actual returns to date so that the ultimate rate of return over the expected life of the business is always 8.0%. However, the Company’s policy is to never exceed a future rate of return assumption in excess of 10.0%. Accordingly, the ultimate rate of return over the life of such business may be less than 8.0%. In addition, in applying the “reversion to the mean” method the Company’s policy does not provide for a floor on the assumed future rate of return. Accordingly, actual returns to date sufficiently in excess of the ultimate assumed rate of return of 8.0% may result in a future rate of return assumption that could actually be negative.
• As required under GAAP, both the expected rate of return assumption for 2004 on assets funding the Company’s pension liabilities and other post-retirement benefits and the discount rate used to determine those liabilities were established at December 31, 2003. The Company made these assumptions on the basis of historical returns on such assets, its outlook for future returns, the long-term outlook for such returns in the marketplace, and yields on high-quality corporate bonds. Due to the continuing decline in the market yield on high-quality corporate bonds, the Company lowered the discount rate assumption for 2004 to 6.125% from 6.625% in 2003, which will cause an increase in the Company’s net periodic expense in 2004 and thereafter. However, while the expected rate of return assumption for 2004 of 8.0% was not changed from that assumed in 2003, the fair value of plan assets grew more than anticipated during 2003, and accordingly, earnings on plan assets during 2004 attributable to such growth are expected to more than offset the increase in pension expense resulting from the use in 2004 of a lower discount rate assumption. Each 1% increment in the return on assets lowers the future expected annual GAAP expense for 2005 and later by approximately $700,000, while each 1% decrease in the discount rate adds approximately $9.6 million to annual expense.
income, this will ultimately depend upon the total amount of any such underfunding, which largely is dependent upon the market values of assets backing the pension plan, and the ABO, at December 31, 2004. It should be noted that, in the event a company is required to charge its prepaid benefit cost asset to comprehensive income due to an underfunded position, in accordance with GAAP, a company may reestablish that asset if the market value of assets supporting the pension plan increases, the ABO decreases, and/or subsequent contributions increase plan assets to the level of the ABO.
• Presently there is a significant debate within industry, the accounting profession and among securities analysts and regulators as to the propriety of the current generally accepted accounting practice provided in Accounting Principles Board Opinion No. 25 Accounting for Stock Issued to Employees (“Opinion No. 25”), which provides for the application of the intrinsic value based method of accounting. For certain stock based compensation plans (including certain stock option plans), the guidance provided in Opinion No. 25 does not require companies to recognize compensation expense. Recently, certain companies, in response to this debate, have announced their intention to adopt the generally accepted accounting guidance prescribed under SFAS 123, which provides for the application of the fair value based method of accounting. In accordance with this method, all forms of employee stock-based compensation are measured at fair value at the date of grant and expensed over the requisite service or vesting period. If the Company chooses to adopt these provisions of SFAS No. 123 or if it becomes required to adopt such provisions as a result of action by the Financial Accounting Standards Board (the “FASB”), the adoption will result in additional expense recognition in an amount that may be material to the Company’s results of operations.
sheet. In most cases, the Company determines fair values using quoted market prices. However, the valuation of certain investments, such as private placement fixed maturity securities, requires the use of assumptions and estimates related to interest rates, default rates and the timing of cash flows because quoted market prices are not available. At December 31, 2003, the carrying value of private placement fixed maturity securities was $3,061.2 million.
The Company records changes in the fair values of investments in fixed maturity and equity securities available-for-sale that are not considered to be “other than temporarily impaired” in other comprehensive income. The Company reports changes in the value of trading securities and venture capital investments accounted for using the equity method, in the consolidated statement of income and comprehensive income. For investments the Company considers to be “other than temporarily impaired”, the Company records an impairment loss, which is reflected in realized gains and (losses) on investments. See - Summary of Investments - Other Than Temporary Impairment Charges On Investments in Fixed Maturity Securities and Common Stocks. Determining whether a security is “other than temporarily impaired” requires the use of estimates and significant judgment. The Company’s financial position and results of operations are therefore affected by changes in circumstances that affect the value of these investments and the Company’s determination as to whether the investments are “other than temporarily impaired”.
The Company records mortgage loans on real estate 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. In addition, the Company records an estimate for incurred but not reported defaults. The Company bases its estimate for incurred but not reported defaults on historical default rates and the current mortgage portfolio composition. The Company’s financial position and operating results are therefore sensitive to: (i) changes in the estimated cash flows from mortgages, (ii) the value of the collateral, and (iii) changes in the economic environment in general. At December 31, 2003 and 2002, the valuation allowance on these mortgage loans was $20.0 million and $22.7 million, respectively.
probable and reasonably estimable, the Company records liabilities related to these matters in accordance with the provisions of SFAS 5 and FASB Interpretation 14. Judgments or settlements exceeding established loss reserves or changes in the circumstances requiring management to update its loss estimate may materially affect the Company’s financial position and results of operations.
As discussed in Note 26 to the Mony Holdings and Subsidiary Consolidated Financial Statements, in each of the years in the three-year period ending December 31, 2003 the Company established reserves related to the reorganization of certain of its businesses. These reserves are primarily related to the estimated costs of employee terminations and related benefits, lease abandonments and other costs directly related to the Company’s reorganization plans and incremental to the Company’s normal operating costs. Although management does not expect significant changes to its reorganization plans, the actual costs related to these plans may differ from management’s estimates. See - Reorganization and Other Charges.
In addition to the items discussed above, the application of GAAP requires management to make other estimates and assumptions. For example, the recognition of deferred tax assets, which depends upon management’s assumptions with respect to the Company’s ability to realize deferred tax benefits. See Notes 4 and 12 to the MONY Holdings and Subsidiary Consolidated Financial Statements.
The following tables summarize the components of the aforementioned charges recorded during 2003, 2002, and 2001, respectively. None of the charges referred to below as “Reorganization Charges” have been allocated to the Company’s operating segments, however, the charges in 2001 referred to as “Other Charges” have been allocated to the Company’s operating segments. All Reorganization Charges incurred in 2003, 2002 and 2001 are reported as reconciling items.
All charges referred to as Reorganization Charges included in the tables above, except $17.0 million related to deferred policy acquisition costs in 2001 and $5.3 million related to investment expenses in 2001, are included in “Other Operating Costs and Expenses” in the Company’s consolidated statement of income and comprehensive income.
Set forth below is certain information regarding the liability recorded in connection with the Company’s restructuring actions, as well as the changes therein during the year ended December 31, 2003. Such liability is reflected in accounts payable and other liabilities on the Company’s consolidated balance sheet.
The following tables present the Company’s consolidated and segment results of operations for the years ended December 31, 2003 and 2002. The financial information herein is presented in accordance with GAAP unless otherwise noted.
(1) Amounts reported as “reconciling” in 2003 primarily relate to (i) contracts issued by MONY Life relating to its employee benefits plans, (ii) revenues and expenses of the MONY Group, (iii) revenues and expenses of MONY Holdings, (iv) charges totaling $5.8 million pre-tax relating to the Company’s reorganization activities (see “Reorganization and Other Charges”) and (v) merger related expenses totaling $0.8 million incurred in connection with MONY Group’s pending merger transaction with AXA Financial - see Note 2 to the MONY Holdings and Subsidiary Consolidated Financial Statements.
(2) Amounts reported as “reconciling” in 2002 primarily relate to: (i) contracts issued by MONY Life relating to its employee benefit plans, (ii) revenues and expenses of the MONY Group, (iii) revenues and expenses of MONY Holdings, (iv) charges totaling $7.7 million pre-tax relating to the Company’s reorganization activities and (v) a $1.5 million reversal of certain reserves associated with the reorganization charge recorded in 2001. See “Reorganization and Other Charges”.
-Year Ended December 31, 2003 Compared to Year Ended December 31, 2002
The increase in premiums in the Accumulation Products segment from $11.6 million to $21.2 million was primarily due to an increase in life contingent immediate annuity sales. The stability and payout stream of the single premium life contingent immediate annuity product has been well received by customers, which has contributed to improved sales of the product.
Universal life and investment-type product policy fees were $210.9 million for 2003, an increase of $10.4 million, or 5.2%, from $200.5 million reported for 2002. The increase was primarily the result of higher fees in
the Protection Products segment of $18.3 million, partially offset by lower fees in the Accumulation Products and Other Products segments of $6.2 million and $1.7 million, respectively. The increase in the Protection Products segment was primarily the result of increases in Universal Life (“UL”), Variable Universal Life (“VUL”) and Corporate Sponsored Variable Universal Life (“CSVUL”) of $15.0 million, $3.2 million, and $2.8 million, respectively, net of reinsurance. The increases in UL and CSVUL fees were primarily due to higher Cost of Insurance (“COI”), administrative, loading, and reinsurance charges aggregating $8.8 million, $2.1 million, $4.8 million and $6.6 million, respectively, partially offset by a $4.4 million decrease in the amount of unearned revenue that was recognized on these products. The increase in VUL fees was primarily attributable to increases in COI charges and the amount of unearned revenue that was recognized of $1.8 million and $5.0 million, respectively, partially offset by decreased surrender, loading and reinsurance charges of $2.2 million, $1.2 million and $0.4 million, respectively. These increases on protection products were partially offset by a higher level of fees ceded to certain reinsurers.
Net investment income was $726.9 million, a decrease of $0.2 million, from $727.1 million reported for 2002. The increase in net investment income related primarily to a higher average invested asset balance offset by a decline in interest rates. The annualized yield on the Company’s invested assets, including limited partnership interests, before and after net realized gains and (losses) on investments was 6.3% and 6.7%, respectively, for the year ended December 31, 2003, as compared to 6.6% and 5.2%, respectively, for the year ended December 31, 2002. See “- Summary of Investments - Investment Yields by Asset Category.”
As of December 31, 2003, the Company had approximately $10.6 million of additional unrealized pre-tax gains related to venture capital limited partnership investments accounted for at fair value that may be recognized in future earnings subject to market fluctuation. This amount is reflected in other comprehensive income on the Company’s statement of income and comprehensive income.
Net realized gains were $46.4 million for the year ended December 31, 2003, an increase of $197.4 million from losses of $151.0 million reported for 2002. The increase was due primarily to significant losses recorded in 2002 relating to other than temporary impairment charges on fixed maturity securities of $115.5 million, valuation allowances taken on real estate properties of $26.7 million, and a $6.8 million litigation loss related to a specific joint venture real estate partnership. In comparison, for 2003 other than temporary impairment charges on fixed maturity securities and venture capital aggregated $42.8 million. Further contributing to the gains in 2003 was an increase in gains from sales of investments and prepayments on bonds and mortgages. See “- Summary of Investments - Other Than Temporary Impairment Charges on Investments in Fixed Maturity Securities and Common Stocks” and see Note 18 to the MONY Holdings and Subsidiary Consolidated Financial Statements.
Other income (which consists primarily of fees earned by the Company’s mutual fund management, securities broker-dealer and insurance brokerage operations, as well as certain asset management fees, and other miscellaneous revenues) was $226.6 million for 2003, an increase of $57.3 million, or 33.9%, from $169.3 million reported for 2002. The increase was due primarily to higher income in the Protection Products, Accumulation Products and Other Products segments of $31.8 million, $9.7 million, and $19.2 million, respectively, partially offset by a decrease in reconciling amounts of $3.4 million. The following table summarizes the components of other income recorded in each of the Company’s segments for the years ended December 31, 2003 and 2002, respectively.
The Company purchased a COLI contract to provide a funding mechanism for its non-qualified deferred compensation liabilities. The investments in the COLI contract are structured to substantially offset the changes in the Company’s non-qualified deferred compensation liabilities. The change in such liabilities is reflected in the statement of income and comprehensive income caption entitled “other operating costs and expenses.” In 2003, the change in the cash surrender value of the COLI contract allocated to the Protection Products segment was $14.0 million compared to $(11.5) million in 2002. The change in the cash surrender value of the COLI contract
Amortization of DPAC was $120.0 million for 2003, a decrease of $36.1 million, or 23.1%, from $156.1 million reported for 2002. The decrease was primarily due to lower amortization of $40.6 million in the Accumulation Products segment, partially offset by an increase of $4.5 million in the Protection Products segment. The decreased amortization in the Accumulation Products segment was due primarily to increased margins as a result of higher revenue from underlying funds and an increase in future profitability due to improved market returns. The market upturn in 2003 triggered lower amortization of $11.0 million for the year ended December 31, 2003 compared to the prior year when the deterioration of the markets triggered accelerated DPAC amortization of approximately $17.9 million for the year ended December 31, 2002. The increased revenue from underlying funds resulted in decreased DPAC amortization in the Accumulation Products segment of approximately $8.6 million. The increase in the Protection Products segment was primarily attributable to increased amortization of $5.2 million, $3.2 million and $3.0 million on the VUL, individual life and UL product lines, respectively, attributable to growth in these blocks of business. These increases were partially offset by lower amortization of $2.8 million on the CSVUL product line due to higher net death claims and lower amortization of approximately $3.9 million in the Closed Block resulting from a reduction in maintenance expenses which reflects cost reduction measures instituted over the past few years.
As required under GAAP, actual Closed Block earnings in excess of expected Closed Block earnings inure solely to the benefit of policyholders in the Closed Block and, accordingly, are recorded as an additional liability to Closed Block policyholders, referred to as the deferred dividend liability. Expected Closed Block earnings were forecasted for each year over the estimated life of the policies in the Closed Block in order to determine the amount of assets to allocate to the Closed Block in order to provide sufficient funding for payment of policyholder liabilities and dividends in the Closed Block in connection with the demutualization of MONY Life as more fully discussed in Note 3 to the MONY Holdings and Subsidiary Consolidated Financial Statements. Due to the recognition of realized losses from other than temporary impairment charges on invested assets during the fourth quarter of 2002, the actual experience of the Closed Block earnings was less than expected in the prior year, and as a result, the deferred dividend liability for 2002 was unusually low compared to the current year. The deferred dividend liability was $65.7 at December 31, 2003.
Other operating costs and expenses were $540.3 million for 2003, an increase of $65.6 million, or 13.8%, from $474.7 million for 2002. The following table summarizes the change in other operating costs and expenses reported in each of the Company’s segments for the years ended December 31, 2003 and 2002, respectively.
Net investment income was $393.5 million for the year ended December 31, 2003, a decrease of $3.0 million, from $396.5 million reported in the prior year, attributable primarily to lower interest rates on fixed maturity securities.
to the run-off of the Closed Block’s block of business and lower maintenance expenses as a result of cost reduction efforts instituted in the Closed Block over the past few years.
The information presented should not be viewed as a substitute for revenues determined in accordance with GAAP. Revenues in accordance with GAAP related to product sales are generated from both current and prior
period sales that are in-force during the reporting period. For protection products, GAAP recognizes premium revenue when due from a policyholder. For accumulation products, GAAP revenues are a function of fee based charges applied to a contract holder’s account balance. Because of how revenues are recognized in accordance with GAAP, management does not believe GAAP revenues are meaningful in assessing the periodic sales production of a life insurance company and, accordingly, a reconciliation to GAAP revenues would not be meaningful.
(1) Includes COLI and BOLI sales of $6.4 million sold through the Retail distribution channel and $1.8 million sold through the Wholesale distribution channel in the year ended December 31, 2003. COLI and BOLI sales through the Wholesale and Retail distribution channels were not significant for the year ended December 31, 2002.
(2) Excludes non-proprietary sales by the Company’s career financial professionals of $36.8 million and $21.1 million for the years ended December 31 2003 and 2002, respectively.
