The following table sets forth selected financial information for the Company. The selected financial information for each of the years in the three-year period ended December 31, 1998 and at December 31, 1998 and 1997 has been derived from the Company's audited financial statements included elsewhere herein. The financial information set forth below for all other periods has been derived from unaudited financial information not included elsewhere herein which, in the opinion of management, presents fairly such financial information in conformity with GAAP. The selected financial information should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations", the Company's financial statements and the notes thereto and the other financial information included elsewhere herein.
applied the accounting alternative available during such prior periods which was most consistent with the subsequent pronouncement. The following sets forth the significant accounting pronouncements with effective dates subsequent to the earliest financial information presented herein, the effective dates of their adoption by the Company and, if applicable, a description of the accounting followed by the Company for periods presented herein prior to the effective date of such pronouncements.
- SFAS No. 114, Accounting by Creditors for Impairment of a Loan, was adopted on a retroactive basis for the year ended December 31, 1993 and subsequent years. For periods prior to the adoption of SFAS No. 114, MONY Life established a policy to record impairment losses for troubled loans based on discounted cash flows. The policy was substantially consistent with SFAS No. 114 except that impairment losses were reflected as permanent reductions in the cost basis of such loans. There was no material effect on the Company's financial statements as a result of the adoption of SFAS No. 114.
- SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, was adopted for the year ended December 31, 1994 and subsequent years. For periods prior to the adoption of SFAS No. 121, the Company had no material real estate that it intended to dispose of, and writedowns on impaired real estate were established if the undiscounted cash flows were less than the carrying value. In such cases, the asset was written down to the discounted cash flow amount. Accordingly, there was no material effect on the Company's financial statements as a result of the adoption of SFAS No. 121.
MONY Life Insurance Company of America (the "Company") is a stock life insurance company organized in the state of Arizona and is the corporate successor of VICO Credit Life Insurance Company, incorporated in Arizona on March 6, 1969. The Company is a wholly owned subsidiary of MONY Life Insurance Company ("MONY Life"), a stock life insurance company domiciled in the state of New York. MONY Life, formerly The Mutual Life Insurance Company of New York, is a wholly owned subsidiary of The MONY Group, Inc. (the "MONY Group"), a Delaware Corporation organized to be the parent holding company of MONY Life.
The Company's primary business is to provide asset accumulation and life insurance products to business owners, growing families, and pre-retirees. The Company's insurance and financial products are marketed and distributed directly to individuals primarily through MONY Life's career agency sales force. These products are sold in 49 states (not including New York), the District of Columbia, the U.S. Virgin Islands and Puerto Rico.
The Company's profitability depends in large part upon (i) the amount of its assets, (ii) the adequacy of its product pricing (which is primarily a function of competitive conditions, management's ability to assess and manage trends in mortality and morbidity experience as compared to the level of benefit payments, and its ability to maintain expenses within pricing assumptions), (iii) the maintenance of the Company's target spreads between credited rates on policyholders' account balances and the rate of earnings on its investments, (iv) the persistency of its policies (which affects the ability of the Company to recover the costs incurred to sell a policy) and (v) its ability to manage the market and credit risks associated with its invested assets. External factors, such as legislation and regulation of the insurance marketplace and products, may also affect the Company's profitability.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Universal life and investment-type product fees were $100.8 million for 1997, an increase of $20.0 million, or 24.8%, from $80.8 million reported for 1996. This increase was primarily the result of an increase in fees relating to the Company's FPVA business of $13.2 million. For the year ended December 31, 1997, the Company reported total fees in its FPVA business of $44.1 million, as compared to $30.9 million reported for the year ended December 31, 1996. FPVA account value increased $1,028.6 million during 1997 to $3,771.9 million, as compared to $2,743.3 million in 1996. The increase in account value in 1997 resulted from new sales and other deposits of $624.5 million and market appreciation of $647.2 million, offset by approximately $243.1 million in withdrawals and surrenders. The increase relating to the Company's VUL and UL business was $8.3 million and $2.1 million, respectively. For 1997, the Company reported total fees from its VUL business of $17.1 million, as compared to $8.8 million reported from 1996. The increase in VUL fees is primarily due to higher charges for the cost of insurance, administration, and loading of approximately $4.2 million, $1.1 million and $2.0 million, respectively.
Net investment income was $99.1 million for 1997, a decrease of $2.9 million, or 2.8%, from $102.0 million reported for 1996. The decrease is primarily related to a decrease in the average portfolio balance of $42.3 million, with portfolio yields remaining constant for both years at approximately 7.3%.
Other income was $5.5 million for 1997, an increase of $0.7 million, or 14.6%, as compared to $4.8 million reported for 1996. The increase is primarily due to higher funds received on supplementary contracts.
Interest credited to policyholders' account balances was $72.5 million for 1997, a decrease of $0.5 million, or 0.7%, from $73.0 million reported for 1996. The decrease was primarily due to lower interest crediting of approximately $5.4 million relating to the Company's SPDA business. During 1997, SPDA account value decreased to $365.9 million at December 31, 1997 from $443.8 million at December 31, 1996. The decrease in account value was due to continued withdrawals in 1997, as compared to 1996, which management believes reflected consumer preferences for separate account products. Average interest crediting rates on the Company SPDA's were approximately 5.5% in 1997, as compared to 5.7% in 1996. This decrease was offset by an increase of $5.0 million of higher interest crediting primarily on UL and VUL products.
Of the $27.6 million of currently outstanding commercial mortgage loans in the Company's investment portfolio at December 31, 1998, $9.2 million, $3.8 million and $5.6 million are scheduled to mature in 1999, 2000 and 2001, respectively. See "Investments -- Mortgage Loans -- Commercial Mortgage Loans".
identifying those companies that may be inadequately capitalized. The RBC guidelines provide a method to measure the adjusted capital (statutory-basis capital and surplus plus the Asset Valuation Reserve ("AVR") and other adjustments) that a life insurance company should have for regulatory purposes, taking into consideration the risk characteristics of such company's investments and products. A life insurance company's RBC ratio will vary over time depending upon many factors, including its earnings, the nature, mix and credit quality of its investment portfolio and the nature and volume of the products that it sells.
The Company has a service agreement with MONY Life whereby MONY Life provides services and equipment including computer and information systems to the Company to conduct its business. See Note 3 to the Financial Statements.
The phases of the Project are: (i) inventorying Year 2000 items and assigning priorities; (ii) assessing the Year 2000 compliance of items; (iii) remediating or replacing items that are determined not to be Year 2000 compliant; (iv) testing items for Year 2000 compliance; and (v) designing and implementing Year 2000 contingency and business continuity plans. To determine that all IT systems (whether internally developed or purchased) are Year 2000 compliant, each system is tested using a standard testing methodology which includes unit testing, baseline testing, and future date testing. Future date testing includes critical dates near the end of 1999 and into the year 2000, including leap year testing.
The inventory and assessment phases of the Project were completed prior to mid-1998. At December 31, 1998, all of MONY Life and its subsidiaries' application systems had been remediated and current date tested. In addition, approximately 94% of MONY Life and its subsidiaries' applications had been future date tested, with future date testing for the remaining 6% scheduled for completion by mid-1999. Newly implemented applications and new releases of software packages will be tested in 1999 as part of the implementation process.
upgraded or replaced. Approximately 50% of critical non-IT systems had been remediated as of December 31, 1998. Ongoing testing for Year 2000 compliance will continue through 1999.
The estimated total cost of the Year 2000 Project for the Company is approximately $2.0 million. Costs incurred on the Project during 1998, 1997 and 1996 were $1.4 million, $0.4 million, and $0.0 million, respectively, aggregating $1.8 million through December 31, 1998. The Company's future cost of completing the Year 2000 Project is estimated to be approximately $0.2 million, which is being funded through operating cash flows. These amounts include costs associated with the current development of contingency plans.