(3) Excludes sales associated with an exchange program offered by the Company wherein contract holders surrendered old FPVA contracts and reinvested the proceeds therefrom in a new enhanced FPVA product offered by the Company.
$32.9 million from the comparable prior year period. New life insurance premium sales from the Company’s Wholesale distribution channel, primarily MONY Partners, totaled $37.5 million for the year ended December 31, 2003 compared to $11.2 million in the comparable prior year. These results are an indication of how well the Company’s protection product offerings have been received by the brokerage community.
New life insurance premiums (annualized recurring and single premiums) sold through the career agency network decreased to $59.2 million for the year ended December 31, 2003 compared to $63.6 million for the comparable prior year. Excluding COLI and BOLI sales of $6.4 million included in the career agency network’s results for the year ended December 31, 2003, new life insurance premiums decreased by $10.8 million from the prior year’s levels. However, sales of non-proprietary products through the career agency network increased to $36.8 million in 2003 from $21.1 million in 2002.
USFL sales were $64.9 million for the year ended December 31, 2003, compared to $55.8 million during the comparable prior year due to increased penetration of the brokerage market.
The following tables set forth assets under management at December 31, 2003 and 2002 as well as the changes in the primary components of assets under management during the years then ended.
(2) Excludes sales and surrenders associated with an exchange program offered by the Company wherein contract holders surrendered old FPVA contracts and reinvested the proceeds therefrom in a new enhanced FPVA product offered by the Company.
(1) Includes $61.1 million and $61.8 million in fixed maturity securities and $5.0 million and $2.1 million in cash and cash equivalents in the DSCA sub-account Ongoing Business and $7.5 million and $9.4 million in cash and cash equivalents included in the DSCA sub-account Closed Block Business for the years ended December 31, 2003 and 2002, respectively.
(2) Includes real estate to be disposed of of $0.0 million and $26.8 million at December 31, 2003 and 2002, respectively, and real estate held for investment of $174.1 million and $180.2 million at December 31, 2003 and 2002, respectively.
The following table illustrates the net investment yields based on average annual asset carrying values, excluding unrealized gains and losses in the fixed maturity asset category. 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 fees.
The yield on general account invested assets (including net realized gains and losses on investments) was 6.7% for the year ended December 31, 2003 and 5.2% and 6.1% for the years ended December 31, 2002 and 2001, respectively.
Fixed maturity securities consist of publicly traded debt securities, privately placed debt and small amounts of redeemable preferred stock. They represented 68.9% of total invested assets at December 31, 2003 and 67.1% of total invested assets at December 31, 2002.
The Securities Valuation Office of the NAIC evaluates the fixed maturity investments of insurers for regulatory reporting purposes and assigns investments to one of six investment categories called “NAIC Designations”. The NAIC designations closely mirror the Nationally Recognized Statistical Rating Organizations’ (“NRSRO”) credit ratings for marketable bonds. NAIC Designations 1 and 2 include fixed maturity investments considered investment grade (“Baa” or higher by Moody’s, or “BBB” or higher by Standard & Poor’s) by the 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 Standard & Poor’s).
At December 31, 2003, the percentage, based on estimated fair value, of total public fixed maturity securities that were investment grade (NAIC Designation 1 or 2) was 95.1% compared to 93.8% at December 31, 2002. At December 31, 2003, the percentage, based on estimated fair value, of total private placement fixed maturity securities that were investment grade (NAIC Designation 1 or 2) was 81.9% compared to 84.5% at December 31, 2002.
The Company has a well-diversified portfolio of fixed maturity securities. At December 31, 2003, the portfolio of fixed maturity securities included 20.0% in consumer goods and services, 16.3% in government
At December 31, 2003, the Company’s largest unaffiliated single concentration of fixed maturity securities consisted of $965.7 million of carrying value of United States Treasury fixed maturity securities which represented approximately 7.8% of the Company’s total invested assets on that date. No other individual non-government issuer represented more than 1.0% of the Company’s invested assets.
The amortized cost and estimated fair value of fixed maturity securities, by contractual maturity dates, (excluding scheduled sinking funds) as of December 31, 2003 and 2002 are as follows:
(1) Amounts in 2003 and 2002 include fixed maturity securities of $58.3 million and $58.3 million, respectively, at amortized cost and $61.1 million and $61.8 million, respectively, at estimated fair value included in the DSCA sub-account Ongoing Business.
The principal risks inherent in holding CMOs, as well as pass-through securities (securities generally representing pooled debt obligations repackaged as shares, that pass income from debtors through intermediaries such as investment banks, to investors), 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.
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. No one issuer represents more than 2.8% of the ABS portfolio. The largest exposure in the ABS portfolio is to credit card receivables. These securities 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 8.9% of the Company’s ABS portfolio as of December 31, 2003 and 9.4% as of December 31, 2002), the Company believes the ABS portfolio is in general insensitive to changes in interest rates.
Mortgage loans, consisting of commercial, agricultural and residential loans, comprised 14.4% and 16.0% of the Company’s total invested assets at December 31, 2003 and 2002, respectively. As of December 31, 2003 and 2002, commercial mortgage loans comprised $1,434.7 million and $1,570.5 million, or 80.5% and 83.7%, of the Company’s total mortgage loan investments, respectively. Agricultural loans comprised $347.4 million and $306.2 million, or 19.5% and 16.3% of the Company’s total mortgage loans, and residential mortgages comprised $0.3 million and $0.7 million, representing less than 1% of the Company’s total mortgage loan investments at the dates indicated.
The underlying properties supporting the commercial mortgage loans at December 31, 2003 and 2002, respectively, consisted of 57.2% and 56.0% in office buildings, 11.4% and 12.0% in industrial buildings, 8.9% and 8.6% in hotels, and 22.5% and 23.4% in other categories, none of which exceeded 10.0% of total commercial mortgage loans.
The largest amount loaned on any single property at December 31, 2003 and 2002 was $49.0 million and $49.5 million, respectively, and represented less than 0.4% and 0.5% of the Company’s general account invested assets, respectively. At these dates, amounts loaned on 20 properties were $17.4 million or greater, representing in the aggregate 37.1% and 36.8%, respectively, of the total carrying value of the Company’s commercial mortgage loan portfolio. Total mortgage loans to the five largest borrowers accounted in the aggregate for approximately 15.4% and 18.3% of the total carrying value of the Company’s commercial mortgage loan portfolio at December 31, 2003 and 2002, respectively, and less than 1.8% and 2.5%, respectively, of the Company’s total invested assets at these dates. All of these loans are performing. The Company’s commercial mortgage loan portfolio is managed by a group of experienced real estate professionals. These professionals monitor the performance of the loan collateral, physically inspect properties, collect financial information from borrowers and keep in close contact with borrowers and the local broker communities to assess the market conditions and evaluate the impact of those conditions on property cash flows. The Company’s real estate professionals identify problem and potential problem mortgage assets and develop workout strategies to deal with borrowers’ financial weakness, whether by foreclosing on properties to prevent a deterioration in collateral value, or by restructuring mortgages with temporary cash flow difficulties.
Of the $142.3 million and $102.9 million in maturing loans during the years ended December 31, 2003 and 2002, no loans were refinanced or restructured, 79.7% and 71.5%, respectively, were paid off and 0.0% and 10.7%, respectively, were foreclosed. Of the $1,434.7 million of outstanding commercial mortgage loans at December 31, 2003, $187.4 million, $74.1 million and $202.3 million are scheduled to mature in 2004, 2005 and 2006, respectively.
Commercial mortgage loans are stated at their unpaid principal balances, net of valuation allowances and writedowns for impairment. The Company provides valuation allowances for commercial mortgage loans considered to be impaired. The Company considers mortgage loans 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. When the Company determines that a loan is impaired, the Company establishes a valuation allowance for loss for the excess of the carrying value of the mortgage loan over its estimated fair value. Estimated fair value is based on the fair value of the collateral. The provision for loss is reported as a realized loss on investment.
As of December 31, 2003 and 2002, there were no problem commercial mortgage loans.
At December 31, 2003 and 2002, the underlying properties supporting potential problem commercial mortgages consisted of 50.1% and 89.8% in office properties and 0.0% and 10.2% in apartment and retail properties respectively. At December 31, 2003, and 2002, the underlying properties supporting restructured commercial mortgage loans consisted entirely of office buildings. The potential problem and restructured commercial mortgages at December 31, 2003 and 2002 were primarily concentrated in the District of Columbia and Texas.
Gross interest income on the Company’s restructured commercial mortgage loan balances that would have been recorded in accordance with the loans’ original terms was approximately $0.7 million for the year ended December 31, 2003 and $3.1 million for the year ended December 31, 2002. Actual gross interest income recorded on these loans for the years ended December 31, 2003 and 2002 was $0.5 million and $0.5 million, respectively.
The Company defines problem, potential problem and restructured agricultural mortgages in the same manner as the Company does for commercial mortgages. The Company’s total problem, potential problem and restructured agricultural mortgages as of December 31, 2003 and 2002 were $17.4 million and $17.3 million, respectively.
The Company has, from time to time, pooled certain of the Company’s agricultural mortgage loans and sold beneficial interests in each of the individual agricultural mortgage loans in such pools (referred to as “participation interests”) to third parties. Under these arrangements, the Company retains a specified equity interest in the loans in the pools and sell the remaining participation interest. The Company is responsible for servicing the individual agricultural mortgage loans in each pool, for which the Company receives a servicing fee from the third party participants. As of December 31, 2003, the aggregate amount of agricultural mortgage loans in the pools that the Company services was approximately $272.9 million.
The Company’s equity securities are comprised of investments in common stocks and limited partnership interests of investment partnerships. The following table presents the carrying values of the Company’s equity securities at the dates indicated.
The Company’s investments in limited partnership interests were $177.6 million and $186.2 million at December 31, 2003 and 2002, respectively. In accordance with GAAP, investment partnerships report their
The limited partnerships in which the Company has invested are investment partnerships which invest in the equity of private companies (generally in the form of common stock). These partnerships will generally hold such equity until the underlying company issues its securities to the public through an initial public offering. At that time or thereafter, at the general partners’ discretion, the partnership will generally distribute the underlying common stock to its partners. Accordingly, certain of the common stocks owned by the Company at December 31, 2003 and 2002 were acquired through distributions from the Company’s investments in limited partnership interests. However, it has been the Company’s practice to sell such positions shortly after such distributions.
The following table sets forth the carrying value of the Company’s investments in limited partnership interests sorted by the basis upon which the Company accounts for such investments (see Note 4 to the MONY Holdings and Subsidiary Consolidated Financial Statements), as well as the amount of such investments attributable to the partnerships’ ownership of public and private common stock at December 31, 2003 and 2002:
Other than Temporary Impairment Charges on Investments in Fixed Maturity Securities and Common Stocks
The following table presents certain information with respect to realized investment losses from “other than temporary impairment” charges for the years ended December 31, 2003 and 2002. These impairment charges were determined based on the Company’s assessment of the factors referred to above, as they pertain to the individual securities determined to be other than temporarily impaired. Excluded are amounts relating to certain invested assets held pursuant to a reinsurance arrangement whereby all the experience from such assets is passed to the reinsurer.
The Company’s portfolio of fixed maturity securities is comprised of public and private securities. The Company’s portfolio of common stocks is comprised of all public securities. Public securities are those that are registered with the Securities and Exchange Commission (“SEC”). Private securities are issued under an exemption from registration under the Securities Act of 1933. It is generally recognized that publicly traded securities are more liquid than privately traded securities. The Company classifies all of its investments in fixed maturity securities and common stocks as “available for sale”. Accordingly, the carrying value of such securities
At December 31, 2003, the carrying values of the public and private fixed maturity securities comprising the Company’s fixed maturity security portfolio were $5,476.3 million and $3,061.2 million, respectively, and the carrying value of the Company’s common stock portfolio was $79.7 million. At December 31, 2002, the carrying values of the public and private fixed maturity securities comprising the Company’s fixed maturity security portfolio were $4,716.9 million and $3,173.1 million, respectively, and the carrying value of the Company’s common stock portfolio was $62.8 million.
In determining that the securities giving rise to the aforementioned unrealized losses were not “other than temporarily impaired”, the Company evaluated the factors cited above, which it considers when assessing whether a security is other than temporarily impaired. In making these evaluations, the Company must exercise considerable judgment. Accordingly, there can be no assurance that actual results will not differ from the Company’s judgments and that such differences may require the future recognition of “other than temporary impairment charges” that could have a material affect on its financial position and results of operations. In addition, the value of, and the realization of any loss on, a fixed maturity security or common stock is subject to numerous risks, including interest rate risk, market risk, credit risk and liquidity risk. The magnitude of any loss incurred by the Company may be affected by the relative concentration of its investments in any one issuer or industry. The Company has established specific policies limiting the concentration of its investments in any single issuer and industry and believes its investment portfolio is prudently diversified. At December 31, 2003 and 2002, no single issuer constituted more than $1.8 million and $5.0 million of the company’s gross unrealized losses, respectively. See “Summary of Investments - Fixed Maturity Securities - Total Fixed Maturity Securities by Credit Quality” for information regarding the ratings by NRSRO of securities comprising the Company’s fixed maturity security portfolio. Also, see “Summary of Investments - Fixed Maturity Securities - Total Fixed Maturity Securities by Credit Quality” for information concerning the industry concentration of the Company’s fixed maturity securities.
Gross Unrealized Losses on Fixed Maturity Securities As of December 31, 2003 Outside the Closed Block
Gross Unrealized Losses on Fixed Maturity Securities As of December 31, 2003
Closed Block By Investment Category, Credit Quality, and By Length of Time Unrealized
As indicated in the above tables, there were 19 investment grade fixed maturity security positions that have been in an unrealized loss position for more than 12 months as of December 31, 2003. The aggregate gross pre-tax unrealized loss relating to these positions was $2.6 million ($1.7 million after-tax) as of such date. Of these positions: (i) eight comprising approximately $1.8 million ($1.2 million after-tax) of the aforementioned aggregate unrealized loss, were not considered “other than temporarily impaired” principally because of the issuer’s financial strength as indicated by the fact that all such securities were rated “A” or better, (ii) eight comprising approximately $0.8 million ($0.5 million after-tax) of the aforementioned unrealized loss were not considered “other than temporarily impaired” because management is of the opinion 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,” and (iii) three positions with negligible unrealized losses were U.S. Government securities.
Based on management’s analysis of the underlying issuers’ fundamentals, management concluded that, with few exceptions, losses incurred on sales of fixed maturity securities at or above prices of 90% of carrying value are not attributable to the creditworthiness of the issuer. In certain instances losses incurred on sales of fixed maturity securities at or above prices of 90% of carrying value were at least in part due to the creditworthiness of the issuer. Management made sales of securities at or above prices of 90% of carrying value in response to portfolio management decisions made in the period of sale, and such sales were not previously contemplated in prior periods. For the year ended December 31, 2003 and the year ended December 31, 2002 the Company incurred losses on sales of fixed maturity securities at prices below 90% of carrying value aggregating $0.1 million and $4.7 million, respectively. For all sales of securities at prices less than 90% of carrying value management’s evaluation of the underlying issuers’ fundamentals up to the period of sale concluded that both the principal and interest would be collected as scheduled. In the period in which management changed its view as to the likelihood that the Company would collect the scheduled principal and interest the Company either recognized an “other than temporary impairment” or sold the securities.