Since most of its in force liabilities result from separate account products, the Company does not focus on more precise liability duration measures because management believes that the scenario testing employed is sufficient to adequately assess interest rate risk. The Company does not use hedging instruments because management believes that there is limited general account risk exposure from recurring cash flows and limitations contained in product designs.
Separate account assets are managed in accordance with the prescribed investment strategy that applies to the specific separate account. Separate accounts are established in conformity with insurance laws and are generally not chargeable with liabilities that arise from any other business of the Company. Separate account
assets are subject to general account claims only to the extent that the value of such assets exceeds the separate account liabilities. Investments held in separate accounts and liabilities of the separate accounts are reported separately as assets and liabilities. Substantially all separate account assets are reported at estimated fair value. Investment income and gains or losses on the investments of separate accounts accrue directly to contractholders and, accordingly, are not reflected in the Company's statements of income and cash flows. Fees charged to the separate accounts by the Company (including mortality charges, policy administration fees and surrender charges) are reflected in the Company's revenues.
(2) Equity real estate income is shown net of operating expenses and depreciation.
(5) Includes mortgage servicing fee and other miscellaneous fee income of approximately $2.3 million, $1.3 million and $1.2 million for the years ended December 31, 1998, 1997 and 1996, respectively.
The Company defines problem securities in the fixed maturity category as securities which, (i) are in default as to principal or interest payments (ii) are to be restructured pursuant to commenced negotiations (iii) went into bankruptcy subsequent to acquisition or (iv) are deemed to have other than temporary impairments to value. The fair value of problem fixed maturities was $4.4 million and $4.6 million at December 31, 1998 and 1997, respectively. For the years ended December 31, 1998, 1997 and 1996 $0.0 million, $0.1 million and $1.3 million of interest income was not accrued on problem fixed maturities.
The Company defines restructured securities in the fixed maturity category as securities where a concession has been granted to the borrower related to the borrower's financial difficulties that the Company would not have otherwise considered. The Company restructures certain securities in instances where a determination was made that greater economic value will be realized under the new terms than through liquidation or other disposition. The terms of the restructure generally involve some or all of the following characteristics: a reduction in the interest rate, an extension of the maturity date and a partial forgiveness of principal and/or interest. The fair value of restructured fixed maturities was $2.7 million and $0.0 million at December 31, 1998 and 1997, respectively.
The amortized cost and estimated fair value of fixed maturity securities, by contractual maturity dates, (excluding scheduled sinking funds) as of December 31, 1998 and 1997 are as follows ($ in millions):
The Company held approximately $232.8 million and $258.0 million of mortgage-backed and asset-backed securities as of December 31, 1998 and 1997, respectively. Of such amounts, $108.3 million and $126.0 million or 46.5% and 48.8%, respectively, represented agency-issued pass-through and collateralized mortgage obligations ("CMOs") secured by the Federal National Mortgage Association, Federal Home Loan Mortgage Corporation, Government National Mortgage Association and Canadian Housing Authority collateral. The balance of such amounts was comprised of other types of mortgage-backed and asset-backed securities. The Company believes that its active monitoring of its portfolio of mortgage-backed securities and the limited extent of its holdings of more volatile types of mortgage-backed securities mitigate the Company's exposure to losses from prepayment risk associated with interest rate fluctuations for this portfolio. At December 31, 1998 and 1997, 91.2% and 94.1%, respectively, of the Company's mortgage-backed and asset-backed securities were assigned a NAIC Designation 1. In addition, the Company believes that it holds a relatively low percentage of CMOs compared to other life insurance companies.
Asset-backed securities ("ABS") are purchased both to diversify the overall credit risks of the fixed maturity portfolio and to provide attractive returns. The ABS portfolio is diversified both by type of asset and by issuer. The largest asset class exposure in the ABS portfolio is to credit card receivables. These are comprised of pools of both general purpose credit card receivables such as Visa and Mastercard and private label credit card receivable pools. Excluding the exposures to home equity loans (which represented 10.8% and 17.0%, of the ABS portfolio as of December 31, 1998 and 1997, respectively), the ABS portfolio is in general insensitive to changes in interest rates. As of December 31, 1998 and 1997, respectively, the ABS portfolio did not contain any pools of assets outside of the United States.
The following table presents the types of ABS held by the Company as of the dates indicated ($ in millions).
Following is a summary of the Company's commercial mortgage loans by geographic area and property type as of December 31, 1998 and 1997 ($ in millions).
At December 31, 1998, the carrying value of restructured loans was $13.5 million, net of valuation allowances of $0.5 million. There were no problem or potential problem loans at December 31, 1998.
Gross interest income on restructured commercial mortgage loan balances that would have been recorded in accordance with the loans' original terms was approximately $1.4 million at December 31, 1998 and 1997. As a result of the restructurings, the gross interest income recognized in net income at December 31, 1998 and 1997 was $1.0 million.
The following table presents the carrying amounts of problem and restructured commercial mortgages relative to the carrying value of all commercial mortgages as of the dates indicated. The table also presents the valuation allowances and writedowns recorded by the Company relative to commercial mortgages defined as problem and restructured as of each of the aforementioned dates ($ in millions).
- - --------------- (1) Problem commercial mortgages included mortgage loans in foreclosure of $0.0 million and $0.9 million at December 31, 1998 and 1997, respectively.
The Company defines problem, potential problem and restructured agricultural mortgages in the same manner as it does for commercial mortgages. The following table presents the carrying amounts of problem, potential problem and restructured agricultural mortgages relative to the carrying value of all agricultural mortgages as of the dates indicated ($ in millions).
(2) As of December 31, 1998 and 1997, there were no valuation allowances/writedowns relating to problem, potential problem and restructured agricultural mortgages.
The Company holds real estate as part of its general account investment portfolio. The Company has adopted a policy of not investing new funds in equity real estate except to safeguard values in existing investments or to honor outstanding commitments. As of December 31, 1998 and 1997, the carrying value of the Company's real estate investments was $8.3 million and $22.0 million, respectively, or 0.6% and 1.6%, respectively, of general account invested assets. The Company owns real estate and real estate acquired upon foreclosure of commercial and agricultural mortgage loans. The following table presents the carrying value of the Company's equity real estate investments by such classifications ($ in millions).
of December 31, 1998 and 1997, respectively. The carrying value of real estate to be disposed of aggregated $0.0 million and $19.2 million as of December 31, 1998 and 1997, respectively.
- - --------------- (1) Includes $1.6 million and $9.5 million at December 31, 1998 and 1997, respectively, relating to impairments taken upon foreclosure of mortgage loans.
At December 31, 1998, 2.0% ($27.6 million) and 2.5% ($34.0 million), respectively, of the Company's general account invested assets consisted of commercial mortgage loans. Commercial mortgage loans are stated at their unpaid principal balances, net of valuation allowances for impairment. The Company provides valuation allowances for commercial mortgage loans when it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Increases in such valuation allowances are recorded as realized investment losses and, accordingly, are reflected in the Company's results of operations. For the years ended December 31, 1998, 1997 and 1996, such increases (decreases) in valuation allowances aggregated ($0.4) million, ($0.3) million and ($0.4) million, respectively. The carrying value of commercial mortgage loans at December 31, 1998 was $27.6 million, which amount is net of $0.9 million representing management's best estimate of cumulative impairment losses at such date. However, there can be no assurance that additional provisions for impairment adjustments with respect to the real estate held for investment will not need to be made. Any such adjustments may have a material adverse effect on the Company's financial position and results of operations.