With respect to common stock investments sold which resulted in a loss for the years ended December 31, 2003 and 2002, the following table presents certain information as to the amount of time such common stock investments have been in an unrealized loss position. The following table excludes amounts relating to certain invested assets held pursuant to a reinsurance arrangement whereby all the experience from such assets is passed to the reinsurer.
All sales of common stocks at losses during 2003 and 2002 were made to offset gains from sales of common stock in order to minimize the Company’s tax liability and were in keeping with management’s decision to reduce the Company’s exposure to common stock investments. Specific common stocks sold at losses were not identified as of periods prior to their sale. Decisions on specific securities to be sold at losses were made during the periods in which they were sold after consideration of the amount of common stock gains realized during the period. The table above presents the amount of other than temporary impairment charges taken during the years ended December 31, 2003 and 2002. Based on management’s analysis of the factors discussed herein management concluded that all other common stock positions during the aforementioned periods were not “other than temporarily impaired”.
All of the Company’s fixed maturity and equity investments are classified as available-for-sale or trading and, accordingly, are marked to market. Unrealized gains and losses on available-for-sale securities are excluded from earnings and reported as a separate component of accumulated other comprehensive income, and unrealized gains and losses on trading securities are reported in the results of operations. Investments whose value the Company deems to be other than temporarily impaired are written down to fair value. The Company records the writedowns as realized losses and includes them in earnings. The cost basis of these investments is adjusted to fair value. The new cost basis is not changed for subsequent recoveries in value. For the years ended December 31, 2003, 2002 and 2001, such writedowns aggregated $30.0 million, $115.5 million and $31.2 million, respectively.
Pursuant to the Agreement, which expired on December 31, 2002, the Company received from AUSA: (i) payments on an annual basis through December 31, 2002 (the “Group Pension Payments”) equal to all of the earnings from the Existing Deposits, (ii) a final payment (the “Final Value Payment”) at December 31, 2002 based on the remaining fair value of the Existing Deposits, and (iii) a contingent payment (the “New Business Growth Payment”) at December 31, 2002 based on new business growth subsequent to the Transaction Date.
For the years ended December 31, 2002 and 2001, AUSA reported earnings to the Company pursuant to the application of the Earnings Formula of $19.1 million and $27.4 million, respectively, and the Company recorded Group Pension Profits of $28.2 million and $30.7 million, respectively. In addition, the Company earned $12.8 million of interest income on the Insured Notes in each of the aforementioned years. In addition, the Company recorded earnings from the Final Value Payment of $54.1 million (before expenses of approximately $6.0 million relating thereto, which were recorded in “other operating costs and expenses” in the consolidated statement of income and comprehensive income), on December 31, 2002.
(2) Includes $2.5 million of pre-tax realized losses ($1.6 million after-tax) relating to the impairment of certain investments which was included in the 4th quarter 2002 Other Charges (see Note 26 to the MONY Holdings and Subsidiary Consolidated Financial Statements).
MONY Holdings was formed as a downstream, wholly-owned, holding company of MONY Group on February 27, 2002 for the purpose of issuing debt tied to the performance of the CBB within MONY Life (see Note 22 to the MONY Holdings and Subsidiary Consolidated Financial Statements for an explanation of the CBB), a wholly-owned and principal operating subsidiary of MONY Group. On April 30, 2002, MONY Holdings commenced of its operations and, in a structured financing tied to the performance of the CBB within MONY Life, issued $300.0 million of floating rate insured debt securities (the “Insured Notes) in a private placement and MONY Group, pursuant to the terms of the structured financing, transferred all of its ownership interest in MONY Life to MONY Holdings. Other than activities related to servicing the Insured Notes in accordance with the Insured Notes indenture and its ownership interest in MONY Life, MONY Holdings has no operations and engages in no other activities.
Proceeds to MONY Holdings from the issuance of the Insured Notes, after all offering and other related expenses, were approximately $292.6 million. Of this amount, $60.0 million was deposited in a DSCA, pursuant to the terms of the note indenture, to provide liquidity and collateral for the payment of interest and principal on the Insured Notes. These funds will ultimately revert back to the Company, provided that the cash flows from the CBB are sufficient to satisfy MONY Holdings’ obligations under the Insured Notes. The balance of the proceeds aggregating $232.6 million was paid in the form of a dividend by MONY Holdings to MONY Group.
This transaction effectively securitized a portion of the future profits from MONY Life’s CBB. The source of cash flows and the collateral for the payment of principal and interest on the Insured Notes is limited to: (i) the amount of dividends that can be paid by MONY Life which are attributable to the CBB, (ii) net tax payments paid to MONY Holdings pursuant to certain tax sharing agreements, (iii) net payments made to MONY Holdings under the interest rate swap, and (iv) amounts on deposit in the DSCA (and the earnings thereon). In addition to the cash flows and collateral, investors in the Insured Notes have limited recourse to MONY Holdings in the event of any default under the Insured Notes. The amount of dividends attributable to the CBB is determined by applying the New York dividend regulation to the surplus and net gain from operations of MONY Life which is attributable to the CBB, subject to certain adjustments described in the indenture (see Note 21 to the MONY Holdings and Subsidiary Consolidated Financial Statements).
If an event of default occurs (and is not waived) with regard to compliance with the terms of the Indenture under which the Insured Notes were issued or if MONY Group’s senior debt rating is downgraded to BB+ or below by Standard & Poor’s Rating Services (“S&P”) or to Ba2 or below by Moody’s Investors Service, Inc., the insurer of the Insured Notes, at its option, may (a) declare all future premiums payable pursuant to the Insurance Agreement among it, MONY Holdings, MONY Group and MONY Life to be immediately due and payable, (b) cause all assets held in the DSCA in excess of an amount equal to the debt service payable on the next scheduled payment date on the Insured Notes to be applied to prepay all or a portion of the principal or accrued interest on the Insured Notes, or (c) do both (a) and (b). See - Business - Ratings and - Potential Forward
The events most likely to cause an adjustment in the Company’s investment policies are: (i) a significant change in its product mix, (ii) a significant change in the outlook for either the economy in general or for interest rates in particular and (iii) a significant reevaluation of the prospective risks and returns of various asset classes.
The following table sets forth by product line the actual amounts paid in connection with surrenders and withdrawals for the periods indicated.
Also, See “ - Summary of Investments” for information on the Company’s investment portfolio.
(1) Included in long-term debt are amounts owed at December 31, 2003 on the Insured Notes, Surplus Notes and the Intercompany Surplus Notes. These borrowings are further explained in Note 16 to the MONY Holdings GAAP Consolidated Financial Statements. The table assumes that the long-term debt is held to maturity.
On February 27, 2002, MONY Group formed a downstream holding company, MONY Holdings. On April 30, 2002, MONY Group transferred all its ownership interests in MONY to MONY Holdings, and MONY Holdings, through a structured financing tied to the performance of the CBB within MONY Life, issued $300.0 million of floating rate insured debt securities in a private placement. The CBB consists of MONY Life’s regulatory Closed Block and surplus and related assets within MONY Life that support the business in the regulatory Closed Block. Other than activities related to servicing the Insured Notes in accordance with the indenture and it’s ownership of MONY Life, MONY Holdings has no operations and engages in no other activity.
In 2001, the Insurance Department of the State of New York, MONY Life’s state of domicile, adopted the NAIC Accounting Practices and Procedures manual, version effective January 1, 2001, (which the Company refers to as NAIC SAP) as a component of prescribed or permitted accounting practices accepted by the state. NAIC SAP represents a new statutory accounting framework adopted by the NAIC, which is substantively different from statutory accounting practices followed prior to 2001. As a result of MONY Life’s adoption of Codified SAP as prescribed or permitted by the State of New York, MONY Life recorded a charge to surplus of approximately $36.9 million on January 1, 2001, the mandatory effective date of the adoption of Codified SAP by insurers. The State of New York has adopted specified prescribed accounting practices that differ from Codified SAP. The principal differences at December 31, 2001 were:
Effective December 31, 2002 New York adopted certain additional provisions of NAIC SAP which require New York domiciled companies to record deferred tax assets and deferred tax liabilities. As a result of the change, the Company reported a change in accounting principle, as an adjustment that increased unassigned funds (surplus) by $90.2 million in 2002.
During the preparation of the current years’ financial statement, the Company discovered an error in the classification of certain separate account group annuity contracts as deposit type contracts, which under statutory accounting practices and procedures should be classified as life contracts. These contracts (primarily employee 401K investment plans) include an annuity purchase rate guarantee which under SSAP No. 50 would classify the contract as a life contract. Deposit type contracts are contracts that do not incorporate any insurance risk (mortality or morbidity).
The change in the classification of these contracts has no effect on the reported net income, surplus, total assets or total liabilities of the Company for this period or the prior year.
In accordance with statutory accounting guidance financial statements of prior periods are not restated and certain amounts reported in the Summary of Operations in prior periods are not comparable to the current reporting of these contracts. In the Summary of Operations of the Company’s Annual Statement these contracts for the current period are reported as premium and annuity considerations, surrenders benefits and withdrawals, and net transfers to or (from) separate accounts. Prior to 2003 these amounts, which net to zero, were not included in the Summary of Operations of the Annual Statement.
For purposes of comparative analysis in this Management Discussion and Analysis, certain prior year amounts related to the classification of certain separate account group annuity contracts have been restated in the Result of Operations section below. As a result, specified line items in MONY Life’s Results of Operations for 2002 which are summarized below are not comparable to amounts reported in the prior year and in the Annual Statement.
Premiums, Annuity Considerations and Fund Deposits consist of premiums and deposits from MONY Life’s Individual Operations (life, health and annuities) and Group Operation of approximately $726.5 million and $106.9 million for the year ended December 31, 2003, respectively, as compared to approximately $695.8 million and $117.0 million for the year ended December 31, 2002, respectively.
The increase of $30.7 million in Individual Operations premiums and deposits for the year ended December 31, 2003 as compared to the comparable prior year period is primarily attributable to an increase in individual annuity considerations of $49.3 million, partially offset by lower individual life insurance premiums of $18.5 million.
The increase in annuity deposits of $49.3 million was primarily due to an increases of $47.3 million in flexible premium deferred annuity deposits and $5.3 million in single premium immediate annuity considerations, partially offset by a decrease in flexible premium variable annuity deposits of $3.4 million. Flexible premium deferred annuity deposits totaled $82.3 million in 2003, compared with $35.0 million from the prior year. The stability and payout stream of the flexible premium deferred annuity product has been well received by customers since its introduction in August 2002, which has contributed to improved sales of the product.
The decrease in individual life premiums of $18.5 million, from $594.6 million for the year ended December 31, 2002 to $576.1 million for the same period in 2003, was primarily due to the declining in force business of the Closed Block. Premium income for the Closed Block decreased by $28.1 million for the year ended December 31, 2003 compared to the same period 2002. Partially offsetting the decrease in individual life premiums due to the declining in force business of the Closed Block, was an increase in Universal Life insurance premiums of $11.1 million.
The decrease in Group Operation’s premiums and deposits of $10.1 million, from $117.0 million for the year ended December 31, 2002 to $106.9 million for the year ended December 31, 2002, is primarily due to lower group pension deposits received in 2003.
For the year ended December 31, 2003, MONY Life reported net investment income of $588.5 million, a decrease of $6.2 million from $594.7 million reported for the year ended December 31, 2002. The was principally caused by lower interest rates in 2003. The annualized yield on MONY Life’s average invested assets, including its investments in venture capital partnerships, before and after realized gains on investments was 6.3% and 5.8%, respectively, for 2003, as compared to 6.4% and 4.9%, respectively, for 2002. The following discusses the nature of MONY Life’s venture capital investments, as well as the statutory accounting practices applied to them.
• reverse the carrying value of the corresponding limited partnership investment, and
(1) Includes $(0.7) million and $91.0 million in connection with the Group Pension Transaction for the year ended December 31, 2003 and 2002, respectively.
For the year ended December 31, 2003 MONY Life reported $(6.8) million in miscellaneous income, an increase of $5.6 million, as compared to $(12.4) million for the year ended December 31, 2002. This decrease is primarily attributable to a decrease in reserves and expenses for various legal matters of $6.2 million, and a decrease in interest expense of $5.2 million related to interest on MONY Life’s tax valuation allowance. Partially offsetting these decreases were increases in expenses of $3.4 million and $2.6 million for prior year investment and fixed asset write-offs, respectively.
For the year ended December 31, 2003, MONY Life reported policyholder and contractholder benefits of $929.5 million, a decrease of $32.0 million from $961.5 million reported for the year ended December 31, 2002. The decrease is primarily attributable to a decrease in surrenders and withdrawals of $80.8 million, partially offset by increases of $24.9 million and $24.6 million in interest on policy and contract funds and death benefits, respectively.
The decrease in surrenders and withdrawals is primarily comprised of decreases of $49.4 million related to group annuity contracts, $21.4 related to individual life contracts, and $10.0 million related to individual annuity contracts,. The decline in withdrawals on retained group annuity contracts from $277.9 million in 2002 to $228.5 million during 2003, is primarily attributable to the decline in inforce group pension business. The decrease in surrenders on individual life contracts from $353.3 million in 2002 to $331.9 million in 2003, is primarily attributable to a decrease in closed block surrenders of $21.8 million due to its declining in force business.
The increase in interest on policy and contract funds of $24.9 million, from $4.3 million in 2002 to $29.2 million in 2003, is primarily attributable to interest credited on MONY Life Company Benefit Plans. Interest credited on Company Benefit Plans increased $24.9 million from $(8.7) million in 2002 to $16.2 million in 2003. The increase is attributable to favorable stock market movement in 2003 as compared to the prior year.
The increase in death benefits of $24.6 million from $201.9 million for the year ended December 31, 2002 to $226.5 million for the comparable period in 2003, was primarily due to less favorable mortality experience of $17.8 million and $6.8 million in closed block business and ongoing business, respectively from 2002.
For the year ended December 31, 2003, MONY Life reported a change in policy and contract reserves of $150.8 million, an increase of $38.1 million from $112.7 million reported for the year ended December 31, 2002. The increase is primarily attributable to:
• the change in reserves on individual annuity contracts for the year ended December 31, 2003 of $93.8 million compared with $50.5 for the same period in 2002, a change of $43.3 million. This change was due to an increase of $45.9 million in flexible premium deferred annuity reserves related to the increase in considerations on these contracts.
• The change in reserves on group annuity contracts for the year ended December 31, 2003 of $(14.4) million compared with $1.2 million for the same period in 2002, a change of $(15.6) million. The decrease in the change in reserves was due to the decline in in-force on retained group pension business.
For the year ended December 31, 2003, MONY Life reported commissions of $26.8 million, an increase of $1.1 million from $25.7 million reported for the year ended December 31, 2002. The increase is primarily due to decreases in direct commissions of $1.6 million partially offset by a decrease in commissions and allowances on reinsurance assumed of $0.5 million. The decrease in direct commissions from $23.8 million for the year ended December 31, 2002 to $25.5 million for the same period ended December 31, 2003 was primarily due to an increase in first year premium. The decrease in commissions and allowances on reinsurance assumed is primarily attributable to a decrease in premiums and corresponding reinsurance allowances received on a modco reinsurance treaty with MLICA, MONY Life’s indirect wholly owned international life insurance company.
For the year ended December 31, 2003, MONY Life reported net transfers from separate accounts of $121.7 million, a decrease of $63.9 million from $185.6 million reported for the year ended December 31, 2002. The decrease is primarily due to decreases in net transfers from the separate accounts on group pension business of $54.4 million and from individual annuity business of $12.2 million, partially offset by an increase of $2.8 million in transfers on life insurance business. The decrease in group pension transfers from the separate accounts during 2002 is primarily attributable to the decrease in surrenders and withdrawals on this business. The
decrease in net transfers from separate accounts on individual annuity business is primarily due to larger amounts of variable annuity deposits and fund balances being allocated to and transferred into separate account investment options during 2003, compared with the prior year.
The following table summarizes the components of other operating expenses for the years ended December 31, 2003 and 2002, respectively.
Net realized capital gains/(losses) by investment type are shown in the following table:
MONY Life’s wholly owned life insurance subsidiary, MLOA, reported a statutory net losses of approximately $79.6 million and $91.9 million during 2003 and 2002, respectively, which was primarily attributable to new business strain and substantial declines in equity markets during 2002. In addition during 2003, MLICA reported a net decrease in equity of approximately $28.1 million, which was primarily due to operating losses of $15.0 million and a charge of $13.1 million related to a deferred tax valuation.
The changes in non-admitted assets in 2002 are primarily related to increases in prepaid pension assets of $6.1 million and capitalized software of $5.7 million.
On December 31, 1993, the Company entered into an agreement with AEGON USA, Inc. (“AEGON USA”) under which the Company agreed to sell substantially all of its group pension business, including its full service group pension contracts, consisting primarily of tax-deferred annuity, 401(k) and managed funds lines of business, to AEGON USA’s wholly-owned subsidiary, AUSA Life Insurance Company, Inc. (“AUSA Life”). The sale (the “Group Pension Transaction”) was accomplished through a transfer of $6.3 billion in group pension assets and liabilities, including $2.7 billion of general account assets and $3.6 billion of separate account assets. AUSA Life also acquired the corporate infrastructure supporting the group pension business, including personnel, data processing systems, facilities and regional offices. In connection with the transaction, the Company and AEGON USA had entered into certain service agreements. These agreements, among other things, provided the Company would continue to manage the transferred assets, and AUSA Life will continue to provide certain administrative services to the Company’s remaining group pension contracts not included in the transfer. The service agreement under which the Company managed the transferred assets was terminated on December 31, 2002.
In addition to interest payments on the Insured Notes, the Company had the right to receive certain payments based on the profits of the transferred business in force on the transaction date, a future payment tied to the determination of the value of the transferred business at the maturity date of the Insured Notes, and a potential payment based on new business growth. Net operating losses, if any, on the transferred business for any year will be carried forward to reduce profit payments in subsequent years. Any deficit remaining at the end of the nine year term and any adjustment related to the final value of the transferred business may only be applied to reduce the principal amount of any outstanding Series A notes.
During 2003 and 2002, the Company earned $(0.7) million and $91.0 million, respectively related to transferred business. The $91.0 million earned during 2002 consisted of $19.1 million based upon the profits of the transferred group pension business and $71.9 from the final value of the transferred business. The Company recorded these amounts as an expense allowances on ceded reinsurance in the Summary of Operations.
Presented below is a discussion and analysis of the invested assets comprising the Closed Block on a statutory basis. Following this discussion and analysis is a discussion and analysis of the invested assets comprising the SRA on a statutory basis.
The amount of invested assets used initially to fund the Closed Block was $5.7 billion on a statutory basis. Set forth below are the invested assets included in the Closed Block as of December 31, 2003, 2002 and 2001 on a statutory basis.
Fixed maturity securities consist of publicly traded debt securities and privately placed debt representing 71.8%, 68.1% and 67.4% of total Closed Block invested assets at December 31, 2003, 2002 and 2001, respectively.
The following table summarizes Closed Block public and private fixed maturity securities by NAIC Designation and the equivalent ratings of the NRSRO as of December 31, 2003, 2002 and 2001, as well as the percentage, based on carrying value, that each designation comprises.
At December 31, 2003, the percentage, based on carrying value, of total public bonds that were investment grade (NAIC Designation 1 or 2) was 95.2%, as compared to 93.2% at December 31, 2002. At December 31, 2003, the percentage, based on carrying value, of total private placement fixed maturity securities that were investment grade (NAIC Designation 1 or 2) was 85.6%, as compared to 83.3% at December 31, 2002.
Following is a summary of Closed Block commercial mortgage loans by geographic area and property type as of December 31, 2003 and 2002, respectively.
The following table presents the carrying amounts of problem, potential problem and restructured commercial mortgages relative to the carrying value of all commercial mortgages as of the dates indicated. The table also presents the valuation allowances and writedowns that the Company recorded relative to commercial mortgages defined as problem, potential problem and restructured as of each of the dates above.
(1) Includes impairment writedowns recorded in accordance with Statements of Standard Accounting Practice No. 37, Mortgage Loans.
The statutory basis book value of the SRA at December 31, 2003 was approximately $1.7 billion.
The events most likely to cause an adjustment in MONY Life’s investment policies are: (i) a significant change in its product mix, (ii) a significant change in the outlook for either the economy in general or for interest rates in particular and (iii) a significant reevaluation of the prospective risks and returns of various asset classes.
The following table sets forth by product line the actual amounts paid in connection with surrenders and withdrawals for the years ended December 31, 2003 and 2002 (in millions):
(1) Excludes approximately $3.8 million and $8.7 million for the years ended December 31, 2003 and 2002, respectively, relating to surrenders associated with an exchange program offered by MONY Life wherein contract holders surrendered old flexible premium variable annuity contracts and reinvested the proceeds in a new enhanced flexible premium variable annuity product offered by MONY Life.
MONY’s principal sources of liquidity to meet unexpected cash outflows are its portfolio of liquid assets and its net operating cash flow. MONY reported net cash flow from operations of $236.2 million in 2003 and $384.2 million in 2002. MONY’s liquid assets include substantial Treasury holdings, short-term money market investments and marketable long-term fixed income securities. Management believes that the Company’s sources of liquidity are more than adequate to meet its anticipated needs. As of December 31, 2003, MONY had total liquidity of approximately $5.5 billion comprised of $3.7 billion public and $1.8 billion private bonds in categories 1 and 2 and cash and short-term investments of $87.5 million.
At December 31, 2003 the Company had commitments to contribute capital to its equity partnership investments of $58.6 million.
MONY Group maintains a syndicated credit facility with banks aggregating $150.0 million. This facility was renewed in July 2003 with a renewal date in July 2004. The purpose of this facility is to provide additional liquidity for any unanticipated short-term cash needs that MONY Group might experience and also to serve as support for MONY Group’s $150 million commercial paper program. In accordance with specified covenants of the facility, MONY Life and its insurance subsidiaries are required to maintain a tangible net worth determined in accordance with Statutory Accounting Practices of not less than $900.0 million and MONY Group is required to maintain (a) a debt to capitalization ratio not to exceed 40%, and (b) cash and cash equivalents, as defined in the credit facility, on a separate company basis equal to or greater of $75.0 million or one and one half years debt service. As of December 31, 2003, MONY Group was in compliance with each of the covenants. MONY Group has not borrowed against the facility since its inception, and did not have any commercial paper outstanding as of December 31, 2003.
Consolidated statements of income and comprehensive income for the years ended December 31, 2003, 2002 and 2001
Consolidated statements of changes in member’s equity for the years ended December 31, 2003, 2002 and 2001
As discussed in Note 4 to the consolidated financial statements, the Company changed its method of accounting for intangible and long-lived assets in 2002.
On February 27, 2002, MONY Holdings, LLC (“MONY Holdings”) was formed as a downstream, wholly owned, holding company of The MONY Group Inc. (the “MONY Group”). MONY Group formed MONY Holdings for the purpose of issuing debt tied to the performance of the Closed Block Business within MONY Life (see Note 21). On April 30, 2002, MONY Holdings commenced its operations and, through a structured financing tied to the performance of the Closed Block Business within MONY Life, issued $300.0 million of floating rate insured debt securities (the “Insured Notes”) in a private placement. In addition, MONY Group, pursuant to the terms of the structured financing, transferred all of its ownership interest in MONY Life to MONY Holdings. Other than activities related to servicing the Insured Notes in accordance with the Insured Notes indenture and its ownership interest in MONY Life, MONY Holdings has no operations and engages in no other activities.
MONY Holdings through its wholly owned direct and indirect subsidiaries (MONY Holdings and its subsidiaries are collectively referred to herein as the “Company”), provides life insurance, annuities, corporate-owned and bank-owned life insurance (“COLI and BOLI”), mutual funds, securities brokerage, business and estate planning. The Company distributes its products and services through Retail and Wholesale distribution channels. The Company’s Retail distribution channels are comprised of (i) the career agency sales force operated by its principal life insurance operating subsidiary, and (ii) financial advisors and account executives of its securities broker dealer subsidiaries. The Company’s Wholesale channel is comprised of (i) MONY Partners, a division of MONY Life, (ii) independent third party insurance brokerage general agencies and securities broker dealers and (iii) its corporate marketing team which markets COLI and BOLI products. For the year ended December 31, 2003, Retail distribution accounted for approximately 17.6% and 42.6% of sales of protection and accumulation products, respectively, while Wholesale distribution accounted for 82.4% and 57.4% of sales of protection and accumulation products, respectively. The Company principally sells its products in all 50 of the United States, the District of Columbia, the U.S. Virgin Islands, Guam and the Commonwealth of Puerto Rico, and currently insures or provides other financial services to more than one million individuals.
MONY Life’s principal wholly owned direct and indirect operating subsidiaries include: (i) MONY Life Insurance Company of America (“MLOA”), an Arizona domiciled life insurance company, (ii) Enterprise Capital Management (“Enterprise”), a distributor of both proprietary and non-proprietary mutual funds, (iii) U.S. Financial Life Insurance Company (“USFL”), an Ohio domiciled insurer underwriting specialty risk life insurance business, (iv) MONY Securities Corporation (“MSC”), a registered securities broker-dealer and investment advisor whose products and services are distributed through MONY Life’s career agency sales force,
The Company incurred merger related expenses totaling $0.8 million for the year ended December 31, 2003 in connection with MONY Group’s pending merger transaction with AXA Financial. These expenses are reflected under the caption “other operating costs and expenses” in the Company’s statement of income and comprehensive income.
On November 16, 1998, MONY Life, pursuant to the New York Insurance Law, established a closed block (the “Closed Block”) of certain participating insurance policies (the “Closed Block in force business”) as defined in its plan of demutualization (the “Plan”). In conjunction therewith, MONY Life allocated assets to the Closed Block that are expected to produce cash flows which, together with anticipated revenues from the Closed Block in force business, are expected to be sufficient to support the Closed Block in force business, including but not limited to the payment of claims and surrender benefits, certain expenses and taxes, and for the continuation of
All the cash flows from the assets allocated to the Closed Block and the Closed Block in force business inure solely to the benefit of the owners of policies included in the Closed Block. The assets and liabilities allocated to the Closed Block at the date of its formation (November 16, 1998, which was the effective date of MONY Life’s demutualization) were recorded in the Company’s financial statements at their historical carrying values. The carrying value of the assets allocated to the Closed Block is less than the carrying value of the Closed Block liabilities at the effective date of MONY Life’s demutualization. The excess of the Closed Block liabilities over the Closed Block assets at the effective date of MONY Life’s demutualization represents the total estimated future post-tax contribution expected to emerge from the operations of the Closed Block, which will be recognized in MONY Life’s income over the period the policies and the contracts in the Closed Block remain in force.
However, because the decision to increase or decrease dividend scales is based on revised estimates as to the ultimate profitability of the Closed Block such actions will not necessarily coincide with periodic reports of the results of the Closed Block. Accordingly, actual earnings that emerge from the Closed Block may either be more or less than the expected Closed Block earnings (or glide path earnings). In accordance with AICPA Statement of Position 00-3 “Accounting by Insurance Enterprises for Demutualizations and Formations of Mutual Insurance Holding Companies and for Certain Long-Duration Participating Contracts”, actual Closed Block earnings in excess of expected Closed Block earnings (or the “glide path earnings”) in any period are recorded as an additional liability to Closed Block policyholders (referred to as the “deferred dividend liability”) because such excess earnings inure solely to the benefit of the policyholders in the Closed Block. If actual Closed Block earnings are less than expected Closed Block earnings (or the glide path earnings) in any period the difference is
Since the Closed Block has been funded to provide for payment of guaranteed benefits and the continuation of current payable dividends on the policies included therein, it will not be necessary to use general funds to pay guaranteed benefits unless the in force business in the Closed Block experiences very substantial ongoing adverse experience in investment, mortality, persistency or other experience factors. MONY Life regularly (at least quarterly) monitors the experience from the Closed Block and may make changes to the dividend scale, when appropriate, to ensure that the profits are distributed to the Closed Block policyholders in a fair and equitable manner. In addition, annually the New York Insurance Department requires the filing of an independent auditor’s report on the operations of the Closed Block.
The accompanying consolidated financial statements include the accounts of MONY Holdings and its subsidiary. All significant intercompany accounts and transactions have been eliminated.
consolidated. In all other circumstances, the Company accounts for its investments in venture capital limited partnerships at estimated fair value. Because the underlying partnerships are required under GAAP to mark their investment portfolios to market and report changes in such market value through their earnings, the Company’s earnings will reflect its pro rata share of such mark to market adjustment if it accounts for the partnership investment under the equity method. With respect to partnerships accounted for at fair value, there will be no impact on the Company’s earnings until: (i) the underlying investments held by the partnership are distributed to the Company, or (ii) the underlying investments held by the partnership are sold by the partnership and the proceeds distributed to the Company, or (iii) an impairment of the Company’s investment in the partnership is determined to exist. Unrealized gains and losses on fixed maturity securities available-for-sale and common stocks are reported as a separate component of other comprehensive income, net of deferred income taxes and an adjustment for the effect on deferred policy acquisition costs that would have occurred if such gains and losses had been realized. Unrealized gains and losses on fixed maturity securities classified as trading securities are reflected in current period revenues. The cost of all fixed maturity securities and common stock is adjusted for impairments in value deemed to be other than temporary. Fixed maturity securities deemed to be other than temporarily impaired are analyzed to assess whether such investments should be placed on non-accrual status. A fixed maturity security would be placed on non-accrual status when management believes it will not receive all principal and interest payments according to the original terms. Any cash received on non-accrual status securities is applied against the outstanding principal. These adjustments are reflected as realized losses on investments. Realized gains and losses on sales of investments are determined on the basis of specific identification.
Real estate held for investment, as well as related improvements, is generally stated at cost less depreciation. Depreciation is determined using the straight-line method over the estimated useful life of the asset, which may range from 5 to 40 years. Cost is adjusted for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. Impairment losses are based on the estimated fair value of the real estate, which is generally computed using the present value of expected future cash flows from the real estate discounted at a rate commensurate with the underlying risks. Impairment losses on real estate held for investment are reported as realized losses on investments.
• The asset is being actively marketed for sale at a price that is reasonable in relation to its current fair value; and
• Actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn.
The Company utilizes short-term repurchase agreements as supplementary short-term financing and delivers U.S. Treasury securities as collateral for cash received. These repurchase agreements are accounted for as collateralized financings. The fee paid by the Company is recorded as interest. The Company monitors the market value of securities transferred on a daily basis, and provides additional collateral as necessary.
The Company, through Enterprise, sells Class B and C shares, which are subject to a contingent deferred sales charge (“CDSC”). At the time of sale, the Company pays commissions to brokers and dealers for sales of Enterprise Group of Funds Class B and C shares. Class B commissions paid are deferred and amortized on the lesser of six years straight-line, or the period during which related distribution and CDSC revenues are earned. The Company evaluates recoverability through ongoing estimates of future revenues from Class B shares. Class C share commissions are expensed when paid.
FASB Statement No. 123, Accounting for Stock-Based Compensation (“SFAS 123”), issued in October 1995, prescribes accounting and reporting standards for employee stock-based compensation plans, as well as transactions in which an entity issues equity instruments to acquire goods or services from non-employees. However, for employee stock based compensation plans, SFAS 123 permits companies, at their election, to continue to apply the accounting prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (“APB 25”), which was issued and effective since 1972. SFAS 123 provides no similar election with respect to transactions in which an entity issues equity instruments to acquire goods or services from non-employees. For companies electing to apply the accounting prescribed by APB 25 to their employee stock-based compensation plans, SFAS 123 requires that pro forma disclosure be made of net income and earnings per share as if the fair value accounting prescribed by SFAS 123 had been adopted. The Company elected to apply the accounting prescribed by APB 25 to option grants to employees and, accordingly, make the aforementioned pro forma disclosures. Based on the definition of an “employee” prescribed in the Internal Revenue Code, the Company’s career financial professionals do not qualify as employees. See Note 23 for further discussion of the Company’s stock based compensation plans.
The Company files a consolidated federal income tax return with its ultimate parent, the MONY Group and its other subsidiaries, as well as the Company’s life and non-life affiliates except Sagamore Financial Corporation, the parent holding company of USFL. 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.
In determining whether a reinsurance contract qualifies for reinsurance accounting, SFAS No. 113 “Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts” requires that there be a “reasonable possibility” that the reinsurer may realize a “significant loss” from assuming insurance risk under the contract. In making this assessment, the Company projects the results of the policies reinsured under the contract under various scenarios and assesses the probability of such results actually occurring. The projected
On January 1, 2001 the Company adopted 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
Effective July 1, 2001, the Company adopted SFAS No. 141, Business Combinations (“SFAS 141”). SFAS 141 addresses the financial accounting and reporting for all business combinations. This statement requires that all business combinations be accounted for under the purchase method of accounting, abolishes the use of the pooling-of-interest method, requires separate recognition of intangible assets that can be identified and named, and expands required disclosures. All of the Company’s past business combinations have been accounted for under the purchase accounting method. The provisions of this statement apply to all business combinations initiated after June 30, 2001. The adoption of SFAS 141 did not have a material effect on the Company’s results of operations or financial position.
On January 1, 2002, the Company adopted SFAS No. 142, Goodwill and Other Intangible Assets (“SFAS 142”). SFAS 142 provides that goodwill and intangible assets that have indefinite useful lives will not be amortized but rather will be tested at least annually for impairment. This Statement provides specific guidance for testing the impairment of goodwill and intangible assets. As a result of adopting this standard, the Company no longer recognizes goodwill amortization of approximately $1.3 million on an annualized basis. In addition, since the adoption of this standard, based on the Company’s estimate of its reporting units, the Company has determined that none of its goodwill is impaired (see Note 25).
On January 1, 2002, the Company adopted SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (“SFAS 144”). This statement establishes a single accounting model for the impairment or disposal of long-lived assets, including assets to be held and used, assets to be disposed of by other than sale, and assets to be disposed of by sale. SFAS 144 retains many of the same provisions as SFAS 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of (“SFAS 121”). In addition to retaining the SFAS 121 requirements, SFAS 144 requires companies to present the results of operations of components of the entity that are held for sale as discontinued operations in the consolidated statement of income and comprehensive income. The Company had real estate that meets the definition of a component of the entity. Substantially all of the Company’s real estate to be disposed of resulted from disposal activities initiated prior to the effective date of SFAS 144. The carrying value of real estate to be disposed of at December 31, 2003 and 2002 was $0.0 million and $26.8 million, respectively. The Company’s pretax income/(loss) from real estate to be disposed of for the years ended December 31, 2003 and 2002, which is reported in the Company’s consolidated statement of income and comprehensive income as a discontinued operation, was $9.0 million and $(3.9) million, respectively.
In December 2002, the FASB issued SFAS No. 148 Accounting for Stock-Based Compensation - Transition and Disclosure and amendment of FASB Statement No. 123 (“SFAS 148”). This Statement amends SFAS 123, to provide alternative methods of transition for an entity that voluntarily changes to the fair value based method of accounting for stock-based employee compensation. It also amends the disclosure provisions of that Statement to require prominent disclosure about the effects on reported net income of an entity’s accounting policy decisions with respect to stock-based employee compensation. Finally, SFAS 148 amends APB Opinion No. 28, Interim Financial Reporting, to require disclosure about those effects in interim financial information. The disclosure provisions for SFAS 148 were effective for interim periods beginning after December 15, 2002. The transition provisions of SFAS 148 were effective for financial statements for fiscal years ending after December 31, 2002. As of December 31, 2003, the Company has not adopted the fair value based method of accounting for stock based compensation.
In April 2003, the FASB issued SFAS 133 Implementation Issue B36, Embedded Derivatives: Modified Coinsurance Arrangements and Debt Instruments That Incorporate Credit Risk Exposures That Are Unrelated or
In May 2003, the FASB issued SFAS No. 150 Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity (“SFAS 150”). SFAS 150 changes the accounting for certain financial instruments that, under previous guidance, could be classified as equity or “mezzanine” equity, by now requiring those instruments to be classified as liabilities (or assets in some circumstances) in the statement of financial position. Further, SFAS 150 requires disclosure regarding the terms of those instruments and settlement alternatives. SFAS 150 affects an entity’s classification of the following free-standing instruments: (i) mandatory redeemable instruments, (ii) financial instruments to repurchase an entity’s own equity instruments, and (iii) financial instruments embodying obligations that the issuer must or could choose to settle by issuing a variable number of its shares or other equity instruments based solely on (a) a fixed monetary amount known at inception or (b) something other than changes in its own equity instruments. SFAS 150 does not apply to features embedded in a financial instrument that is not a derivative in its entirety. The guidance in SFAS 150 was generally effective for all financial instruments entered into or modified after May 31, 2003, and was otherwise effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of SFAS 150 did not have a material impact on the Company’s results of operations and financial position.
In October 2003, the FASB finalized the proposed FASB Staff Position 46-e Effective Date of Interpretation 46 (“FIN 46”), for Certain Interests Held by a Public Entity (“Staff Position 46-e”). Staff Position 46-e defers the latest date by which all public entities must apply SFAS Interpretation No. 46 Consolidation of Variable Interest Entities (“Interpretation 46”), to the first reporting period ending after December 15, 2003. Interpretation 46 represents an interpretation of Accounting Research Bulletin No. 51, Consolidated Financial Statements (“ARB 51”). ARB 51 requires that a company’s consolidated financial statements include subsidiaries in which the company has a majority voting interest. However, the voting interest approach is not effective in identifying controlling financial interests in entities (referred to as “variable interest entities”) that are not controllable through voting interests or in which the equity investors do not bear the residual economic risks. Interpretation 46 provides guidance on identifying variable interest entities and on assessing whether a company’s investment in a variable interest entity requires consolidation thereof. Interpretation 46 was initially effective in January 2003 for investments made in variable interest entities after January 31, 2003 and it was effective in the first fiscal year or interim period beginning after June 15, 2003 for investments in variable interest entities made prior to February 1, 2003. The deferral applied to all variable interest entities and potential variable interest entities, both financial and non-financial in nature. Variable interest entities that were previously consolidated in issued financial statements under Interpretation 46 were not unconsolidated. The adoption of Interpretation 46 did not have a material impact on the Company’s results of operations and financial position.
In December 2003, the FASB issued SFAS No. 132 (revised 2003) Employers’ Disclosures about Pensions and Other Postretirement Benefits (“SFAS 132-2003”). SFAS 132-2003 improves the financial statement disclosures for defined benefit plans contained in SFAS No. 132 Employers’ Disclosures about Pensions and
In December 2003, the FASB issued SFAS Interpretation No. 46-Revised Consolidation of Variable Interest Entities (“Interpretation 46R”), which incorporates a number of modifications and changes to Interpretation 46 (see - New Accounting Pronouncements Adopted as of December 31, 2003, above). Interpretation 46R clarifies some of the requirements of Interpretation 46, eases some of its implementation problems, and adds new scope exceptions and applicability judgments. Interpretation 46R is effective for reporting periods ending after December 15, 2003 for investments in variable interest entities considered to be special-purpose entities. The implementation of Interpretation 46R for all other investments in variable interest entities is required for reporting periods ending after March 15, 2004, with early adoption permitted. The adoption of FIN 46R is not expected to have a material impact on the Company’s results of operations and financial position.
5. Investment Income, Realized and Unrealized Investment Gains (Losses), and Comprehensive Income:
(1) Amounts in 2003 and 2002 include $(0.7) million and $3.5 million, respectively, of changes in unrealized gains/(losses) related to fixed maturity securities, which are on deposit in the DSCA sub-account OB - see Note 22.
Reclassification adjustments, excluding net unrealized gains/(losses) on assets allocated to the Closed Block, reported in the above table for the years ended December 31, 2003, 2002 and 2001 are net of income tax
expense (benefit) of $6.5 million, $(22.5) million and $5.1 million, respectively, and $(3.1) million, $4.1 million and $1.8 million, respectively, relating to the effect of such amounts on DPAC.
(2) The amortized cost, gross unrealized gains, gross unrealized losses and estimated fair value of fixed maturity securities in the DSCA Sub-account OB at December 31, 2002 are $58.3 million, $3.5 million, $0.0 million and $61.8 million, respectively - see Note 21.
The carrying value of the Company’s fixed maturity securities at December 31, 2003 and 2002 is net of adjustments for impairments in value deemed to be other than temporary of $113.5 million and $124.4 million, respectively.
Fixed maturity securities that are not due at a single maturity date have been included in the preceding table in the year of final maturity. Actual maturity dates may differ from contractual maturity dates because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
There were 19 investment grade fixed maturity security positions that have been in an unrealized loss position for more than 12 months as of December 31, 2003. The aggregate gross pre-tax unrealized loss relating to these positions was $2.6 million ($1.7 million after-tax) as of such date. Of these positions: (i) eight comprising approximately $1.8 million ($1.2 million after-tax) of the aforementioned aggregate unrealized loss, were not considered “other than temporarily impaired” principally because of the issuer’s financial strength as indicated by the fact that all such securities were rated “A” or better, (ii) eight comprising approximately $0.8 million ($0.5 million after-tax) of the aforementioned unrealized loss were not considered “other than temporarily impaired” because management is of the opinion 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”, and (iii) three positions with negligible unrealized losses were U.S. Government securities.
During 2003, 2002, and 2001, the Company recognized $4.1 million, $11.3 million and $12.8 million, respectively, of interest income on impaired loans.
Amounts reported as “reconciling amounts” in the table below primarily relate to: (i) contracts issued by the Company relating to its employee benefit plans, (ii) revenues and expenses of MONY Holdings in 2003 and 2002 (see Note 1), (iii) interest expense associated with the surplus and intercompany surplus notes, (iv) charges totaling $5.8 million, $7.2 million and $56.8 million in 2003 and 2002, and 2001, respectively, associated with the Company’s reorganization activities (see Note 26), (v) a $1.5 million decrease in 2002 in certain reserves established in connection with the reorganization charge recorded in 2002 (see Note 26), and (vii) merger related expenses totaling $0.8 million in 2003 incurred in connection with MONY Group’s pending merger transaction with AXA Financial (see Note 2).
(1) Includes Group Pension Profits in 2002 and 2001 (see Note 13).
(5) Amounts reported as “reconciling” in 2002 primarily relate to: (i) contracts issued by MONY Life relating to its employee benefit plans, (ii) revenues and expenses of MONY Holdings, (iii) interest expense associated with the surplus and intercompany surplus notes (see Note 16), (iv) charges totaling $7.2 million pre-tax relating to the Company’s 2003 reorganization activities (see Note 26), and (v) a $1.5 million decrease in certain reserves associated with the Company’s 2001 reorganization charge (see Note 26).
(8) Amounts reported in 2003 include a gain of $9.0 million pre-tax from discontinued operations, of which $7.7 million, $0.9 million and $0.4 million, has been allocated to the Protection Products, Accumulation Products and Other Products segments, respectively.
(9) Includes separate account liabilities relating to the Group Pension Transaction of $3,179.5 million as of December 31, 2001 (see Note 13).
(10) As explained in Note 13, in accordance with GAAP, the Group Pension Transaction did not constitute a sale because the Company retained substantially all the risks and rewards associated with the business transferred to Aegon USA, Inc. (“AEGON”). Accordingly, over the life of the transaction the Company was required to reflect the transferred assets and liabilities on its balance sheet under separate captions entitled “Assets transferred in Group Pension Transaction” and “Liabilities transferred in Group Pension Transaction”. As a result of the expiration of the transaction at December 31, 2002 and the recognition of earnings from the Final Value Payment from AEGON the Company has no further interest in the transferred assets and liabilities and, accordingly, such assets and liabilities are no longer reflected on its balance sheet.
Policy acquisition costs deferred and amortized in 2003, 2002, and 2001 are as follows:
The assets of the qualified pension plan are primarily invested in MONY Pooled Accounts which include common stock, real estate, and public and private fixed maturity securities. At December 31, 2003 and 2002, $312.0 million and $304.7 million, respectively, were invested in the MONY Pooled Accounts. Benefits of $34.0 million, $30.2 million and $27.9 million were paid by this plan for the years ended December 31, 2003, 2002 and 2001, respectively.
The following presents the change in the benefit obligation, change in plan assets and other information with respect to the Company’s qualified and non-qualified defined benefit pension plans and other benefits which represent the Company’s postretirement benefit obligation:
The Company’s qualified plan had assets of $387.6 million and $354.9 million at December 31, 2003 and 2002, respectively. The projected benefit obligation and accumulated benefit obligation for the qualified plan were $385.6 million and $354.3 million at December 31, 2003 and $365.2 million and $338.9 million at December 31, 2002, respectively.
MONY Life uses a December 31 measurement date for its pension plans and other postretirement benefits.
• Real estate - The estimated fair value of real estate is generally computed using the present value of expected future cash flows from the real estate, discounted at a rate commensurate with the underlying risks.
The Company also has a qualified money purchase pension plan covering substantially all career field underwriters. Company contributions of 5% of earnings plus an additional 2% of such earnings in excess of the social security wage base are made each year. At December 31, 2003 and 2002, the fair value of plan assets was $188.2 million and $165.1 million, respectively. For the years ended December 31, 2003, 2002, and 2001, the Company contributed $2.2 million, $2.8 million and $3.2 million to the plan, respectively, which amounts are reflected in “other operating costs and expenses” in the Company’s consolidated statement of income and comprehensive income.
The Company has a non-qualified defined contribution plan, which is unfunded. The non-qualified defined contribution plan projected benefit obligation, which equaled the accumulated benefit obligation, was $61.2 million and $52.9 million as of December 31, 2003 and 2002, respectively. The non-qualified defined contribution plan’s net periodic expense was $11.1 million, $(2.7) million and $(0.2) million for the years ended December 31, 2003, 2002 and 2001, respectively.
The Company also has incentive savings plans in which substantially all employees and career field underwriters of MONY Life are eligible to participate. The Company matches field underwriter contributions up to 2% of eligible compensation and may also make an additional profit sharing contribution for non-officer employees. As with the employee excess plan, the Company also sponsors non-qualified excess defined contribution plans for both the field underwriter retirement plan and the incentive savings plan for field underwriters of MONY Life. The Company also sponsors several other 401(k) plans for its smaller subsidiaries which the Company considers immaterial.
The Company’s federal income tax returns for years through 1993 have been examined by the 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.
On December 31, 1993 (the “Group Pension Transaction Date”), the Company entered into an agreement (the “Agreement”) with AEGON USA, Inc. (“AEGON”) under which the Company transferred a substantial
portion of its group pension business (hereafter referred to as the “Group Pension Transaction”), including its full service group pension contracts, consisting primarily of tax-deferred annuity, 401(k) and managed funds lines of business, to AEGON’s wholly-owned subsidiary, AUSA Life Insurance Company, Inc. (“AUSA”). The Company also transferred to AUSA the corporate infrastructure supporting the group pension business, including data processing systems, facilities and regional offices. AUSA was newly formed by AEGON solely for the purpose of facilitating this transaction. In connection with the transaction, the Company and AEGON entered into certain service agreements. These agreements, among other things, provided that the Company would continue to manage the transferred assets, and that AUSA would continue to provide certain administrative services to the Company’s remaining group pension contracts not included in the transfer.
In accordance with GAAP, the transaction did not constitute a sale because the Company retained substantially all the risks and rewards associated with the existing deposits on the transferred business (the “Existing Deposits”). Accordingly, the Company reflected the transferred assets and liabilities on its balance sheet under separate captions entitled “Assets transferred in Group Pension Transaction” and “Liabilities transferred in Group Pension Transaction” until the expiration of the agreement, December 31, 2002. In addition, the Company reported in its GAAP earnings the profits from the Existing Deposits as discussed below.
For the years ended December 31, 2002 and 2001, AUSA reported earnings to the Company pursuant to the application of the Earnings Formula of $19.1 million and $27.4 million, respectively, and the Company recorded Group Pension Profits of $28.2 million and $30.7 million, respectively. In addition, the Company earned $12.8 million of interest income on the Insured Notes in each of the aforementioned years. In addition, the Company recorded earnings from the Final Value Payment of $54.1 million (before expenses of approximately $6.0 million relating thereto, which are recorded in “other operating costs and expenses” in the 2002 consolidated statement of income and comprehensive income), on December 31, 2002.
The fair value of mortgage loans is estimated by discounting expected future cash flows, using current interest rates for similar loans to borrowers with similar credit risk. Loans with similar characteristics are aggregated for purposes of the calculations. The fair value of mortgages in process of foreclosure is the estimated fair value of the underlying collateral. At December 31, 2003 and 2002, the fair value of mortgage loans was $1,926.9 million and $2,065.5 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, 2003 were $1,727.4 million and $1,701.1 million, respectively. The carrying value and fair value of annuities at December 31, 2002 were $1,459.2 million and $1,439.4 million, respectively.
At December 31, 2003 and 2002, 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 1.0% and 1.3%, respectively, of total cash and invested assets.
The Company’s fixed maturity securities are diversified by industry type. The industries (excluding U.S. Treasury securities and obligations of U.S. government agencies) that comprise 10.0% or more of the carrying value of the fixed maturity securities at December 31, 2003 are Consumer Goods of $1,698.1 million (20.0%).
value of the fixed maturity securities at December 31, 2002 are Consumer Goods of $1,444.8 million (18.3%) and Other Manufacturing of $848.0 million (10.8%).
The states with the largest concentrations of mortgage loans and real estate investments at December 31, 2003 are: California, $220.1 million (11.3%); Arizona $206.3 million (10.5%); Texas, $179.7 million (9.2%); Virginia, $130.3 million (6.7%); Georgia, $111.5 million (5.7%); Washington, $96.1 million (4.9%); and District of Columbia, $93.2 million (4.8%).
As of December 31, 2003 and 2002, the real estate and mortgage loan portfolio was also diversified by property type as follows:
(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
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 consolidated and transferred by the Judicial Panel on Multidistrict Litigation to the United States District Court for the District of Massachusetts. While most of the cases before the District Court have been held in abeyance pending the outcome in Goshen, in June 2003, the Court granted plaintiffs in two of the constituent cases (the McLean and Snipes cases) leave to amend their complaints to delete all class action claims and allegations other than (in the case of McLean) those predicated on alleged violations of the Massachusetts and Illinois consumer protection statutes. On November 19, 2003, the Court in McLean entered an order granting defendants dispositive motion seeking dismissal of the individual claims of the proposed class representatives of the putative statewide class comprised of Massachusetts purchasers, but denying that motion as to the individual claims of the proposed class representatives of the putative state-wide class of Illinois purchasers only. The order is now on appeal to the United States Court of Appeals for the First Circuit.
(ii) Between September 22 and October 8, 2003, ten substantially similar putative class action lawsuits were filed against MONY Group, its directors, AXA Financial and/or AIMA in the Court of Chancery of the State of Delaware in and for New Castle County, entitled Beakovitz v. AXA Financial, Inc., et al., C.A. No. 20559-NC (Sept. 22, 2003); Belodoff v. The MONY Group Inc., et al., C.A. No. 20558-NC (Sept. 22, 2003); Brian v. The MONY Group Inc., et al., C.A. No. 20567-NC (Sept. 23, 2003); Bricklayers Local 8 and Plasterers Local 233 Pension Fund v. The MONY Group Inc., et al., C.A. No. 20599-NC (Oct. 8, 2003); Cantor v. The MONY Group Inc., et al., C.A. No. 20556-NC (Sept. 22, 2003); E.M. Capital, Inc. v. The MONY Group Inc., et al., C.A. No. 20554-NC (Sept. 22, 2003); Garrett v. The MONY Group Inc., et al., C.A. No. 20577-NC (Sept. 25, 2003); Lebedda v. The MONY Group Inc., et al., C.A. No. 20590-NC (Oct. 3, 2003); Martin v. Roth, et al., C.A. No. 20555-NC (Sept. 22, 2003); and Muskal v. The MONY Group Inc., et al., C.A. No. 20557-NC (Sept. 22, 2003).
By order dated November 4, 2003, Vice Chancellor Stephen P. Lamb, to whom the cases had been assigned, consolidated all ten actions under the caption In re The MONY Group Inc., Shareholders Litigation, Consolidated C.A. No. 20554-NC, and ordered plaintiffs to file a consolidated amended complaint. On or about November 5, 2003, plaintiffs filed a Consolidated Class Action Complaint on behalf of a putative class consisting of all MONY Group stockholders, excluding the defendants and their affiliates. The consolidated complaint alleges that the $31.00 cash price per share to be paid to MONY Group stockholders in connection with the proposed merger is inadequate and that MONY Group’s directors breached their fiduciary duties in negotiating and approving the merger agreement by, among other things, (i) failing to maximize stockholder value, (ii) improperly diverting merger consideration from MONY Group’s stockholders to MONY Group’s management by amending and extending management’s change-in-control agreements, (iii) failing to comply with Delaware law in determining the “fair value” of MONY Group’s stock and (iv) disseminating incomplete and inaccurate information regarding the proposed merger. The consolidated amended complaint alleges that AXA Financial and AIMA aided and abetted the alleged breaches of fiduciary duty by MONY Group and its directors. The complaint seeks various forms of relief, including damages and injunctive relief that would, if granted in its entirety, prevent completion of the merger. Defendants served and filed their answers to the consolidated amended complaints on December 29, 2003.
(v) In December 2002 the SEC and self-regulatory organizations (National Association of Securities Dealers, Inc. (“NASD”)) directed all broker-dealers, including the Company, to evaluate their procedures with respect to mutual fund sales charge breakpoints. The outcome of the Company’s evaluation, including any determination it made with respect to sales charges paid by its customers, did not have a material adverse effect on the Company’s results of operations, cash flows, or financial position.
(vi) Recently, there has been a significant increase in federal and state regulatory activity in the financial services industry relating to numerous issues, including market timing and late trading of mutual fund and variable insurance products. The Company, like many others in the financial services industry, has received requests for information from the SEC and the NASD seeking documentation and other information relating to these issues. In addition, the SEC recently advised the Company of its plan to conduct an on-site examination of the Company’s variable annuities separate account. The Company has been responding to these requests and continues to cooperate fully with the regulators.
(vii) It is possible that the results of operations or the cash flow of the Company in a particular quarterly or annual period could be materially affected as a result of the settlement, or re-evaluation of, the matters discussed above. Management believes, however, that the ultimate payments in connection with such matters should not have a material adverse affect on the Company’s financial statements. In addition to the matters discussed above, the Company is involved in various other legal actions and proceedings (some of which involve demands for unspecified damages) in connection with its business. In the opinion of management of the Company, resolution of contingent liabilities, income taxes and other matters will not have a material adverse effect on the Company’s financial position or results of operations.
$44.0 million in 2001. The future minimum rental obligations for the next five years and thereafter under these leases are: $30.4 million for 2004, $27.1 million for 2005, $23.8 million for 2006, $22.1 million for 2007, $20.7 million for 2008, and $86.7 million for the years thereafter.
For the years ended December 31, 2003 and 2002, the Closed Block recognized $1.8 million and $9.9 million, respectively, of interest income on impaired loans.
At December 31, 2003 and 2002, the Closed Block had restructured mortgage loans of $4.7 million and $8.5 million, respectively. Interest income of $0.4 million and $0.6 million was recognized on such loans for the years ended December 31, 2003 and 2002, respectively. Gross interest income on these loans that would have been recorded in accordance with the original terms of such loans amounted to approximately $0.6 million and $1.0 million for the respective periods.
The pre-tax Contribution from the Closed Block includes only those revenues, benefit payments, dividends, premium taxes, state guaranty fund assessments, and investment expenses considered in funding the Closed Block. However, many expenses associated with operating the Closed Block and administering the policies
included therein were excluded from and, accordingly, are not funded in the Closed Block. These expenses are reported in the Company’s statement of income and comprehensive income in the separate line items to which they apply based on the nature of such expenses. Federal income taxes applicable to the Closed Block, which are funded in the Closed Block, are reflected as a component of federal income tax expense in the Company’s statement of income and comprehensive income. Since many expenses related to the Closed Block are funded outside the Closed Block, operating costs and expenses outside the Closed Block are disproportionate to the level of business outside the Closed Block.
The Closed Block Business (“CBB”) is comprised of certain amounts within MONY Holdings and MONY Life. Within MONY Holdings, the CBB includes: (i) the Insured Notes, (ii) the capitalized costs of issuing the Insured Notes, (iii) the DSCA Sub-account CBB (see Note 22), (iv) the Swap, and (v) the Insurance Policy (see Note 1). Within MONY Life, the CBB includes: (i) the Closed Block discussed in Notes 3 and 20 and (ii) an amount of capital (hereafter referred to as “Surplus and Related Assets” or “SRA”) outside the Closed Block, but within MONY Life, that when aggregated with the assets and liabilities in the Closed Block results in an aggregate carrying value of assets in the CBB within MONY Life in excess of the carrying value of the liabilities in the CBB within MONY Life. The amount by which the assets in the CBB within MONY Life exceed the liabilities in the CBB within MONY Life represents a sufficient amount of capital based on regulatory standards to support the CBB within MONY Life. All business of MONY Holdings and its subsidiary, consolidated, other than the CBB is defined in the Insured Notes indenture as the Ongoing Business (“OB”). The determination of the amount of Surplus and Related Assets was based on Statutory Accounting Practices as required by the Insured Notes indenture. As the Closed Block’s results of operations emerge, an equal amount of the Surplus and Related Assets is intended to become available to the OB. The investment of the Surplus and Related Assets is restricted to permitted investments and subject to certain concentration limitations as outlined in the Insured Note indenture (see Note 1).
(1) Includes: (i) revenues and expenses associated with the DSCA, the Insured Notes and the Swap (ii) the net contribution to income from the SRA, and (iii) the results of operations from the Closed Block.
The statutory surplus of MONY Life as of December 31, 2003 and 2002 was $926.8 million and $906.4 million, respectively, of which $436.8 million and $409.8 million, respectively, was attributable to the OB and $490.0 million and $496.6 million, respectively, was attributable to the CBB. The statutory net gain from operations of MONY Life for the years ended December 31, 2003 and 2002 was $87.4 million and $154.6 million, respectively, of which $9.2 million and $59.3 million, respectively, was attributable to the OB and $78.2 million and $95.3 million, respectively, was attributable to the CBB. The net gain from operations attributable to the CBB includes: (i) the net contribution to income from the Surplus and Related Assets and (ii) the results of operations from the Closed Block.
In May 2002, MONY Group’s shareholders approved the 2002 Stock Option Plan (the “2002 SOP”) and the allocation of 5,000,000 shares of MONY Group common stock for grants under that 2002 SOP Plan. Options granted under the plan may not be exercised, transferred or otherwise disposed of by the grantee prior to December 24, 2003, even if vested. Options granted under the 2002 SOP are NQSOs. Options may be granted at a price not less than 100% of the fair value of MONY Group’s common stock as determined on the date of grant, and vesting provisions are determined at the discretion of the MONY Group’s board of directors. As of December 31, 2003, options to acquire 1,957,275 common shares of the MONY Group had been issued to employees and certain career financial professionals of the Company and 1,881,425 of these options were outstanding under the 2002 SOP. All options granted through December 31, 2003 under the 2002 SOP vest one-third ratably on the December 31st after each of the first three anniversaries following the date such option was granted, and will remain exercisable for a period not to exceed 10 years from the date of grant.
During 2003 there were 836,025 options granted with a weighted average exercise price of $21.96 and a weighted average fair value of $7.59.
Set forth below are unconsolidated condensed financial statements of MONY Holdings. The significant accounting policies used in preparing these financial statements are substantially the same as those used in the preparation of the consolidated financial statements of the Company, except that MONY Holdings’ subsidiary is carried under the equity method.
The following table presents the condensed statements of cash flows for the years indicated:
The goodwill amortization recorded for the year ended December 31, 2001 was included in the Protection Products and Other Products segments as follows:
The following table summarizes the significant components of goodwill, and the related amortization, by segment for the periods presented. Goodwill is reflected under the caption “other assets” in the Company’s balance sheet.
(iv) write-offs of unused furniture and equipment in certain abandoned agency offices of $1.3 million; and (v) moving and alteration costs incurred in connection with the consolidation of leased space in the Company’s home office of $0.2 million. The severance actions were substantially completed during the fourth quarter of 2003. The reserves established for the abandonment of leased agency offices and leased space in the Company’s home office are expected to run-off through 2008 and 2016, respectively. All of the charges recorded in 2003 represent “costs associated with exit or disposal activities” as described in SFAS 146, Accounting for Costs Associated with Exit or Disposal Activities (“SFAS 146”).
Set forth below is certain information regarding the liability recorded in connection with the Company’s restructuring actions, as well as the changes therein during the year ended December 31, 2003. Such liability is reflected in “accounts payable and other liabilities” on the Company’s consolidated statement of financial position.
As described in Notes 2 and 3 to the financial statements, the Company prepared these financial statements using accounting practices prescribed or permitted by the Insurance Department of the State of New York, which practices differ from accounting principles generally accepted in the United States of America. The effects on the financial statements of the variances between the statutory basis of accounting and accounting principles generally accepted in the United States of America are presumed to be material; they are described in Note 2.
February 4, 2004, except for matters described as subsequent events in Note 21 to which the date is March 9, 2004.
MONY Life Insurance Company (formerly, The Mutual Life Insurance Company of New York), is the principal subsidiary of MONY Holdings LLC (“MONY Holdings”). MONY Holdings is a subsidiary of The MONY Group Inc. (“MONY Group”). On November 16, 1998, pursuant to the Plan of Reorganization (the “Plan”) approved by the New York Superintendent of Insurance, The Mutual Life Insurance Company of New York (“MONY” or “the Company”) converted from a mutual life insurance company to a stock life insurance company and became a wholly owned subsidiary of MONY Group which was organized on June 24, 1997 for the purpose of becoming the parent holding company of MONY. Also, on November 16, 1998, MONY Group consummated an initial public offering (the “Offerings”) of approximately 12.9 million shares of common stock. The shares of common stock issued in the Offerings are in addition to approximately 34.3 million shares of common stock of MONY Group distributed to certain eligible policyholders of MONY in exchange for their ownership interests in MONY.
The Company and its subsidiaries provide life insurance, annuities, corporate-owned and bank-owned life insurance (“COLI and BOLI”) products, mutual funds, securities brokerage, asset management, and business and estate planning. `The Company distributes its products and services through Retail and Wholesale distribution channels. The Company’s Retail distribution channels are comprised of (i) the career agency field force and (ii) financial advisors and account executives of its securities subsidiary. The Company’s Wholesale channel is comprised of (i) MONY Partners, (ii) independent third party insurance brokerage general agencies and securities broker dealers and (iii) its corporate marketing team which markets COLI and BOLI products. The Company principally sells its products in all 50 of the United States, the District of Columbia, the U.S. Virgin Islands, Guam and the Commonwealth of Puerto Rico and currently insures or provides other financial services to more than one million people.
The accompanying statutory financial statements are presented on the basis of accounting practices prescribed or permitted by the Insurance Department of the State of New York (“SAP”), which is a comprehensive basis of accounting other than accounting principles generally accepted in the United States of America (“GAAP”).
Accounting changes adopted to conform to the provisions of SAP are reported as changes in accounting principles. The cumulative effect of changes in accounting principles are reported as an adjustment to unassigned funds (surplus) in the period of the change in accounting principle. The cumulative effect is the difference between the amount of capital and surplus at the beginning of the year and the amount of capital and surplus that would have been reported at that date if the new accounting principles had been applied retroactively for all prior periods. As a result of the adoption of certain provisions of SSAP No. 10 related to DTA’s and DTL’s by New York State as discussed above, the Company reported a change in accounting principle, which increased unassigned funds (surplus) by $90.2 million in 2002.
Certain reclassifications have been made in amounts presented on the Statements of Operations and Statements of Cash Flows from the prior year Annual Statement to conform such year to the current year’s presentation. These reclassifications principally relate to certain separate account group annuity contracts and had no effect on previously reported net income, surplus, total assets or liabilities. Such contracts are required to be accounted for as life insurance contracts, whereas in the prior year these contracts were accounted for as deposit-type contracts. Premium and annuity considerations, surrenders benefits and withdrawals, and net transfers to or from separate accounts on these contracts were $78.0 million, $230.6 million, and $(152.6) million for the year ended December 31, 2002.
• Premiums for universal life and investment-type products, except those classified as “deposit type contracts” under SAP, are recognized as revenue when due under SAP; whereas under GAAP, they are reported as deposits to policyholders’ account balances. Revenues from these contracts under GAAP consist of amounts assessed during the period against policyholders’ account balances for mortality, policy administration and surrender charges.
• Policy reserves are based on statutory mortality and interest requirements, without consideration of withdrawals, and are reported net of reinsurance reserve credits under SAP; whereas under GAAP, the reserves for interest sensitive life and annuity products are equal to the fund value, and the reserve for long duration participating contracts is the net level premium reserve calculated using the dividend fund interest rate and the mortality rates guaranteed in calculating cash surrender values. GAAP reserves are gross of reinsurance reserve credits.
• Under SAP, recognition of deferred income tax assets (“DTAs”) is limited to the sum of (a) federal income taxes paid in prior years that can be recovered through loss carrybacks for existing temporary differences that reverse by the end of the subsequent calendar year and (b) the lesser of the amount of gross DTAs, after considering item (a), expected to be realized within one year of the balance sheet date; or ten percent of statutory capital and surplus, excluding DTAs and nonadmitted assets; whereas under GAAP, deferred income tax assets are recorded based on the difference between the book and tax basis of assets and liabilities with a valuation allowance recorded if necessary based on management’s estimates.
• An interest maintenance reserve (“IMR”) is established as a liability to capture realized investment gains and losses, net of tax, on the sale of fixed maturities and mortgage loans resulting from changes in the general level of interest rates, and is amortized into income over the remaining years to expected maturity of the assets sold under SAP; whereas under GAAP, no such reserve is required.
• An asset valuation reserve (“AVR”), based upon a formula prescribed by the NAIC, is established as a liability to offset potential non-interest related investment losses, and changes in the AVR are charged or credited to surplus; whereas under GAAP, no such reserve is required.
• Bonds and redeemable preferred stocks in good standing are generally carried at amortized cost under SAP; whereas under GAAP, bonds and redeemable preferred stocks are classified as available for sale and carried at fair value. The related change in unrealized gains and losses, net of related deferred taxes and an adjustment for deferred policy acquisition costs, is reported as a component of other comprehensive income in equity in accordance with GAAP.
• Certain assets designated as “non-admitted” are excluded from assets by a direct charge to surplus; whereas under GAAP, such assets are carried on the balance sheet, net of appropriate valuation allowances.
• Subsidiaries are reported using the equity method of accounting; whereas under GAAP, all entities in which a company has control and a majority economic interest are consolidated.
• Surplus notes are reported as surplus for statutory purposes and as debt for GAAP.
• Certain reinsurance agreements recognized as reinsurance for statutory purposes are accounted for as financing transactions under GAAP.
Expenses incurred in connection with the acquiring of new insurance business, including acquisition costs such as sales commission, are charged to operations as incurred.
Common stocks are carried at fair value, except investments in subsidiaries, which are generally carried on the equity basis. The carrying values of these investments are adjusted for impairment deemed to be other than temporary through write-downs recorded as realized losses.
The Company’s subsidiaries are not consolidated. The subsidiaries are carried principally on the equity method. Changes in the Company’s equity in subsidiaries are included in unrealized capital gains and losses. Dividends from subsidiaries are recognized as investment income when declared.
For the year ended 2003, premiums under individual and group insurance participating policies were $624.1 million, or 75.0% of individual and group premiums earned.
Closed Block policies are based on changes in the specific experience for this business relative to the experience underlying the 1998 dividend scale. The change in the liability for dividends payable in the following year is charged or credited to current year operations. The Company paid dividends in the amount of $202.6 million to policyholders in 2003 and did not allocate any additional income to such policyholders.
Separate account assets and liabilities represent primarily segregated funds administered and invested by the Company for the benefit of certain contractholders. Approximately 99 percent of these assets consist of securities reported at market value and 1 percent consist of fixed maturity securities carried at amortized cost. Premiums, benefits and expenses of the separate accounts are included in the Company’s statements of operations.
The Company amortizes non-operating system software on a straight-line basis over the lesser of its expected useful life or five years. The Company recorded non-operating system software depreciation expense of $17.8 million and $14.2 million for the years ended December 31, 2003 and 2002, respectively. Non-operating system software totaled $128.8 million, accumulated depreciation was $58.5 million, and the net non-admitted asset was $70.3 million at December 31, 2003.
The Company amortizes furniture, fixtures and equipment (FF&E) on a straight-line basis over a seven year period. The Company recorded FF&E depreciation expense of $3.9 million and $2.5 million for the years ended December 31, 2003 and 2002, respectively.
Amortized cost represents the principal amount of fixed maturity securities adjusted by unamortized premium or discount and reduced by cumulative writedowns of $80.8 million and $81.7 million for bonds at December 31, 2003 and 2002, respectively, as required by the NAIC for securities which are in or near default. There were cumulative writedowns for redeemable preferred stocks of $5.3 million at December 31, 2003 and 2002.
At December 31, 2003, 93.0% of the Company’s Collateralized Mortgage Obligation (CMO) portfolio was held in U.S. government and government agency-backed securities. The remainder of the CMO portfolio consisted of NAIC category 1-investment grade securities.
The amortized cost of fixed maturity securities and estimated fair value by maturity as of December 31, 2003 are summarized as follows (in millions):
Proceeds from sales of investments in bonds and redeemable preferred stocks during 2003 and 2002 were $486.2 million and $377.9 million, respectively. Gross gains of $36.6 million in 2003 and $28.7 million in 2002 and gross losses of $2.3 million in 2003 and $5.5 million in 2002 were realized on these sales.
The Company applies the retrospective adjustment method to loan backed securities using historical cash flows and anticipated prepayment assumptions. Prepayment assumptions for single class and multi-class mortgage-backed/asset-backed securities were obtained from Salomon Brothers (Yield Book). The Company used an independent pricing service in determining the market value of its loan-backed securities.
The following table presents certain information by type of investment with respect to the Company’s gross unrealized losses on fixed maturity securities and common stocks at December 31, 2003, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position. This table excludes amounts relating to certain invested assets held pursuant to a reinsurance agreement whereby all the experience from such assets is passed to the reinsurer.
There were no common stock positions in an unrealized loss position for more than 12 months as of December 31,2003.
The Company paid dividends of $25.0 million and $90.0 million in 2003 and 2002 respectively, to MONY Holdings.
The Company issued two surplus notes to MONY Group on March 8, 2000 for $115.0 million and $100.0 million and received a capital contribution from MONY Group of $65.0 million (see Note 18).
At December 31, 2003 and 2002, the Company’s investments in subsidiaries, all of which are wholly owned, consisted of the following (in millions):
At December 31, 2003, MLOA had assets of $6,023.3 million; including bonds ($1,639.6 million), mortgage loans ($419.6 million) and separate account assets ($3,504.0 million); and liabilities of $5,755.2 million, primarily life insurance and annuity reserves ($2,211.2 million) and separate account liabilities ($3,504.0 million). Capital and surplus of MLOA was $268.1 million as of December 31, 2003. In 2003 and 2002, total revenues of MLOA were $1,197.1 million and $1,154.4 million, benefits and expenses were $1,322.6 million and $1,297.6 million and net income (loss), including realized capital gains (losses), was $(79.6) million and $(91.9) million, respectively.
In 2003, the Company made aggregate capital contributions of $5.0 million to MONY International Holdings, the parent holding company of MLICA, $5.0 million to Sagamore Financial Corporation, the parent holding company of USFL, $10.3 million to MONY Venture Partners, $19.5 million to MONY Realty Partners, and $7.0 million to MSC. In 2002, the Company made aggregate capital contributions of $17.5 million to MONY International Holdings, the parent holding company of MLICA, $5.0 million to Sagamore Financial Corporation, the parent holding company of USFL, $4.1 million to MONY Venture Partners, and $1.0 million to MSC.
The Company has service agreements with certain subsidiaries to provide personnel services, facilities, supplies and equipment as shall reasonably be necessary to conduct business. These agreements provide for reimbursement of actual costs and are subject to cancellation upon written notice by either party. Income related to these agreements was $197.7 million and $194.3 million in 2003 and 2002 respectively. In addition, the
The Company has an investment advisory agreement with MONY America with respect to the investment and management of MONY America’s assets. The agreement provides that services are provided on a cost reimbursement basis and may be terminated by either party upon written notice. Income related to this agreement was $1.0 million and $0.7 in 2003 and 2002, respectively. In addition, the Company carried an intercompany receivable related to this agreement of $0.1 million at December 31, 2003 and 2002.
The Company has performing restructured mortgage loans of $12.3 million and $27.4 million as of December 31, 2003 and 2002, respectively. The new terms typically defer a portion of contract interest payments to future periods. Interest is recognized in income based on the modified rate of the loan. Deferred interest, which is the difference between the original contractual rate and the modified rate, is excluded from income. Gross interest income on restructured loans that would have been recorded in accordance with the loans’ original terms was approximately $1.4 million in 2003 and $3.8 million in 2002. Gross interest income recognized in net income for the period from these loans was approximately $1.1 million in 2003 and $1.3 million in 2002. There are no commitments to lend additional funds to any debtor involved in a restructuring.
At December 31, 2003 and 2002, the carrying values of mortgage loans which were non-income producing for the twelve months preceding such dates were $0.0 million and $13.8 million, respectively.
At December 31, 2003 and 2002 the Company held mortgages with interest more than 180 days past due, excluding accrued interest of $3.8 million and $5.8 million, respectively. Total interest due on mortgages with interest more than 180 past due was $0.4 million and $0.4 million at December 31, 2003 and 2002, respectively.
The Company held $9.5 million in impaired mortgage loans that carried a related allowance for credit losses of $0.9 million at December 31, 2003. The Company held $28.8 million in impaired mortgage loans which did not carry an allowance for credit losses at December 31, 2003.
The following presents the change in the allowance for credit losses on restructured mortgage loans for the year ended December 31, 2003 (in millions):
During 2003 and 2002, realized capital gains/(losses) resulting from changes in interest rates on bonds, redeemable preferred stocks, and mortgage loans of $19.8 million (net of $10.8 million tax) and $11.5 million (net of $6.2 million tax), respectively, were transferred to the Company’s IMR for future amortization into net income. Included in realized capital gains/(losses) with other invested assets are other than temporary charges related to the Company’s venture capital interests of $47.5 million.
The estimated fair values of mortgage loans, unaffiliated equity securities, cash, short-term investments, separate account assets and liabilities and investment-type contracts approximate their carrying amounts. The carrying values of bonds and redeemable preferred stocks were $6,029.2 million and $5,652.0 million at December 31, 2003 and 2002, respectively. The estimated fair values of bonds and redeemable preferred stocks were $6,388.3 million and $6,034.2 million at December 31, 2003 and 2002, respectively.
The estimated fair values of bonds and redeemable preferred stocks are based upon quoted market prices, where available. The fair values of bonds and redeemable preferred stocks 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 mortgage loans in process of foreclosure is the estimated fair value of the underlying collateral. The fair value of mortgage loans was $1,479.1 million and $1,670.5 million at December 31, 2003 and 2002, respectively.
The estimated fair value of assets held in separate accounts is based principally on quoted market prices. The fair value of liabilities related to separate accounts is the amount payable on demand, which estimates quoted market prices, net of surrender charges.
The fair values of investment type contracts are based on estimates of the value of payments available upon full surrender. Investment type contracts include certain general account annuity contracts reported as liabilities as life insurance and annuity reserves on the Statement of Liabilities, and deposits left with the company also reported on the Statement of Liabilities. The carrying value and fair value of investment-type contract annuities at December 31, 2003 and 2002 was $291.6 million and $199.8 million, and $286.7 million and $194.4 million, respectively. The carrying value and fair value fair value of deposits left with the company at December 31, 2003 and 2002 was $487.2 million and $491.0 million, and $493.1 million and $496.8 million, respectively.
At December 31, 2003 and 2002, the Company had no single investment or series of investments with a single issuer (excluding U.S. Government and Government Agency securities) exceeding 0.5% and 1.6% respectively of total cash and invested assets.
The bond portfolio is diversified by industry type. The only industry that comprised 10 percent or more of the carrying value of the bond portfolio at December 31, 2003 is Consumer Goods and Services of $1,252.7 million (20.7%).
The states with the largest concentrations of mortgage loans and real estate investments at December 31, 2003 are: Arizona, $196.2 million (12.5%); Texas, $161.8 million (10.3%); California, $152.1 million (9.7%); Georgia, $108.3 million (6.9%); Virginia, $103.2 million (6.6%); and Minnesota, $76.1 million (4.9%).
The Company is exposed to market risk in the event that: (i) the market price of a given derivative financial instrument varies significantly from what is expected or from its theoretical value, or (ii) there is no secondary market for a particular derivative instrument. The Company plans to hold most derivatives to their expiration. Accordingly, illiquid markets do not expose the Company to significant risk.
The Company is exposed to credit risk in the event of nonperformance by either the exchange (for exchange traded derivatives) or the counterparty (for over the counter traded derivatives (OTC)). The credit exposure of derivative financial instruments is represented by the fair value (market value) of contracts with a positive fair value (market value) at the reporting date. For exchange traded contracts the Company minimizes risk by limiting trading to the Chicago Board of Trade, the Chicago Mercantile Exchange and the Chicago Board Options Exchange. Each of these exchanges has a long record of meeting their obligations. For OTC derivatives the Company only accepts counterparties rated Aa3 or better by Moody’s or AA- or better by S&P at the time the transaction is initiated. Given the quality of the exchanges and counterparties, as well as internal limits with respect to exposures to derivative instruments the Company has little exposure to credit related losses in the event of nonperformance by counter-parties to such financial instruments.
In the ordinary course of its business, the Company’s policy is to match the terms of its assets with the terms of its liabilities. In achieving this objective the Company seeks access to the broadest universe of investment alternatives to diversify and better correlate its risk. Derivative financial instruments provide the Company the ability to participate in markets that would not otherwise be desirable based on the nature of its business. For instance, currency swaps allow the Company to participate in foreign denominated securities although the Company’s assets and liabilities are almost entirely denominated in the U.S. dollar. In addition, interest rate swaps allow the Company to participate in floating rate securities although the Company’s assets and liabilities are almost entirely in the form of fixed rate obligations.
Currency swaps may be used by the Company from time to time to allow the Company to participate in the market for debt instruments denominated in foreign currencies without the risk of currency fluctuation.
At December 31, 2003 the Company had no positions in derivative financial instruments, except for a $100 million notional amount interest rate swap contract. The interest swap is designated as a hedge of floating rate notes and is accounted for in accordance with SSAP No. 86.
For Life and Deposit-Type Contracts the Company’s reserve practices include the following:
(1) The Company waives deduction of deferred fractional premiums upon death of insured and returns any portion of the final premium beyond the date of death. Surrender values promised in excess of the legally computed reserves totaled $43.9 million at December 31, 2003.
(2) Substandard policies are valued from basic actuarial principals using the policy’s substandard rating.
(3) As of December 31, 2003, the Company had $3,113.9 million of insurance in force for which the gross premiums are less than the net premiums according to the standard valuation of the State of New York. Reserves to cover the above insurance totaled $18.0 million at December 31, 2003.
(5) The Tabular Interest on funds not involving life contingencies is generally the interest credited or paid on such funds.
(6) The details for “Other Increases” (net) under Analysis of Increases in Reserve in the Annual Statement during the year, include the following (in millions):
The withdrawal characteristics of the Company’s annuity actuarial reserves and deposit-type contract funds and other liabilities without life or disability contingencies as of December 31, 2003 were as follows:
The Company has coinsured a portion of its extended term insurance, guaranteed interest contract and long-term disability claim liabilities. The total ceded reserves and claims liabilities under these agreements were $23.3 million and $25.0 million at December 31, 2003 and 2002, respectively.
During 1994, the Company entered into an agreement to reinsure approximately 50 percent of its block of paid-up life insurance policies. The Company transferred assets equal to the total liabilities ceded into a segregated portfolio within its general account to secure benefit payments from the reinsurer and established a funds held liability to the reinsurer for a corresponding amount. Reserves ceded under this agreement were $58.5 million and $62.6 million at December 31, 2003 and 2002, respectively.
As of December 31, 1997, the Company reinsured 100 percent of its net retained individual disability (“DI”) business. Total ceded reserves, claim and dividend liabilities under these agreements were $376.4 million and $384.8 at December 31, 2003 and 2002 respectively.
provisions. Pursuant to the restricted stock plan MONY Group is shares of its common stock. As of December 31, 2003, 767,243 restricted shares of MONY Group common stock had been issued under the plan. All shares issued under the plan are subject to certain vesting and performance requirements, as well as to certain other forfeiture provisions.
In addition to interest payments on the notes, the Company has the right to receive certain payments based on the profits of the transferred business in force on the transaction date, a future payment tied to the determination of the value of the transferred business at the maturity date of the notes, and a potential payment based on new business growth. Net operating losses, if any, on the transferred business for any year will be carried forward to reduce profit payments in subsequent years. Any deficit remaining at the end of the nine year term and any adjustment related to the final value of the transferred business may only be applied to reduce the principal amount of any outstanding Series A notes. During 2003 and 2002, the Company earned $(0.7) million and $91.0 million, respectively related to transferred business. The $91.0 million earned during 2002 consisted of $19.1 million based upon the profits of the transferred group pension business and $71.9 from the final value of the transferred business. The Company recorded these amounts as expense allowances on ceded reinsurance in the Summary of Operations.
To finance the repurchase of the 9.5% Notes and the 11.25% Notes, MONY Life issued two surplus notes to MONY Group (the “Inter-company Surplus Notes”) to replace the 9.5% Notes and the 11.25% Notes and received a capital contribution from MONY Group of $65.0 million. The terms of the Inter-company Surplus Notes are identical to the 9.5% Notes and the 11.25% Notes, except the Inter-company Surplus Notes were priced to yield a current market rate of interest of approximately 8.35% and the Inter-company Surplus Note issued to replace the 11.25% Notes was issued at a face amount of $100.0 million. As a result of the repurchase, MONY Life recorded a pre-tax loss of approximately $109.9 million ($80.7 million after tax) in 2000, which was recorded as a direct charge to surplus.
The $115.0 million face amount and $100.0 million face amount Inter-company Surplus Notes mature on December 31, 2012 and August 15, 2024, respectively, and both pay interest to MONY Group at 8.65% semiannually on March 8 and September 8. Each accrual and payment of interest on the Inter-company Surplus Notes may be made only with the prior approval of the New York State Superintendent of Insurance. Interest expense incurred on surplus notes was $18.8 million in both 2003 and 2002.
The Company files a consolidated federal income tax return with MONY Group and its other subsidiaries, and the Company’s life and non-life subsidiaries with the exception of Sagamore Financial Corporation and Subsidiaries, which file a separate tax return. The method of allocation between the companies is subject to a written agreement, approved by the Board of Directors.
Federal income tax (benefit)/expense for the years ended December 31, 2003 and 2002 is summarized as follows (in millions):
The components of the change in deferred tax assets and deferred tax liabilities resulting from differences between statutory book and tax from December 31, 2003 and 2002 are as follows (in millions):
The Company did not have any operating loss carry forwards at December 31, 2003
Income taxes incurred in the current and prior years that will be available for recoupment in the event of future net losses are $17.0 million, $27.2 million, and $0.4 million for each of the years ended December 31, 2003, 2002, and 2001, respectively.
The Company’s federal income tax returns for years through 1993 have been examined by the Internal Revenue Service (“IRS”). No material adjustments were proposed by the IRS as a result of these examinations. In the opinion of management, adequate provision has been made for any additional taxes which may become due with respect to open years.
For measurement purposes, a 10% annual rate of increase in the per capita cost of covered health care benefits was assumed for 2003. The rate was assumed to decrease gradually to 6% for 2010 and remain level thereafter.
The Company has multiple non-pension postretirement benefit plans. The health care plans are partially contributory, with participants’ contributions adjusted annually; the life insurance plans are noncontributory. The accounting for the health care plans recognizes the imposition of a cap on employer contributions.
Because of the aforementioned cap on employers contribution, assumed health care cost trend rates do not have a significant effect on the amounts reported for the health care plans. A one-percentage-point change in assumed health care cost trend rates has an immaterial impact on the amount reported.
(i) The Company has guaranteed to certain states that the surplus of MLOA and USFL, wholly owned subsidiaries, will be maintained at amounts at least equal to the minimum surplus required for admission to those states.
On October 21, 1997, the New York State Supreme Court granted MONY Life’s and MLOA’s motion for summary judgment and dismissed all claims filed in the Goshen case against MONY Life and MLOA. On December 20, 1999, the New York State Court of Appeals affirmed the dismissal of all but one of the claims in the Goshen case (a claim under New York’s General Business Law), which has been remanded back to the New York State Supreme Court for further proceedings consistent with the opinion. The New York State Supreme Court subsequently reaffirmed that, for purposes of the remaining New York General Business Law claim, the class is now limited to New York purchasers only. On July 2, 2002, the New York Court of Appeals affirmed the New York State Supreme Court’s decision limiting the class to New York purchasers. In addition, the New York State Supreme Court has further held that the New York General Business Law claims of all class members whose claims accrued prior to November 29, 1992 are barred by the applicable statute of limitations. On September 25, 2002, in light of the New York Court of Appeals’ decision, MONY Life and MLOA filed a motion to decertify the class with respect to the sole remaining claim in the case. By orders dated April 16, and May 6, 2003, the New York State Supreme Court denied preliminarily the motion for decertification but held the issue of decertification in abeyance pending appeals by plaintiffs in related cases and a hearing on whether the present class, or a modified class, can satisfy the requirements of the class action statute in New York. MONY Life and MLOA have appealed from the denial of their motion for decertification, which appeal is presently pending in the Appellate Division, First Department. MONY intends to defend itself vigorously against the sole remaining claim. There can be no assurance, however, that the present litigation relating to sales practices will not have a material adverse effect on MONY.
By order dated November 4, 2003, Vice Chancellor Stephen P. Lamb, to whom the cases had been assigned, consolidated all ten actions under the caption In re The MONY Group Inc., Shareholders Litigation, Consolidated C.A. No. 20554-NC, and ordered plaintiffs to file a consolidated amended complaint. On or about November 5, 2003, plaintiffs filed a Consolidated Class Action Complaint on behalf of a putative class consisting of all MONY Group stockholders, excluding the defendants and their affiliates. The consolidated complaint alleges that the $31.00 cash price per share to be paid to MONY Group stockholders in connection with the proposed merger is inadequate and that MONY Group’s directors breached their fiduciary duties in negotiating and approving the merger agreement by, among other things, (i) failing to maximize stockholder value, (ii) improperly diverting merger consideration from MONY Group’s stockholders to MONY Group’s management by amending and extending management’s CIC agreements, (iii) failing to comply with Delaware law in determining the “fair value” of MONY Group’s stock and (iv) disseminating incomplete and inaccurate information regarding the proposed merger. The consolidated amended complaint alleges that AXA Financial and AIMA aided and abetted the alleged breaches of fiduciary duty by MONY Group and its directors. The complaint seeks various forms of relief, including damages and injunctive relief that would, if granted in its entirety, prevent completion of the merger. Defendants served and filed their answers to the consolidated amended complaint on December 29, 2003.
On January 16, 2004, after the filing and mailing of the definitive proxy statement on January 8, 2004, plaintiffs sought and were granted leave to further amend their complaint to include additional allegations
On March 9, 2004, plaintiffs filed a second amended complaint which included, among other things, allegations that (i) the MONY Group board of directors’ decision to reschedule the special meeting and set a new record date reflects an attempt by MONY Group to manipulate the vote by disenfranchising its long-term stockholders, (ii) MONY Group selectively communicated its intent to change the record date to certain investors so as to enable them to acquire voting power prior to the public announcement of the new record date, (iii) the press release issued in connection with the board’s decision to reschedule the meeting and record dates was materially false and misleading in that it failed to disclose and/or misrepresented the manipulation of the voting process and the true reason for the changing of such dates and (iv) the rescheduling of the meeting and record dates constitutes a breach of fiduciary duty by the MONY Group defendants. The second amended complaint seeks an order directing that MONY Group reinstate the record date of January 2, 2004 or, alternatively, denying voting power with respect to MONY Group shares allegedly purchased with knowledge of the prospect of a new record date.
Based on the first of these allegations, on February 3, 2004, Judge Loretta Preska granted MONY Group’s request for a temporary restraining order and prohibited defendants from enclosing any proxy voting card, including a duplicate copy of MONY Group’s proxy voting card, in their solicitation materials, pending a determination on whether a preliminary injunction should be issued. By order dated February 11, 2004, Judge Richard Holwell denied MONY Group’s motion for a preliminary injunction and dissolved the temporary restraining order. Later that day, MONY Group filed a notice of appeal from Judge Holwell’s order and made an emergency application to the United States Court of Appeals for the Second Circuit, seeking an expedited appeal from the denial of the preliminary injunction, as well as stay of Judge Holwell’s order dissolving the temporary
restraining order or a preliminary injunction pending appeal. A single judge of the Second Circuit denied MONY Group’s request for a stay or injunction pending appeal, but the Court granted MONY Group’s motion for an expedited appeal, which is now pending.
(vi) In addition to the matters discussed above, the Company is involved in various other legal actions and proceedings (some of which involve demands for unspecified damages) in connection with its business. In the opinion of management of the Company, resolution of contingent liabilities, income taxes and other matters will not have a material adverse effect on the Company’s statutory surplus or results of operations.
The Company leases office space, furniture and equipment, and electronic data processing equipment under various noncancelable operating lease agreements that expire through December 31, 2016. Rental expense for 2003 and 2002 was approximately $26.9 million, and $31.0 million, respectively.
During 1997, the Company entered into a 17-year lease with the New York City Industrial Development Agency (“NY IDA”). NY IDA issued bonds to MLOA on behalf of the Company, related to the Company’s consolidation of site locations to New York City. At December 31, 2003, IDA bonds outstanding were $1.2 million. NY IDA will use the lease payments to make principal and interest payments to the bondholder. Lease payments for NY IDA were $0.2 million for both 2003 and 2002.
The future minimum rental obligations under these leases at December 31, 2003 are as follows:
Most separate accounts held by the Company primarily relate to individual variable annuity and group annuity contracts with a nonguaranteed return. These variable annuities generally provide an incidental death benefit of the greater of account value or premium paid less any surrenders and surrender charges. Certain other separate accounts are used as funding vehicles for flexible premium variable life insurance policies, variable life insurance with additional premium option policies and variable universal life policies. The net investment experience of the separate accounts is credited directly to the policyholder and can be positive or negative. The assets and liabilities of these accounts are carried at market.
Certain other separate accounts relate to experience-rated group annuity contracts, which fund defined contributions pension plans. These contracts provide guaranteed interest returns for one-year only, where the
guaranteed interest rate is re-established each year based on the investment experience of the separate account. The assets and liabilities of these separate accounts are carried at book value.
The assets, liabilities, income and expenses relating to the Closed Block have been included within the appropriate captions in the statement of admitted assets, liabilities, capital and surplus at December 31, 2003 and 2002, and statement of operations and capital and surplus and statement of cash flows for the years ended December 31, 2003 and 2002. The assets and liabilities allocated to the Closed Block are recorded in the Company’s financial statements at their historical carrying values. The carrying value of the assets allocated to the Closed Block are less than the carrying value of the Closed Block liabilities at the Plan Effective Date. The excess of the Closed Block liabilities over the Closed Block assets at the Plan Effective Date represents the total estimated future post-tax contribution expected to emerge from the operation of the Closed Block, which will be recognized in the Company’s income over the period the policies and the contracts in the Closed Block remain in force.
The interim measure provides that reserve calculations need not reflect future partial withdrawals and adds an asset adequacy requirement. For contracts subject to AG XXXIV the total reserve held is subject to asset adequacy analysis wherein all guarantees must be analyzed.
Department has had discussions with the insurance industry by way of conference calls with the Life Insurance Council of New York (“LICONY”), a life insurance industry trade association, to discuss their concern with the risk.